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.
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.
In the recent Court of Appeal decision with grounds of judgment dated 9 September 2015 by Tan Sri Idris Harun, the Court of Appeal set out the test for the imposition of fiduciary duties on employees.
Unlike a director, an employee of a company would ordinarily not owe any fiduciary duties to the company.An employee may owe contractual duties as well as the common law duty of fidelity to the employer, but this is far removed from the stricter fiduciary duties.
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.
The Federal Court in its grounds of judgment dated 10 August 2015 in the case of Sinnaiyah & Sons Sdn Bhd v Damai Setia Sdn Bhd has made a significant clarification on the law. The standard of proof of fraud in a civil claim is now only based on a balance of probabilities and not beyond a reasonable doubt. The Federal Court overturned its earlier decisions in Ang Hiok Seng  2 MLJ 45 and Yong Tim  3 CLJ 229.
The Federal Court examined the different authorities in the UK, Canada, Australia, and Singapore. The Federal Court emphatically adopted the English position as set out in the House of Lords decision in In re B (Children)  UKHL 35. At law, there are only two standards of proof: beyond reasonable doubt for criminal cases and on the balance of probabilities for civil cases. As such even if fraud is the subject in a civil claim, the standard of proof is on the balance of probabilities.
There is no other hybrid or third standard. Neither the seriousness of the allegation nor the seriousness of the consequences should make any difference to the standard of proof to be applied in determining the facts.
The Federal Court made it clear however that the judgment only applied to the appeal in question and to future cases, and should not be utilised to set aside or review past decisions involving fraud in civil claims.
The statutory provision is far from being a “Star Chamber” clause (as originally described in In re Greys Brewery Company (1884) 25 Ch D 400 at 408), referring to the secretive Elizabethan court proceedings where prisoners were forced to answer self-incriminating questions.