Summary Notes on Company Law : Majority Power / Protection of Minority

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Company Law - Majority Power / Protection of Minority

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CHAPTER 13 : MAJORITY POWER & PROTECTION OF MINORITY

z  FOSS v HARBOTTLE

Ø  FOC : 2 shareholders in the co. brought an action vs the co.’s directors & other persons. It was alleged that the prop. of the co. had been misapplied & that certain transactions were entered into improperly.

Ø  HELD : The injury caused by the df is not exclusively directed to the pf, it is to the co. as whole. As for that only the co. can sued the df for improper behaviour upon the co., the indi. don’t have right to do so.

Ø  PRINCIPLE :

         i.            THE PROPER PF RULE : If the wrong is committed vs the co., the co. must sue not its shareholders. S.16(5) of CA give power for the co. to sue own its own name.

       ii.            THE INNER MANAGEMENT RULE : Internal irregularities within the co. may be ratified by gen. meeting hence the co. may not sue. Its useless to allow the minority to held any meeting when the general meeting can ratified the irregularities. If the majority can pardon the wrongdoing, minority shall not sue. This is because internally, the majority can decide whether or not to take an action.

z  EXCEPTIONS TO THE PF PROPER RULE

1)       An infringement to the member’s personal right.

ü  WOOD v ODESSA WATERWORKS

·         PRICINPLE :  Members are entitled to bring personal action vs the co. to enforce their right that a dividend be paid in cash as provided in the article.

2)       Ultra vires act : A conduct of the co. which is vs its objects – S.20(2) of CA

ü  PAIDAH GENGANAIDUIS CASE

·         FOC : P claimed that the resolution passed by the co. at an EGM was null & void for ultra vires, illegal & fraud on the minority.

·         PRICINPLE :  Ct found no evidence of ultra vires & dismissed the P’s claim.

3)       A decision in which need a special majority but was passed with simple majority.

ü  EDWARDS v HALLIWELL

·         PRICINPLE : 2 members of trade union successfully restrained an attempt by the delegate meeting to increase the members contribution without obtaining the 2/3 majority required under the rules.

4)       Where the justice of the case so requires.

ü  BIALA v MALLINA

·         PRINCIPLE : Ct shall not be restrained from determining whether or not the party should proceed with DA.

5)       Fraud on minority.

ü  ABDUL RAHIM v KRUBONG INDUSTRIAL PARK

·         PRINCIPLE : It is not necessary to prove an ACTUAL DIHONESTY before the minority can bring the case to the ct. It is suffice if they can prove that majority had abused the power vested on them or such power had been used for other purposes or not been used for the purposes vested on them by statute, memorandum of the co, etc. Eg : Not declaring the dividend / not informing the true value of market price of share = implied dishonesty.

Р ANOTHER EXCEPTION : S.181A of CA: Statutory Derivative Action

Ø  This SDA had been introduced in 2007, and does not abolished the Common Law DA, S.181A(3) of CA.

Ø  Here, for the applicant to bring an action on behalf of the co. based on the fraud of minority (s)he need to show that :

         i.            The wrongdoer had obtained money from the co.’s expense.

       ii.            The wrongdoer will / had exercise his majority votes to prevent the co. from suing the wrongdoer.

ü  ABDUL RAHIM v KRUBONG INDUSTRIAL PARK

·         PRINCIPLE : DA is based on the premise that the co. which has been wronged is unable to sue because the wrongdoers are in the control of the co.  here, a minority shareholder may bring an action on behalf of himself & other shareholders of the co., other than D. In short, before one can initiate DA, the wrongdoers must be in control.

ü  TING CHONG MAA

·         FOC : Both the P & D held equal shares in the co., but D is the managing director.

·         PRINCIPLE : Being a majority / minority is not a conclusive test as the exception required only the alleged wrongdoers to be in control. Control includes de facto control.

Р GROUNDS FOR BRING ACTION UNDER SDA

Ø  OPPRESSION :

·         The applicant has to show that there is oppression result caused to him.

Ø  REMEDY AVAILABLE :

·         S.181 – The oppression remedy

·         S.218(1)(f) & (i) – The ct may order the winding up of co. if it is just and equitable to do so / because the directors of the co. are acting on their own interest.

ü  SOH JIUN JEN v ADVANCE COLOUR LABORATORY

·         PRINCIPLE : The court held that oppression only available for the party in which had been infringed his PERSONAL RIGHT as a member, not his PRIVILEGES as director (as per this case the director used S.181 to allege oppression).

Ø  S.181(1)(a) :

·         Here, the ct will provides a remedy for a member where –

       The affairs of the co. are being conducted / the power of the directors are being exercised

IN :

       In an oppressive manner to one of the members including the applicant / In a disregard manner of the member’s interest.

Ø  S.181(1)(b) :

·         Here, the ct will provides a remedy for a member where –

       An actual or proposed act on behalf of the co. / A resolution or proposed resolution of members, debenture holders or class of members of the co.  IS EITHER :

       Unfairly discriminatory to a member or members, or shareholders or debenture holders which include the applicant himself / Prejudicial to the members or member or shareholder or debenture holders which include the applicant himself.

z  4 Main Elements (Ground To Use S.181 CA)

Ø  OPPRESSION & DISREGARD INTEREST (s.181(1)(a))

·         Oppression : “Burdensome, harsh & wrongful”

ü  SCWS v MEYER

·         FOC : The parent controlling co. here had cause a detrimental impact of the subsidiary co. via their controlling manner. Besides, the directors of the parent co. had cause loss to the subsidiary’s co. shareholders, Dr. Lucas & Dr. Meyer. The parent co. destroyed the subsidiary co.

·         PRICINPLE :  Ct order the pf to purchase the shares of the 2 members at a price decided by ct.

·         Disregard : “Proof on = Co. aware of the interest +  Still put an act to override it ”

ü  RE KONG THAI SAW MILL

·         PRINCIPLE :  Here, there must be a VISIBLE violation on standards of fair dealing which the shareholders is supposed to entitle before the case of oppression took place. DISREGARD here must not only a failure of taking into account the minority’s interest but ALSO there must be an evidence of awareness on of that interests + the act of override such interests.

       Lack of fair dealing

ü  RE HARMER LTD

·         FOC : A co. is owned by a 77 yo man who owned majority of the shares. Later, at the age of 88 yo the other members of shareholder (minority) felt that the fact Mr. Harmer had old, deaf and acted foolishly in the management of co. is causing a lack of fair dealing in the co.

·         PRINCIPLE :  Due to that fact, Mr. Harmer is not allowed to interfere with the co. management.

ü  NG CHEE KEONG v TEONG KIT HIGHLANDS PLANTATION

·         FOC : The co. asset is consisting of tea plantation. Due to the neglecting part of the director, such asset incurred loss.

PRINCIPLE :  There was an oppression because the directors had conducted the affairs of the co. in disregard of the member’s interest.

       Unfairly restricting dividends

·         The general is that, even if the co. decided not to declare any dividend of the co., it is not wrong to do so, unless such act is accompanied by the directors’ act which is improper purpose / not for the best interest of the co.

ü  RE COLISEUM STAND CAR SERVICE

·         FOC : A director had manage a business of a co. by himself without consulting other directors and co. members. He also not declaring any dividend of the co. despite the fact that the co. had gained a big profit.

·         PRINCIPLE :  There was an oppression and disregard of member’s interest.

Ø  UNFAIR DISCRIMINATION & PREJUDICE (s.181(1)(b))

·         ‘UNFAIRLY’ Discriminate : “To differentiate”.

·         Prejudicial : “Causing prejudicial detrimental which damaging to some rights or interests.”

ü  JAYA MEDICAL CONSULTANT v ISLAND & PENINSULAR BHD

·         PRINCIPLE :  To use the above grounds, it must not be a mere discrimination or prejudicial. It is held that it must be ‘UNFARILY’ discrimination / prejudicial. The test here is the objective test. The test is that is the commercial bystander feel it is reasonable for the directors to act so. If yes, then the case to sue the director fail, but if no then the directors is at fault and this ground can be used.

       Unfairly prejudicial conduct

·         This concern on the mismanagement of the co.

·         Here, if the applicant can prove to court there is SERIOUS mismanagement in the co, not a mere disagreement managerial decisions, and it constitute to the UNFAIR PREJUDICIAL to the interest of the members, S.181 can be invoked.

·         Even though that ct will be very reluctant to interfere in the co. internal management, but if such interest is affected by the internal management of the co., such interference is relevant.

Ø  DOES APPLICANT NEED TO SHOW THE WRONGFUL ACT CONT. TILL THE DATE OF THE PETITION?

·         S.181(1)(a) – Require a proof on the continuation of such act till the date of petition.

·         S.181(1)(b) – Doesn’t require the continuation of the act as it deals with future / threatened conduct that may amount to acts which unfairly discriminate / prejudicial to the members’ interest.

ü  OWEN SIM v PIASAU JAYA

·         PRINCIPLE : In gen. S.181 only require the effect from the act to persists at the date of the petition.

ü  KONG THAI SAWMILL

·         FOC : The family business co. was managed by the elders brothers who also the person who held the majority of the shares in the co. It were alleged that the brothers had abused their power as directors when they drew from the co. funds. Besides there as oppression when they had used the co. money for funding a political funds, and also advanced the co. funds for investment purposes. However, all the funds were authorised by the board meetings as a loan that had then repaid by the brothers.

·         PRINCIPLE : There was no oppression.

è  REMEDY FOR THE GROUNDS TAKEN IN S.181(1)(a) & (b).

Ø  As the ct had granted the claim under S.181 (1), it is now open for the court to granted the remedy stated in S.181(2).

Ø  As per the S.181(2) ct may :

a)      Direct of prohibit any act/cancel/vary any transaction / resolution.

b)      Regulate the conduct of the affairs of the co. in future.

c)      Provide for the purchase of the shares / debenture.

d)      In the case of a purchase of shares by the co. provide for a reduction accordingly of the co.’s capital.

e)    Provide for the co. wound up.

       Voluntary Winding-Up As A Member’s Remedy

·         A member can apply for making the co. to compulsorily wound up via :

                     i.            S.218(1)(i) – If it is just & equitable to do so.

                   ii.            S.218(1)(f) – The directors are acting on their own interest rather than the interest of the co. / acting in a way that it is unfair or unjust to the members.

·         ISSUE : Can applicant brings 2 action as per S.181 & S.218 as they kind of overlap?

ü  LAI KIM LOI CASE

·         PRINCIPLE : The applicant cannot roll up both actions at once.

ü  OON AH BAA v EAGLE & PAGODA

·         PRINCIPLE : In this case the application was made to wind up the co. on  the allegation of oppression.

ü  HENDRICK INTERNATIONAL HOTELS v YTL HOTELS

·         FOC : Hendrick wanted YTL to purchase the shares in the co., thus he files a petition under S.181 for oppression ground. This petition had been filer before the winding up order been granted. Trial judge had mistakenly struck of the oppression petition thinking that the winding up order had been granted to the co. Hendrick applied to COA.

·         PRINCIPLE : COA held that oppression order cannot be heard when a winding up order is already made. It was also held that to use the S.181 & 218, the petitioner needs to come before court with a clean hand, based on fairness & justice concept.

è  WINDING UP UNDER S.218(i)

Ø  The ct will uphold this provision in certain provision :

         i.            If the principal object of the co. cannot be achieved / has failed – RE TIVOLI FREEHOLDS

       ii.            If the co. is form for fraudulent purpose : - RE THOMAS EDWARD BRINSMEAD

      iii.            If it is a small co. & the members are in a deadlock (dispute cannot resolved) – RE YENIDJE TOBACCO

     iv.            If there is a justifiable lack of confidence in the management of the co.’s affair – LOCK v JOHN BLACKWOOD

      v.            If it is a small co. & the members are denied the right to take part in the management of the co.– ABDUL RAVAFF v PASLA HOLDINGS