Shareholder Disputes in Malaysia: A Practical Guide for Shareholders and Directors

How do shareholder disputes usually start?

In private companies, shareholder disputes usually begin when trust between the founders breaks down. The most common triggers we see are:

• a shareholder being removed as a director or shut out of management and information;
• profits kept in the company year after year while the majority draws large salaries or fees;
• new shares issued to dilute a shareholder’s stake;
• company money or business opportunities diverted to a related company or to a director;
• a 50:50 deadlock in which no decision can be made;
• disagreement over the price when one shareholder wants to leave;
• changes to the company’s directors or shareholders lodged with SSM without the shareholder’s knowledge;
• disputes with the family of a shareholder who has died.

Each of these has a different legal answer, which is why the first step is always to identify exactly what has gone wrong, and whether the wrong is done to you as a shareholder or to the company itself.

Which documents govern a shareholder dispute?

Three layers of rules apply to a Malaysian company:

• the Companies Act 2016, which applies to every company and cannot be contracted out of in many respects;
• the company’s constitution, if it has one, which binds the company and its members;
• any shareholders’ agreement, which binds the shareholders who signed it as a contract.

A shareholders’ agreement often decides the dispute. It may contain reserved matters that need unanimous approval, rights to appoint directors, pre-emption rights, deadlock procedures, buy-sell clauses and an arbitration clause. We explain how these clauses are enforced in How to Enforce a Shareholders’ Agreement in Malaysia.

Every member also has statutory rights, including rights to attend and vote at meetings and to inspect certain registers and records. See Shareholder Rights in Malaysia: Meetings, Requisitions and Information.

Which remedy fits which problem?

The table below sets out the usual starting point. More than one remedy can apply to the same facts.

What counts as oppression under section 346?

Section 346(1) allows a member to apply to court where the company’s affairs are conducted, or the directors’ powers are exercised, in a manner oppressive to one or more members or in disregard of their interests, or where an act or resolution unfairly discriminates against or is otherwise prejudicial to them.

The Privy Council described oppression in Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227 as a visible departure from the standards of fair dealing that a shareholder is entitled to expect. Malaysian courts have found oppression where a shareholder was excluded from management despite an understanding that all founders would participate, as in Tan Kian Hua v Colour Image Scan Sdn Bhd & Ors [2004] 6 CLJ 174, and where dividends were withheld without explanation, as in Chiew Sze Sun & Anor v Cast Iron Products Sdn Bhd & Ors [1994] 1 CLJ 157.

The courts are also reluctant to interfere with ordinary business decisions made by the majority in good faith, as the Court of Appeal emphasised in Soh Jiun Jen v Advance Colour Laboratory Sdn Bhd & Ors [2010] 5 MLJ 342. The question is unfairness, not disagreement. For a fuller explanation, see Minority Shareholder Oppression in Malaysia.

What can the court order in an oppression case?

Under section 346(2), the court may make any order it thinks fit to bring the matters complained of to an end or to remedy them, including orders to:

• direct or prohibit any act, or cancel or vary any transaction or resolution;
• regulate the conduct of the company’s affairs in future;
• provide for the purchase of the shares of any member by other members or by the company;
• where the company buys the shares, reduce its capital accordingly;
• wind up the company.

In practice, a buy-out at a fair value is the most common outcome where the relationship has broken down. The Court of Appeal in Ngiu-Kee Corporation (M) Bhd & Anor v Pan-Pacific Construction Holdings Sdn Bhd [2008] 1 MLJ 498 recognised that, for a going concern, a buy-out may be more appropriate than winding up. How the shares are valued is often the real battle, which we discuss in How to Exit a Sdn Bhd as a Minority Shareholder.

What if the wrong was done to the company, not to me?

Where a director has breached duties owed to the company, for example by diverting a contract to a business he owns, the proper plaintiff is the company. If the directors in control will not sue, a shareholder may apply for leave to bring a derivative action in the company’s name under sections 347 and 348.

The complainant must give the directors 30 days’ written notice of the intention to apply for leave. In deciding whether to grant leave, the court considers whether the complainant is acting in good faith and whether the action appears to be in the best interests of the company. Any recovery goes to the company, not to the shareholder personally. See Derivative Actions in Malaysia and Directors’ Duties in Malaysia.

When can a company be wound up because of a shareholder dispute?

Section 465(1) allows the court to wind up a company on several grounds, including where the directors have acted in their own interests rather than in the interests of the members as a whole, or in a way that appears unfair or unjust to other members (paragraph (f)), and where the court is of the opinion that it is just and equitable to do so (paragraph (h)).

The just and equitable ground is often used for small companies run like partnerships, following the House of Lords in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. Winding up ends a profitable business, so courts treat it as a last resort and may prefer a buy-out. See Just and Equitable Winding Up in Malaysia and Quasi-Partnership Disputes in Malaysia.

What should I do first?

The first weeks decide how strong your position will be. Before taking any step that the other side could treat as a breach, we usually recommend that a shareholder:

• collects the constitution, shareholders’ agreement, share certificates, minutes, financial statements and correspondence;
• obtains the company’s current information from SSM to confirm who is on record as director and shareholder;
• keeps a dated record of each instance of exclusion, refusal of information or unfair treatment;
• requests information formally and in writing, so that any refusal is documented;
• avoids taking company documents, funds or assets without authority, and avoids signing resignations or transfers under pressure;
• takes advice quickly if new shares are about to be issued, assets are being moved or a meeting has been called to remove them.

Urgent cases, such as an imminent share issue or the transfer of a key asset, may need an interim injunction within days. Where the other side may dissipate assets, a Mareva injunction may be considered: see Mareva Injunctions in Shareholder Disputes.

How long do these disputes take, and can they settle?

An oppression petition or derivative action that goes to full trial can take a year or more in the High Court, and contested valuations add time and cost. Many disputes settle earlier, often through a negotiated buy-out once both sides have seen the documents and an independent valuation.

Mediation is worth considering, and some shareholders’ agreements require it, or arbitration, before court proceedings. For indicative costs, see Cost of Shareholder Dispute Litigation in Malaysia. If you are the majority shareholder facing a claim, see How to Defend Against Minority Oppression Claims.