News
Minority Shareholders β How to Protect and Exert your Rights
2 March 2007
Good corporate governance implies something more than shareholder democracy and the mere rights of shareholders to vote. These rights carry with it an obligation to participate, and in the case of shareholder activism, this obligation is to optimize shareholders’ interests and management interests for mutual benefits of both to contribute to shareholder value.
In the real world, shareholder democracy, after all, relies on participation. In a democracy, every shareholder has an obligation to ensure that the fullest use is made of his/her participation and activism. In this respect, all investors have a role here, equally responsible as minority shareholders, acting like owners to monitor directors of companies in which they invest. This is nothing new in the corporate finance domain. Many shareholder activists know that angry investors can wield their cudgels from time to time for two reasons:-
Unhappy investors have often held the CEOs not only accountable but to be ethical in running the company’s business. For transparency, they want companies to set up an investor relations programme, make frequent communications and have dialogues with them. Their approach is to ensure that proper corporate conduct counts and good companies do the right things to ensure performance and investor confidence.
Minority shareholders are just happened to be another group of investors much on their own, often got caught in their own dilemma, depending on two principles set out in case law, Foss vs Harbottle (1843) as follows:-
As a rule, the Court would not simply entertain a lawsuit taken by a minority shareholder who is unhappy over the company’s internal management but it has acted within its powers. The rule means that a minority shareholder would usually have a problem to take an action for wrongdoings by directors who happen to control a majority stake in the company (see Table 1: Shareholders Rights).
The rule was decided in this manner for practical reasons as follows:-
The principle upon which minority shareholders or investors may, sometimes, be allowed to sue a company for internal irregularities is based on the doctrine of control by the majority. The majority must not encroach on their rights unfairly as protected by the law. Hence, minority shareholders or investors are allowed to sue on the following grounds:-
Whatever their shareholdings, all shareholders or investors of a company are entitled to be treated fairly.
A common dilemma faced by minority shareholders or investors is the absolute and total control by the majority shareholders. Often, such a control is done unfairly by a few, acting in concert for their own benefits which minority shareholders or investors feel could be at their expense.
Oppression occurs when majority shareholders, having the control of the company, dominate and exercise their power to run and manage the company’s affairs for their personal gains in total disregard or unfair discrimination or prejudicial treatment to and against the minority shareholders or investors (see Table 2: Section 181). Hence, the circumstances under which s181 of the Companies Act 1965 can apply are:-
The law is clear enough that minority shareholders or investors can only take actions for “equitable considerations” when they feel that they have been sidelined, discriminated or treated unfairly. Often, they feel inferior as second class to the majority and because of this, they are afraid to take actions to seek remedies. The situation is made worse when minority shareholders or investors do not know each other or when they are disunited or totally disorganized among themselves. It is here Minority Shareholder Watchdog Group (MSWG) can play a critical role for them (see Table 3: Benefits of Shareholder Activism).
Minority shareholders or investors would normally have no control or complete information over how the directors and management conduct their duties, say, for example, in the following types of situations:-
Having no access to insider information, they are unable to block any transactions concerning with “connected persons or related parties” between companies on the one hand and directors or majority shareholders or persons connected with them and/or the companies. Such transactions can often be at the interests of minority shareholders or investors.
How directors and management can be entrusted to play their role honestly and accountably in such transactions is a real challenge.
Since its inception, MSWG has effectively represented large numbers of investors. Generally, all investors in the stock market, unless they run the companies, are minority shareholders. They include those who buy few lots of shares in the stock market and those who invest in unit trusts or any investment-linked products controlled by corporations, banks or financial institutions, whether listed or unlisted.
MSWG’s role is to effectively represent them, to secure their participation at AGMs or EGMs through the use of their votes, to help them table resolutions at AGMs with proper notice and to help them issue written statements to other shareholders of the company for collective actions. MSWG’s role is also to act as a forum for them to deal with the directors of listed corporation, and to make sure their voice is heard or to advise them make an exit (i.e. sell off their investment) or to encourage them make valuable contribution to the company’s general meetings, by asking tough questions, expressing opinions or making endeavors to influence the company’s direction.
MSWG’s objectives are to strongly raise the standard of corporate governance and shareholder activism for all investors to benefit and exercise their voting rights either to oppose or to vote in person or to vote by proxy against unfair resolutions or against corporate abuses that can adversely destroy their investments. Considering the complexity of derivative actions and statutory minority remedies, all investors not in control of running the company, should see the need to be active and to set the right directions for their investments and bring effective reforms towards integrity and accountability in listed corporations.
Abdul Wahab Jaafar Sidek
Chief Executive Officer
Minority Shareholder Watchdog Group (MSWG)
Dated: 2 March 2007
2 March 2007
Good corporate governance implies something more than shareholder democracy and the mere rights of shareholders to vote. These rights carry with it an obligation to participate, and in the case of shareholder activism, this obligation is to optimize shareholders’ interests and management interests for mutual benefits of both to contribute to shareholder value.
In the real world, shareholder democracy, after all, relies on participation. In a democracy, every shareholder has an obligation to ensure that the fullest use is made of his/her participation and activism. In this respect, all investors have a role here, equally responsible as minority shareholders, acting like owners to monitor directors of companies in which they invest. This is nothing new in the corporate finance domain. Many shareholder activists know that angry investors can wield their cudgels from time to time for two reasons:-
- To protect their investments but they are aware, not to interfere in the commercial decision-making process of the company; and
- To make an exit by selling off their investments, to confront the directors and management or to make attempt to remove the CEOs or directors or to take them to task for blatant abuses and breaches of their fiduciary duty.
Unhappy investors have often held the CEOs not only accountable but to be ethical in running the company’s business. For transparency, they want companies to set up an investor relations programme, make frequent communications and have dialogues with them. Their approach is to ensure that proper corporate conduct counts and good companies do the right things to ensure performance and investor confidence.
Minority shareholders are just happened to be another group of investors much on their own, often got caught in their own dilemma, depending on two principles set out in case law, Foss vs Harbottle (1843) as follows:-
- First principle is where a wrong has been done to a company, only the company, not individual shareholders can take action against it;
- Second principle is that the wishes of the majority members of the company should, in general, prevail in the running of the company’s business, not the minority.
As a rule, the Court would not simply entertain a lawsuit taken by a minority shareholder who is unhappy over the company’s internal management but it has acted within its powers. The rule means that a minority shareholder would usually have a problem to take an action for wrongdoings by directors who happen to control a majority stake in the company (see Table 1: Shareholders Rights).
Table 1: Shareholders Rights |
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As members of a company, shareholders are all entitled to the following rights:-
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| Section 181 of the Companies Act 1965 provides a statutory control against potential abuses by the majority’s voting powers. | |
| Shareholdings (%) and Its Significance under the Companies Act 1965 | |
| 5% and above | A substantial shareholder (s69L). Very little protection as a substantial shareholder. |
| 10% to 15% | A shareholder of 10 % to 15 % or more can protect variations to his rights but he will need to apply to the court within one month (s65 of the Companies Act, 1965). He can apply to set aside an alteration to objects clause (s28). A shareholder of 10% or more can request for an EGM (s144). He can also seek an invitation to sit on the board. Any acquisition of 30 % or more by a foreigner will require the approval of Securities Commission. |
| 20% to 50% | The status of an associated company. At below 20%, it is only considered as an investment. A shareholder of 25% or more can block a special resolution or a major change to the Articles (s33). He can exercise a negative control to frustrate the wishes of majority shareholders or to block any special resolution which he disapproves. |
| At 33.3% threshold, the Malaysian Code on Takeovers and Mergers will require the shareholder to make a mandatory general offer for the balance of the company’s shares. Hence, a critical level in a take-over bid for a public listed company (plc). | |
| Above 50% to74% | The status of a subsidiary company. A shareholder of 50% or more will have control of the company with the ability to change its board of directors (s5). However, a major shareholder cannot alter the statutory rights of minority shareholders especially when their rights are prejudiced by transactions carried out merely to satisfy the interests of the majority shareholder. |
The rule was decided in this manner for practical reasons as follows:-
- To prevent unnecessary lawsuits taken by individual shareholders or investors against the company for any wrongdoing. Only the company itself should take the action;
- To allow the majority rule prevail in running the company’s business. Any complaints or grievances by minority shareholders or investors against the directors must be legitimate cases pertaining to an oppression, unfair discrimination or prejudice against their interests.
The principle upon which minority shareholders or investors may, sometimes, be allowed to sue a company for internal irregularities is based on the doctrine of control by the majority. The majority must not encroach on their rights unfairly as protected by the law. Hence, minority shareholders or investors are allowed to sue on the following grounds:-
- To restrain a company from acting ultra vires; or
- To prevent the company from passing a resolution not in accordance with the Articles, or passed by means of a deceit or trick or if there is non compliance with procedures;
- To allow minority shareholders or investors to take personal action to enforce their rights; or
- To uphold natural justice or an equitable consideration when there is total disregard, unfair discrimination or unfair treatment against their interests.
Whatever their shareholdings, all shareholders or investors of a company are entitled to be treated fairly.
Table 2: Section 181 of the Companies Act 1965 |
Circumstances under which section 181 of the Companies Act 1965 provides statutory protection:-
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| The above circumstances cover a multitude of possible situations of abuses for which the common law has evolved specific remedies. In place of the common law rules, section 181 enacts all embracing situations for redress of grievances brought forth for court action by members of minority shareholders. |
Position of Directors and Shareholders under the Law |
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“ The directors are not servants to obey directions given by shareholders as individuals. They are persons who may, by regulations, be entrusted with the control of the business and if so entrusted, they can only be removed by shareholders in general meetings or by statutory majority who can alter the Articles.” Lord Justice Buckley, 1908 |
| “ The shareholders are not trustees for one another, and unlike directors, they occupy no fiduciary position and are under no fiduciary duties. They vote in respect of their shares, which are property, and the right to vote is attached to the share itself as an incident of property to be enjoyed and exercised for the owner’s personal advantage.” Peter’s American Delicacy Co. Ltd vs Heath (1939) |
| The right of shareholders to vote in their own interests extends to situations where a director can also seek to exercise his right as a shareholder at general meetings called to ratify his actions as a director who is in breach of his duty. |
A common dilemma faced by minority shareholders or investors is the absolute and total control by the majority shareholders. Often, such a control is done unfairly by a few, acting in concert for their own benefits which minority shareholders or investors feel could be at their expense.
Oppression occurs when majority shareholders, having the control of the company, dominate and exercise their power to run and manage the company’s affairs for their personal gains in total disregard or unfair discrimination or prejudicial treatment to and against the minority shareholders or investors (see Table 2: Section 181). Hence, the circumstances under which s181 of the Companies Act 1965 can apply are:-
- Total disregard to the interests of minority shareholders or investors;
- Unfair discrimination against them or
- Any act that is prejudicial to and against their interests.
The law is clear enough that minority shareholders or investors can only take actions for “equitable considerations” when they feel that they have been sidelined, discriminated or treated unfairly. Often, they feel inferior as second class to the majority and because of this, they are afraid to take actions to seek remedies. The situation is made worse when minority shareholders or investors do not know each other or when they are disunited or totally disorganized among themselves. It is here Minority Shareholder Watchdog Group (MSWG) can play a critical role for them (see Table 3: Benefits of Shareholder Activism).
Minority shareholders or investors would normally have no control or complete information over how the directors and management conduct their duties, say, for example, in the following types of situations:-
- Substantial deals involving material transactions of the company’s business β the purchase of landed properties or an overseas investment, etc;
- Deal tactics applied by directors and management to complete such transactions β the hidden motives or bad intentions, etc;
- Mechanisms by which directors and management discharge their duties, for example, to exchange deal confirmations and to settle deal arrangements in such transactions β share for share exchange, cash considerations, valuations, etc; and
- Accounting practices for transactions relating to mergers and acquisitions, and the significance of such transactions in the company’s interests β merger accounting, uses of revenue or capital reserves, etc.
Having no access to insider information, they are unable to block any transactions concerning with “connected persons or related parties” between companies on the one hand and directors or majority shareholders or persons connected with them and/or the companies. Such transactions can often be at the interests of minority shareholders or investors.
How directors and management can be entrusted to play their role honestly and accountably in such transactions is a real challenge.
Table 3: Benefits of Shareholder Activism |
| In 2003, a public listed company (plc) had to abort a transaction which appeared not to be in the interests of the company after a group of shareholders expressed their concern through MSWG. Because of this, enough pressure was made on the management and the plc had to abort the deal. |
(Sources: New Straits Times, Asian Wall Street and The Economist) |
Since its inception, MSWG has effectively represented large numbers of investors. Generally, all investors in the stock market, unless they run the companies, are minority shareholders. They include those who buy few lots of shares in the stock market and those who invest in unit trusts or any investment-linked products controlled by corporations, banks or financial institutions, whether listed or unlisted.
MSWG’s role is to effectively represent them, to secure their participation at AGMs or EGMs through the use of their votes, to help them table resolutions at AGMs with proper notice and to help them issue written statements to other shareholders of the company for collective actions. MSWG’s role is also to act as a forum for them to deal with the directors of listed corporation, and to make sure their voice is heard or to advise them make an exit (i.e. sell off their investment) or to encourage them make valuable contribution to the company’s general meetings, by asking tough questions, expressing opinions or making endeavors to influence the company’s direction.
MSWG’s objectives are to strongly raise the standard of corporate governance and shareholder activism for all investors to benefit and exercise their voting rights either to oppose or to vote in person or to vote by proxy against unfair resolutions or against corporate abuses that can adversely destroy their investments. Considering the complexity of derivative actions and statutory minority remedies, all investors not in control of running the company, should see the need to be active and to set the right directions for their investments and bring effective reforms towards integrity and accountability in listed corporations.
Abdul Wahab Jaafar Sidek
Chief Executive Officer
Minority Shareholder Watchdog Group (MSWG)
Dated: 2 March 2007
