In an earlier article on ‘Getting Away with Fraud: Defraud the Subsidiary?‘, I had written about the development of the multiple derivative action in other jurisdictions. This is where a shareholder of a holding company brings an action on behalf of a subsidiary of that holding company. In a way, it allows you to skip past one or more levels of the corporate structure in order to bring an action for a wrong done to that subsidiary.
In the recent unreported Grounds of Judgment dated 16 November in the Zavarco case, the High Court upheld the existence of a multiple derivative action in Malaysia. It is therefore possible for a shareholder to bring such an action.
This recent High Court decision in CLLS Power System  11 MLJ 485 emphasised that the mere filing of an appearance would amount to a step in the proceedings. This would be fatal to applying for a stay under section 10 of the Arbitration Act. This is the importance of preserving the right to apply to stay the court proceedings pending arbitration. An application to stay court proceedings could only be made before that applicant had taken a step in the proceedings. Once the applicant took such a step, the Court would treat it as having waived its right to arbitrate and had instead opted for court litigation.
Justice Mary Lim referred to her earlier decision in Winsin Enterprise  3 CLJ 634 as well as to the Federal Court decision in Sanwell Corp  2 MLJ 625.
An article analysing the multiple derivative action where a shareholder of a holding company can possibly file an action on behalf of a subsidiary of that holding company.
Where a wrong has been carried out against a company, the rule in Foss v Harbottle provides that the company itself must bring an action and not the shareholder of the company. An aggrieved shareholder may be left powerless in the face of wrongdoing by the majority.
The common law then carved out an exception for a shareholder to bring an action on behalf of the company where the company itself is unable to do so. This is allowed where a wrong is committed against the company and at the same time, the wrongdoers are in control of the company. This is known as a ‘fraud on the minority’ as the wrongdoers are able to prevent the company from taking action against them. In these circumstances, a derivative action by the shareholder on behalf of the company is allowed.
Certain jurisdictions have also extended the derivative action to allow a shareholder of a parent company to bring an action on behalf of a subsidiary of that parent company. Such an action has been termed as a multiple derivative action.
The ability to bring a multiple derivative action is extremely pertinent in today’s world, where businesses can be and are often structured into a multi-tiered group of companies and subsidiaries. Shareholders may invest in the investment holding company, with the actual businesses being run and assets held by the first-tier or second-tier subsidiaries further down the corporate structure.
Lord Millet, writing extra-judicially in Multiple Derivative Actions, Gore-Browne bulletin July 2010, succinctly describes the consequences if the situation were otherwise:
“The moral for would be fraudsters is simple; choose [a] company, and be careful to defraud its subsidiary and not the company itself.”
We will discuss the availability of the multiple derivative action in various jurisdictions and the application of these cases in Malaysia. Continue reading
For those interested, the Companies Bill 2015 has finally been released. It clocks in at 628 pages (solely for the English version), 610 clauses, and 13 Schedules.
Do note that the English version will be authoritative text of the Bill (see P.U.(B) 403/2015 under the National Language Acts 1963/67).
From my quick reading, the Companies Bill 2015 does differ from the 2013 consultation copy issued by the Companies Commission. There have been improvements and tweaks made to several of the sections, while possibly leaving some lacunas.
Will cover more of the areas in future posts. I have to soon say goodbye to oft-used sections like sections 176, 181, 181A, and 218 under the Companies Act 1965 and then memorise new sections.
I was interviewed by The Edge Financial Daily and I shared my views on some of the challenges that directors will face under the upcoming Companies Bill.
“It’s not an easy balancing act to be done. But if you are speaking from the perspective of minority shareholders or even shareholders, I would say they will be welcoming these changes because there is more information, and the directors have to allow a platform for the shareholders to discuss, query, ask questions, even if it’s not contained specifically in any audited accounts.
“Free flow of information is quite welcomed,” Lee told The Edge Financial Daily after presenting his paper “New Companies Bill: Upcoming Changes and Impact on Directors and Shareholders” at the Malaysia Legal and Corporate Conference on Oct 7.
Although Lee welcomed the greater flow of information and interaction between the board and the shareholders, he warned of the possibility of shareholders abusing the new privileges to the detriment of the company and its operations.”
My views in The Edge were also briefly discussed on the BFM Morning Run.
It appears from the Parliament website that the Companies Bill 2015 was tabled for its First Reading on 19 October 2015 and its Second Reading on 20 October 2015. We are now close to ushering in the new laws.
The Federal Court decision in Hong Leong Finance Bhd v Low Thiam Hoe and another appeal  8 CLJ 1 sets out a significant clarification on the principles for amendment of pleadings very close to trial (as opposed to amending pleadings at the beginning of proceedings).
This decision adds additional requirements to the Federal Court case of Yamaha Motor  1 MLJ 21 which originally, set out three basic requirements: (i) whether the application was bona fide; (ii) whether the prejudice caused to the other side can be compensated by costs; and (iii) whether the amendments would not in effect turn the suit from one character into a suit of another and inconsistent character. Continue reading
Marcus van Geyzel and I have just launched The Malaysian Lawyer website. It is a collaborative blog between two lawyers, and we’ll share our experience on a variety of legal and non-legal matters. Marcus is a co-founder of his corporate boutique law firm and is a corporate lawyer. On the other hand, I will share more from my perspective as a corporate litigator.