Week 6: Enforcement of Corporate Rights

1. Week 6:Enforcement of Corporate Rights Suits by the Company:The ‘Proper Plaintiff’ Rule Derivative Actions: Actions by a Minority Member

2. Suits By the Company • Effect of separate legal personality: member may not sue to enforce a co’s rights. • Foss v Harbottle (1843): allegation that dirs misapplied co’s property & improperly entered into transactions. Suit brought by 2 shareholders. Held: conduct of dirs was not an injury to the P exclusively; but to the corporation as a whole. P could not maintain the action. • Principle: Only the co could enforce its corporate right. Members & strangers has no locus standi. • Reason: To avoid multiplicity of suits on the same subject matter (Gray v Lewis (1873)).

3. ‘locus standi’ means entitlement to judicial relief apart from the questions of the substantive merits & legal capacity of a plaintiff.

4. Who can sue on behalf of company? • Co has no physical existence; thus, corporate action during: a) ongoing: refer to AoA (if any); if none in AoA ~ the person / body of whom the function of management is vested (usually BoD authorizes proceeding). b) liquidation: by liquidator in the co’s name / in his own name. Dir will be personally liable for costs if they do so. c) judicial management: judicial manager. d) receivership: directors.

5. Has the managing director (MD) an implied power to commence proceeding? • Every suit brought by the MD in the co’s name is unchallengeable if: • The fiduciary power must be exercised in the interest of the co.; not to futher own personal interests. • There is no restriction or exclusion of the MD’s implied authority to authorize litigation by shareholders agreement/ by the AoA.

6. Common problems: • Board does not want co to get involved in litigation but shareholders disagree ~exercise the fiduciary power in the interests of the co. Has the board honestly considered all the relevant matters & come to the conclusion that it is not in the co’s interest to sue? Yes: court will not interfere. • When there is a genuine disagreement between board & members about the desirability to sue. ~depend on whether members can give instructions to the board regarding management decisions. Marshall’s Valve Gear Co. v Manning, Wardle & Co [1909]. Avel Consultants Sdn Bhd v Mohd Zain Yusof [1984]

7. Other issues: • Court can adjourn the proceedings to have a meeting called. • Members can ratify & adopt an action that has been commenced without authority of co. • Authority need not via resolution; sufficient if all members know & approve of the action. • Action commenced by a single director as agent of necessity can be subsequently ratified by the BoD.

8. Suits by Member:a) Personally • Member can sue in his own name. • What is complained of is not a wrong to the company but an injury to a member personally [not a corporate action but for member’s personal remedy]. ~ when the co threaten to breach/actually breaches a contract with a member; co committed tort; co wrongfully remove him as a director; co enters into ultra vires transaction Edwards v Halliwell [1950]

9. b) Representative action • Regulated by O.15 r.2 • When two or more shareholder suffer similar personal losses, one/more of them can bring representative action. • Eg: excluding the members’ rights to vote

10. b) Actions by a Minority Member~ Derivative action • When a member feel a wrong being done to a co & nobody is doing anything about it. • Steps before derivative action: • Request the BoD to take whatever action necessary; • If BoD refuse, the member may requisition a general meeting for the purpose of passing a resolution to commence litigation;

11. ~ If (ii) failed, the member can commence the action himself against the defendant. This is ‘derivative action’ (tindakan terbitan). ~member is suing to enforce company’s right. Action brought in the member’s name. ~intended to protect the rights of minority shareholders. ~it is in a sense a representative action & O.15 r.2 may be invoked in appropriate cases.

12. Abdul Rahim bin Aki v. Krubong Industrial Park (Melaka) Sdn Bhd & Ors [1995] 4 CLJ 551 • ... derivative action; an ingenious procedural device created by Court of equity by which the rule of judicial non-interference is overcome. It is based upon the premise that the company which has been wronged is unable to sue because the wrongdoers are themselves in control of its decision making organs and will not, for that reason, permit an action to be brought in its name. In these circumstances, a minority shareholder may bring an action on behalf of himself and all the other shareholders of the company, other than the defendants. The wrongdoers must be cited as defendants. So too must the company …(per Gopal Sri Ram JCA).

13. Tang Kwor Ham & Ors v Pengurusan Danaharta Nasional Bhd & Ors [2003]: the test of of derivative action is to be found in the element of control particularly de facto control over the litigation machinery of the company. • the traditional view of "control" was based on ownership of shares but a new view of control - who has de facto control of the company. • Ting Chong Maa v. Chor Sek Choon[1989] P was a shareholder while D was the MD of a company, in which both of them held equal equity. On a claim by P for accounts and enquiries of secret profits which D had obtained from their company, D applied to strike out the P's claim on the ground that the plaintiff did not have locus standi. Held: P although not a minority shareholder had locus standi to bring the claim for the benefit of the company as the D, the alleged wrongdoer, was in control of their company. The learned judge was of the view that the majority or minority shareholding was not a conclusive test but control, including de facto control, is.

14. Exceptions to ‘Proper Plaintiff’ rule at common law: • As in Edwards v Halliwell, cited inTan Guan Eng v Ng Kweng Hee [1992]: 1. Ultra Vires Acts • in cases where the acts complained of are wholly ultra vires the company or association, the rule has no application because there is no question of the transaction being confirmed by any majority. 2. Fraud on the Minority • Such fraud done by those in control of the company; the aggrieved minority can bring minority shareholders’ action on behalf of themselves and all others.

15. 3. Special majorities • An individual member is not prevented from suing if the matter is one which could validly be done or sanctioned, not by a simple majority of the members but only by some special majority. 4. Personal rights • where a member is suing to enforce his own rather than the company’s rights. His personal and individual rights has been invaded. 5. Where the justice of the case requires, though this has been doubted by the English Court of Appeal in Prudential assurance Co. Ltd v Newman Industrial Ltd & Ors (No. 2).

16. Fraud on the Minority • Action in members’ own names. • ‘Fraud’ at common law & equity. • Examples: • Appropriation of the company’s money, property or opportunities Burland v Earle [1902]; Menier v Hooper’s Telegraph Works (1874); Cook v Deeks [1916]

17. b) Majority obtaining a benefit at the expense of a company Alexander v Automatic Telephone Co [1900]; Daniels v Daniels [1978] c) Preventing an action being brought Estmanco (Kilner House) Ltd v Greater London Council d) Reduction of capital to injure a class of shareholder Re Holder Investment Trust

18. Fraud on the Minority:~Requirements • That the majority obtained some sort of benefit; • That the benefit was obtained at the expense of the company or that some loss or detriment was caused to the company; and • That the majority used their controlling power to prevent an action being brought against them by the company. ~applies to act done intentionally/ unintentionally, fraudulently/negligently [Daniels v Daniels] ~all three factors must be shown.

19. Pavlides v Jensen : wrongdoer obtains no benefit for himself. ~ contrast with Daniels v Daniels. • Regal (Hastings) Ltd v Gulliver ~ contrast with Cook v Deeks • Prudential Assurance Co Ltd v Newman Industries Ltd (No. 2): de facto/actual control

20. Provisions Under the Company Act / Statutory Derivative Action • S. 65(1) • S.28(1) & s. 31(1) • S. 181, s.181(2) & (4) • S. 197 • S.65(4) • S.144

21. Automobile Peugeot SA v Asia Automobile Industries Sdn Bhd. & Ors [1988] • s 181(1) and (2) of the Companies Act 1965 was specially enacted to overcome the problem posed by Foss v Harbottle and to strengthen the position of the minority shareholders in limited companies. Since there is now statutory sanction for a shareholder with a minority interest in a company to institute proceedings against directors from conducting the affairs of the company in a manner prejudicial to the company, there is no longer any need for a derivative action to be filed by the petitioner in the manner suggested by the second respondent as that would amount to a duplicity of actions relating to the same subject matter.