12/28/2017 How to Slay a Dragon – Shareholder Remedies in Malaysia

How to Slay a Dragon – Shareholder Remedies

in Malaysia

24 November 201523 November 2015 Lee Shih

Within the corporate sphere, there is an ever-present tension between majority rule, where the
majority shareholders are allowed to dominate the decision-making process, and that of protection of
minority shareholders. Where majority rule is abused and is wielded in the majority’s self-interest
rather than the interest of the company, then the minority shareholder may be able to seek court
intervention for relief.

I have always found this area of company law fascinating and I will be writing more on this in future.
This article will serve as a primer on some of the forms of shareholder remedies, especially in a
Malaysian context.

(h ps://themalaysianlawyerdotcom.files.wordpress.com/2015/11/slay_me.png)

The Rule in Foss v Harbo le: The Fire-Breathing Dragon

The rule in Foss v Harbo le (a 19th century decision of the English courts) has sometimes served to
keep the minority shareholders subdued and unable to seek relief. The rule in Foss v Harbo le has
even been dubbed a “fire-breathing and possibly multiple-headed dragon.”

This dragon has two distinct heads.

https://themalaysianlawyer.com/2015/11/24/how-to-slay-a-dragon-shareholder-remedies-in-malaysia/ 1/4
12/28/2017 How to Slay a Dragon – Shareholder Remedies in Malaysia

The first is that of the ‘proper plaintiff rule’ being that the proper claimant to bring an action in
respect of a wrong done to the company must prima facie be the company. Since the company is a
separate entity from its shareholders, a shareholder may not sue to enforce a company’s rights.

The second is the general principle of majority rule being the right of the majority shareholders to
decide how the company’s affairs are to be conducted.

This article will touch on the three main weapons in the minority’s arsenal in a empting to slay this
dragon.

Statutory Derivative Action

Malaysia has moved in line with other jurisdictions in enacting statutory derivative action provisions.
Sections 181A – 181E of the Companies Act allow a minority shareholder to take on the name of the
company in order to bring an action against a wrong done to the company. This derivative action
seeks to overcome the situation where the directors (often times under the control of the majority) or
where the majority shareholders take no action for a wrong done to the company. This may range
from directors acting in breach of their duties to the company or where company assets are being
wrongly depleted.

Both the heads in Foss v Harbo le would have largely prevented (although certain limited exceptions
do apply) an aggrieved minority shareholder from pursuing any action in relation to these wrongs.

Any shareholder (or a former shareholder in certain circumstances) or director can apply to the Court
for permission in order to control the company in initiating or continuing court proceedings.

The first element that must be satisfied is that the applicant must provide a 30-day notice to the
directors of the applicant’s intention to apply to the Court. Secondly, the applicant must demonstrate
that he is acting in good faith and that it appears prima facie to be in the best interest of the company
that the application be allowed.

This statutory derivative action is altruistic in nature, in that this is ultimately an action by the
company (under the direction of the applicant) to seek relief for a wrong done to the company and
any damages would flow back to the company itself. The applicant would not benefit directly from
bringing such an action.

Unlike a few jurisdictions, Malaysia’s statutory derivative action maintains the age-old common law
derivative action provisions. This allows an aggrieved shareholder more options.

Oppression Remedy

The oppression remedy is embodied in section 181 of the Companies Act, which allows shareholders
to seek relief for personal wrongs suffered in their personal capacity as shareholders.

While often relied on by the minority, even the majority shareholder can raise the issue of oppression
where the majority is unable to exercise its majority views due to certain provisions in any wri en
agreement among the shareholders

At the very heart of the oppression remedy is the question of whether there has been commercial
unfairness. The starting point in determining commercial unfairness is an examination of the
agreement between the shareholders, which would be the wri en contract and which could also
include any implied understandings and legitimate expectations among the shareholders. If a breach
of such an agreement has then led to prejudice, the shareholder may be entitled to seek the
appropriate remedies.

https://themalaysianlawyer.com/2015/11/24/how-to-slay-a-dragon-shareholder-remedies-in-malaysia/ 2/4
12/28/2017 How to Slay a Dragon – Shareholder Remedies in Malaysia

A significant development in Malaysia is where the Federal Court (our apex court) essentially held
that breaches of a shareholders agreement cannot form the basis of an oppression action. Relief
would then have to lie in contractual remedies and the shareholder cannot rely on the statutory
remedy of oppression. This will unduly restrict the ability of a shareholder to rely on the full avenues
of relief.

In ordering relief, the Court will be empowered to grant any remedy to bring the oppression to an
end. Often, this could be an order that the majority shareholder purchase the minority’s shares at a
fair price. This is normally the most reasonable remedy because it allows the minority to realise the
value of their interest in the company and puts an end to the unfairness – but does not destroy the
company. In Malaysia, this share buy-out order can only be made for a majority to buy up the
minority and not vice versa.

Just and Equitable Winding Up

A shareholder may also apply to the Court to wind up a company where it is “just and equitable” to
do so. This area of the law overlaps largely with that of the oppression remedy as the Court will also
be guided by the concept of fairness.

Notwithstanding the corporate structure, the Court can impose equitable considerations. The cases
decided in a just and equitable winding up often feature elements of quasi-partnership, and mutual
trust and confidence among the shareholders. A breach of such elements may then justify the
winding up of the company.

The jurisdiction under a just and equitable winding up is wider than that of oppression, as it can
apply in a fault-neutral situation. For instance where there was a mutual breakdown in the
relationship between the shareholders, with neither party at fault, or where there was the frustration
of the underlying purpose of forming the company.

The only relief that can be granted by the Court is ultimately that of a winding up of a company. The
shareholder would then only be entitled to any excess proceeds from the liquidation of the
company’s assets.

Conclusion

These are merely three of the more important weaponry available to an aggrieved minority
shareholder in a empting to seek relief against any abuse by the majority.

A statutory derivative action seeks relief and damages for the company. An oppression remedy is for
a wide-range of personal relief for the shareholder, while the just and equitable remedy results in the
winding up of a company.

While not outright slaying the dragon of Foss v Harbo le, these remedies, in appropriate
circumstances, allow a minority to outflank the beast and thereby pierce the majority’s armour.

Lee Shih company, company law, derivative action, oppression, shareholders, winding up

Create a free website or blog at WordPress.com.

https://themalaysianlawyer.com/2015/11/24/how-to-slay-a-dragon-shareholder-remedies-in-malaysia/ 3/4
12/28/2017 How to Slay a Dragon – Shareholder Remedies in Malaysia

https://themalaysianlawyer.com/2015/11/24/how-to-slay-a-dragon-shareholder-remedies-in-malaysia/ 4/4