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.
Focus Malaysia 16 July 2016 issue
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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.
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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 →
In the recent unreported High Court decision of Abdul Rahim bin Suleiman and another v Faridah binti Md Lazim & 7 Others dated 3 April 2015, Justice Wong Kian Kheong considered an application for leave under section 181A of the Companies Act 1965 to bring a statutory derivative action. I have written a commentary on the statutory derivative action provisions over here before.
The decision is useful in setting out some of the procedural guidelines that must be met in bringing such an action. Some of the significant points are:
- A complainant only apply under 181A to bring a new action, to act for the company when the company intervenes in an action, and to defend a pending action against the company.
- A complainant cannot seek to apply to act for the company where the suit is already concluded or where the suit is pending (as that suit would be under the control of the present management of the company).
- Notice under section 181B must be given to each of the directors. It is not sufficient just to address it to the Board of Directors.
- This decision gave some guidance on what should be in the contents of the section 181B notice and the decision referred to several Canadian cases.
- The application for leave is filed by way of Originating Summons (OS). In the OS, the applicant need only cite the Company itself as the sole Defendant. There is no need to cite the other alleged wrongdoers as parties to the OS. Nonetheless, citing the other alleged wrongdoers was not fatal in this case.