Introduction
In the realm of corporate disputes, shareholders often face complex decisions when seeking legal remedies for perceived wrongs within a company. Two common legal avenues available to address such grievances are oppression actions and derivative actions. While both serve to protect shareholders and the company from misconduct, they differ in their purpose, scope, and application. This article seeks to analyse the recent judgment of the Federal Court in Low Cheng Teik & Ors v. Low Ean Nee,[1] which expounded on the key differences between oppression and derivative actions and provided guidance on when each should be used to effectively address corporate grievances.
Brief facts
In this case, the 1st to 3rd Appellants and the Respondent were shareholders and directors of the company, SNE Marketing Sdn Bhd. The 1st Appellant, also serving as the company's chairman, transferred the company's trademarks to another company, SNE Global, for RM10 without board approval. SNE Global was co-founded by the 1st Appellant, and its ownership and control were tied to the Appellants and related parties.
The Respondent, instead of filing a derivative action on behalf of the company as initially sought, brought an oppression action against the Appellants in the High Court. Meanwhile, the company separately filed a suit to reclaim the trademarks, and a consent order was reached, restoring the company's ownership of the trademarks.
The High Court rejected all 8 complaints of oppression and dismissed the Respondent's oppression action. On appeal, the Court of Appeal upheld the rejection of 7 of 8 of the grounds but reversed the High Court's decision on 1 complaint of oppression. It ruled that the Appellants had acted to benefit themselves, through related entities, to the detriment of the Respondent, constituting oppressive conduct.
The primary legal question in the present appeal was whether the Respondent's claim was actionable through an oppression action or if it should have been pursued as a derivative action under the Companies Act 2016.
Nature of oppression remedy
The remedy is stipulated under Section 346 of the Companies Act 2016:-
346. Remedy in cases of an oppression
(1) Any member or debenture holder of a company may apply to the Court for an order under this section on the ground -
(a) that the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the members or debenture holders including himself or in disregard of his or their interests as members, shareholders or debenture holders of the company; or
(b) that some act of the company has been done or is threatened or that some resolution of the members, debenture holders or any class of them has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the members or debenture holders, including himself. (emphasis added)
Based on the wordings of Section 346 of the Companies Act 2016, the Federal Court enunciated that oppression claims require the oppressive act to be directed specifically at one or more minority shareholders, causing personal harm or injury. The minority shareholders must demonstrate that they suffered a distinct loss or prejudice not shared by all shareholders. If the harm or wrong affects all shareholders equally, it does not fall under section 346(1) of the Companies Act 2016. Instead, the provision is meant to address cases where a minority shareholder has ‘suffered a peculiar harm to the exclusion of the majority.’[2]
Nature of statutory derivative action
The statutory regime of derivative action is governed under section 347 of the Companies Act 2016, which provides as follows:-
347. Derivative proceedings
(1) A complainant may, with the leave of the Court initiate, intervene in or defend a proceeding on behalf of the company.
(2) Proceedings brought under this section shall be brought in the company's name.
(3) The right of any person to bring, intervene in, defend or discontinue any proceedings on behalf of a company at common law is abrogated. (emphasis added)
The Federal Court shed some light on the nature and scope of a derivative action by stating that it allows minority shareholders to pursue a legal claim on behalf of the company when harm is done to the company itself. This action is taken when the majority shareholders fail to act in the company's interest by seeking relief. The minority shareholders are essentially stepping in to enforce the company's rights, as their right to take legal action "derives" from the company's own rights. The focus is on harm done to the company, not to individual shareholders.[3]
Difference between oppression action or derivative action
Based on the foregoing, the Federal Court went on to clarify in great length the difference between oppression action and derivative action.
In essence, it was expounded that an oppression action is a personal claim by a minority shareholder who has suffered distinct and personal harm. In contrast, a derivative action is brought by a shareholder on behalf of the company to address harm done to the company itself.
To decide which action to pursue, the focus is on who was harmed: if the harm affects shareholders personally, an oppression action is appropriate; if it affects the company, a derivative action is the correct approach.
Importantly, it was emphasized that an oppression action cannot be pursued simply because the company has been harmed, with indirect consequences to shareholders. Allowing this would undermine the purpose of derivative actions, which are specifically for harm done to the company. The legislature created separate provisions for oppression and derivative actions to maintain this distinction, and courts must respect these differences: oppression addresses personal harm to shareholders, while derivative actions address harm to the company:-
‘[83] …Oppression cannot be established merely by showing that the company itself has suffered damage, with consequential damage to the shareholder. If that was the case, it would mean that a shareholder would always be able to mount an oppression action whenever a wrong has been committed against the company. This would, in effect, eviscerate the statutory derivative action provisions which were specifically enacted by the Legislature to allow a shareholder to bring an action for and on behalf of the company.’
The Federal Court further referred to the rule against reflective loss which means that when a wrong is done to a company, it can also harm its shareholders, such as when misappropriation of company funds by a majority shareholder reduces the value of shares. However, shareholders cannot recover this type of loss personally due to the ‘reflective loss’ principle. This principle provides that a shareholder's loss merely reflects the company's loss and cannot be claimed separately by the shareholder.
Legal test
The Federal Court then formulated a test in deciding whether a shareholder’s complaint is actionable under section 346 of the Companies Act 2016 or more properly on behalf of the company under section 347 of the Companies Act 2016:-
‘[93]…the following criteria are proposed…
(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.’
Decision
Despite the unilateral assignment of SNE trademarks to SNE Global, which was executed by the 1st Appellant, the SNE trademarks are company assets, and the wrongful assignment of these assets without the board's approval harms the company, not the Respondent personally.
Accordingly, the Federal Court concluded:-
‘[130] Applying the elements of the legal test as set out in para. 93 above:
(i) the wrong or infraction complained of is the wrongful assignment to a third party of the SNE trademarks which belong to the company;
(ii) the wrongful act cannot be said to be oppressive or unfairly discriminatory or otherwise prejudicial to the respondent alone in her capacity as a shareholder. Rather, it is a wrong that affects all the shareholders;
(iii) the cause of action vests in the company and not the respondent;
(iv) the loss or damage arising as a consequence of the wrongful assignment of the SNE trademarks to a third party is suffered by the company and not by the respondent alone in her capacity as a shareholder; and
(v) the loss is suffered by all the shareholders and not by the respondent alone.’
This follows that the Respondent must seek leave to initiate a derivative action on behalf of the company, as outlined in Section 347 of the Companies Act 2016, to address the wrongful assignment of the SNE trademarks.
In allowing the appeal, the Federal Court held that the Respondent’s claim cannot be pursued as an oppression action because the harm primarily affects the company, not the Respondent personally.
The Federal Court further explained that any loss suffered by the Respondent, such as reduced share value or dividends, is considered "reflective loss," as it mirrors the company's loss. Since this loss affects all shareholders equally, it is not unique to the Respondent, and therefore cannot be treated as a personal, distinct injury. Additionally, the conduct in question, attributed to the 1st Appellant as opposed to the majority shareholders, does not amount to unfair prejudice against the Respondent as an individual shareholder.
Conclusion
The case of Low Cheng Teik (supra) has clarified the distinctions between an oppression and derivative action. As can be seen above, adopting the wrong route can be fatal. As such, it is of paramount importance for the shareholders facing gri evances to embark on the appropriate route in order to effectively safeguard their interests and ensure corporate accountability. Ultimately, being informed and strategic in the selection of legal recourse can lead to more equitable outcomes in corporate disputes.
[1] [2024] 9 CLJ 171
[2] [71] Furthermore, s. 346(1) expressly requires a minority shareholder to show a separate and distinct loss from that suffered by all the shareholders of the company. Both limbs (a) and (b) of s. 346(1) stipulate that the oppressive act needs to have been carried out against "one or more of the members". A plain reading of the words clearly indicates that the oppressive conduct ought to have been directed against a single shareholder or a specific class of shareholders. In other words, a minority shareholder needs to show that they have been singled out as a victim of unfair prejudice.
[72] It follows that a wrong done to the company, which affects all the shareholders equally, falls outside the ambit of s. 346. Rather, the provision envisages oppressive conduct as being established where a minority shareholder has suffered a peculiar harm to the exclusion of the majority.
[3] [77] The characteristic feature of the derivative action is that there is harm done to the company. Where the majority shareholders fail to rectify the harm inflicted on the company by filing an action for relief in the name of the company, the company's power to enforce its legal rights is delegated to its minority shareholders for the purpose of enforcing the company's rights through a derivative action. In other words, a minority shareholder's right to pursue a derivative action 'derives' from the right vested in the company (see: Dan W Puchniak, Harald Baum and Michael Ewing-Chow, The Derivative Action in Asia: A Comparative and Functional Approach (Cambridge University Press, 2012) at pp. 7 to 8).
[78] A derivative action is brought by a minority shareholder for the benefit of the company. Therefore, the outcome of the derivative action will not only affect the minority shareholder but will benefit all the shareholders of the company in the form of increased share value.
Authored by Tan Zu Hao
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