Written by Richard Wee & Jacob Wong
A brief comment about shareholders role and rights under the Company Act 2016 of Malaysia
Introduction
Shareholders are the backbone and somewhat, owners of a company. It is imperative for shareholders to be aware of their rights and interests as stakeholders in a company. This article will attempt to illustrate the general rights of shareholders with some observations on issues related with minority shareholders. We will address these issues under 3 broad sub-headers:-
- Role of shareholder
- General rights of shareholders
- Protection of minority shareholders
Generally in any market, a person can become a shareholder in a public company by purchasing stocks issued by the company through a brokerage firm in the market. For a private company, shares have to be purchased through contacting and negotiating with the owner of the company in order to make an investment.
The main function of a company’s shareholders is to provide financial backing to the company in a form of investment. In return, they will obtain dividends when the company is generating profit. Normally, shareholders will not be involved in the management of the company, instead they will appoint a board of directors to run the company’s day-to-day business. On a side note, directors do not necessarily have to be one of the shareholders in the company.
Shareholders are also required to attend Annual General Meeting (AGM) which will be held once a year and also Extraordinary General Meeting (EGM) which will be taking place in time of emergency or any special event occurring. During these meetings, shareholders will be discussing and voting on company’s matters. Apart from that, shareholders also play a vital role in the corporate governance structure of a company.
As the owners of the company, it is necessary for shareholders to have the privilege of having their rights preserved. There are a variety of rights provided in the legislation as well as the common law and it is important for a shareholder to be aware of all the rights they possess.
According to Section 71(1) of the Companies Act 2016 (CA 2016), a share in a company, other than preference shares, confers on the holder :
- the right to attend, participate and speak at a meeting;
- the right to vote on a show of hands on any resolution of the company;
- the right to one vote for each share on a poll on any resolution of the company;
- the right to an equal share in the distribution of the surplus assets of the company; or
- the right to an equal share in dividends authorized by the Board.
Another fundamental right of a shareholder is the right to vote on the appointment and removal of directors. This right gives all the shareholders an opportunity to elect the best possible board of directors to manage the company and when the shareholders have lost their patience on the directors, they will be able to launch the motion of vote of no confidence as well. These decisions will be decided through an ordinary resolution on show of hands where each member will have one vote on their hand and this is governed under Section 293(1)(b) CA 2016. An ordinary resolution requires at least 51% of the members favouring the motion whereas a special resolution requires 75%.
On the other hand, shareholders are able to vote on a company’s written resolution under Section 293(1)(a) of CA 2016 in respect of each share or stock held by them. This right gives shareholders the power to decide how the company is to be run or administered. However, any alteration or amendment of the company’s resolution can only be done by way of ordinary or special resolution.
In addition, shareholders will be given the power to have pre-emptive rights on the issuance of new shares under Section 85 CA 2016 unless stated otherwise under the company’s constitution. The main objective of this right is to protect the shareholder’s power of voting.
Throughout the history of company law, minority shareholders do not have much power to challenge the decisions or conducts of the majority shareholders and this is due to the majority rule applied in most of the companies. The law has always been evolving in this area to provide minority shareholders with adequate protections. Although the law should not interfere with a company’s internal management, it is allowed to prevent majority shareholders from oppressing the minority.
(i) Director’s duty of care
Shareholders have the right to expect the directors of the company to at all times act in good faith in the best interest of the company, failing to do so will be contravening with Section 213(1) CA 2016. This section can prevent the majority from abusing their voting power to harm the minority shareholders’ interest.
In Section 351 CA 2016, the section provides that if anyone acts in a way contrary to this Companies Act, the court may order an injunction against the said action. Therefore, if the directors fail to act in the company’s best interest, minority shareholders may seek an order of injunction from court.
(ii) Derivative action
Common law’s derivative action is one of the protections given to the minority shareholders if a wrong has been done to the company by the directors. One of the exceptions to the majority rule is fraud on the minority. In the case of Tan Guan Eng & Anor v Ng Kweng Hee & Ors [1992] 1 MLJ 487 , the court held that fraud can be proven if the plaintiff can prove that wrongdoers abused their power and are still in control of the company. Minority shareholders can bring this derivative action on behalf of themselves and other shareholders against the wrongdoers and the company.
However, it has to be noted that common law’s derivative action has been abrogated by Section 347(3) CA 2016 with the section stating “The right of any person to bring, intervene in, defend or discontinue any proceedings on behalf of a company at common law is abrogated”. The law on derivative action is now replaced by Section 347(1) CA 2016 where the law states that “A complainant may, with the leave of the Court initiate, intervene in or defend a proceeding on behalf of the company”. Therefore, the action has to be brought in a correct procedure to avoid being struck out.
(iii) Personal rights violated
When a shareholder’s personal rights such as right to vote, right to receive dividend, and many other rights have been violated, an action can be brought against the wrongdoer. This claim can be brought under personal capacity of the shareholder and not through the company, thus, the shareholder will be able to gain personal compensation as well. This is a well established option for the minority to protect their rights as seen in the case of Pender v Lushington in 1877, the plaintiff’s right to vote was infringed by the majority shareholders and the court held that the plaintiff can sue to enforce his right.
(iv) Oppressive conduct
When a member is oppressed by the controlling members of the company, an action may be conducted under Section 346 CA 2016 against the said members. This is not limited to minority shareholders, as long as the shareholder is not one of the controlling members, an action can be brought under this section. The act stated that a shareholder can bring an action against the directors if the power is being exercised in an oppressive manner or a resolution was passed to unfairly discriminate one or more of the company’s members.
In the case of Rinota Construction Sdn Bhd v Mascon Rinota Sdn Bhd & ors [2018] 1 MLJ 141, the Federal Court of Malaya listed the hallmarks of a minority oppression petition and distinct this claim from derivative action, which are :
- The wrongful conduct did not affect all the shareholders equally;
- In derivative action, the relief sought on behalf of a company for the benefit of that company;
- There was a personal element; and
- A derivative action would serve no purpose for the petitioner since it could only seek to restore benefits to the joint venture company.
(v) Petition of winding up
Minority shareholders can make a petition to wind up the company under Section 464 CA 2016. Upon petition, the court will have the power to grant a winding up order if it thinks fit. However, winding up order is always deemed to be the last resort and the court’s common approach is to have the majority shareholders buy out the shares of the minority.
Conclusion
Shareholding is the epitome of capitalism. It permits the investing shareholder to leave the administration of the company to a group of executives who will operate under the watchful eye of the shareholders but at the same time the shareholder retains control of the company’s direction. And as illustrated above, the Company Act and numerous decisions by the Courts on shareholders’ rights will continue to shape the role and rights of shareholding in a company.
Published on 15 September 2020