Shareholder’s Remedies: Personal vs. Corporate Wrongs
Navigating the complexities of corporate governance can be particularly challenging for shareholders contemplating legal action. When confronted with grievances related to mismanagement or unfair treatment, they must choose between pursuing an oppression action or a derivative action on behalf of the company. Each option presents distinct legal challenges and strategic considerations, with broader implications for their investments and relationships within the company.
In Ning Yang Properties1, a minority shareholder of a property construction and development company initiated an oppression action, centred on allegations of misappropriation of company funds that disregarded his interests as a shareholder. The Defendants argued that the minority shareholder’s complaint, even if it holds water, constituted a corporate wrong that should be addressed by way of a derivative action. The trial judge concurred and held as follows:
[45] In this case, the defendants’ counsel Mr SM Shanmugam further postulated that the alleged misconduct by Lee Senior and Lee Junior in purportedly causing various contractors of the company to issue false claims (even if true) are alleged wrongs done to the company (not to the plaintiff qua member) and can only be remedied by way of a derivative action instead of an oppression action.
[46] This postulation to me, is of crucial importance as the CA 2016 provides a separate and distinct remedy for corporate wrongs by way of a statutory derivative action, found in ss 347 and 348 of the Act where the proper party to sue is the company and when the company is unwilling to bring an action, any member of the company can bring such an action on behalf of the company by way of derivative action by first invoking the leave of court as a safeguard against frivolous claims. Where the wrong is done to the member, such member can bring an action in his own right personally.
This distinction was further examined in the recent Federal Court decision in Low Cheng Teik2. The Plaintiff holds equal shares with the 1st to 3rd Defendants in SNE Marketing Sdn Bhd (“Company”), which they managed. In 2018, the 1st Defendant executed a Deed of Assignment to transfer the SNE trademarks to SNE Global, a company he co-founded, for a nominal sum of RM10 without authorisation from the Board of Directors. The Plaintiff then initiated an oppression action, alleging that the 1st to 3rd Defendants conducted the Company’s affairs in a manner that unfairly disregarded her interests as a shareholder and sought an order for them to buy out her shares.
The High Court dismissed the Plaintiff’s oppression action and found that, among others, the 2nd and 3rd Defendants were unaware of the assignment of the SNE trademarks, and therefore the Plaintiff was not unfairly discriminated against, given all the shareholders were equally affected by the impugned assignment. The Court of Appeal subsequently overturned the High Court’s decision, finding that the assignment of the SNE trademarks was “unquestionably dubious” and amounted to non-compliance with norms of fair dealing and violation of conditions of fair play, thereby satisfying the elements of oppression.
Federal Court’s Ruling
At the Federal Court, a pivotal leave question was posed on the dichotomy between the 2 causes of action – “What is the legal test to determine whether a shareholder’s complaint is actionable by way of an oppression action or a derivative action?”.
In formulating the legal test, the Federal Court elucidated:
- The statutory remedy for oppression pursuant to s. 346 Companies Act 2016 is to provide redress against oppressive conduct in the management of a company where a shareholder suffers injury in their personal capacity. The aggrieved shareholder must demonstrate that they were specifically singled out as a victim, suffering a distinct loss not shared by other shareholders. A wrong done to the company which affects all the shareholders equally falls outside the ambit of this section.
- Conversely, the statutory derivative action under s. 347 Companies Act 2016 allows a shareholder to pursue an action on behalf of the company in a representative capacity to remedy a wrong done to the company itself, where the shareholder suffers only incidental loss.
- The strict delineation is to prevent shareholders from misusing oppression actions as an exit mechanism to force a share buyout or to seek a company wind-up, remedies that would otherwise be unavailable in a derivative action.
- Another distinctive feature is the rule preventing claims for reflective loss, where the shareholder’s loss merely reflects the company’s loss. The rationale is that such reflective loss, either due to diminution of the share value or dividends, will be addressed through the company’s recovery from the wrongdoer.
- The reflective loss principle is a corollary to the proper plaintiff rule, in that, where the loss suffered by an aggrieved shareholder can be made good if the company were able to enforce its rights, the proper party to recover that loss is the company and not the individual shareholder.
- Ultimately, an oppression action should not be utilised to vindicate wrongs which are, in substance, corporate wrongs inflicted upon the company. The appropriate recourse for a shareholder seeking redress for losses to the company caused by those in control, who refuse to take steps to recover such losses, is to pursue a derivative action to enforce the company’s rights.
In the present facts, the wrongful assignment of the SNE trademarks, being assets of the Company, was a collective loss affecting all shareholders. For the Plaintiff to prevail in an oppression action, she would have required to demonstrate that the 1st to 3rd Defendants colluded and benefitted from the assignment to her exclusion. As there was no such evidence and the loss was that of the Company, the proper course of action was a statutory derivative action. Consequently, the Federal Court allowed the Defendants’ appeal (thus affirming the High Court’s decision in dismissing the Plaintiff’s oppression action).
Conclusion
The decision in Low Cheng Teik underscores the critical distinction between the 2 separate causes of action available to shareholders. It is essential for shareholders to accurately assess whether the wrongful conduct they complain of constitutes a ‘personal wrong’ directed solely at them or a ‘corporate wrong’ affecting all shareholders equally. Failing to do so could result in losing the legal battle before it even begins.
Author: Calvin Hooi Chung Wai
References
- Chan Tai Ping v Ning Yang Properties Sdn Bhd & Ors [2022] 11 MLJ 394, HC. The High Court decision was affirmed by the Court of Appeal in [2024] CLJU(O) 2 ↩︎
- Low Cheng Teik & 3 Ors v Low Ean Nee [2024] CLJU 1861, FC ↩︎
The views and opinions attributable to the author(s) of this publication are not to be imputed to the firm, Shan Chambers. The contents of this publication are intended for purposes of general information and academic discussion only. It should not be construed as legal advice or legal opinion on any fact or circumstance