ISSUES 1. Whether there are abuse of majority rule and should it be subject to the exception of the rule? 2. Whether the actions that have been taken by the majority members are consider as a fraud on minority? 3. Whether the minority members can bring an action against the majority members in the name of company INTRODUCTION Majority Rule Any decisions is duly convened and held at the board or shareholders meetings and through a property cast votes of the majority becomes binding on the company. Foss v Harbottle.
LAW The application of the Majority Rule sometimes creates many problems. The freedom with no limit given to the majority may cause them to act in a manner that unfairly discriminatory to the minority members as well as to the company as an entity. For purpose of justice, the rule in Foss v Harbottle has been declared as not a universal rule. It is a rule subject to exceptions, and the exceptions depend very much on the necessity of the case.
Exceptions to the rule in Foss v Harbottle. a. Where the act of the company is ultra vires. b. Where the act of the company requires a special majority. c. Where the members personal rights are infringed. d. Where the majority has perpetrated a fraud on the minority. e. Where the interest of justice require.
Fraud On Minority If the actions of the majority constitute a fraud on the minority and the wrongdoers are in control of the company, a minority member may bring an action to enforce the companys rights. Fraud in the context of fraud on the minority means an abuse of power whereby the majority secures an unfair gain at the expense of the minority, the injured party need not actually be the minority shareholders. The injured party may also be the company itself. The circumstances that amount to fraud on the minority are many but the most common are where the majority : a. Appropriates the rights, advantages and property belonging to the company. b. Appropriates the rights, advantages and property belonging to other shareholders. c. Ratifies directors breach of duties. d. Obtains a benefit at the expense of the company. APPLICATION Fizah and Fahmi have caused the company to sell its land at Sepang at lower price compared to the market value to the Fahmis sister, Nurul. This case relate to the circumstances of fraud on the minority which is appropriates the rights, advantages and property belonging to the company. It is a duty of a director to use the assets and property of the company for a proper purpose and in a proper manner. A fraud on the minority exists where the majority endeavors directly or indirectly to appropriate to themselves money, property or advantages which belong to the company. It same with case Daniels v Daniels.
Daniels v Daniels 3 minority shareholders wished to bring an action against the 2 majority, who were also the directors. It was alleged that the company, Ideal Homes Ltd, had sold property to one of the directors at a price considerably less than its true value. They brought an action but fraud was not alleged against the Defendants. The Defendants applied to have the statement of claim struck out as disclosing no reasonable cause of action. Templeman J nevertheless allowed the minority shareholder to maintain the action on the basis that a minority shareholder who has no other remedy may sue where directors use their power intentionally or unintentionally, fraudulently or negligently in a manner which benefits themselves at the expense of the company. The case can be applied to this situation : If Nazri and Apek can prove that the land sold at the lower value compare to the market value. If Nazri and Apek has no other remedy may sue where directors use their power intentionally or unintentionally, fraudulently or negligently in a manner which benefits themselves at the expense of the company. The company has made bad investment when purchased a land by Fizah and Fahmi near a slum clearance programme in Ulu Yam for a price of RM 5.5 million. Nazri and Apek made a complaint according to this matter but their complaint have gone unheeded. This case relate under circumstances of fraud on minority which is ratification of the directors breach of duty. The general meeting has a power to ratify an act of director which amount to breach of duty and to exonerate them from liability arising from such breach. It can refer to case North-West Transportation Co v Beatty.
North-West Transportation Co v Beatty The court has clearly stated that such power given to the general meeting has a limit, provided that the ratification is not brought by unfair or improper means and in illegal manner or fraudulent or oppressive towards other shareholders. Where it is clear that the directors have acted in their own interests rather than in the interests of the company, the ratification made by majority be challenged by the minority. The ratification of directors breach of duty by the majority may constitute a fraud of minority if it can be shown that the majority in ratifying failed to act bona fide for the benefit of the company as a whole. The case can be applied to this situation : If Nazri and Apek can prove that the land have been purchased by Fahmi and Fizah from Fizahs brother, Din have conflict interest between Fizah and Din because have close relationship between them. If the purchased of land not give benefit to the company as a whole and only give benefit to the majority shareholders. CONCLUSION Apek and Nazri can bring an action against Fizah and Fahmi in the name of the company and can take derivative action. Derivative action is an action taken on behalf of the company in order to enforce the companys right. Apek and Nazri can sue Fizah and Fahmi on behalf of the company as they used advantages on the company for their own interest and they also made purchased for their company with the related party.
Whether protect action can be taken by the minority members on their own behalf?
The protections given to the minority for redressing any wrong act done either to him or to the company. Section 181- which covers a very broad range of conduct. Conduct Oppressive conduct Conduct in disregard of interest Prejudicial conduct Unfairly discriminatory LAW AND PROVISIONS Section 181 - any member or holder of a debenture of a company may apply to the court for an order under this section on the ground.
- The affair of the company or the power of director are being conducted in the manner oppressive to one or more the members - The affairs of the company or the power of director are being conduct in the manner disregard the interest as members or debenture holders. - The act of the company has been done or is threatened or some resolution of the members or is proposed which unfairly discriminates against to one or more of members - The act of the company has been done or is threatened or some resolution of the members or is proposed which prejudicial to one or more member
APPLICATION TO THE QUESTION Fizah and Fahmi : - refuse to pay dividend to Nazri and Apek - had excluded the Nazri and Apek from the profit of the company - made payment of high salaries Section 181(1)(a) court gave a restrictive meaning to oppressive conduct, a member usually found it difficult to obtain a remedy except in extreme circumstances. Section 181(1)(b) the term of unfairly prejudicial and unfairly discriminatory means that a remedy is available even in cases where the company is run in good faith but the effect of its action or will cause unfair prejudice or unfair discrimination to the interest of one or more of the members.
CASES Singapore case - Re Gee Chan Trading Co Ltd
The court held that the act of the directors in paying themselves directors fees and salaries but not declaring dividend had constituted as unfair prejudicial.
Australia case - Sanford v Sanford Courier Service
- Majority had excluded the minority from the profit of the company. The majority also made payment of high salaries, made provisions for motor vehicle and retirement benefits. At the same time, they refuse to pay dividend. This meant that a distribution of a significant part of the profit was made to the majority. - Court: - Allowed the minority to bring action under the equivalent of the section 181 and ordered the other shareholders purchase the minority shares as the act of the minority amounting to oppressive conduct The case can be applied to Apek and Nazri situation: - If Apek and Nazri want to seek a remedy own their behalf, they have to prove that dividend not declared even the company made considerable profits and the payment of high salaries to the directors. - If they fails, they will not get the statutory remedies for the minority members.
CONCLUSION Apek and Nazri can seek a remedy on their own behalf and take representative action - Proper to be brought whenever the right infringed by the company is the right given generally to members. - Apek or Nazri can take this issues on their own behalf of all against the company. - The court will allowed the minority to bring this action under the equivalent of the section 181.