Rights of minority in takeover/privatisation arrangements

What can a minority shareholder do if shares in the company are targeted to be transferred to another entity ("NewCo"), especially if the minority thinks that the valuation offered is less than fair? Here is a summary of section 180 of the Companies Act:

1. The NewCo can within 4 months of receipt of 90% shareholder support give notice that it intends to compulsorily acquire the shares of the remaining 10% on the same terms as that accepted by the 90% (section 180(1)).

2. Upon receipt of notice mentioned in para 1 above, dissenting minority shareholders may within 1 month issue a notice to NewCo seeking names and addresses of all other dissenting shareholders (section 180(2)).

3. Within 1 month from date of notice in para 1 or 7 days from date details are furnished pursuant to para 2 above, dissenting minority shareholders may apply to Court to challenge the NewCo's right to compulsorily acquire their shares. Usually, the challenge goes towards the valuation of the shares, as opposed to qualitative objections.

4. Alternatively, if NewCo does not indicate its intention to compulsorily acquire the shares of the dissenting shareholders, the dissenting shareholder himself can give notice within 3 months of transfer of the 90% shares to the NewCo to compel the NewCo to acquire their shares either (a) on the same terms as the 90% shareholders; or (b) on any other agreed terms; or (c) on terms as the Court deems fit. Again, this implies that the Court will resolve valuation issues in such a scenario.

In view of the aforesaid, minority shareholders who receive a less-than-palatable offer need not be concerned that they would eventually be stuck as minority shareholders in a new entity where the value of their shares cannot be unlocked.

Dispute amongst directors does not entitle claim in minority oppression

Section 181 of the Companies Act allows any minority shareholder who alleges oppression in the conduct of the affairs of the company by the majority shareholder(s) to petition for the winding-up of the company.

Many times, the deterioration of the relationship starts with a removal of the minority shareholder as a director of the company.

In Dato Ting Check Sii v Datuk Hj Mohamad Tufail Mahmud & Ors, the petitioner who was removed as a managing director sued for minority oppression.

The Court held that a member of the company must show that the conduct of the majority shareholders have seriously diminished or jeopardised the value of his shareholding before he can succeed in a s181 petition. In other words, the shareholder must have suffered damage in his capacity as a shareholder.

Damage suffered in his other capacities (including in his capacity as a director) does not entitle him to a claim in oppression.

Of course, the reality is that once a member is removed from directorship, he loses access to much of the company's operations and management decisions, as a result of which he may be hard-pressed to show wrongdoing. It's a tough obstacle to overcome, but that may be necessarily so due to the drastic measures available to a Court of law, to effectively over-ride majority rule, if oppression is proven.

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High Court did well to restore certainty in Islamic loans

Islamic loans are intended to avoid the burden of riba, or interest commonly found in conventional loans. Instead of the riba, the Islamic loan instead relied on an agreed rate of profit to be earned by the financier.

Some controversies have arisen when Courts have refused to acknowledge the agreed rate of profit, on the basis that the profit turned out to be even more than the riba of conventional loans, thereby rendering Islamic loans to be even more burdensome. This has caused uncertainty to Islamic lenders as to whether the actual terms of their financing contract would be upheld. In fact, one High Court judge had previously opined that it is open for him to re-negotiate terms between the parties if he found them to be unconscionable. Of course, what is conscionable or otherwise would be a matter of opinion, and this would result in much uncertainty in the law.

In the case of Bank Kerjasama Rakyat Malaysia Bhd v PSC Naval Dockyard Sdn Bhd, the Court restored some certainty in Islamic loans when the High Court judge refused to entertain arguments of unconscionability of the terms.

The Court instead stated unequivocally that certainty is a basic requirement in any contract, regardless whether the contract was made under the Contracts Act 1950 or under Islamic law. As long as factually, the certainty can be ascertained, then there is no reason for a contract not to be upheld.

This is clearly a very sensible and sound reason propagated by the Court. Without certainty in law, what would result would be chaos, a breakdown in social order, and opportunities for corruption (not that there is any hint of corruption in any of the cases before this).

Well done to the learned Judge concerned.

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Federal Court creates anomaly in re appointment of judges

With regret, the Federal Court had decided that when the Federal Constitution requires a person to be at least an advocate of 10 years before being appointed as a High Court judge, the Federal Constitution does not in fact mean an advocate in active practice. This stance is clearly contradictory to the Federal Court's own decision that when the Industrial Relations Act requires a person to be at least an advocate of 7 years before being appointed an Industrial Court chairman, that person has to be an advocate in active practice.

The effect of this decision is that a person can be qualified to be appointed as a High Court judge (a superior tribunal) even though that person is not qualified to be an Industrial Court chairman (an inferior tribunal). This cannot make sense.

The majority decision in the Federal Court deciding in this manner justified their decision by saying that a Constitution must be liberally interpreted. It is quite unthinkable that the Federal Court would choose to be liberal in interpreting this provision, but has consistently displayed a conservative streak when interpreting fundamental liberties including right to life, freedom of expression, freedom of association and religious freedom.

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If you have any questions or comments, e-mail me at khenghoe@mycounsel.com.my.