Introduction
Minority Oppression refers to the unfair treatment or disregard of the rights and interests of minority shareholders by the majority shareholders or directors of a company. It involves situations where the majority abuses its power to benefit itself at the expense of the minority, thereby impeding the proper functioning of the company. Minority oppression is a significant concern as it can undermine the principles of corporate governance, fairness, and shareholder protection.
Understanding Minority Shareholders
Minority shareholders are individuals or entities that hold a smaller percentage of shares in a company compared to the majority shareholders. While their ownership stake may be limited, they still possess certain legal rights and protections. These rights include the ability to participate in decision-making processes, receive dividends, access company information, and protect their investments.
Forms of Minority Oppression
- Exclusion from decision-making: Minority shareholders may be excluded from important decisions regarding the company's operations, such as changes in the articles of association, appointment of directors, or amendments to the share capital structure.
- Dividend deprivation: The majority may decide not to distribute dividends to minority shareholders, depriving them of their rightful share in the company's profits.
- Squeeze-outs: Majority shareholders may employ tactics to force minority shareholders to sell their shares at unfair prices, effectively pushing them out of the company.
- Misappropriation of company assets: Majority shareholders or directors might engage in self-dealing or divert company resources for personal gain, thereby prejudicing the interests of the minority shareholders.
- Oppressive management practices: The majority may engage in oppressive or unfair management practices that disadvantage minority shareholders, such as awarding excessive compensation to themselves or engaging in discriminatory business practices.
Legal Remedies
To address minority oppression, Companies Act 2016 provides specific legal remedies and safeguards for minority shareholders, including:
- Derivative Actions: Minority shareholders can initiate legal proceedings on behalf of the company against directors or majority shareholders for actions that are detrimental to the company's interests.
- Oppressive Petitions: Minority shareholders can sue the company vide originating summons or file a petition to wind up the company under Section 346 Companies Act 2016. These remedies are listed under section 346(2) that include the power of the court to order (i) buy-out by the other shareholders; (ii) injunctive or directive relief; and/or (iii) winding-up of the company.
- Court Discretions: The court when dealing with an oppression action has wide powers to grant reliefs that would bring such matters to an end, including the reliefs which an oppressed shareholder did not ask for. For example, the Court can order a sale of the company to a third party and the proceeds of sale thereof to be distributed among the shareholders in the manner as the Court deems fit and appropriate.
Minority shareholders are protected to a far greater degree than they are often aware. The above remedies are just some of the main options available and the list is not exhaustive. It is thus important to consult a legal expert to discuss how these, amongst others options, can be used to help protect your interests.
Case Example
Company XYZ was a partnership between deceased Mr A, and Mr B whereby Mr A had full management control of Company XYZ and Mr B as a sleeping partner. There was no written agreement between partners and company affairs were administered based on mutual trust and confidence.
Mr A later passed away. Ms C (being the widow of Mr A) was appointed as director and shareholder replacing Mr A in Company XYZ. Hence, Ms C continued the partnership with Mr B as Mr A did and to have full management control of Company XYZ.
However, tree months after Mr A’s death, Mr B together with other shareholders/directors started clandestine moves to take over control of Company XYZ from Ms C such as excluded Ms C from the management, failed to notify with Ms C in making changes to key personals like the company secretary, blocked Ms C from the access to the company’s accounts, and subsequently, passed a resolution to remove Ms C from the board of directors.
Mr B contended that he never recognised Ms C as a partner and the board of directors never agreed to let Ms C have the management control of Company XYZ and since Ms C was only a minority shareholder, the decisions passed by the board were in accordance with the majority rule.
Ms C filed an application to Court for remedies on the ground of minority oppression. The Court held that a partnership enured to the partner’s widow, here, Ms C and accordingly, Ms C had a legitimate expectation to participate in the management of Company XYZ. Mr B’s denial of Ms C’s rights of management constituted an act of oppression.
Ultimately, the Court decided in favour of Ms C and Company XYZ was wound up as a consequence thereof. On top of the damages of RM5million, being the capital injected by Ms C’s deceased husband (Mr A), Ms C was further awarded with a cost of RM20,000.
Conclusion
If minority shareholders are finding it difficult to deal amicably with company directors and/or majority shareholders, an expert in corporate law and dispute resolution may be able to help. By setting out the position and the required solution, issues may be clearer for those involved. Once the majority shareholders realise that a lawyer has been instructed, they are more likely to understand that the difficulties will not simply go away. This can motivate everyone to negotiate a solution.
There are also points of pressure that can be applied, for example, a minority shareholder with a 10% holding can request a full audit of the company’s accounts, which could be both time-consuming and costly. Directors wishing to avoid this may be willing to listen to alternative suggestions.
It is highly recommended that you take action without delay when an issue of concern arises, before the matter escalates or positions become entrenched.