As a minority shareholder in a Malaysian company, you might feel powerless when majority shareholders or directors make decisions that harm your interests. However, Malaysian law provides robust protections through the Companies Act 2016, giving minority shareholders several powerful legal remedies to safeguard their investments and rights.
This comprehensive guide explains the three primary remedies available to minority shareholders in Malaysia: the oppression remedy under Section 346, derivative actions under Sections 347 and 348, and winding up on just and equitable grounds under Section 465.
Understanding Minority Shareholder Vulnerability
In corporate governance, majority shareholders typically control decision-making through voting power. This can leave minority shareholders vulnerable to various forms of prejudice, including exclusion from management, denial of dividends despite company profitability, dilution of shareholding, misappropriation of company assets, and decisions that benefit majority shareholders at the expense of the company.
Recognising these vulnerabilities, Malaysian corporate law has developed specific statutory remedies that allow minority shareholders to seek court intervention when their interests are disregarded or when they face oppressive conduct.
The Oppression Remedy Under Section 346
Section 346 of the Companies Act 2016 is the primary statutory remedy for minority shareholders facing oppressive conduct. This provision replaced the former Section 181 of the Companies Act 1965 and provides a powerful mechanism for shareholders to seek court intervention.
Who Can Apply
Any member or debenture holder of a company may apply to the Court for relief under Section 346. This includes both individual shareholders and groups of shareholders acting together.
Grounds for Application
A minority shareholder can bring an oppression claim on two main grounds. First, that the affairs of the company are being conducted, or the powers of the directors are being exercised, in a manner oppressive to one or more members or debenture holders, or in disregard of their interests. Second, that some act of the company has been done or threatened, or some resolution has been passed or proposed, which unfairly discriminates against or is otherwise prejudicial to one or more members or debenture holders.
Remedies Available
If the Court finds that oppression has occurred, it has broad discretionary powers to make orders including directing or prohibiting any act, cancelling or varying any transaction or resolution, regulating the conduct of the company's affairs in the future, ordering the purchase of the aggrieved member's shares by other members or by the company itself, providing for a reduction of capital if the company purchases shares, and in extreme cases, ordering that the company be wound up.
The flexibility of these remedies allows courts to fashion appropriate relief based on the specific circumstances of each case. As established in Wong Kien Yip v Byard Spiral Mill Sdn Bhd [2022], Section 346 embodies a statutory right conferred by the legislature specifically to protect shareholders from oppressive conduct.
Derivative Actions Under Sections 347 and 348
While the oppression remedy addresses wrongs done to shareholders personally, derivative actions address wrongs done to the company itself. This distinction is crucial in Malaysian corporate law.
What is a Derivative Action
A derivative action allows a shareholder to bring legal proceedings on behalf of the company when the company itself, typically controlled by those who committed the wrong, refuses to take action. Under Section 347, proceedings brought under this section must be brought in the company's name, not the shareholder's name.
Importantly, Section 347(3) has abrogated the common law right to bring derivative actions in Malaysia. As confirmed in Goh Choon Kim v Chan Eng Leong [2022], the statutory derivative action under Sections 347 and 348 is now the only avenue available.
The Leave Requirement
Before commencing a derivative action, a complainant must obtain leave of the Court under Section 348. This serves as a safeguard against frivolous claims, as explained in Tan Eng Joo v Sandeep Singh Grewal [2022].
The complainant must give thirty days' written notice to the directors of their intention to apply for leave. Once leave is granted, proceedings must be initiated within thirty days.
Criteria for Granting Leave
Under Section 348(4), the Court considers two main factors when deciding whether to grant leave. First, whether the complainant is acting in good faith, which involves a twofold test as explained in Fazal Ellahi Oli Mohamed v Km Oli Mohamed Sdn Bhd [2023]: the applicant must honestly believe that a good cause of action exists with a reasonable prospect of success, and must not be bringing the derivative suit for a collateral purpose.
Second, whether it appears prima facie to be in the best interest of the company that leave be granted. Notably, as held in Low Yee Meng v Lau Kok Loon [2020], Section 348(4) does not require that it be solely in the best interest of the company—the fact that a successful derivative action would benefit the company is sufficient.
Winding Up on Just and Equitable Grounds
Section 465(1)(h) of the Companies Act 2016 provides that the Court may order the winding up of a company if it is of the opinion that it is just and equitable to do so. This remedy is typically considered a last resort when other remedies are inadequate.
When This Remedy Applies
The just and equitable ground is particularly relevant in quasi-partnership situations where there has been a breakdown of trust and confidence between shareholders. It may also apply when directors have acted in their own interests rather than the interests of members as a whole, as specified in Section 465(1)(f), or when the substratum of the company has failed, meaning the company can no longer achieve the purpose for which it was formed.
Court's Discretion
Courts have broad discretion in applying the just and equitable principle. Malaysian courts have endorsed the approach from the English House of Lords case of Ebrahimi v Westbourne Galleries Ltd, recognising that the foundation lies in the words "just and equitable" themselves, allowing courts to consider the circumstances broadly.
Choosing the Right Remedy
The choice between these remedies depends on the nature of the wrong suffered. If the wrong is done to you personally as a shareholder, the oppression remedy under Section 346 is appropriate. If the wrong is done to the company, such as directors misappropriating company assets, a derivative action under Sections 347 and 348 is the proper course. If the relationship between shareholders has irretrievably broken down, winding up on just and equitable grounds may be the only practical solution.
Practical Steps for Minority Shareholders
If you believe your rights as a minority shareholder have been violated, consider taking these steps. Document everything by keeping records of all communications, board resolutions, financial statements, and any evidence of misconduct. Review the company's constitution, as this may contain provisions regarding dispute resolution, share transfers, or exit mechanisms. Seek legal advice early, because these matters involve complex legal principles and strict procedural requirements. Consider negotiation first, as litigation is expensive and time-consuming, and a negotiated settlement may preserve business relationships. Act promptly, because delay can prejudice your claim and may be taken as acquiescence to the conduct complained of.
Conclusion
Malaysian law provides meaningful protection for minority shareholders through the oppression remedy, derivative actions, and winding up on just and equitable grounds. These remedies recognise that while majority rule is a fundamental principle of corporate governance, it must be exercised in a manner that respects the legitimate interests of all shareholders.
Understanding these rights is the first step toward protecting your investment. If you find yourself in a situation where your interests as a minority shareholder are being disregarded, knowing that the law provides these remedies can be empowering.
Disclaimer: This article provides general information about minority shareholder rights under Malaysian law and does not constitute legal advice. The application of these legal principles depends on the specific facts and circumstances of each case. Laws and their interpretation may change over time. If you are facing issues as a minority shareholder, you should consult a qualified Malaysian lawyer who can assess your specific situation and provide tailored legal advice. Nothing in this article creates a lawyer-client relationship.