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Mohammad Rizal Salim and Philip Lawton (2008) “The Law in a Post-Colonial State: The Share- holders' Oppression Remedy in Malaysia,” Global Jurist: Vol.
Global Jurist Frontiers Volume 8, Issue 1

2008

Article 3

The Law in a Post-Colonial State: The Shareholders’ Oppression Remedy in Malaysia Mohammad Rizal Salim∗

∗ †

Philip Lawton†

Universiti Teknologi MARA, [email protected] Lancaster University, [email protected]

Recommended Citation Mohammad Rizal Salim and Philip Lawton (2008) “The Law in a Post-Colonial State: The Shareholders’ Oppression Remedy in Malaysia,” Global Jurist: Vol. 8: Iss. 1 (Frontiers), Article 3. Available at: http://www.bepress.com/gj/vol8/iss1/art3 c Copyright 2008 The Berkeley Electronic Press. All rights reserved.

Electronic copy available at: http://ssrn.com/abstract=1462865

The Law in a Post-Colonial State: The Shareholders’ Oppression Remedy in Malaysia∗ Mohammad Rizal Salim and Philip Lawton

Abstract Once colonised by the British, Malaysia inherited the British political and legal system, as well as written and judge-made laws. We trace the development of the law on the shareholders’ oppression remedy in Malaysia, and compare it with the development in England. We found that the influence of English case laws is still very pervasive in the courtroom. The reasons for this includes, among others, the use of a company law statute based on the British statute, the reliance of English case laws and other legal materials, the legal training of members in the legal profession, as well as the use of the English legal tradition and the English language in the Malaysian courtroom. We conclude that despite a similarity in the written law, the sharing of a common legal heritage and a propensity by Malaysian lawyers and judges to use English laws, the laws as applied by the courts in Malaysia is not identical to the law in England. There was a desire to keep up with English developments, but in the whole the Malaysian courts have not been able to keep pace. In the courtroom, the lack of resources and expertise are probably the main factors contributing to the underdevelopment of the law. The propensity to rely on the reforms in other countries with little emphasis to the peculiarity in the local environment has undermined law reform. We argue that an effective law-making process and legal institutions are as important as the law itself. KEYWORDS: post-colonialism, company law, shareholders, oppression remedy, unfair prejudice, Malaysia



The authors thank Michael Likosky for his comments on the earlier draft of this paper.

Electronic copy available at: http://ssrn.com/abstract=1462865

Salim and Lawton: The Shareholders' Oppression Remedy in Malaysia

1.

INTRODUCTION

This paper concerns one aspect of reception of colonial law, the reception of the shareholders’ oppression remedy, now provided by s. 181 of the Malaysian Companies Act 1965.1 Following the Alan Watson—Pierre Legrand debate,2 this paper examines the impact of the transplanted oppression remedy in the host environment. This paper concludes that the views taken by Alan Watson (that legal change is independent from social conditions) and Pierre Legrand (that legal transplants are impossible) were both exaggerated, at least where the shareholders’ oppression remedy in Malaysia is concerned. Legal transplants are indeed possible, even between countries of different culture and levels of material advancement. However, there will be differences in the manner in which the law operates. The prevalence of family companies, cultural factors and the influence of the state resulted in the society avoiding the official judicial system as the forum to resolve disputes. In the Malaysian context, this has already been discussed elsewhere.3 This paper examines disputes which have been adjudicated upon in the law courts and whose decisions are publicly available, whether reported or not. It will be seen that, despite sharing a similar statutory base, the oppression remedy as applied by the courts in Malaysia has developed characteristics which are not wholly identical with the law as applied in its countries of origin. In this case, the countries of origin are the United Kingdom (UK) and Australia, as the Malaysian oppression remedy was an improved form of the then UK provision, following the Australian example. This paper is organized in the following manner. First, we discuss the legal development in Malaysia, in particular the history of the reception of laws. This places the discussion on the oppression remedy in the Malaysian context. Next, we discuss the oppression remedy as applied by the courts in Malaysia. As 1

The colonial company law statutes, starting from the Straits Settlement Companies Ordinance 1889, to the Companies Ordinance 1946, were closely modeled after statutes applicable in the UK at the time. The post-colonial Companies Act was enacted in 1965, based on the UK Companies Act of 1929, but with modifications following the modernise version of the UK statute, the Australian Uniform Companies Act 1961. 2 Alan Watson, “Legal Transplants and Law Reform” (1976) 92 Law Q. Rev. 79; Pierre Legrand, “The Impossibility of Legal Transplants” (1997) 4 Maastricht J. of European and Comparative Law 111. Another of Watson’s often cited work is Legal Transplants: An Approach to Comparative Law 2nd ed., The University of Georgia Press, Athens, 1993 (first edition was published in 1974). Other Watson critics include L. Friedman, “Borders: On the Emerging Sociology of Transnational Law” (1996) 32 Stanford J. of International Law 65. See also William Twining, “Social Science and Diffusion of Law” (2005) 32 Journal of Law and Society 203 (providing the background of the debate) and Otto Kahn-Freund, “On Uses and Misuses of Comparative Law” (1974) 37 Modern L. Rev. 1 (which sparked the debate). 3 See Mohammad Rizal Salim, “Legal Transplantation and Local Knowledge: Corporate Governance in Malaysia” (2006) 20 Australian Journal of Corp. Law. 55.

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the remedy was received law, comparisons with the laws as applied in the countries of origin are inevitable. In the case of the UK, the reform of the remedy in 1980 has transformed the remedy. We will look at the impact (if any) of the UK reform in Malaysia. This is followed by a discussion on the sometimes curious way legal precedents are used in Malaysia. Although in principle Malaysia follows the common law system of precedent which is founded on the principle of stare decisis, the use of legal precedents in this country has been erratic. We examine the reasons for this. We emphasise that the use of legal precedents has important consequences on legal development of the subjectmatter. This paper concludes that despite enjoying a shared legal tradition, a similarity in the statutory law and the desire to follow UK developments, Malaysian courts has struggled to keep pace.

2.

BRITISH LAW, LEGAL SYSTEM AND LEGAL TRADITIONS IN MALAYSIA

The history of law in Malaysia is also a history of legal reception.4 The dominant law in the pre-colonial period was the adat, which borrowed from a mix of Hindu-Buddhist elements originated from South Asia followed by the more prominent syaria from the Middle East, often through the Indian subcontinent. The adat and syaria laws have survived the succession of Portuguese, Dutch and British rule, a period spanning over four centuries.5 However, while the Portuguese and the Dutch had little interest in the administration of the occupied territory outside of the trading port, British colonial administration was more farsighted.6 British rule left a lasting impact on the adat and syaria law. The use of legislative, judicial and administrative laws, the system of law reporting and the technique of judicial precedent have stifled the unwritten, fluid and adaptable adat, which eventually led to a loss of confidence and rejection of the adat laws administered by the colonial courts.7 The syaria, likewise, was bureaucratised, 4

Andrew Harding said that Malaysia’s long history of legal transplant makes it perhaps one of, if not the best, example of legal development through transplant: Andrew Harding, “Global Doctrine and Local Knowledge: Law in South East Asia” (2002) 51 International Comparative Law Quarterly 35; Law, Government and the Constitution in Malaysia, Kluwer, London, 1996 at Preface, vii. See also Barry M. Hooker, “English Law and the Invention of Chinese Personal Law in Singapore and Malaysia” in Barry M. Hooker (ed.) Law and the Chinese in Southeast Asia, Institute of Southeast Asian Studies, Singapore, 2002, 95-130 at pp. 95-96. 5 The Portuguese invaded Malacca in 1511. Malaya gained independence from Britain in 1957. 6 For a fascinating account of early British rule and the reception of English laws in the Straits Settlement, see Barry M. Hooker, “The East India Company and the Crown 1773-1858” (1969) 11 U. Malaya L. Rev. 1. 7 Barry M. Hooker, Adat Laws in Modern Malaya: Land Tenure, Traditional Government and Religion, Oxford University Press, Kuala Lumpur, 1972 at p.3-5. The fate of adat laws is not a unique example as customary laws of the indigenous population in other British colonies suffered

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Salim and Lawton: The Shareholders' Oppression Remedy in Malaysia

labelled “Muhammadan law” and its application limited to “personal” matters, i.e. matters relating to marriage, divorce, custody, guardianship, inheritance and succession.8 In Malaysia’s long history of legal transplants, probably none are as important as the transplantation of English laws and legal system. They were transplanted for various reasons, which include (1) ideological (that they were perceived to be superior); (2) their importance to British commercial interests;9 and (3) the assumption that colonial administrators were better able to administer English laws.10 Today after nearly half a century of independence, the English legal legacy continues to be pervasive. It extends from specific written and common laws to the legal and political systems and institutions, including the system of government and the law-making process. The continuing British economic interest in the colony was probably the prime reason the British colonial government sought to formalise the use of English corporate and commercial laws, even after they have agreed to Malaya’s independence. This was achieved through the enactment of the Civil Law Ordinance (now Act) 1956. This legislation makes provision for the import of English common law, rules of equity and statutes of general application as administered in England on certain cut-off dates, subject only to “local circumstances”.11 English commercial laws are applicable unless provisions are made by written law.12 The Constitution of the Federation of Malaya (now the Federal Constitution) defines “law” to include “the common law”.13 These provisions remain unchanged today. There are other factors which enhanced the continuing application of English laws. First, there was a great reliance on British expatriate personnel in the same fate, as Snyder showed in Senegal and Chanock in Zambia and Malawi: Francis Snyder, Capitalism and Legal Change: An African Transformation, Academic Press, New York, 1981 and “Colonialism and Legal Form: The Creation of ‘Customary Law’ in Senegal” (1981)19 Journal of Legal Pluralism 49; Martin Chanock, Law, Custom, and Social Order: The Colonial Experience in Malawi and Zambia, Cambridge University Press, Cambridge, 1985. 8 See Barry M. Hooker, “Introduction: The Translation of Islam into South-East Asia” and “Muhammadan Law and Islamic Law” in Barry M. Hooker (ed.) Islam in South-East Asia, E.J. Brill, Leiden, 1983, 1-22 and 160-182. 9 Radhe S. Rungta, The Rise of Business Corporations in India 1851-1900, Cambridge University Press, Cambridge, 1970; McQueen, Rob (1995) “Company Law as Imperialism” (1995) 5 Australian Journal of Corporate Law 187. 10 But see Bashir A. Mallal (1959) “Law and Law Reporting in Malaya” (1959) 1 U. Malaya L. Rev. 71; Emily Sadka, The Protected Malay States, 1874-1895 University of Malaya Press, Kuala Lumpur,1968, at 252; Victor Purcell, Memoirs of a Malayan Officer, Cassell, London, 1960, at 298. For an illuminating example from Hong Kong, see Austin Coates, Myself a Mandarin: Memoirs of a Special Magistrate, Oxford University Press, Oxford, 1968. 11 Civil Law Act 1956, s.3. 12 Civil Law Act 1956, s. 5. This section makes reference to the law of partnerships, corporations, banks and banking, principals and agents, carriers by air, land and sea, marine insurance, average life and fire insurance, and with respect to mercantile law generally. 13 Article 160. Although not explicitly stated, this is understood to be English common law.

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the legal and judicial services, especially prior to and for a period after independence. At the time of independence in 1957, there were only two locals sitting in the superior courts. The first local judge was elevated as the Lord President, the highest judicial officer of the land, only in 1966, nine years after independence.14 The second factor was the legal training of members in the legal profession. Initially the sole training ground was the Inns of Court in England. It was only in 1976 when the first batch of law graduates graduated from the University of Malaya (the University’s Law Faculty was established in 1972). The third is the use of the Judicial Committee of the Privy Council as the final court of appeal. The Council’s decisions bind the lower courts where the decision concerned a case on appeal from Malaysia.15 Additionally, a decision of the Privy Council was also binding in the case where the appeal was from a common law country and the law in point was the same as in Malaysia.16 Even when appeals to the Privy Council were abolished in 1984, its decisions continue to bind local courts, unless overruled by the Supreme Court (now Federal Court, which is now the apex court) or by an Act of Parliament.17 These factors influenced, both administratively and intellectually, the administration of justice in the country. Local innovation is often in short supply in Malaysia, and this is perhaps best reflected in the law on shareholders remedies. There could be a number of reasons for this, one of which is that it is still fashionable to borrow the wisdom of current English thinking on the subject. This is reinforced by the continued usage of the English language in legal education as well as in the profession.18 The implementation of the national language policy resulted in the enactment of statutes in both the Malay and English languages.19 Court proceedings are required to be in Malay, but with an important exemption – the court may, “after considering the interests of justice”, conduct the proceedings partly in Malay and in English.20 In general, however, English is commonly used in the superior courts as it is still the unofficial lingua franca of members of the legal profession. 14

See Mohamed Suffian, “Four Decades in the Law—Looking Back” in F.A. Trinidade and H.P. Lee (eds.) The Constitution of Malaysia: Further Perspectives and Developments, Oxford University Press, Singapore, 1986, pp. 213-254 at pp. 214-215. 15 Wong See Leng v Saraswathy Amal (1954) 20 MLJ 141. 16 Khalid Panjang v Public Prosecutor (No 2) (1964) 30 MLJ 108; affirmed in Director-General of Inland Revenue v Kulim Rubber Plantations Ltd [1981] 1 MLJ 214. 17 Inchape Malaysia v RB Gray [1985] 2 MLJ 297; Enesty v Transport Workers Union [1986] 1 MLJ 18. Both were Supreme Court decisions. 18 English continued to be the official language in the courts until 1967 as s. 8 of the National Language Act 1963/67 requires all court proceedings to be in the national (Malay) language. This was despite the Constitution providing that the Malay Language is to be the official national language: The Federal Constitution, Article 152(1). 19 Section 6 of the National Language Acts 1963/67 provides that all Bills, Acts of Parliament, Enactments, subsidiary legislation, and Ordinances “shall be in the national language and in the English language”, with the text in the national language being authoritative. 20 Ibid, s. 8.

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Salim and Lawton: The Shareholders' Oppression Remedy in Malaysia

The majority of the members of the Bar received their legal education in English, which may help explain why this is so.21 There are also very few legal texts and reference materials written in the Malay language. Law reports were also in English, although today some have Malay translations (but often limited to headnotes). The lack of Malay legal literature is compounded by problems in translating legal terms. Literal translation often distorts the real meaning of the term, compounded by the absence of appropriate words in the Malay language. The English legal concepts and jargon are also alien to most Malaysians except those having some legal education.22 It was extra-judicially noted that the concept and language of law have very specific meanings because it was developed from a particular society’s history, tradition and culture that used the language in its official and commercial activities.23 The convenience and expediency of using the English language, and also perhaps because the more senior members of the legal profession are more comfortable with the language, means that it continues to be the dominant language in the superior courts. So pervasive is the application of English laws in Malaysia that one estimate suggested that even conservatively, 90 per cent of Malaysian laws come directly from England or are based on English precedents.24 This figure is difficult to verify, especially since it is extremely difficult, impossible even, to identify the truly local laws from those which are entirely foreign. Nevertheless, a perusal of any Malaysian company law text or journal articles on the subject will reveal the heavy influence of foreign case law, in particular English cases. Where local cases were cited, more often than not one will find that the origin of the law were in fact foreign, again particularly English. The law of shareholders’ remedies is no exception; in fact it provides an excellent example of the heavy English influence. However, as the introduction to this paper foretells, one should be cautioned against making an assumption that the law as applied in Malaysia corresponds to the law as applied in England. There are differences in how the law is applied. As 21

The medium of instruction in established public law schools in Malaysia are varied from mixed English and Malay (in University Malaya’s law faculty), English only (Universiti Teknologi MARA’s and International Islamic University Malaysia’s law faculty) and mostly Malay (Universiti Kebangsaan Malaysia’s law faculty). However the number of law graduates from foreign, especially British universities still outnumbers local law graduates. 22 Nik Safiah Karim “Bahasa Melayu Dalam Bidang Undang-Undang: Perspektif Linguistik” (The Malay Language in Law: Linguistic Perspective) paper presented at the Seminar of Language and the Law, Kuala Lumpur, 1991. 23 Justice Faiza Thamby Cik “Masalah Pelaksanaan Penggunaan Bahasa Malaysia di Mahkamah Agung” (Problems in the Implementation of the Usage of the Malaysian Language in the Supreme Court), paper presented at the Seminar on the Usage of the Malaysian Language in the Supreme Court, Kuala Lumpur, 1990. For a consideration of similar issues in Hong Kong, see Roebuck, Derek (1994) “Law as a Foreign Language: Chinese and English in Hong Kong’s Legal System” Journal of Asian Pacific Communication 185. Even in the context of England, Norman French and Latin legal terms were hardly used by ordinary people in their everyday conversation. 24 Richard Mead, Malaysia’s National Language Policy and the Legal System, Yale University Southeast Asian Studies, New Haven, 1988, at 49 and 85, note 9.

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we will see later, the quality of legal personnel and institutions and the manner in which legal precedents are used have a bearing on the application of the law.

3. 3.1

THE SHAREHOLDERS’ OPPRESSION REMEDY The history

The continuing colonial legacy can be seen in the oppression remedy provided by s. 181 of the Companies Act 1965. The section reads: 181

Remedy in cases of an oppression

(1) Any member or debenture holder of a company or, in the case of a declared company under Part IX, the Minister, 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 director are being exercised in a manner oppressive to one or more of the members or the debenture holders including himself or in disregard of his or their interests as members, shareholders or holders of debentures of the company; or b) that some act of the company has been done or is threatened or that some resolution of the members, holders of debentures or any class has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the members or holders of debentures (including himself).

This remedy was first introduced in the UK in the form of s. 210 of the Companies Act 1948 on the recommendation of the Cohen Committee.25 The remedy was adopted by other Commonwealth jurisdictions, including Australia, in the form of s. 186 of the Australian Uniform Companies Act 1961. Section 181 of the Malaysian Companies Act resembles the wider s. 186 of the Australian Uniform Companies Act. The legislation in the UK was first reformed in 1962 to remove the procedural ties to the winding-up action, and more importantly in 1980 to substitute the term “oppression” in favour of the more liberal “unfair prejudice”.26 In general, however, both the Malaysian and the UK provisions 25

Cohen Committee, Report of the Committee on Company Law Amendment, Cmnd 6659, Stationary Office, London, 1945. 26 The UK Companies Act 1980, s 75, pursuant to the recommendation by the Jenkins Committee, Report of the Company Law Committee, Cmnd 1749, Stationary Office, London, 1962. It is now contained in ss. 994-999 Companies Act 2006. The Australian remedy is now rewritten in the

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allow shareholders to take a direct action against the company, therefore avoiding the rule in Foss v. Harbottle.27 3.2

The scope of the remedy

The Malaysian oppression remedy when first introduced was different from s. 210 of the UK Companies Act 1948 in two respects. First, the UK provision was intended to provide an alternative remedy to winding-up on the just and equitable ground, while s. 181 leaves a wide discretion as to the relief it may grant, including the winding-up of the company.28 In addition, s. 210 provided only for “oppression”, and its replacement, s. 75 of the UK Companies Act 1980 and now s. 994 of the UK Companies Act 2006 provides only for “unfair prejudice”. In contrast, s. 181 covers conduct which is “oppressive”, “disregard of interests”, “unfairly discriminates” and “otherwise prejudicial”.29 The Malaysian provision has approximate equivalents in countries which adopted the UK Companies Act. The phrases oppression, unfair discrimination and unfair prejudice appeared in company legislations in Australia, New Zealand and Canada.30 As noted above, the UK provision now provides only for unfair prejudice.31 A unique aspect of the Malaysian provision is that it has two limbs, “oppressive” and “disregard of interests” in paragraph (a) of s. 181(1), and “unfairly discriminates” and “otherwise prejudicial” in paragraph (b). Lord Wilberforce delivering the Privy Council’s decision in Re Kong Thai Sawmill (Miri) Sdn Bhd32 was explicit on the wider scope of s. 181 compared to the then corresponding provision in the UK. He therefore cautioned against over-reliance on “restrictive” UK decisions which are based on a different section. Rather, he suggested, the court should apply the provision “according to its terms and its purpose”. It is most humbly submitted that he should have taken his own advice. This case represented the pro-management bias which characterised early English decisions.33 Corporations Act 2001, ss. 232-235. 27 (1843) 2 Hare 461. But see Re Tong Eng Sdn Bhd [1994] 1 MLJ 451 and Hoy Pak Kwai v. Leong Kon Fah [2005] 3 MLJ 633 where the courts dismissed the petitions on the ground that the injury was to the company and therefore falls under the rule in Foss v. Harbottle. 28 The UK provision was amended in 1962 to remove the procedural ties with the winding-up action, upon the recommendations by Jenkins Committee, supra note 26. 29 The phrase “unfairly discriminates” was adopted from the Macarthur Committee’s Final Report of the Special Committee to Review the Companies Act, 1973, para 364. 30 Corporations Act 2001 (Australia), s. 232; Companies Act 1993 (New Zealand), s. 174(1); Canada Business Corporation Act , s. 241. 31 The UK Companies Act 2006, s. 994. 32 [1978] 2 MLJ 227. 33 For a comment on this case see Mohammad Rizal Salim, “The Oppression Remedy in Malaysia: A Critique on the Reform Proposal” (2007) 3 Corporate Governance Law Review 56.

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In general, Malaysian courts have disregarded the technical differences in the various expressions used in the section. In all cases, without exception, emphasis was given to “oppressive”, subordinating “disregard of interests”, “unfairly discriminates” and “prejudicial”. 3.3

Statutory development

Unlike other leading common law jurisdictions, the oppression remedy has not undergone any significant change. The only amendment to the section was made in 1986 where the penalty for failure to lodge an office copy of a court’s order under the section with the Registrar from RM250 to RM1000.34 3.4

Section 181(1)(a) – “oppressive”, “disregard of interests”

Section 181(1)(a) resembles the old s. 210 of the UK Companies Act 1948. It provides for remedies where “the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive … or in disregard to his or their interests as members”. The phrase “affairs of the company” has not been properly explained in Malaysia. It was construed widely in the UK. The phrase does not include the acts of a shareholder carried out in a personal capacity and outside of the course of the company’s business.35 It also does not apply in situations where directors breached their fiduciary duties or misappropriated money belonging to the company.36 However, where breach of directors’ duties is part of a wider scheme to deprive a shareholder of his or her agreed benefit under the corporate business such as diverting business (taking a corporate opportunity), the breach of director’s duty may be a factor contributing to a finding of unfair prejudice.37 Australian courts have given the phrase a wider meaning. In Re Cumberland Holdings Ltd38 the court said that the phrase is “not limited to business or trade matters, but encompass capital structure, dividend policy, voting rights, consideration of take-over offers, and indeed, all matters which may come before the court for consideration”.39 34

Companies (Amendment) Act 1986, s. 19(b). Re a Company [1987] BCLC 141, Re Posgate & Denby (Agencies) Ltd [1987] BCLC 8, Re JE Cade & Sons Ltd [1992] BCLC 213, Re Astec (BSR) plc [1998] 2 BCLC 556, Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171. 36 Re Stewarts (Brixton) Ltd [1985] BCLC 4; Re a Company [1987] BCLC 141. 37 See e.g. Re Cumana Ltd [1986] BCLC 430. 38 (1976) 1 ACLR 361 at pp. 374-375. 39 (1976) 1 ACLR 361 at 374-375. See also Morgan v. 45 Flers Avenue Pty Ltd (1987) 5 ACLC 222 at 223. Re Cumberland was referred to in Indrani a/p C. Rajaratnam v. Fairway Schools Bhd [1997] 5 MLJ 267 and Foo Yin Shung v. Foo Nyit See & Brothers Sdn Bhd [1989] 2 MLJ 369, both in relation to winding up on the just and equitable ground.

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The language used poses a few difficulties to the petitioner. The first is in relation to locus standi. The section allows for a member or a holder of a debenture or a Minister, where the company is under investigation under Part IX of the Companies Act, to petition for relief under s. 181.40 A person who is not a member, or whose name did not appear in the company’s register of members at the date of presentation of the petition, will have no standing. The Federal Court has however held that a shareholder whose shares have been compulsorily acquired pursuant to the articles will be entitled to petition under the section.41 Gopal Sri Ram JCA, delivering the judgment of the court, said that the applicable rule as to standing is merely “a general rule” which will not be applied where the application of the general rule would be unfair or unjust.42 The second difficulty is that the conduct is defined by reference to the company. Applying a strict corporate entity doctrine, a shareholder of a company will not be entitled to relief where the act complained of is not in a legal sense the act of the company but its subsidiary. This strict legal approach was taken by the High Court in Verghese Mathai v. Telok Plantations Sdn Bhd .43 By this approach, where a company nominated a director to the board of its subsidiary, the director so nominated will not be considered to be acting in the affairs of the company when disposing of the subsidiary’s assets at an undervalue to a person connected with the controlling shareholder of the company.44 However, such a strict interpretation may cause unnecessary injustice to the petitioner, which was the reason the High Court in Dato’ Ng Tian Sang v. Toh Pee Yok45 lifted the corporate veil to enable the petitioner to bring an action despite him not having a direct shareholding in the company in which he was excluded from participating. It is submitted that this approach is more equitable. Furthermore it is not without precedent. In Tan Guan Eng v. Ng Kweng Hee46 the High Court allowed a

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There are no known cases of the Minister ever exercising his power to file a petition under this section. 41 Owen Sim Liang Khui v. Piasau Jaya Sdn Bhd (1996) 4 CLJ 716. 42 Ibid. In the UK a former member will have no standing: Re A Company (No. 00330 of 1991) [1991] BCLC 597. 43 [1988] 3 MLJ 216. 44 Thus Dan Prentice argued that “where activities are carried on in a group form, the economic reality of group activity should be recognized and the manner in which the affairs of one member of the group are conducted should, in most circumstances, be treated as part of the affairs of other group members”: D.D. Prentice, “The Theory of the Firm: Minority Shareholder Oppression: Sections 459-461 of the Companies Act 1985” (1988) 8(1) Oxford Journal of Legal Studies 55 at 69. Current decisions in the UK tend to support this view – see Re A Company (No 002470 of 1988, ex parte Nicholas [1993] BCLC 360, Re BSB Holdings Ltd [1996] 1 BCLC 155, Re Brenfield Squash Rackets Club [1996] 2 BCLC 184; but cf. Re Legal Cost Negotiators Ltd [1999] 2 BCLC 171. 45 [2004] 5 CLJ 153. 46 [1992] 1 MLJ 487.

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shareholder of a parent company to commence a derivative action against the subsidiary by piercing the corporate veil.47 The third difficulty lies in the present tense employed by the section: “the affairs of the company are being conducted and the powers of the directors are being exercised”. A literal interpretation would mean that a remedy under the section cannot be obtained based on an isolated act in the past. The act complained of must be continuing at the time when the petition is made. It also excludes the possibility of a member from complaining against conduct discovered only after he became a member. In Re Kong Thai Sawmill (Miri) Sdn Bhd,48 Lord Wilberforce, delivering the judgment of the Privy Council, said that while the language in the paragraph is grammatically clear, the argument that the act complained of must be current “must not be taken too far”.49 Citing an Australian decision, Re Bright Pine Mills Pty Ltd,50 his Lordship said: “A last minute correction by the majority may well leave open a finding that, as shown by its conduct over a period, a firm tendency or propensity still exists at the time of the proceedings to oppress the minority or to disregard its interests so calling for a remedy under the section”.51 A similarly liberal interpretation was taken by the Federal Court in Owen Sim Liang Khui v. Piasau Jaya Sdn Bhd which took the view that a single act or omission in the past may in an appropriate case entitle a shareholder to relief if the effect of the act or omission persists at the date of the presentation of the petition.52 47

In contrast to the limited range of applicants allowed to petition under the oppression provision, other common law jurisdictions have expanded the categories of persons who can apply. The UK provision extends the term “member” to cover a person to whom shares “have been transferred or transmitted by operation of law”: UK Companies Act 2006, s 994(2). Thus it covers the member’s trustee in bankruptcy or his personal representative, or a person to whom a proper instrument of transfer has been executed in his favour and delivered to him or the company: see Prentice, supra note 44 at p. 63, citing Re A Company [1986] BCLC 391. The Australian and Canadian legislations are significantly wider. Under the Australian legislation, the term member is widely defined to include the member whether or not in the capacity as a member, a person who has been removed from the register of members because of a selective reduction, a person who has ceased to be a member if the application relates to the circumstances in which they ceased to be a member, or a person to whom a share in the company has been transmitted by will or by operation of law: Australian Corporations Act 2001, s 234(a)-(d). The Canadian provision allows standing to a wide range of persons: the present or former registered holders or beneficial owners of securities, directors, officers, and former directors and officers, the Director, or any person who, in the discretion of the court, is a proper person to make an application: Canada Business Corporations Act, s 238. In addition, these three legislations allow an action to be taken on behalf of the shareholders: the Secretary of State in the UK (Companies Act 2006, s. 995); a person empowered by the Australian Securities and Commission Act in Australia (Corporations Act 2001, s 234(e)); and the Director in Canada (Business Corporations Act, s 238(d)). 48 [1978] 2 MLJ 227. 49 [1978] 2 MLJ 227 at p. 229. 50 (1969) VR 1002 at pp. 1011-2. 51 [1978] 2 MLJ 227 at p. 229. 52 (1996) 4 CLJ 716 at p. 737. Cf. Re Chloride Eastern Industries [1995] 4 MLJ 95 in which the High Court declined a remedy to a preference shareholder who was not formally registered as

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Fourth, the words “interests as members” has been interpreted narrowly to deny a remedy to a member who has been dismissed as a director. This was so held by the High Court in In the matter of Tahansan Sdn Bhd.53 However, a very different outcome can be found in a prior decision, Re Chi Liung & Son Ltd.54 In this case the petitioner’s removal as director was held to be oppressive as it affected his rights both as a member as well as a director.55 Additionally, there have been a number of occasions when the courts imposed additional elements in s. 181 which, it could be argued, was not merited by the section. In Re Tong Eng Sdn Bhd,56 the High Court rejected the petition on the ground that the relief was sought for wrongs committed to the shareholders collectively. It can be argued that the language in s. 181(1) may not have merited such a conclusion.57 In Hoy Pak Kwai v. Leong Kon Fah58 the High Court dismissed a petition on the ground that the conduct of two directors, who were also majority shareholder and who set up a business in competition with the company, fell outside the purview of the oppression remedy. The Court based its decision on the ground that these actions related to injury to the company and not to the petitioner as a member. This ignored the well established principle that the mere fact that an action can also be brought derivatively does not bar a petition under s. 181.59 For completeness, it should be mentioned that the term member is not limited to minority shareholders; it will be available to majority shareholders “where they are unable to exert their will at a general meeting of the company”.60 such. 53 [1984] 1 MLJ 204. Fortunately the petitioner succeeded in winding up the company in the just and equitable ground pursuant to s. 218(1)(i) of the Companies Act. 54 [1968] 1 MLJ 97. 55 As pointed out above, the breach of directors’ duties in the UK may in appropriate cases be a factor contributing to a finding of unfair prejudice. 56 [1994] 1 MLJ 451. 57 English decisions were divided on this issue. In Re a Company (No 00370 of 1987), ex parte Glossop (1988) 4 BCC 506 Harman J. refused an unfair prejudice petition on the ground that the non payment of dividends affected all shareholders collectively (although this could justify the making of an order for winding up on the just and equitable ground). Cf. Re Sam Weller & Sons Ltd (1989) 5 BCC 810 where Peter Gibson J. held that the payment of low dividends when the company is profitable was unfairly prejudicial to those shareholders who were simply investors. Section 459 of the UK Companies Act 1985 (now s. 994 of the UK Companies Act 2006) was amended in 1989 to include the following - “unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself)”. This supports the Re Sam Weeler approach. 58 [2005] 3 MLJ 633. 59 Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227 at 229; see also Re a Company [1986] BCLC 68. 60 Owen Sim Liang Khui v. Piasau Jaya Sdn Bhd [1996] 4 CLJ 716 at 741 (Federal Court). See also Kumagai Gumi Co. Ltd v. Zenecon-Kumagai Sdn Bhd (1994) 2 MLJ 789. But in Ganeswary d/o Ponnudurai v. Prismatic Sdn Bhd [1994] 4 CLJ 671 the High Court ruled that a 50 per cent shareholder cannot bring an action under s. 181 as the remedy provided in the section is open only to minority shareholders. It is most humbly submitted that this decision was wrong as it is not

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3.4.1 “Oppressive”, “disregard of interests” The words “disregard of interests” has been largely ignored save for the mention given to it by the Privy Council in Re Kong Thai Sawmill (Miri) Sdn Bhd.61 Lord Wilberforce said in this case: “disregard involves something more than a failure to take into account 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”.62 The word “oppressive” has been the key, not only to the paragraph but also the section. The definition most often used by Malaysian courts is Lord Keith’s “lack of probity or fair dealing” in a Scottish case Elder v. Elder & Watson Ltd.63 The other is the dictionary meaning of oppression, “burdensome, harsh and wrongful”, adopted by the House of Lords in Scottish Co-operative Wholesale Society Ltd v. Meyer.64 The first definition was generally preferred, which can be attributed to the influence of the Privy Council’s judgment in Re Kong Thai Sawmill (Miri) Sdn Bhd.65 Interestingly, in all judgments in which the definition “burdensome, harsh and wrongful” was cited, the other definition “lack of probity or fair dealing” was also cited, although none of these cases explained the difference between the two definitions. It may, and indeed appeared to be the case, that in all these examples, the judges saw no material differences between these two definitions. It is to be noted that the opposite was true in the UK. The restatement of the unfair prejudice remedy in the UK Companies Act in 1980 was motivated by the desire to move away from the onerous “burdensome, harsh and wrongful” standard to a broader “lack of probity or fair dealing” used in Elder v.

supported by the language of the section. 61 [1978] 2 MLJ 227. 62 [1978] 2 MLJ 227 at p. 229. 63 1952 SC 49 at p. 60. This definition was referred to in Low Tien Sang v. How Kem Chin [2000] 2 MLJ 334; Eric Lau Man Hing v. Eramara Jaya [1998] 7 MLJ 528; Dato’ Toh Kian Chuan v. Swee Construction and Transport Co [1996] 1 MLJ 730; Re Chi Liung & Son Ltd [1968] 1 MLJ 97; Re Kong Thai Sawmill [1978] 2 MLJ 227. In many others, the courts approved the “lack of probity or fair dealing” definition although no reference was made to Elder v. Elder & Watson Ltd [1959] AC 324. These include Re Chi Liung & Son Ltd [1968] 1 Malayan Law Journal 97; Re Sin Lee Sang Sawmill [1990] 1 MLJ 250; Chiew Sze Sun v. Cast Iron Products [1994]1 CLJ 157; Kumagai Gumi Co Ltd v. Zenecon [1994] 2 MLJ 789; Beh Chun Chuan v. Paloh Medical Centre Sdn Bhd [1999] 3 MLJ 262; Tan Kian Hua v. Colour Image Scan Sdn Bhd [2004] 6 CLJ 174; Edmund Charles Liebenberg v. IGB-Griffin Manufacturing Sdn Bhd [2005] 5 MLJ 259, [2005] 3 CLJ 613; Liew Teck Fook v. Chan Yip Pooi [2005] 5 CLJ 20. 64 [1959] AC 324, per Viscount Simonds and Lord Keith at 342 and 364 respectively. This was referred to in Low Tien Sang v. How Kem Chin [2000] 2 MLJ 334; Beh Chun Chuan v. Paloh Medical Centre Sdn Bhd [1999] 3 MLJ 262; Dato Toh Kian Chuan v. Swee Construction and Transport Co [1996] 1 MLJ 730; Kumagai Gumi Co Ltd v. Zenecon [1994] 2 MLJ 789; Re Chi Liung & Son Ltd [1968] 1 MLJ 97. In some instances, this definition of oppression was attributed to Re Harmer Ltd [1959] 1 WLR 62. 65 [1978] 2 MLJ 227.

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Elder & Watson Ltd.66 In fact, the Jenkins Committee had said that the test stated in Elder v. Elder & Watson Ltd67 accords to the intention underlying s. 210 of the UK Companies Act 1948.68 3.5 Section 181(1)(b) – “unfairly discriminates against or is otherwise prejudicial” Section 181(1)(b) allows relief where “some act of the company has been done or is threatened or that some resolution of the members, holders of debentures or any class has been passed or is proposed which unfairly discriminates or is otherwise prejudicial”. This paragraph has two limbs. The first limb requires an “act of the company”. As a company would normally act through its board or by authority given by the board, the phrase in its ordinary meaning means the exercise of powers by the board. Additionally, the decision of shareholders in general meeting should be regarded as an act of the company.69 In any case, the second limb of the paragraph refers to “resolution of the members” which means resolution of the members in general meeting. Paragraph (b) is wider than paragraph (a) in a number of different and important respects. First, the words “is threatened” and “is proposed” used in paragraph (b) clearly means future conduct. This overcomes the restriction in paragraph (a) which requires the conduct to be continuing at the time of the petition. Second, the words “interests as members” appearing in paragraph (a) was not repeated in paragraph (b). Therefore, a member who has been removed as a director would find himself liberated from the constraints of having to prove that his removal also affected his rights as a member by relying on paragraph (b). 66

1952 SC 49. 1952 SC 49. 68 See the Jenkins Committee, supra note 26, para. 204. In the UK, the courts have employed a very restrictive definition of the term “oppressive”. The phrase “wrongful” is particularly limiting as it gives the notion that an act will amount to oppression only if it is a wrongful or an illegal act. This definition also gives “the notion that the oppression section was aimed only at providing better remedies for existing wrongs”: Paul L. Davies, Gower’s Principles of Modern Company Law, 7th ed., Sweet & Maxwell, London, 2003, p 516. LCB Gower in one of his early editions to his company law text said that a rigid application of the section had frustrated attempts to use it: L.C.B. Gower, The Principles of Modern Company Law, 3rd. ed., Sweet & Mawxell, London, 1969, at 602. Gower cited Re Five Minute Car Wash Service Ltd [1966] 1 WLR. 745 as an example, where it was held that oppression was not proved as the managing director had not “acted unscrupulously, unfairly, or with any lack of probity”, the “mere acts of omission of the controlling shareholders were not ‘designed to achieve some unfair advantage”, although the court did accept that he had been “unwise, inefficient and careless” and that the controlling shareholders had failed to exercise their control to curtail his damaging activities. The Australian case Re Tivoli Freeholds Ltd [1972] V.R. 445 summarised the elements constituting oppression. 69 Davies, ibid at 179. Harman J. in Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609 at 623 said that relief is available only for acts or conduct of the company and not acts or conduct of a shareholder in his private capacity. 67

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Third, the petitioners relying on paragraph (b) will be able to free themselves from the demands of proving “burdensome, harsh and wrongful”.70 These should, at least in theory, make paragraph (b) more attractive than paragraph (a). However, this has not been the case. Only a handful of cases has referred to s. 181(1)(b), and even then in the majority of these the reference was made in passing without discussing the merits of the paragraph. In some cases references were made to “unfair discrimination and prejudice” without specific reference to s. 181(1)(b).71 3.5.1 “Unfairly discriminates” The phrase “unfairly discriminates” has been treated in Malaysia almost as if it does not exist.72 To a large degree, this was because there is no corresponding phrase in the UK legislation. Similarly, the phrase has not been given any significant importance in Australia and New Zealand, two other jurisdictions which shares the same statutory language. “Discrimination” is independent of “prejudice” as indicated by the words in paragraph (b): “unfairly discriminates against or is otherwise prejudicial”. Thus the non-payment of dividend may not amount to discrimination, as all shareholders are similarly affected, but it may nevertheless be “prejudicial” to certain shareholders. However, where all shareholders were involved in the management of the company, the petitioner’s exclusion may be both unfair discrimination as well as prejudicial. Perhaps the wider scope of “prejudice” was the reason unfair discrimination as an independent concept has not been fully explored. In the Malaysian context it is however more likely that “unfair discrimination” has suffered neglect simply because the phrase did not appear in the corresponding UK legislation. In one case the judge was quite explicit on this. In this case, Foo Yin Shung v. Foo Nyit Tse Brothers Sdn Bhd,73 a minority shareholder applied for the company to be wound up based on a provision in the Malaysian Companies Act 1965,74 a provision which has no equivalent in the UK. Justice Peh Swee Chin said in his opening sentence:

70

Following Scottish Co-operative Wholesale Society v. Meyer [1959] AC 324. These include Kumagai Gumi Co Ltd v. Zenecon [1994] 2 MLJ 789; Eric Lau Man Hing v. Eramara Jaya [1998] 7 MLJ 528; Re Chloride Eastern Industries [1995] 4 MLJ 95; Re Senson Auto Supplies Sdn Bhd [1988] 1 MLJ 326; and Re Tong Eng Sdn Bhd [1994] 1 MLJ 451. 72 In Canada, the phrase “unfair disregard” has also not been given a “meaningful distinction”: Copp, Steven and McGuiness, Kevin, “Protecting Shareholder Expectations: A Comparison of U.K. and Canadian Approaches to Conduct Unfairly Prejudicial to Shareholders: Part 2” (2000) 11 ICCLR 217-229 at p. 217. 73 [1989] 2 MLJ 369. 74 Section 218(1)(f) of the Act allows the court to order the winding up if “the directors have acted in the affairs of the company in their own interests rather than the interests of the members as a whole, or in any other manner whatsoever which appears to be unfair or unjust to other members”. 71

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This case involved also the interpretation of s 218(1)(f) of the Companies Act 1965 which did not seem to have been dealt with by any Malaysian court in any reported judgment, a situation no doubt partly brought about by the fact that s 218(1)(f) was transplanted from Australia in 1965, the same not having been in United Kingdom's Companies Act 1948, or our previous Companies Ordinance 1946.

3.5.2 “Unfairly discriminates or is otherwise prejudicial” The paragraph reads “unfairly discriminates against or is otherwise prejudicial”. It is a matter for debate as to whether prejudice means unfair prejudice.75 However the common assumption, whether in law reports or scholarly work, is that prejudicial means unfairly prejudicial.76 The clearest indication of this can be found in a High Court judgment in Tan Kian Hua v. Colour Image Scan Sdn Bhd77 where the High Court imported the element of unfairness into prejudice. Justice Abdul Malik Ishak in this case relied upon the Australian decision Wayde v. New South Wales Rugby League Ltd78 but failed to notice that the word “unfair” precedes “prejudice” in the Australian provision, but not in the Malaysian provision. 3.5.3 Shareholders’ legitimate expectations It has been accepted in the UK and several other common law jurisdictions that the unfair prejudice remedy protects not only rights but expectations of the petitioner. The basis of the protection “arises out of a fundamental understanding between the shareholders which formed the basis of their association but was not put into contractual form.”79 The House of Lords in the landmark case O’Neill v. Phillips80 has since returned to the more traditional approach of constraining the exercise of legal rights by reference to “equitable considerations”.81 Legitimate expectations received its first mention in Malaysia in Jaya Medical Consultants Sdn Bhd v. Island & Peninsular Bhd.82 The petitioner in this case, a minority shareholder, claimed that his legitimate expectations that the company would build a hospital was not fulfilled despite representations to that 75

In contrast, the provision in Australia, New Zealand and also Canada are explicit in qualifying “prejudicial” with the word “unfairly”. 76 The same applies to Singapore which provision is in pari materia with the Malaysian provision. 77 [2004] 6 CLJ 174. 78 [1985] 3 ACLC 799. 79 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at p 19, per Hoffmann J. 80 [1999] 1 BCLC 1. 81 Adopting the phraseology used by Lord Wilberforce in Ebrahimi v. Westbourne Galleries Ltd [1973] AC 360. 82 [1994] 1 MLJ 520.

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effect from the other major shareholders. The court found that the project was abandoned due to factors beyond the control of the other shareholders and that in taking the decision they had not acted unfairly towards the petitioner. The second case in which legitimate expectation was pleaded and discussed by the court was the Court of Appeal’s decision in Tuan Haji Ishak Ismail v. Leong Hup Holdings.83 The petitioner in this case was a public listed company, as was the company at the centre of the dispute, KFCM. The petitioner pleaded that they had legitimate expectations to be represented on KFCM’s board on the basis of representations and oral agreements between themselves and the respondents who controlled the company. Mahadev Shankar JCA, delivering judgment for the Court of Appeal, made a comparison between s. 181 and the then UK provision, s. 459 of the UK Companies Act 1985. He noted that the UK provision “cover the same ground as our s. 181(1)” and therefore, if the petitioner “had a legitimate expectation which was enforceable against the respondents, it could claim oppression and disregard”.84 However, on the facts, since (1) KFCM is a public company, (2) the arrangement is merely between the petitioner and a group which controls KFCM, and (3) there was no indication that all the shareholders of KFCM were parties to the arrangement, the court was obliged to dismiss the petition. In coming to this conclusion, Shankar JCA made reference to a passage from a UK company law text85 and a leading UK case.86 The soundness of the Shankar JCA’s reasoning and conclusion can hardly be questioned.87 However, the court had, instead of incorporating legitimate expectations into the language of “unfair prejudice”, following the UK and other common law countries, chose 83

[1996] 1 MLJ 661. [1996] 1 MLJ 661 at p. 687. 85 Farrar’s Company Law, in which the authors argued that it is harder to establish conduct which is unfairly prejudicial in public companies. 86 Re Blue Arrow plc [1987] BCLC 585. 87 In the context of a public company the court is most reluctant to take into account agreements and understandings that are not recorded in the documents available to outside investors therefore restricting, if not totally excluding, the concept of legitimate expectation in the context of public listed companies, see Re Blue Arrow plc [1987] BCLC 585; Re Tottenham Hotspur plc [1994] 1 BCLC 655; Re Astec (BSR) plc [1998] 2 BCLC 556, per Jonathan Parker J at 589. In the context of public companies trivial or technical infringement of the articles are not “wrongs” intended to be covered by the UK Companies Act 1985, s. 459 (now s. 994 of the UK Companies Act 2006): per Hoffman LJ in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 19. Nor will an infringement of a member’s rights under the articles of itself necessarily be unfairly prejudicial, see Re Carrington Viyella plc (1983) 1 BCC 98,951. See also Re Benfield Greig Group plc, Nugent v Benfield Grieg Group plc [2000] 2 BCLC 488 reversed [2002] 1 BCLC 65; CAS (Nominees) Ltd v Nottingham Forest FC plc [2002] 1 BCLC 613; Rock Nominees Ltd v RCO (Holdings) plc (in liquidation) [2003] 2 BCLC493 affm [2004] 1 BCLC 439. In Hong Kong, The Securities and Futures Ordinance 2003 (Cap 571), s 214 has a specific provision allowing the Commission to petition for oppression, unfair prejudice and other forms of misfeasance in listed companies. This provision replaces s 37A of the previous Ordinance under which successful actions were brought, cf SFC v Chesterfield Ltd (1995) MP No 3504 of 1994 and SFC v Mandarin Resources Corporation Ltd [1997] 1 HKC 214. 84

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instead to incorporated legitimate expectations into “oppression” and “disregard”. One could argue that this is evidence of local innovation. However, it is more likely that this is merely an oversight considering the propensity of Malaysian judges to follow UK decisions, as well as the absence of any deliberation of how legitimate expectations can be incorporated into the Malaysian provision. In two subsequent cases the courts appeared to have misunderstood the very concept of legitimate expectations. The first is Beh Chun Chuan v. Paloh Medical Centre Sdn Bhd88 where the High Court appeared to have rejected the petitioner’s contention that he was denied his legitimate expectations on the basis that the agreement was not incorporated in the articles. The judge has since clarified his judgment in a later judgment, Liew Teck Fook v. Chan Yip Pooi,89 saying that the fact that the terms of an agreement were never incorporated in the articles is no bar for a s. 181 petition.90 However, the same issue arose again in Tung Ah Leek v. Perunding DJA Sdn Bhd.91 The court in this later case used Beh Chun Chuan v. Paloh Medical Centre Sdn Bhd92 as the authority that an agreement outside the articles cannot be used as a basis of legitimate expectations.

4.

THE REFORM OF THE OPPRESSION REMEDY

The Malaysian Corporate Law Reform Committee (CLRC) has recently published its Consultative Paper for the reform of shareholders’ remedies in January 2007 with the title On Members’ Rights and Remedies.93 This paper covers wide areas including the oppression remedy and the statutory derivative action. It is obvious from the discussion in the Consultation Paper that the CLRC is keen to develop the law along the lines of other more advanced common law countries. The claim that legal transplantation forms a most fertile source of legal development found support here. The proposals made in the Consultation Paper on the oppression remedy have been discussed elsewhere and will not be repeated.94 However, for the purpose of this paper, a brief comment would be useful. The CLRC made references to the legislation in the UK, Australia, New Zealand and Hong Kong, 88

[1999] 7 CLJ 1; [1999] 3 MLJ 262. [2005] 5 CLJ 20. 90 See also Edmund Charles Liebenberg v. IGB-Griffin Manufacturing Sdn Bhd [2005] 5 MLJ 259; [2005] 3 CLJ 613. 91 Unreported, judgment by Datuk Ramly Haji Ali dated 23 April 2004, Commercial Division, High Court of Malaya at Kuala Lumpur. 92 [1999] 7 CLJ 1; [1999] 3 MLJ 262. 93 CLRC, On Members Rights and Remedies, 2007. The paper is available at the Malaysian Companies Commission’s web page at http://www.ssm.com.my/clrc/clrc.html, last accessed on 12 July 2007. 94 See Mohammad Rizal Salim, supra note 33. 89

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as well as the UK Law Reform Commission’s Consultation Paper on Shareholders Remedies, issued in 1996.95 The reforms proposed by CLRC are in line with the developments in these jurisdictions. Law reforms such as this partly explain how laws have become converged. In the past, Britain has successfully exported its Companies Act to its colonies – it was a unilateral export and achieved not voluntarily but by forceful means. Today the export of laws and ideas is often voluntary, and sometimes reciprocal. The CLRC made reference to the oppression remedies in other common law countries and no doubt learned a great deal from them. Unfortunately, they did not concern themselves with the efficacy or otherwise of these provisions. Additionally, the CLRC has overlooked issues that are particularly relevant in Malaysia, including inconsistencies in law as a result of the conflicting decisions. There was also no discussion or clarification on the issue of the scope and limits of shareholders’ legitimate expectations, or clarification on the principles of the law which are obviously wrong and have not been put right by the higher courts. There was also evidence that the CLRC was concerned with the proliferation of litigation.96 This is not new. The Committee on Corporate Governance has earlier warned of “the spectre of massive litigation” in relation to the introduction of the statutory derivative action.97 These are perhaps reflections of current attitude - that litigation may not be the best way to resolve disputes and should be limited wherever possible.

5.

THE USE OF LEGAL PRECEDENTS IN MALAYSIA

One aspect of the legal system which is commonly assumed is that the common law system in Malaysia works in the same way as it does in England. However, a detailed examination of the decisions on the oppression remedy in Malaysia shows that despite the continued importation of legal precedents and the acute shortage of judicial innovation, the common law system as practiced in Malaysia is not a clone of the system in England. In the common law system, the court in arriving at its decision pays special attention to decisions in previous cases. This doctrine of judicial precedent or stare decisis requires a court to follow the prior decisions of a higher court, and that the decision of courts outside of the judicial hierarchy is not binding but can be persuasive.98 Indeed, a Federal Court judge 95

UK Law Commission, Shareholders Remedies, Consultation Paper No 142, HMSO, London, 1996. 96 The CLRC proposed that simultaneous petitions for oppression and winding up should not be allowed as “might be used to pressure respondents into a settlement”: CLRC, supra note 93 at p. 29, para 1.29. 97 The High Level Finance Committee on Corporate Governance, Report on Corporate Governance, 1999, p. 190, para. 4.21. 98 Subject to sections 3(1), 5(1) and 5(2) of the Civil Law Act 1956 which provides that the decisions of the House of Lords to be binding, subject to the cut-off dates and “local

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once said that the doctrine of stare decisis is “a cornerstone of our system of jurisprudence”.99 In practice, at least in relation to the oppression remedy, one may find that this doctrine is often ignored. In the great majority of cases, judges gave too much attention to foreign, in particular English decisions. This sometimes comes at the expense of other local judgments, even those delivered by courts of higher authority. The use of these foreign cases were not motivated by s. 3(1) of the Civil Law Act 1956 (which allows for the importation of English decisions subject to cut-off dates) for a number of reasons – first, the provision was not discussed at all in any of these cases; second, many of the cases referred were cases decided in England after the relevant cut-off dates; and third, the case which enjoyed the most frequent citation was in fact a Scottish case.100 There were also occasions where decisions of a superior court were glossed over, ignored and on occasions misread. The Court of Appeal’s decision in Tuan Haji Ishak bin Ismail v. Leong Hup Holdings Berhad101 provides a good example. Notwithstanding the strong English flavour in Shankar JCA’s judgment, it should be considered a landmark decision, at least where the concept of shareholders’ legitimate expectations is concerned. However, it was referred to in only two out of the seven cases decided after it. One of them, Beh Chun Chuan v. Paloh Medical Centre Sdn Bhd,102 has been discussed above. The High Court judge in this case, appeared to have excluded the scope of legitimate expectations but in a later case clarified himself (or corrected himself, depending on the point of view). This judgment, together with others such as Hoy Pak Kwai v. Leong Kon Fah103 is indicative of problems relating to familiarity with the subject matter, Malaysian authority and the quality of advocacy.104

6.

CONCLUSION

In Malaysia, there is a desire to keep up with international developments, but on the whole the courts have struggled to keep pace. As a result, one may find quite a few anomalies in the law as applied. From a very early stage the courts have emphasised the need for all shareholders, especially minorities, to be treated circumstances” proviso. The doctrine was affirmed in Malaysia in numerous decisions. 99 Co-operative Central Bank Ltd. v. Feyen Development [1997] 2 MLJ 829, per Edgar Joseph Jr. Federal Court Judge at 835. 100 Elder v Elder & Watson Ltd 1952 SC 49, which defined oppressive conduct as “lack of probity or fair dealing”. 101 [1996] 1 MLJ 661. 102 [1999] 3 MLJ 262. 103 [2005] 3 MLJ 633. 104 For a comment of Beh Chun Chuan v. Paloh Medical Centre Sdn Bhd [1999] 3 MLJ 262, see Mohammad Rizal Salim “The Oppression Remedy—A Journey Back in Time with Beh Chun Chuan v. Paloh Medical Centre Sdn Bhd” (2001) 1 MLJ lxxxvii.

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fairly. However when it really matters, it would appear that in many cases the courts preferred to maintain the status quo by not interfering with management decisions. This overly pro-management attitude, especially in the earlier cases, raises concerns as to the efficacy and the role of the law in enabling interested parties to discipline management by enforcing directors’ duties, as well as on “the law matters”105 discourse generally. Also, given the overly pro-management bias, the position of the minority is weakened in the context of mediation or alternative dispute resolution. This also contributed to the excessively wide norms and parameters of managements’ legal behaviour. In the context of the United States, it has been argued that management is more effectively disciplined by minority actions, especially the derivative action, than it is by the market for corporate control, whilst the situation in England is the reverse.106 The oppression remedy was designed with the smaller private company in mind rather than the public quoted corporation and its use in the latter context has not been very successful in the large majority of cases in both the UK and Malaysia. The efficacy of the law in protecting minority shareholders in the Malaysian context (and arguably in the public company in the UK) has implication for the law matters thesis in relation to the concentration of shareholdings. The other anomaly is the persistence in focusing on s. 181(1)(a) and the corresponding neglect of paragraph (b). It has been seen in the UK that the oppression remedy was severely limited, and the reform there has resulted in the flourishing of the unfair prejudice remedy. In Malaysia, it is arguable that such a reform is unnecessary as the law provides for both concepts, oppression in paragraph (a) and unfair discrimination and prejudice in paragraph (b). Despite the obviously wider scope of paragraph (b), a fact which has been repeated on numerous occasions, it has remained neglected. In fact, there has not been a single case in which the court’s attention was devoted to this paragraph. At the same time the desire to develop the law in the same general direction as other common law countries has resulted in the incorporation of the restricted concept “legitimate expectations” into “oppression” instead of “unfair discrimination and prejudice”. Too often one will find judgments which fall short of the desired quality, at least by standards normally expected in a more developed common law country. Inconsistencies, failure to make references to prior decisions on the same legal issue, the use of legal principles and concepts without fully explaining them, 105 Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, “Corporate Ownership Around the World” (1999) 54 The Journal of Finance 471. 106 Geoffrey Miller, “Political Structure and Corporate Governance: Some Points of Contrast Between the United States and England” (1998) Columbia Business Law Review 52; cf Mark J. Loewenstein, “Shareholder Litigation and Corporate Governance” (1999) 24 Delaware Journal of Corporate Law 1, Roberta Romano, “The Shareholder Suit: Litigation without Foundation” (1991) 7 Journal of Law, Economics and Organisation 55.

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and making superficial references to the law in other jurisdictions with little regard to the differences in the statute books as well as their underlying developments are some of the problems. The relatively small body of reported cases and rarity of appeals may be factors contributing to the under-development of legal principles. Also, as a developing country, the legal institutions in Malaysia have yet to achieve the standard of operation and efficiency which may be expected in a more developed country. It is accepted that the law must develop, but Malaysian courts have proved that they are not adequately equipped to develop the law without the guidance that foreign court decisions can offer, regardless of the relevance of that guidance in the local context. Finally, there are two broad conclusions that can be made here. First, legal institutions are primarily responsible for both the application as well as the implementation of the law. Therefore the importance of an efficient legal institution cannot be denied. However questions may be asked on the efficacy of legal institutions when they are transplanted across societies of different cultures and levels of material advancement. As Kenneth Dam remarked:107 [T]he first instinct of lawyers, which is simply to transplant world-class legal institutions to developing countries, will most likely produce little more than a harvest of dead leaves. The institutions important to development are more likely to bear fruit if they evolve out of roots already growing in the soil of particular countries. How to do that systematically is, of course, still well beyond the current state of the art.

Second, the ability for laws to be transplanted, while possible, does not come with a guarantee that it will work as intended. Rather than asking whether legal transplants are possible, the question that should be asked are how the transplanted law operate in the host environment, how it has been and could be further developed, and whether it has served the purpose for which it was transplanted. As with legal institutions, the laws which are more likely to work are those evolving “out of roots already growing in the soil”. This, it is most humbly submitted, should serve as the foundation for law reform.

107

Kenneth W. Dam, The Law-Growth Nexus: The Rule of Law and Economic Development, Brookings Institution Press, 2006, p. 6. See also Katharina Pistor, Yoram Keinan, Jan Kleinheisterkamp and Mark D. West, “Innovation in Corporate Law” (2003) Journal of Comparative Economics 676; “The Evolution of Corporate Law: A Cross-Country Comparison” (2003) 23 Journal of International Economic Law 791; “Evolution of Corporate Law and the Transplant Effect: Lessons from Six Countries” (2003) 18 The World Bank Research Observer 89.

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