Do you own some shares in a company? Did you buy the said shares because you thought the company has a great future profit potential? That sounds like a great decision. But how many shares did you buy? Less than 51% of the issued shares? If so, then you are a "minority shareholder".

Shares allow voting rights but if you are not a majority or substantial shareholder, then there is every chance that you maybe outvoted on a matter that may be crucial to you. What if you feel what the directors/majority shareholders are doing is wrong? Can you take action?

The general answer is no. There is a rule called the "Foss v Harbottle" rule which states that "the proper plaintiff in respect of wrong committed against a company, is the company; not the shareholder". In such a scenario, if you feel that the directors/majority shareholders are doing something wrong, they are committing that wrong against the company, not against you personally. Therefore, the entity which has the right to take any action, is the company and not you.

Therefore, that leads to a conundrum. How can action be taken by the company if the wrongdoers (being majority shareholders) are already in control of the company? Surely they would never cause the company to take action against themselves. What then can you (as a minority shareholder) do?

Fret not! There is Section 181 of the Companies Act 1965: Remedy in cases of oppression. But it should firstly be borne from the outset that this is not a remedy to be used "willy-nilly". A person who joins a company (as a member/shareholder) must bear in mind that he/she does so on the understanding that he/she may be outvoted. This is called the "majority rule" – which simply means the will of the majority should prevail, just like democracy. You therefore may not challenge a decision of the majority just because you do not like it. There must be "oppression".

What amounts to "oppression" (for the purposes of our Companies Act)? Lord Wilberforce in Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227 states:

"The mere fact that one or more of those managing the company possess a majority of the voting power and, in reliance upon that power, make policy or executive decisions, with which the complainant does not agree, is not enough. Those who take interests in companies limited by shares have to accept majority rule. It is only when majority rule passes over into rule oppressive of the minority, or in disregard of their interests, that the section can be invoked; there must be a visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder was entitled to expect before a case of oppression could be made up... their Lordships would place emphasis on 'visible'... Neither 'oppression' nor 'disregard' need be shown by a use of the majority's voting power to vote down the minority: either may be demonstrated by a course of conduct which in some identifiable respect, or at some identifiable point in time, can be held to have crossed the line."

The above case merely makes a statement of principle. But it is not a very useful practical guide because it is vague. However, over the years there have been a few guidelines:

  1. Domination and Control: It must be shown that the wrongdoer is holding "dominant power" in the company. If he/she is a majority shareholder, then clearly such a person has dominant power. But one does not need to be the majority to be dominant as this term is meant to be interpreted in a way which makes sense. An example of that would be where a person (who does not own majority shares) may be deemed to be dominant if the articles of the company provide him with very wide ranging powers.
  2. Mismanagement is not actionable: If the complaint pertains merely to mismanagements then it is not actionable or not "oppressive". Mere disagreements about how the company should be run are not considered "oppression". But on the other hand, if the directors are completely indifferent to the commercial interests of the company and allow the business to deteriorate to the point of inactivity, then that may amount to "oppression" (Ng Chee Keong v Ng Teong Kiat Highlands Plantations Ltd [1980] 1 MLJ 45).
  3. The oppression must affect you as a member/shareholder: What this means is that the oppressive act must have had a detrimental effect on your interests as a shareholder. This means that it must have some connection with the affairs of the company. For example, if you are not paid for your consulting services by the directors, then you cannot seek remedy under this provision. This is because it has affected you in your capacity as a contractor or service provider to the company and not as a shareholder. It does not matter even if you may own shares in the company or if the only reason you were asked to provide such services were because you were a member of the company.

If you fulfil the requirements above, then you may be entitled to an appropriate remedy. But bear in mind, the burden of proof is on you as the "complainant"; i.e. he who alleges must prove. It is not for the wrong-doer to prove their innocence. Getting a remedy in this respect may not be easy, but there are many deserving cases which have been successful. A good example is the case of Re Coliseum Stand Car Service Ltd [1972] 1 MLJ 109.

In Re Coliseum, the respondent (wrongdoer) was a majority shareholder in the company and more or less ran the business himself in his own way. This in itself is

not wrong, but the respondent proceeded to do the following:

  • Failed to declare dividends even though the company was profitable;
  • Continued to receive a salary from the company although he was absent from the country for three and a half years;
  • Made loans to himself and his son; and
  • Kept certain details secret regarding the terms of the renting out of the company's premises.

This is a good illustration of a case that is deserving of remedy under Section 181. Clearly, the majority shareholder in this case sought to abuse the power that came with his majority shares (and hence his majority voting rights) and all the elements justifying a remedy against oppression were in place:

  1. There was domination by the respondent;
  2. It was not merely mismanagement; and
  3. The acts adversely affected the petitioner (minority shareholder) in his capacity as a shareholder.

Taken collectively, there was clearly "a line that was crossed" and a "visible departure from the standards of fair play which a shareholder is entitled to expect" as explained by Lord Wilberforce (above). Surely a shareholder can fairly have an expectation, for example that dividends would be declared if the company has been doing well.

The Court is given wide-powers under Section 181 to grant any remedy "as it thinks fit" which the Court usually exercises in the way that is probably most fair in the circumstances. In Re Coliseum, the Court ordered the wrongdoer to transfer such amount of shares to the other shareholders such that the company would be henceforth managed jointly.

Thus, all hope is not lost should you find yourself in an unfair situation vis a vis as a minority shareholder of a company. Do not assume that just because you do not have enough voting rights to change any wrongdoing that nothing can be done. If the conduct of the company's affairs have "crossed a line", you may just be able to bring an action against the wrongdoer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.