On 28.8.2024, the Federal Court issued a landmark decision that clarified the distinctions between oppression actions and derivative actions under the Companies Act 2016 (CA 2016). This ruling offers valuable guidance in determining the appropriate legal course based on individual circumstances.
Facts
Low Cheng Teik & ors v Low Ean Nee Civil Appeal No.: 02(f)-30-04/2023(W) was an appeal by Low Cheng Teik and two others (Appellants) against the decision of the Court of Appeal, which found the Appellants liable for oppression against Low Ean Nee (Respondent), a shareholder of SNE Marketing Sdn Bhd (Company). The Court of Appeal granted a buy-out remedy against the Respondent’s shares in the company.
The Respondent owned 50% of shares in the company, whilst the Appellants collectively held 50% of the remaining shares (39.7%, 10% and 0.3% respectively). All of them were directors of the company, with the First Appellant holding the position of Chairman. Despite being a director of the company, the Respondent did not participate or play any role in running the company’s business. At all material times, the company was managed and operated by the First to Third Appellants.
The Respondent filed an oppression action against the Appellants in the High Court. The main complaint was that the Appellants wrongfully transferred the company’s trademark rights over “SNE” and its variants (SNE Trademarks) to SNE Global Sdn Bhd (SNE Global), through:
· the passing of a resolution; and
· an unauthorised assignment.
The Respondent argued that this transfer of trademark rights was oppressive against the Respondent.
The High Court ruled that the disposal of the SNE Trademarks, whilst detrimental to the company, did not, ipso facto, amount to oppression against the Respondent. The court noted that the assignment equally affected all shareholders, including the Appellants, and thus was not unfairly discriminatory against the Respondent.
Additionally, since the SNE Trademarks were owned by the company, the proper claimant for any loss should be the company itself, not the Respondent. Therefore, the Respondent should have initiated a statutory derivative action with the court’s leave. Consequently, the High Court dismissed the Respondent’s claim.
Dissatisfied, the Respondent appealed to the Court of Appeal. The Court of Appeal unanimously set aside the High Court order and found oppression against the Respondent. The Court of Appeal held, amongst others, that the disposal of the SNE Trademarks was calculated to indirectly benefit the Appellants to the prejudice of the Respondent as a substantial shareholder of the company.
Before the Federal Court, the central question was whether the disposal of the SNE Trademarks was actionable by way of an oppression action or a derivative action. The distinction between the two, as noted by the Federal Court, can be summarised as follows:
· Section 346: Oppression Action
Section 346 allows a member of a company to seek relief in their own right if they have been oppressed as a minority shareholder. The act of oppression must directly target and cause personal harm to one or more minority shareholders, resulting in a distinct loss or harm that is not shared by the other members of the company. If the loss is not unique to the minority shareholder, an oppression action cannot be sustained.
· Section 347: Derivative Action
Section 347 provides a mechanism for a minority shareholder to bring an action on behalf of the company when a wrong has been done to the company and the majority shareholders have failed to address it. This action allows the minority shareholders to step into the company’s shoes to enforce the company’s rights. A derivative action is brought for the company’s benefit, and any outcome of the action affects all shareholders equally.
The Legal Test
In this regard, the Federal Court established a five-step dynamic test to determine whether a shareholder’s complaint should be pursued personally under Section 346 or on behalf of the company under Section 347 of the CA 2016:
(a) What is the act or omission that one or more of the shareholders complain of?
(b) Can the act(s) or omission(s) be characterised as being:
(i) oppressive to;
(ii) in disregard of the interests of;
(iii) unfairly discriminatory against; or
(iv) otherwise prejudicial to
one or more of the shareholders?
(c) Does the cause of action vest in the shareholder or in the company?
(d) Who has suffered loss or damage from the wrong done–the shareholder in his capacity as a shareholder, or the company?
(e) Is the loss suffered by the shareholder as plaintiff separate and distinct from the plaintiff in his capacity as a shareholder, or is it a loss suffered by all the shareholders?
Applying the test, the Federal Court ruled that:
(a) The alleged wrong was the wrongful assignment of the SNE Trademarks, which belonged to the company;
(b) The wrongful act did not specifically oppress or discriminate against the Respondent alone as a shareholder; rather, it affected all shareholders;
(c) The cause of action vested in the company, not the Respondent;
(d) The resulting loss or damage from the wrongful assignment was suffered by the company, not by the Respondent individually; and
(e) The loss impacted all shareholders, not just the Respondent.
Based on the facts, the Federal Court ultimately concluded that the loss was suffered by the company, not the Respondent individually. Therefore, the appropriate remedy was a statutory derivative action, to be pursued by any shareholder in a representative capacity. As no oppression was established against the Respondent, the Federal Court allowed the appeal and dismissed the Respondent’s oppression action.
Conclusion
Fundamentally, the Federal Court underlined that the determination of the appropriate legal action depends on the bearer of the cause of action. The five-step test offers much-needed lucidity in this area of law. If a shareholder suffers a direct and distinct loss in their role as a shareholder, Section 346 applies. However, if the wrongdoing affects the company as a whole, causing a loss to the company, Section 347 is the proper course. This framework ensures that the correct legal avenue is pursued based on the nature of the loss.
9 September 2024