Background Facts: A Family Business in Conflict
This case concerns the dispute among the shareholders of SNE Marketing Sdn Bhd (“the Company”), a multi-level marketing company engaged in selling food and nutritional supplements bearing the SNE trademarks.
In the High Court, one Low Ean Nee (“the Respondent”) who holds 50% of the Company’s shares, commenced oppression action against the 3 Appellants who collectively holds the remaining 50% shares pursuant to section 346 of the Companies Act 2016. The High Court rejected all complaints of oppression, dismissing the action.
Notably, the Respondent before commencing the oppression action, issued a statutory notice to seek leave to initiate a derivative action on behalf of the company under S 348(2) of the Companies Act 2016 (“CA 2016”), alleging that the Appellants were in breach of their fiduciary duties. Despite the notice, the Respondent filed the oppression action instead.
On appeal, the Court of Appeal upheld the rejection of 7 complaints but reversed the High Court’s decision on 1 complaint of oppression which concerned the assignment of the Company’s trademarks to one SNE Global Sdn Bhd (a company co-founded by the 1st Appellant) for a nominal consideration of RM10.00. The trademarks represented valuable intellectual property that contributed significantly to the company’s success. The Respondent was not informed of this transaction, and no resolution from the board of directors authorized this assignment.
The Appellants were accordingly found liable for oppression which entails a buy-out order of the Respondent’s shares.
Issue: Whether the Complaint is Actionable by way of Oppression Action under S 346 of the CA 2016 or Derivative Action under S 347 of the Companies Act 2016.
Appellant’s Argument
The Appellant’s argument is rather straightforward. The oppression action brought by the Respondent is flawed because the act of the First Appellant amounts to a misappropriation of company’s assets in breach of a director’s fiduciary duties and is therefore a corporate wrong that ought to be actionable under derivative action.
Respondent’s Argument
The Respondent argued that the grievance suffered is appropriately actionable through an oppression action. There ought not be a bright-line test to determine whether a shareholder’s complaint is actionable by way of oppression action or derivative action. It should be on case-to-case basis depending on facts of the case. The complaint can be containing both corporate wrong and personal wrong. This is because the Respondent seek for personal relief and suffered injury distinct from the other shareholders.
Further, it was argued that the Appellants’ interest no longer aligns with the Respondent, leaving her in a non-operational and unprofitable company. Under a derivative action, the Respondent will not be properly remedied because the damages will be paid back into a company that remains under the control of the Appellants even if her action is successful.
Federal Court’s Decision
The Federal Court allowed the appeal and reversed the Court of Appeal’s finding of oppression. Based on the facts, the loss is suffered by the Company and therefore the correct recourse is a statutory derivative action to be brought by any shareholder.
The Court acknowledged the challenges in distinguishing between personal grievances and wrongs to the company, particularly in cases where the wrongdoing affects both the Company and the shareholders.
The integral difference between oppression action and derivative action lies in the nature of the claim. An oppression claim under S 346 CA 2016 is a personal claim made by the minority shareholder who suffers a distinct and personal loss. On the other hand, a derivative action is brought on behalf of the company by shareholder in representative capacity.
The question to be asked when deciding on which is the appropriate action to pursue is: against whom has the alleged harm been caused.
The court outlined a legal test to determine whether a shareholder’s complaint is actionable by way of oppression or as a derivative action: –
- (A) The nature of the harm: Is the harm personal to the shareholder, or is it a corporate harm that affects all shareholders equally?
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- (i) If it is to one or more shareholders, then the oppression action is proper.
- (ii) If the harm is to the company alone, a derivative action is the appropriate cause of action.
- (B) The cause of action
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- (i) If the cause of action is vested in the company, then it is the company itself that should take action.
- (ii) If, on the other hand, it is vested in the shareholder, then he must take action.
Essentially, if the harm is done to the company, the plaintiff is the company, and a derivative action is appropriate. If the harm is personal to a shareholder, then an oppression action may be more appropriate.
The strict delineation is to prevent the shareholders from bringing oppression action for situations where there is no unfair conduct affecting their interest as shareholders. The oppression remedies are broader than those available in statutory derivative action. The oppression remedy will not be available where a minority shareholder wishes to leave and sell their shares, or to take control of or break up the company.
The following criteria was laid down by the Court to ascertain whether a shareholder’s complaint is actionable under S 346 or S 347 of the CA 2016:-
- (i) What is the act or omission that one or more of the shareholders complain of?
In short, identify the act, series of acts or omissions;
- (ii) Can the act(s) or omission(s) be characterised as being:
- (a) oppressive to;
- (b) in disregard of the interests of;
- (c) unfairly discriminatory against; or
- (d) otherwise prejudicial to one or more of the shareholders?
- (iii) Does the cause of action vest in the shareholder or in the company?
- (iv) Who has suffered loss or damage from the wrong done – the shareholder in his capacity as a shareholder, or the company?
- (v) Is the loss suffered by the shareholder as plaintiff separate and distinct to the plaintiff in his capacity as a shareholder, or is it a loss suffered by all the shareholders?
In conclusion, the decision in Low Cheng Teik v. Low Ean Nee serves as a significant precedent for future shareholder disputes in Malaysia. By clarifying the distinction between oppression actions and derivative actions, the Federal Court has provided a roadmap for minority shareholders seeking redress.
About the Authors
Lum Man Chan
Partner
Dispute Resolution
Halim Hong & Quek
manchan@hhq.com.my
.
Esther Lee Zhi Qian
Associate
Dispute Resolution
Halim Hong & Quek
esther.lee@hhq.com.my
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