I was interviewed by Focus Malaysia on the rights of minority shareholders in a public listed company context. My view was that there were limited options for the minority to express their displeasure at the directors or management of the company.
The interview was partly through email answers and also through a phone call. I set out below my emailed answers setting out my views.
I am honoured to join a long list of distinguished speakers drawn from the Companies Commission of Malaysia, Bursa Malaysia, and public listed companies. I will be speaking on 8 August at the Plenary 2 session. It will be a panel discussion on the new Companies Act regime.
The High Court has recently upheld the existence of the multiple derivative action in Malaysia. This is seen in the decision of Ranjeet Singh Sidhu & Anor v Zavarco plc & Ors  2 CLJ 975 (and with the original Grounds of Judgment here).
A multiple derivative action is where a shareholder of a holding company files an action on behalf of the subsidiary of that holding company. This common law action would allow shareholders to seek relief against wrongdoings where there are wrongs carried out against subsidiaries further down the corporate structure.
In the face of wrongdoings carried out against a company or its subsidiary, the law would clothe a suitably interested representative with the necessary standing to bring an action on behalf of the wronged company and to be the company’s champion.
The new Companies Act will undoubtedly transform Malaysia’s corporate landscape. Underpinning the changes are the aims of spurring entrepreneurship, making the corporate vehicle more attractive for businesses, deregulating certain aspects of the corporate process, and to introduce the concept of corporate rescue for ailing companies.
It is anticipated that the new Companies Act itself will not be brought into force until a year’s time or so. This is because the new regulations, rules and guidelines will still need to be drawn up.
I set out below 7 of the more significant areas we will see in the new Companies Act.
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.
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.”
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.
I highlight the recent Grounds of Judgment dated 27 August 2015 by Justice Dr Prasad Abraham in the Petra Perdana Court of Appeal decision.
The case involved the former directors of Petra Perdana Bhd being sued for breach of their duties in selling down the company’s stake in Petra Energy Bhd. The High Court had dismissed the suit finding that they had not acted in breach of their duties. They had exercised their business judgment in selling off those shares due to liquidity and cash flow problems (see Petra Perdana Bhd v Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra & Ors  11 MLJ 1).
At the Court of Appeal, the Court focused on the interplay between the directors’ powers of management (including the power to deal and dispose assets of the company) and the shareholders right to make resolutions to intrude on those powers of management.