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Proper Plaintiff rule and Majority Rule Foss v Harbottle

Proper Plaintiff rule and Majority Rule Foss v Harbottle Two minority shareholders initiated legal proceedings against, among others, the directors of the company. They claimed that the directors had misapplied the company's assets.

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Proper Plaintiff rule and Majority Rule Foss v Harbottle

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  1. Proper Plaintiff rule and Majority Rule Foss v Harbottle Two minority shareholders initiated legal proceedings against, among others, the directors of the company. They claimed that the directors had misapplied the company's assets. Held - when a company is wronged by its directors it is only the company that has standing to sue the directors

  2. In effect the court established two rules: i- the proper plaintiff rule “the proper plaintiff in an action in respect of a wrong alleged done to a company ... is prima facie the company itself.” ii- the majority rule principle … if the alleged wrong can be confirmed or ratified by a simple majority of members in a general meeting, then the court will not intervene.

  3. Proper plaintiff rule Meaning???? Originate fr separate entity concept. It is applicable to matters relating to the internal management of companies - Complain of irregularity in the conduct of the company’s affairs but not on illegality. However, there is an exception to the rule i-ultra vires s 20 ii- activity taken is an infringement of the s/holder’s personal right

  4. iii- activity amount to fraud on minority iv-where the activity should have been passed by special resolution but passed by ordinary majority v- activity oppressive on minority _______________ i- section 20 allows member to sue the company to prevent ultra vires action Go back to Ultra Vires slides Executive Aids Sdn Bhd v Kuala Lumpur Finance Bhd One of the questions posed to the was: (1)   whether the third party charge of the Def's

  5. property was ultra vires the objects of the Plf company as set out in its MOA and if so whether the transaction is saved by s 20(1)? Held- Section 20(1) of the Companies Act 1965, which enshrines a principle of equity, was applicable to the present case so as to render the third party charge created by the plaintiff fully effective and valid

  6. Ahmad Zaini Bin Japar v TL Offshore Sdn Bhd Section 20(1) of the Companies Act abolishes the absolute effect of the ultra vires doctrine except in certain circumstances including in proceedings against the company by any member of the company to restrain the doing of any act or acts or the conveyance or transfer of any property to or by the company.

  7. ii- An infringement of personal rights, the person affected can bring proceedings Pender v Lushington member AOA gave members 10 votes for each share held subject to a maximum of 100 voted per member. Company transferred shares to the Plf. In a meeting the c/main rejected the Plf’s vote. Held- the plaintiff’s votes were a right of property and he was entitled to protection against the company.

  8. Wood v Odessa Waterworks Co Members of a company were entitled to bring personal action against the company to enforce their right that a dividends be paid in cash as provided under the AOA. Ling Beng Hui & Ors v Ling Beng Sung In a different suit, the Def. obtained an injunction to restrain a bank from holding an AGM, extraordinary GM or any other meetings unless a company in wh. the Def is the chairman, director and shareholder, is given notice and allowed to attend the meetings and vote thereat.

  9. The company is a s/holder in the bank in wh the Def. is also the chairman, director and s/holder. Plfs, registered s/holders of the bank alleged that their rights to attend and vote at a meeting and requisition an extraordinary GM or attend the AGM are infringed by the injunction obtained by the Def by virtue of his position and interests in the company as well as the bank. Q- does the Plfs has a ground to sue? Against whom the alleged wrong was committed?

  10. Held - “…the [MOA] and [AOA] constitute a contract between the members inter se. The contract is deemed to contain covenants that each member will observe all the provisions of the [MOA] and [AOA] …Therefore every member has a personal right to have the terms of the [MOA] and [AOA] observed. Since this right is personal, there is no room for the application of the rule in Foss v Harbottle…in an action to enforce the [MOA] or [AOA]. In fact a member may enforce his right to have the provisions of the [MOA] and [AOA observed by injunction, either mandatory or prohibitory.

  11. The action may be brought directly against the other members, and the company does not have to be joined as a party”

  12. iii- Fraud on minority Does not mean actual fraud. Abdul Rahim bin Aki v Krubong Industrial Park (Melaka) Sdn Bhd Those in control abused the powers vested in them in the sense that they used or omitted to use their powersfor an oblique or collateral motive or purpose and not for the true purpose for the power was entrusted to them by the MOA, AOA, statutes or the general law.

  13. Need not prove dishonesty. Member must show • -wrongdoers in the company are in control of the company, & prevent the company from bringing action in its own name; and How to provecontrol? i- hold majority of the votes in the company;

  14. ii- have actually approved fraud on the minority; or iii- shown their unwillingness to sue for wrong done to the company To be entitled to sue on this ground the minority s/holder must make some attempt to persuade the company to sue. Ting Chong Ma v Chor Sek Choon T & C s/holders of a company. They hold equal shares. C was also a director. T alleged that C obtained secret profits in the course of his duties

  15. T sued C for accounts and payment of any sums found to be due. C used Foss v Harbottle to argue that T has no ground of action Held- C a s/holder and also director had control of the company. C has been the MD; other things being equal, C would prima facie have de facto control of the company.

  16. Control should include de facto control though the Def has less than a clear majority of shares. Power to control will be examined – de facto control and de jure control Tan Guan Eng & Anor v Ng Kweng Hee & Ors “The easiest way of determining whether the wrongdoers control a company is to have regard to their shareholdings. If the majority shares is held by them then it goes without saying that they are in control of the company;

  17. but if that is not the case, it does not necessarily follow that they are not in control, for the court may go behind the apparent ownership of the shares, in order to determine whether the wrongdoers do in fact control the company.” b)- there is fraud on minority What amount to fraud on minority? Fraud includes abuse of power

  18. Cook v Deeks There were 3 directors/shareholders. 1 was a minority s/holder. 2 directors diverted a contract, wh the company had been pursuing, to a new company formed by them. They obtained a resolution of the 1st company ratifying their action. Minority s/holder sued the 2 directors on behalf of the company for the benefit wrongly obtained by the 2 directors Held- 2 directors had clearly breach their duties as directors. Their actions could not be ratified by the company as it amounted to forfeiting the interests and property of the minority in favour of the majority

  19. Negligence action that benefit the one in control Daniels v Daniels Minority s/holder sued the directors who were also majority s/holders who had sold the company’s property at a gross undervaluation to one of them. Held- directors negligence wh profited one of them amounted to fraud on minority

  20. Refuse to take action or continue an action to protect the company’s rights Estmanco (Kilner House) Ltd v Greater London Council The company was formed by the council to manage 60 council flats wh the council was in the process of selling to their tenants. The company issued 60 shares. One share would be transferred to each purchaser of the flat. 

  21. Until all the flats had been sold, the transferees of the shares had no voting right in the company. Thus, the council as owner of the unsold flats had 100% of the voting right in the company. Council decided to abandon the plan. Company voted to discontinue proceeding against the council for breach of an agreement to sell council properties to their tenants Held- although a majority shareholder, unlike a director, owed no fiduciary duty to the company and was entitled to vote in his own interest, that

  22. did not give him an unrestricted right to pass a resolution depriving a minority shareholder of his rights or property. iv- Requirement of a special resolution Minority can take action if the company violated the requirement Quin & Axtens Ltd v Salmon Art 75 of the AOA provides – the directors shall manage the company. They are empowered to exercise all the powers of the company "subject to

  23. such regulations as may be prescribed by the company in general meeting" provided the regulation does not being inconsistent with the AOA. Art 80 provided that resolution of the BOD to acquire or let premises is invalid if notice is not given to each of the MD; Salmond and Axtents. It further said that they both must approve the proposed transaction.

  24. BOD held a meeting to propose the letting of premises but Salmon objected to it. An extraordinary GM was held and shareholders passed a resolution to approve the project by simple majority. Held; upon the true construction of the AOA the resolutions passed by the company in the meeting were inconsistent with the provisions of the AOA and that the company must be restrained from acting upon them.

  25. v-where the justice of the case requires Abdul Rahim Bin Aki v Krubong Industrial Park (Melaka) Sdn Bhd & Ors the court approved the Australian case of Biala Pty Ltd v Mallina Holdings Ltd (No 2) “…Desirable to allow a minority shareholder to bring a derivative claim where the justice of the case clearly demands that such a claim be brought…”

  26. Oppression and statutory remedy s. 181 – oppression may be done to the majority or minority i- oppression; ii- disregard of interest; iii- unfair discrimination; and iv- prejudice

  27. Oppression: a) The affairs of the company are being conducted oppressively towards one or more members including the petitioner; b) Directors’ powers are being exercised in a manner oppressive to one or more members, including the petitioner

  28. Disregard: • Affairs of the company are being exercised in disregard of the petitioner’s interests as a member; b) Directors’ powers are being exercised in disregard of the petitioner's interests as a member

  29. Unfair discrimination: • Some acts of the company has been done or threatened to be done and it unfairly discriminates against one / more members including the petitioner; • Some resolutions of the members or any class of them has been passed/ proposed and it unfairly discriminates against one / more members including the petitioner

  30. Prejudice: • Some acts of the companyhas been done or threatened to be done and it is prejudice to one / more of the members including the petitioner; • Some resolutions of members or any class of members has been passed / proposed and it is prejudice to one / more of the members including the petitioner

  31. i- oppression No specific and comprehensive definition of Oppression. Depends on the facts of the case Guidelines given in Re Kong Thai Sawmill (Miri) Sdn Bhd “There must be a visible departure from the standards of fair dealing and a violation of the condition of fair play which a s/holder is entitled to expect before a case of oppression can be made…”

  32. Scottish Co-operative Wholesale Society Ltd v Meyer Oppressive was described as: Unfair or burdensome, harsh and wrongful; Lack of probity on the part of those conducting the affairs of the company Example of situations where oppression was found: A s/holder who is entitled to manage a company is excluded from the scope of management

  33. Director pays himself huge director’s fees and makes loans unconnected with the company’s business. Persistent illegal conduct towards a s/holder dictated by the self-interest of the directors. Example where relief from oppressionwill notbe granted: s/holder did not suffer harm in his capacity as a s/holder; s/holder acquiesces in the conduct complained of; Applicant guilty of serious misconduct himself;

  34. Ng Chee Keong v Ng Teong Kiat Highlands Plantations Ltd In this case the assets of the company were allowed to deteriorate to such an extent that they were almost forfeited by the Government. It was held that looking at the degree of the directors negligence and the seriousness of the resulting loss, the neglect and indifferent conducts of directors towards the asset of the company clearly established that the affairs of the company were being conducted in an oppressive manner.

  35. Re Chi Liung & Son Ltd; Tan Chong Fah v Tong Lee Haw & Ors Alleged oppression were: The dismissal of the petitioner from his position as MD; The Appointment of the 1st as MD and 2nd respondent as assistant director under circumstances not authorised by the AOA; and The registration of 325 of the petitioner’s shares in the name of the 1st respondent

  36. Held: there had been lack of probity and fair dealing in the affairs of the company ii- Disregard Re Kong Thai Sawmill (Miri) Sdn Bhd “…Disregard involve something more than a failure to take account of the minority interest: there must be awareness of that interest and an evident decision to override it or brush it aside or to set at naught the proper company procedure”

  37. What is important for an action under s. 181(1)(a) is that the effect of the action or omission were such that they persisted at the date of the presentation of the petition. The conducts may have ended. The wrong complained of must relate to the affairs of the company - depends on facts of each case. The person who conducted the affairs can be the directors, majority s/holders = relief can only be obtained against a person implicated in the oppressive conduct.

  38. Interests of the petitioners as members - based on the members’ legitimate expectation – legal rights as members provided by the MOA, AOA, or unwritten agreements or understanding between the members.

  39. iii- unfair discrimination and prejudice Jaya Medical Consultants Sdn Bhd v Island & Peninsular Bhd & Ors The essence of the wrong done to the minority member under section 181(1)(b) is the “unfairness” of the discrimination or prejudice suffered by the member resulting from some acts of the company in the advancement its objectives. Mere discrimination against or prejudice to such member is insufficient to attract the court’s jurisdiction to intervene. The question of unfairness is one of fact

  40. and degree which subsection (1) requires the court to determine”. The court will look at the business realities. Concept of unfairly prejudicial: Re Saul D Harrison i-The words “unfairly prejudicial” are general words and they should be applied flexibly to meet the circumstances of the particular case; ii- The relevant conduct (commission or omission) must relate to the affairs of the company of wh. the petitioner is a member;

  41. iii- They must be both prejudicial (in the sense of causing prejudice or harm to the relevant interest) and also unfairly so; iv- in construing the “unfairly” it is necessary to take into account not only of the petitioner’s legal right, but must also consider whether there are any equitable consideration such as the petitioner’s legitimate expectation; v- look to MOA, AOA

  42. vi - Not enough to show that some managerial decision may have prejudiced the petitioner’s interest. Serious mismanagement can amount to unfair prejudice Unfairness = the first step is to consider whether the conduct which the s/holders complain was in accordance with the AOA.

  43. The test = whether reasonable directors possessing any special skill, k/ledge or acumen (insight, wisdom), and having in mind the important of furthering the corporate object on one hand and the disadvantage, disability or burden wh their decision will impose on the member on the other, would have decided that it was unfair to make that decision.

  44. Relief under s. 181(1)(a): court may i- direct/prohibit any act / vary a transaction undertaken by the company; ii- regulate the affairs of the company in the future; iii- provide that the minority shares are purchased by other members/by the company, and a reduction of the company share capital; iv- debentures are bought by other holders of debentures/the company; v- provide that the company be wound up.

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