Section 346 of the Companies Act 2016 (“CA 2016”) (then s.181 of the Companies Act 1965 (“CA 1965”)) sets out remedies available to shareholders who have been oppressed. Generally, oppression occurs when the affairs of the company are being conducted in a manner oppressive to one or more of the shareholders of the company, or when the interest of a shareholder has been unfairly prejudiced and/or disregarded.
Some instances where shareholders oppression have been found are:
- Misappropriation of company assets
- Failure to declare dividends to its members whilst high salaries are drawn by directors holding majority voting power
- Dilution of shareholding or voting rights
- Serious mismanagement of the company’s affairs
Shareholder oppression commonly occurs to the disadvantage of minority shareholders, as they are more likely to be outvoted by the majority in making decisions pertaining to the company’s affairs.
This article discusses instances where oppression of majority shareholders may be found, as opposed to minority shareholders.
YES, MAJORITY SHAREHOLDERS MAY BE FOUND TO BE OPPRESSED
It is firstly pertinent to note that the wordings of both s.346 CA 2016 and s. 181 CA 1965 do not confine the application of the provision to minority shareholders.
The High Court in the case of Kumagai Gumi Co Ltd v Zenecon-Kumagai Sdn Bhd [1994] 2 MLJ 789 (the “Kumagai Gumi” case), as affirmed in the Federal Court case of Owen Sim Liang Khui v Piasau Jaya Sdn Bhd & Anor [1996] 1 MLJ 113, has made it clear that majority shareholders who (1) are not in control of the management of the company; and (2) are unable to control the board for whatever reason, can also be oppressed and be entitled to the statutory remedy provided for under s.346 of CA 2016 and s. 181 CA 1965.
INSTANCES WHERE THERE MAY BE OPPRESSION AGAINST MAJORITY SHAREHOLDERS
- Where there has been a separate shareholders agreement which confers managerial powers on the minority shareholders
In the Kumagai Gumi case, the oppression petition was initiated by one minority shareholder. Notwithstanding, the Court found that pursuant to a shareholders’ agreement, the majority shareholders had in fact handed over control and management to the petitioner premised on his undertaking that he would inject funds into the company, which he never did. In a turn of events, the High Court found that considering the case as a whole, the petitioner had not only failed to make out a case of oppression but was in fact the true oppressor.
- Where the company has issued shares of different classes with different voting rights
This is entrenched in the English case of Re H R Harmer Ltd [1958] 3 All ER 689, where the defendant and his wife, despite being the minority shareholders, collectively held more voting power than the majority shareholders by virtue of their shareholding of class “B” shares, which carries all the voting power. It was held that the majority shareholders, who mainly held class “A” shares with no voting power, had been oppressed and were not barred from claiming relief from the defendant’s oppressive behaviour.
- Where the company’s constitutional arrangement has rendered the majority shareholders powerless
In the New Zealand case of Sturgess v Dunphy [2014] NZCA 266, the majority shareholders, although holding more than 75% of the shares, had no control over the company’s affairs due to the way the company’s constitution had been drafted which does not empower them to pass ordinary or special resolutions. Further, the company’s governance has been vested to its board of directors to an unusual extent and the appellant, as a director, was able under the company’s constitutional arrangements to veto Board decisions. Those arrangements permitted deadlock at both shareholder and Board levels.
Coupled with a management services contract which had nominated the appellant as a Chief Operating Officer that the Board could not terminate, the majority shareholders were rendered substantially powerless to discipline any unauthorised conduct or actions in the company conducted by the appellant, a director and minority shareholder of the company.
In this instance, the New Zealand Court of Appeal held that it is manifest that the appellant had enjoyed the capacity, as a matter of fact and law, to behave in a manner that had oppressed the majority shareholders
- Where the majority shareholders do not possess any other power to self-remedy the prejudicial conducts
In the case of Ng Kek Wee v Sim City Trading Ltd [2014] 4 SLR 723, the Singaporean Court of Appeal held that although being a majority shareholder of the company would not preclude a shareholder from claiming relief for oppression, the question to be asked is whether the said shareholder has the power to self-help or remedy any prejudice or discrimination suffered by him.
In this case, the petitioner, by virtue of his majority shareholding, could have voted its representatives onto its board of directors to put an end to the oppressive conduct and did in fact do so after his commencement of the oppression suit, and was thus disentitled from claiming relief for oppression.
Conclusion
It is thus clear that in certain situations, majority shareholders may be found to be oppressed and may be entitled to the remedy accorded for under s.346 CA 2016. In conclusion, the majority shareholders must show that, amongst others, despite their majority shareholding, they were unable to self-remedy the prejudicial or discriminatory state of affairs, thereby rendering the said majority shareholder “powerless”.