Must Shareholder Be Minority Shareholder To Institute Derivative Action?

Need to consult lawyer regarding derivative action and company’s shareholder?

A brief guide on “derivative action”

A derivative action1 is an exception to the common law rule in Foss v Harbottle2 (the rule in Foss v Harbottle provides that if a company suffers a wrong, prima facie it is the company itself that should institute an action to remedy the wrong done to it, and not any of its shareholders, as the company is a separate legal entity from its members). This exception was first expounded by the Court of Appeal in Abdul Rahim Bin Aki v Krubong Industrial Park (Melaka) Sdn Bhd & Ors3, where the exception allows minority shareholders to institute proceedings, such as in respect of ultra vires which cannot, in any event, be confirmed by the majority and where there is fraud on the minority by the wrongdoer in control.

However, must a shareholder be a minority shareholder to institute a derivative action?

The long answer

Not quite, as pointed out in the High Court case of Ong Keng Huat v Fortune Frontier (M) Sdn Bhd & Anor4. In this case, Keng Huat brought a derivative action against Tan Boon Leong  (both equal shareholders of Fortune Frontier) and a third party for causing losses to Fortune Frontier. One of the contentions was whether only a minority shareholder can bring a derivative action against the majority shareholders of the company.

The court’s answer

The court replied in the negative. As for the why behind the what, the court has this to say5:

“There are occasions where majority shareholding may not necessarily be accompanied by the entitlement to the exercise of control. First, the issue of control may be relevant at the board level or the general meeting level. It is well-entrenched under the Act 1965 that the board is responsible for the management of the business or affairs of the company6, except where actions by the shareholders in a general meeting are required under the Act. Therefore, if the matter complained of is within the authority of the directors to decide on, which commonly is the case, given that most are management-related decisions such as on the institution and defence of legal suits, a majority shareholder who somehow does not have control at board level (potentially at the board of listed entities where the number of independent directors is sizeable or where regulations prohibit the shareholder-appointed directors from voting on account of being ‘interested’) may also be considered as being aggrieved. Even though the power to remove directors in a public company is itself vested in the shareholders at a general meeting7, the corresponding right to appoint new directors may be affected by regulations in certain industry sectors which could prevent the shareholder from having majority control on the board as well.”

Simply put, the question to be asked is whether, based on the facts of each particular case, the complainant, being a shareholder (with either a minority or majority ownership) is able to get the company to take action to seek redress for the wrong done to the company, as perpetrated or facilitated by an insider in a position of influence or control. Therefore, it is strictly not necessary for a shareholder to be a minority shareholder in order to institute a derivative action.

Need to consult lawyer regarding derivative action and company’s shareholder?

1. Section 181A, Companies Act 1965. Currently can be found under Section 347 of the Companies Act 2016.

2. (1843) 67 ER 189.

3. [1995] 3 MLJ 417.

4. [2015] 11 MLJ 604.

5. Paragraph 69.

6. Section 131B (1), Companies Act 1965. Currently, can be found under Section 211 of the Companies Act 2016.

7. Section 128, Ibid. Currently, can be found under Section 206 of the Companies Act 2016.