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In the corporate world, majority shareholders typically control the decisions of a company. However, Malaysian company law recognizes the need to protect minority shareholders from unfair treatment or actions that harm the company. Two primary legal remedies available are derivative action and minority shareholders’ oppression action. This. article explores the legal framework governing these remedies under the Companies Act 2016 (CA 2016) and outlines the conditions that must be satisfied for a successful claim.

 

What is a Derivative Action?

A derivative action allows a shareholder to initiate legal proceedings on behalf of the company when the company itself (often controlled by the majority) fails or refuses to act against wrongdoers. This ensures that those in control cannot commit wrongs against the company without consequence.

 

Legal Framework:

Section 347 of the Companies Act 2016 governs derivative actions in Malaysia.

Requirements to Initiate a Derivative Action:

A shareholder must apply to the High Court for permission to commence or continue a derivative action. The applicant must satisfy the following conditions:

 

⁃Good Faith (Bona Fide Intention)The applicant must act in the best interest of the company rather than for personal gain.

 

⁃Serious Question to be Tried: There must be a prima facie case showing that the wrong alleged requires judicial intervention

 

⁃Notice Requirement: The applicant must serve 14 days’ notice on the company’s directors, allowing them to address the complaint.

 

⁃Best Interest of the Company: The action must benefit the company as a whole, not just the applicant.

 

Examples of Grounds for Derivative Action:

•Fraud by directors

•Breach of fiduciary duties

•Misappropriation of company assets

 

 

Minority Shareholders’ Oppression Action Section 346 of the Companies Act 2016 provides relief for shareholders where the company’s affairs are conducted in a way that is oppressive, unfairly prejudicial, or discriminatory against minority shareholders.

 

What Constitutes Oppression?

Oppression refers to conduct that is burdensome, harsh, or wrongful. Examples include:

•Exclusion from company management decisions

•Misuse of company funds for personal gain

•Unfair dilution of shares

 

Requirements to Establish Minority Shareholder Oppression:

1.Standing to Sue

Any member of the company (including minority shareholders) can apply for relief.

2.Unfair Conduct

The applicant must prove that the company’s affairs are conducted in a manner that is:

•Oppressive to one or more shareholders

•Prejudicial to shareholder interests

•Discriminatory without reasonable cause

3.Conduct Must Be Continuous

A one-time breach may not suffice; the applicant must demonstrate ongoing unfairness.

 

Remedies Available:

The court has broad discretion under Section 346(2) to grant various forms of relief, including:

•Share buy-out: Requiring the oppressors to buy out the minority’s shares at a fair value.

•Winding up: An order to dissolve the company.

•Injunctions: Preventing further oppressive conduct.

 

Strategic Considerations for Shareholders

•When to Choose Derivative Action: If the harm affects the company’s assets and the directors refuse to act.

•When to Choose Oppression Action: If the shareholder’s personal rights are affected or they face exclusion or unfair treatment.

 

Practical Tip:

Always gather documentary evidence of the oppressive conduct or corporate wrongdoing before filing an action. Legal advice is essential to assess the merits of your case.

 

Conclusion

Malaysian company law recognizes the vulnerability of minority shareholders and provides two key avenues for redress: derivative action and minority oppression action. Understanding the legal requirements and choosing the appropriate remedy is crucial in protecting shareholder interests and ensuring corporate accountability.

If you are a shareholder facing such issues, seeking professional legal assistance can help you navigate these complex processes effectively.