Ganging Up Incorporated: Oppression in a Group Company

Introduction

In many instances, the interest of the minority (or even majority) shareholders will be blatantly ignored or disregarded. To prevent unfair prejudice, S346 of the Companies Act (“CA”) allows an oppressed shareholder to bring an action against the his/her/its oppressors.

Oppression can also occurs occur in a group company context.An example of this is when an oppressive conduct of a holding company has adversely affected affects the interests of the shareholders in the subsidiary.

The Concept of Oppression

S346(1) of CA provides for what amounts to oppression.

1. Any member or debenture holder of the company may apply to the Court for an order under this section on the ground –
   1. 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;
   2. 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.

The remedies are provided under S346(2) of CA, where the court may make an order to

1. Direct or prohibit any act or cancel or vary any transaction or resolution
2. Regulate the conduct of the affairs of the company in the future
3. 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
4. In the case of a purchase of shares by the company, provide for a reduction accordingly of capital of the company
5. Provide that the company be wound up

To establish that there is an oppression under S346 of CA against the shareholder, the test provided in the case of Re Khong Thai Sawmill (Miri) Sdn Bhd v Ling Beng Sung [1978] 2 MLJ 227 shall be fulfilled. It must be satisfied that there is a visible departure from standards of fair dealing and violation of conditions of fair play which the shareholder is entitled to expect.

“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 shareholder is entitled to expect before a case of oppression can be made”

Application of S346 of CA in a Group Company Context

Courts recognize that the definition of “affairs of the company” in S346(1) of CA includes the affairs in the subsidiary company or holding company.The authorities below demonstrate that oppression at the subsidiary company level (where it affects the holding company) can become the affairs of the holding company.

In Tob Chee Hoong v Tob Chee Choong & Ors [2017] MLJU 1303 per Mohd Nazlan Mohd Ghazali J (as His Lordship then was), the High Court found that the affairs of the subsidiary company are also that of the parent company:

[50] the phrase ‘affairs of the company’ found in Section 181(1) of the CA (and the new but identically worded Section 346(1) of the Companies Act 2016) should be construed widely, to encompass the affairs of entities which are not themselves the subject of the oppression action, but which affairs of those entities, affect the subject company in the nature and to the extent which is beyond the inconsequential, be it a parent or a subsidiary.

…

[54] This provide much support to a wide reading of ‘affairs of the company’ which is wholly in line with the design of the law to ensure that in circumstances where oppressive conduct could be proven, legal redress to those unlawfully aggrieved is available and not impeded by the artificiality or in the complexity of corporate structures. Otherwise, wrongdoers in corporate world would be encouraged to strategize and build upon more complex conglomerate-like structures and perpetuate such unlawful and oppressive conduct in a fashion orchestrated to defeat the application of Section 181 (1) (Section 346 (1) of the Companies Act 2016), and almost literally employing the section as an engine of fraud. The law will fail in its true objective and the ends of justice will be far from being served if such a grim scenario is allowed to transpire, if not already manifest and flourishing.

[55] It bears repetition that the existence of the holding and subsidiary structure may not necessarily mean that the affairs of the latter will always be those of the former in all cases (or vice versa). It is still a question of evidence. It is fact-sensitive. The predominant question must thus turn on whether it can be shown that the affairs of the subsidiary actually truly affected the holding company.

[56] Accordingly, in the instant case, it is my finding that the phrase ‘affairs of the company,’ stated in Section 181 (1) (a) of the CA, which is the affairs of the subject fourth defendant company, must include the affairs of Orchard Circle because of the former’s 100% ownership of the latter, the common directorship of two directors from the controlling block as well as the fact that the parent is purely an investment holding company and that the subsidiary, which is a property development company, is its one and only business investment.

Interestingly, in Nuraslina bt Zainal Abidin v Dagang Net Technologies Sdn Bhd & Ors [2022] MLJU 2670, Ong Chee Kwan J clarified that the Courts will intervene even if the oppression occurs at the subsidiary company level and where it also affects the holding company:

[116] In fact, the Courts will intervene even when the oppressive conduct takes place at the subsidiary of a holding company where the plaintiff is the shareholder if the same impinges or affects the affairs of the holding company. For all intents and purposes the oppression at the subsidiary level has become the affairs of the holding company.

…

[119] The upshot was that the phrase ‘affairs of the company’ found in Section 346(1) of the CA 2016 be construed widely, to encompass the affairs of entities which are not themselves the subject of the oppression action, but which affairs of those entities, affect the subject company in the nature and to the extent which is beyond the inconsequential, be it a parent or a subsidiary.

See also: Ng Kek Wee v Sim City Technology Ltd [2014] SGCA 47

The Test of Oppression and Examples

The same test of commercial unfairness as laid down in Re Khong Thai Sawmill [1978] 2 MLJ 227 is equally applicable to the oppression in a group company context.

Although an identical test of commercial unfairness is being applied in the cases of oppression in a group company context, the test operates in a slightly differing way due to the involvement of the corporate structure and the complexity of the case.

Below are a few examples of how the court determine whether there is an oppression in group company context:

1. In Datuk Kasi a/l KL Palaniappan v Menara Embun Sdn Bhd & Ors and another [2018] MLJU 1439, the court explained that oppression occurs when the shareholder’s right in the subsidiary company as specified in the shareholders’ agreement is being declined.
2. In LGB Engineering Sdn Bhd & Ors v Rayston Resources Sdn Bhd [2023] 1 MLJ 649, the shareholder in the subsidiary company commenced an oppression action against the investment holding company for procedural irregularities in holding the member’s meeting. The court held that there was no oppression as the irregularity is curable by subsequent members’ written resolution.

Conclusion

The affairs of a subsidiary company will be that of a holding company in ascertaining the presence of oppression if the affairs of the subsidiary company affect the holding company. Ong Chee Kwan J in Nuraslina bt Zainal Abidin v Dagang Net Technologies Sdn Bhd & Ors [2022] MLJU 2670 aptly sums this concept:

[119] The upshot was that the phrase ‘affairs of the company’ found in Section 346(1) of the CA 2016 be construed widely, to encompass the affairs of entities which are not themselves the subject of the oppression action, but which affairs of those entities, affect the subject company in the nature and to the extent which is beyond the inconsequential, be it a parent or a subsidiary.