Family Feud: Oppression in Family Companies

INTRODUCTION

Shareholders, particularly minority shareholders, are vulnerable to abuse or oppression by the majority shareholders.  When such oppression occurs in family companies, it would often result in acrimony and bitterness. 

Whilst witnessing the breakdown in personal relationships may be entertaining to some, the more crucial focus herein is how judges view oppression in family companies.  In the following paragraphs, I will first briefly explain what oppression is; I will then outline how Courts assess oppression in different types of companies; lastly I will explain how has Courts viewed family companies through the lens of oppression.

OPPRESSION, BRIEFLY

Section 346 of the Companies Act 2016 outlines what constitutes oppression and its remedies, as seen below:

“(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 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 naught the proper company procedure.”

Courts have found, inter alia, the following conducts to be oppressive:

1. Withholding dividends whilst high salaries are drawn by the directors who hold the majority voting power;[1]
2. Financial impropriety;[2]
3. Autocratic conduct by the directors holding the majority voting power;[3]
4. Serious mismanagement of the Company;[4] and
5. Failure to hold annual general meetings and to lay accounts.[5]

What constitutes oppression is succinctly explained by Abdul Malik Ishak J in Tan Kian Hua v Colour Image Scan Sdn Bhd & Others [2004] MLJU 178 wherein “the critical test to show oppression is whether there is commercial unfairness.”

Further, eminent practitioner, Dato’ Loh Siew Cheang observed that such ‘fairness’ must be assessed through the factual contours of different companies.[6]  Courts have viewed the following three (3) types of companies differently when assessing oppression:[7]

1. “Ordinary companies”;
2. Ebrahimi companies; and
3. Family companies.

NON-FAMILY COMPANIES

1. “Ordinary Companies”

“Ordinary companies” are companies that are not Ebrahimi and family companies.  Here, equitable considerations are inapplicable in assessing unfairness.  Instead, unfairness is assessed through the parameters of the constitution of the company, or through the presence of any breach of fiduciary duties of the directors or the fraud on the minority.[8]

The Court of Appeal in Tuan Haji Ishak v Leong Hup Holdings Bhd [1996] 1 MLJ 661 alluded that oppression must be viewed in a commercial context. At the outset, the Courts must consider the articles of association:

“It is worth underscoring that this case was brought under s 459 of the Companies Act 1985 and the Wilberforce approach in the Ebrahimi case as now being used to determine not just whether there were grounds for winding up, but whether the conduct complained of was unfairly prejudicial. Two further passages from the judgment now follow (at p 488):

In deciding what is fair or unfair for the purposes of s 459, it is important to have in mind that fairness is being used in the context of a commercial relationship. The articles of association are just what their name implies: the contractual terms which govern the relationship of the shareholders with the company and each other. They determine the powers of the board and the company in general meeting and everyone who becomes a member of a company is taken to have agreed to them. Since keeping promises and honouring agreements is probably the most important element of commercial fairness, the starting point in any case under s 459 will be to ask whether the conduct of which the shareholder complains was in accordance with the articles of association.”

2. Ebrahimi Companies

Ebrahimi companies derive their name from Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, HL, are characterised as follows:

“The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be "sleeping" members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.”

In Ebrahimi companies, Courts will consider equitable considerations and not just the constitution of the company in assessing the presence of oppression.

FAMILY COMPANIES

1. What are they?

Family companies are often characterised by having family members as shareholders and directors with the aim of carrying out family business. A ‘typical’ Asian family company’s composition can be gleaned though Re Gee Hoe Chan Trading Co Pte Ltd [1991] 3 MLJ 137:

“Before the incorporation of the company, there was a partnership business established by one Ng Ah Kim and another Ng Boon Hong. Ng Boon Hong died in 1952. After his death, his interest in the partnership was retained by his widow, Madam Tan Ah Huan (fourth petitioner herein) and his children, Ng Kim Kee, Ng Kim Ming, Ng Kin Yeow and Ng King Leang (the fifth to eighth petitioners herein) and the partnership business was managed entirely by Ng Ah Kim. On the incorporation of the company in 1960, Madam Tan Ah Huan and her children were made shareholders. She was also made a director.

Ng Ah Kim died in 1976. Before his death, most of his shares in the company were bought over by another company, Ng Ah Kim Development Pte Ltd. Ng Ah Kim Development Pte Ltd was and is owned by the respondents.

…

The first, second and third petitioners are related to the respondents in that they are half-brothers; the former being children of Ng Ah Kim and his second wife, Madam Tan Poh Tee.”

Abdul Malik Ishak J in Tan Kian Hua v Colour Image Scan Sdn Bhd & Others [2004] MLJU 178 also explained the common trappings of such family companies, for instance: “Of course, that was a case which concerned a Chinese family company and like many other traditional Chinese businesses it was run with an iron fist and in an autocratic manner and so the court ordered winding-up.”

Though not all family companies are Ebrahimi companies, Courts are more likely to view them as such because it is more likely that family companies arise from considerations of a personal nature.[9]  

Commercial Unfairness in Family Companies

In patriarchal family companies, children often receive their shares as gifts and do not contribute capital but industry, or none.[10] 

The Supreme Court of New South Wales case of Belgiorno-Zegra v Exben Pty Ltd & Ors (2000) 35 ACSR 305 viewed the fact that the son, Marco, had received his shares as gifts from his parents as a relevant factor in ascertaining commercial unfairness:

“[133]  In my opinion, it is convenient first to consider what, as a matter of legal entitlement and also as a matter of fairness, Marco was entitled to expect when, in November 1999, it became clear that the MOU could not be implemented.

[134]  Relevant factors bearing on this, in my opinion, include the fact that Transfield had been built by Franco, over a period of 43 years; the fact that Marco's shares had been gifts from his parents; the fact that Marco had devoted 23 years of his life to Transfield, and had been instrumental in its growth from 1989–96; the fact that Franco and his sons had agreed to the shareholders’ agreement, the CGA and the MOU; the fact that there had been disagreements concerning management, and a deterioration in the fortunes of Transfield coinciding with increased participation in management by Luca and Guido; the fact that Marco had over a considerable period made it clear that he wished to leave Exben and Transfield; the fact that, at the time of negotiation of the MOU, Luca and Guido had indicated that they wished Marco to leave; and the fact that it had not been possible to give effect to the terms of the MOU.”

Crucially, the Wellington Court of Appeal case of Thomas v HW Thomas Ltd [1984] 1 NZLR 686 is illustrative of the balance between the concept of fairness in family companies and prejudice in the commercial context.[11]

Yap Yong Huat & Anor v Yap Yoke Beng & Ors [2015] MLJU 1190, summarises the above balance by elucidating:

“family companies, the pursuit of profits may not be the overriding goal of the company and therefore the intention of the founder must be given due consideration in determining the concept of ‘fairness’. In dismissing the petitioner’s contention, the Court held:

… fairness is not to be assessed in a vacuum or simply from one member’s point of view; there must be a balancing of all the interests involved. In the present case I believe the court has to give weight to the consideration that HW Thomas Ltd since its corporation has been essentially a family company having as a central objective the provision of employment for members of the founder’s family. To preserve that objective can be justifiable, and indeed praiseworthy. (per Sir Thaddeus McCarthy at p 697).”

In short, Courts will consider the following distinct factors in ascertaining commercial unfairness, and consequently, oppression in family companies:

1. Whether the said family company is an Ebrahimi company?
2. If so, what are the equitable considerations surrounding the shareholders of the said family company?
3. Whether the said family company is run with an “iron fist”?
4. Whether the children shareholders in the said family company receive their shares as gifts?
5. And crucially, what is the intention of the founder of the said family company?

CONCLUSION

It is clear from the above that the Courts will consider the peculiarities of family companies before establishing the presence (or absence) of commercial unfairness and oppression.

What remains clearer is the diversity of family companies, which had sprung up in different cultures with various managerial approaches. 

In light of such diversity, one must caution oneself against stereotyping family companies.  Not all Chinese businesses are traditional, let alone autocratic.  Likewise, not all children receive shares as gifts from their parents.  Not all family companies are incorporated with personal considerations in mind, they may exist solely for a pragmatic, commercial aim.

As such, the Courts’ decision on oppression in family companies will, like intricate familial relations, be based on the people behind it.