Archive for the ‘Company Law’ Category

The Statutory Derivative Action (By Lee Shih)

Wednesday, April 9th, 2008

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The Minority Shareholder’s Sword to Pierce the Majority’s Twin Shields of Corporate Personality and Majority Rule

Part A. Introduction

A derivative action is an action brought by a shareholder based on a cause of action that the company has, rather than a cause of action belonging to the shareholder. The common law allows a minority shareholder to bring this action on behalf of the company in situations where the company does not take action because the wrongdoer controls the company and is able to prevent the company from taking any action.

The new statutory derivative action, under sections 181A to 181E of the Companies Act 1965 (“the Act”), allows a complainant to apply for leave of the Court to bring an action on behalf of the company. This new action, which came into effect on 15 August 2007 under the Companies (Amendment) Act 2007, allows a shareholder to sidestep the restrictions of the common law derivative action.

The common law rule in Foss v Harbottle (1843) 67 ER 189 states that if a company suffers a wrong then, because it is a separate legal entity from its shareholders, prima facie it is the company that should bring an action. Such a rule allowed a shareholder to bring an action on behalf of the company if two elements could be proven. First, that the wrong is one that cannot be validly ratified by the majority as there has been a fraud on the minority, and second, that the perpetrators of the fraud were in control of the company.

The new statutory derivative action bypasses the narrow Foss v Harbottle rule. However, it is clear that the right to bring a common law derivative action continues to be maintained here in Malaysia (see section 181A(3) of the Act).

The new sections 181A to 181E of the Act are very similar to the statutory derivative action provisions of the Singapore Companies Act, which were in turn modelled after the provisions of the Canadian Business Corporations Act.
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