Ditching the Dime: Whether the Non-Distribution of Dividends Constitute Oppression

A quote, often attributed to John D. Rockefeller states: “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

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Whist the Companies Act 2016 provides for the distribution of dividends by companies, companies at times do not provide dividends, much to the chagrin of shareholders.  This non-distribution of dividends usually happens when the company could not show profits.

There are certain circumstances in which the non-distribution of dividends can constitute oppression under s.346 of the Companies Act and vice versa. 

The crucial question is, when does the non-distribution of dividends enter the realm of oppression?

PRELIMINARY ISSUES: UNDERSTANDING DIVIDENDS AND OPPRESSION

Dividends

Under s.131(1) of the Companies Act 2016, a solvent company may only distribute dividends to shareholders out of the profits of the company.

Further, s.132(1) of the Companies Act 2016 provides that the distribution of dividends must obtain prior authorization from the directors of a company. Pursuant to s.132(2) of the Companies Act 2016, the directors, in turn, may authorize such distribution if they are satisfied that the company will be solvent immediately after the said distribution is made.

Oppression

S.346 of the Companies Act 2016 outlines what constitutes oppression and its remedies:-

(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.

(2) If on such application the Court is of the opinion that either of those grounds is established, the Court may make such order as the Court thinks fit with the view to bringing to an end or remedying the matters complained of, and without prejudice to the generality of subsection (1), the order may-

(a) direct or prohibit any act or cancel or vary any transaction or resolution;

(b) regulate the conduct of the affairs of the company in the future;

(c) provide for the purchase of the shares or debentures of the company by other members or debenture holders of the company or by the company itself;

(d) in the case of a purchase of shares by the company, provide for a reduction accordingly of the capital of the company; or

(e) provide that the company be wound up.

(3) If an order that the company be wound up is made under paragraph (2)(e), the provisions of this Act relating to winding up of a company shall apply as if the order had been made upon a petition duly presented to the Court by the company, with such adaptations as are necessary.

(4) If an order under this section makes any alteration in or addition to any constitution, then, notwithstanding anything in any other provision of this Act, but subject to the order, the company concerned shall not have power without the leave of the Court to make any further alteration in or addition to the constitution inconsistent with the order, but subject to the foregoing provisions of this subsection, the alterations or additions made by the order shall be of the same effect as if duly made by resolution of the company.

(5) An office copy of any order made under this section shall be lodged by the applicant with the Registrar within fourteen days from the making of the order.

(6) The applicant who contravenes subsection (5) commits an offence and shall, on conviction, be liable to a fine not exceeding ten thousand ringgit and, in the case of a continuing offence, to a further fine of five hundred ringgit for each day during which the offence continues after conviction.

The Privy Council case of Re Kong Thai Sawmill (Miri) Sdn Bhd v Ling Beng Sung [1978] 2 MLJ 227 is instructive in holding that there must be a visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder is entitled to expect before a case of oppression can be made: 

“It is only when majority rule passes over into rule oppressive of the minority, or in disregard of their interests, that the section can be invoked. As was said in a decision upon the United Kingdom section there must be a visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder is entitled to expect before a case of oppression can be made (Elder v Elder & Watson Ltd 1952 SC 49): their Lordships would place the emphasis on “visible”. And similarly “disregard” involves something more than a failure to take account of the minority’s interest: there must be awareness of that interest and an evident decision to override it or brush it aside or to set at nought the proper company procedure.” (Emphasis added)

CIRCUMSTANCES IN WHICH THE NON-DISTRIBUTION OF DIVIDENDS ARE NOT OPPRESSIVE

(a) For the Greater Good of the Shareholders

In Yap Yong Huat & Anor v Yap Yoke Beng & Ors [2015] MLJU 1190, the Court observed that there was no discrimination against the plaintiffs in respect of the non-payment of dividends. In fact, the dividend payments were used to pay off a company loan, ultimately benefiting the shareholders, including the plaintiffs.  As such, this non-distribution of dividends does not result in oppression.

(b) The Company could not Show Profits

As aforementioned, dividends can only be distributed out of the profits of a solvent company.  As a corollary, shareholders of an unprofitable company cannot possibly ask, nor claim that they are oppressed if dividends were not distributed to them.

In Ghanesh Periasamy & Ors v Glamjaya & Ors [2017] 1 LNS 1897, the Court’s response to the plaintiffs’ contention that they were oppressed in the absence of dividends is as follows:

“[87] It is manifestly common business sense and logic that no company can provide a return on investment to its shareholders if it cannot show profits in the first place. Thus, again, the argument of the plaintiffs here is untenable.”

(c) What if the Company could Show Profits?

Herein lies the tricky part.

Courts are of the view that there is no oppression provided that the management’s discretion to declare and distribute dividends is proper and if there is no common understanding to declare dividends.

HS Wang Holdings Sdn Bhd v Borneo Pride Sdn Bhd & Ors [2017] MLJU 2239 is illustrative of the above principle, wherein the Court held as follows:

“[72] There is no dispute that the 1st defendant did not pay a dividend to any shareholder including the 2nd, 3rd and 4th defendants and other shareholders. Counsel for the plaintiff argued that by not declaring dividends, the defendants breached the “common understanding”. I have already found that there is no evidence of a “common understanding” between the plaintiff and the 2nd to 4th defendants. Furthermore, there is no dispute that the accounts show that the 1st defendant’s cash flow turned positive only in 2001. By that time, the 1st defendant had the benefit of loans from the bank and capital injections through rights issue. There is no requirement under the Companies Act 1965 that a company is obliged to declare dividends merely because it has recorded a positive cash flow in a particular year. It is a management decision dependent on the company policy and the discretion of the board of directors.”

In Lee Ah Kong @ Lee Muk Sang v Wings Logistic Sdn Bhd & Anor [2015] 7 MLJ 408, the Court held that there is no oppression in the absence of dividends when:

• the petitioner’s complaint regarding the non-distribution of dividends is ten (10) years late;
• the directors exercised proper discretion not to declare dividends;
• the company instead made good investments which drove up the share value of the petitioner’s shares; 
• the petitioner did not say that non-declaration of dividends was targeted specifically at him; and
• the petitioner’s proxy did not raise specific questions on the non-payment of dividends in an AGM.

“[125] In so far as the complaint that he has not been receiving annual dividends is concerned, that has always been the case since 2002 when he became a shareholder until he filed the petition on 7 January 2013. And so for almost ten years, he has not been receiving dividends. The question is: what has he been doing all these years? He appears to have gone along without receiving any dividends and it is rather late for him to complain in 2012 that he has not received dividends and that that is a manifestation of oppressive conduct.

[126] There has obviously been a delay and the principle enunciated in Re Sensun Auto Supplies Sdn Bhd [1988] 1 MLJ 326 applies, regardless of the fact that the petitioner was not in management of the company. The principle is that the complainant should not delay in making complaints of so-called oppressive conduct otherwise he would be deemed to have acquiesced to the conduct and may be precluded from mounting a challenge by way of an action under s 181 of the Companies Act 1965.

[127] Now, on the topic of annual dividends also it must be borne in mind that it is the discretion of the directors whether to declare dividends or not. As was rightly pointed out, in the initial years, the company was indebted to directors and financiers. So, payment of dividends was, properly in the exercise of the discretion of the management, not declared.

[128] Then when we also look at the articles of association it provides for the company to invest in property and this is exactly what they have done. They have a bonded warehouse which is yielding income by way of rentals and they have also ploughed the access funds of the profits available for distribution, into the purchase of the 13 shop-lot units in Maritime Piazza.

[129] When looked at objectively, it would appear that that is a good investment and because of all these investments, the share value of the petitioner’s share has appreciated. Again, that repudiates any notion of oppressive conduct against the second respondent based on the non-declaration of dividend.

…

[131] In the present case, there is no assertion by the petitioner that the non-declaration of dividends was targeted specifically at the petitioner.

[132] Lastly, I observed that the petitioner’s proxy Mr Wong Thai Sun who attended the AGM on 12 July 2012 asked several questions about expenses but raised no specific question about non-payment of dividend (see exh CKA3 encl 7). So it was clear that the petitioner was only concerned with the surge in expenses but was not concerned with non-payment of dividends.”

CIRCUMSTANCES IN WHICH THE NON-DISTRIBUTION OF DIVIDENDS ARE OPPRESSIVE

(a) Collateral Purpose

Though the Courts take cognizance of the directors have the discretion to recommend a dividend, such discretion must be exercised fairly and honestly.  Re SQ Wong Holdings (Pte) Ltd [1987] 2 MLJ 298 reflects this principle:

“In law, the directors have a discretion whether or not to recommend a dividend, even on the preference shares, but this discretion must be exercised fairly and honestly in the interest of the company. They would not be acting honestly or fairly if the discretion were exercised to deny the preferential shareholders their rights for a collateral purpose.”

(b) Punishing the Minority

In Re Gee Hoe Chan Trading Co Pte Ltd [1991] 3 MLJ 137, the shareholders were deprived of dividends as the majority shareholders, who controlled the board of directors and drew high directors’ fees, wanted to punish the minority shareholders.

“Looking at the evidence objectively, I did not think I could accept the explanations of the respondents. The truth was probably, and I do so find, that the respondents were upset that the petitioners had the audacity to question how the respondents managed the company and to even think to withdraw from the company. I am inclined to believe that, the non-declaration of dividends was the respondents’ (who controlled both the general meeting and the board of directors) way to punish the petitioners. I think this comes out quite clearly if one were to look at the accounts which are tabulated below:

…

And of the lot of directors’ fees and salaries paid out in those years, only $60,000 were received by one of the petitioners, ie Madam Tan Ah Huan.”

(c) Excessive Directors’ Fees

Further, Wong Shee Cheong [2011] 1 LNS 666 held that excessive directors’ fees wherein the directors are also the majority shareholders coupled with the non-declaration of dividends constitute oppression:

“Thirdly, the payment of excessive directors’ fees and other emoluments may amount to oppression particularly when the directors deriving such fees and emoluments are also the majority shareholders. Such fees coupled with the failure to declare dividends will invariably amount to oppression.”

CONCLUSION

The distribution of dividends hinges on the discretion of the directors of a solvent and profitable company.  As such, the directors of such companies must exercise this discretion fairly and honestly if they choose not to declare dividends. In doing so, they will not depart from the standards of fair dealing and violate the conditions of fair play leading to oppression.