THE UPDATE SCOOP (#12/2024) – Tay & Helen Wong Law Practice

Legal Test to Decide on a s.346 Oppression Action or a s.347 Derivative Action │ Company Law

By TAY & HELEN WONG – September 4, 2024

Our Federal Court set the legal test to determine whether a shareholder’s complaint is actionable by way of an oppression action (under s.346 of the Companies Act 2016 [CA2016]) or a derivative action (under s.347 of CA2016), when it recently allowed the appeal in Low Cheng Teik and 3 Others v Low Ean Nee (Federal Court Civil Appeal No.: 02(f)-30-04/2023(W) published on 28.08.2024). In the case, the plaintiff/respondent (P) had filed an oppression suit against three other shareholders (defendants/appellants, Ds) of SNE Marketing Sdn Bhd (the Company) on 8 grounds but only one single ground was held by the Court of Appeal (COA) to have been established, namely that the appellants had, by the assignment of a series of trademarks of the Company (SNE Trademarks) to one SNE Global Sdn Bhd, acted so as to benefit themselves indirectly via other corporate entity that were controlled by or related to them, to the prejudice of P and were accordingly liable for oppression. The appellants were ordered to purchase all the shares of P in the Company at a share price to be valued and determined by an independent auditor.

On final appeal to the apex court, the decision was set aside. It was ruled that P ought to have pursued her complaint concerning the assignment of the SNE Trademarks to SNE Global by way of a derivative action instead of an oppression action. Having gone through the historical origins of the two causes of action, the distinction between them and the analytical framework laid down by the Court of Appeal in our neighbouring Singapore, the final appellate court stated that the main difference lies in the nature of the claim. An oppression claim under s.346(1) is a personal claim made by the minority shareholder who suffers a distinct and personal loss separately from that suffered by all the shareholders generally, whereas a derivative action is brought on behalf of the company by the shareholder in a representative capacity and the harm is to the company alone.

The court went on to formulate a legal “test” or guidelines to ascertain whether a shareholder’s complaint was actionable under s.346 of CA 2016 or more properly on behalf of the company under s.347 of CA 2016 as follows:

(i) What is the act or omission that one or more of the shareholders complain of?

In short, identify the act, series of acts or omissions.

(ii) Can the act(s) or omission(s) be characterised as being:

oppressive to;
in disregard of the interests of;
unfairly discriminatory against; or
otherwise prejudicial to

one or more of the shareholders?

(iii) Does the cause of action vest in the shareholder or in the company?

(iv) Who has suffered loss or damage from the wrong done – the shareholder in his capacity as a shareholder, or the company?

(v) Is the loss suffered by the shareholder as plaintiff separate and distinct to the plaintiff in his capacity as a shareholder, or is it a loss suffered by all the shareholders?

Where the resulting injury and loss was suffered directly and specially or separately and distinctly by the shareholder in such capacity, as opposed to injury and loss suffered by the company or all other shareholders, then oppression is made out and the cause of action vested in the shareholder under s.346. If, however, it was an injury done to the company resulting in a loss to the company, then the cause of action vested in the company and s.347 was the proper remedy. Further, under the “reflective loss” principle, the plaintiff shareholder’s loss might be merely a reflection of the loss suffered by the company. A diminution in the value of share capital or dividends was not a separate and distinct harm suffered by the shareholder as it was merely reflective of the company’s loss. Thus, the reflective loss principle bolstered the requirement under s.346 that the loss suffered by a shareholder must be special and distinctive to the shareholder. To that extent, the apex court stated its view in an earlier decision in Rinota Construction Sdn Bhd v Mascon Rinota Sdn Bhd [2018] 1 MLJ 141, which held that the reflective loss principle had absolutely no application in an oppression action, was to be departed from.

Applying the test to the facts of the case, the wrongful act in the assignment to a third party of the SNE Trademarks which belonged to the Company was a wrong that affected all the shareholders. The cause of action vested in the Company. The loss or damage arising was suffered by the Company and not by P alone in her capacity as a shareholder. P ought to have commenced a derivative action on behalf of the Company under s.347. P’s claim could not be properly pursued by way of an oppression action under s.346.

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Tags: [Company] [Oppression] [Derivative] [Reflective Loss] [s.346] [s.347] [Companies Act 2016]