The textbook definition of minority oppression refers to unfair treatment or behaviour by a corporation, likely controlled by a majority shareholder(s) or director(s) of a company that disregards the minority shareholders.

In most cases, the acts carried out are in the best interest of the majority shareholder(s) or director(s) at the expense of minority shareholders.

This is against the spirit of corporate governance and shareholder protection.

There are many ways minority oppression can take place that deny the rights of minorities.

This can even happen in companies with a majority of directors being independent non-executive directors (INED) as they, although qualified to be INED based on the criteria set out in the Bursa Malaysia Listing Requirements (BMLR,) may not be that independent after all. The clear violation occurs when one cannot make a distinction whether the INED is indeed independent.

Among others, an INED is defined as someone who is not acting as a nominee or representative of any executive director or major shareholder of a company, which falls under Paragraph 1.1 (e) of BMLR. However, often, we see situations whereby an INED is solely appointed due to the “connection” with the major shareholder(s) or an executive director(s).

An INED must act in the best interest of the company and not merely as a rubber-stamp for the major shareholders or an executive director.

An INED owes a fiduciary duty to act in good faith, without conflict and in the best interest of the company and its shareholders. They cannot be beholden to the executive directors, especially on matters that are oppressing minority shareholders.

Percentage Ratios

One of the key manners in which a controlling shareholder is able to carry out certain acts that can be defined as minority oppression is the acquisition of assets that do not require shareholders’ approval. The threshold for this is defined under Chapter 10 of BMLR.

For transactions with a percentage ratio of less than 5% and the consideration is satisfied by cash or unquoted shares, no announcement is required. However, a listed issuer is encouraged to make a voluntary disclosure to the exchange, providing details and particulars of the transaction and exhibiting good corporate governance.

For transactions with a percentage ratio of more than 5%, a listed issuer is required to make an announcement to the exchange and provide the relevant information of the transaction.

It is only when a transaction is carried out by a listed issuer whereby the percentage ratio is more than 25% that a listed issuer is required to issue a circular to shareholders and seek shareholders’ approval at a general meeting.

Percentage ratios under BMLR refer to either the net assets of the listed corporation, the net profit of the asset that is being purchased against the net profit of the corporation, or the total assets of the target acquisition against the total assets of the corporation, among others.

The issue with the current BMLR is in relation to the relative nature of what is deemed as passing or failing the test of the threshold value when it comes to the acquisition of an asset or a company.

For instance, a company with total net assets of RM5bil or with a net profit of RM200mil, will easily be able to purchase an asset that is worth not more than RM250mil (for example a high-end property in New York or London, a yacht or even a private jet), or acquire a company that has less than RM10mil profit without the scrutiny of minority shareholders or any announcement to Bursa Malaysia.

Hence, Bursa Malaysia must amend the BMLR by adding a threshold value to asset purchases or acquisition of a company in absolute terms as this will tighten the noose on majority shareholder(s) and executive director(s) from executing acquisitions that are off the radar of minority shareholders and regulators.

This threshold should be set at RM10mil for ACE Market-listed companies and RM20mil for Main Market-listed companies.

In addition, Bursa Malaysia could also add another “deeming” paragraph to stop the misuse via repeated purchases of additional stakes in a company or adding more assets that did not meet the current threshold values on an individual transaction basis but crossed the threshold level on a collective basis.

The BMLR on related-party transactions (RPT) is stricter as a listed issuer is required to announce if any of the percentage ratios is 0.25% or more unless it is less than RM500,000 or if it is a recurrent RPT (RRPT).

In cases where the percentage ratio in a RPT is more than 5%, a corporation would need to appoint an independent adviser, who will form an opinion on whether the transaction is fair and reasonable and whether it is detrimental to minority shareholders and advise the minority shareholders whether they should vote in favour of the transaction.

A director with any interest, whether direct or indirect, must abstain from board deliberation and voting on the relevant resolution in respect of a RPT.

In addition, in a meeting to obtain shareholders’ approval, a related party (director(s) or major shareholder(s)) with any interest must not vote on the resolution in respect of the RPT while persons connected to the director(s) or major shareholder(s) must also abstain from voting on the resolution in respect of a RPT.

Types of Oppression

There are no specific rules that define oppression but the test is really whether there is commercial unfairness in the treatment of a shareholder.

Examples of this include how a company could circumvent BMLR in relation to a transaction either to ensure the percentage ratio is not breached, or in the case of a RPT, the majority shareholder(s) or director(s) are able to convince other INED to vote for it as these INED are not truly independent.

At a general meeting to approve a RPT, it is always a case of the number and voting shares that are present and voting to enable the resolution to be approved or rejected.

In general, there are several types of minority oppression and this includes misappropriation of assets of a company, breach of fiduciary duties, lavish spending (like buying high-end property for personal use, a luxury yacht or a private jet), diversion of the company’s funds in the name of “capital investment”, mismanagement, non-payment of dividends, dilution of shares as well as the removal of directors in an unprofessional manner to inject new and friendly INED.

There are legal remedies under Section 346 of the Companies Act, 2016 for oppressed shareholders to bring the matter to court and seek relief. The court has the power and order the company to direct, prohibit any act, or cancel or vary any transaction or resolution. It may even regulate the conduct of the affairs of the company in the future or even wind-up the company.

In certain instances, an oppressed minority shareholder may see the tide turning against him/her, especially if the majority shareholder(s) or director(s) embarks on an offensive strategy to discredit the minority shareholder(s) claims of oppression. Here, the enforcement authorities play a crucial role in ensuring that the matter is thoroughly investigated with facts and not swayed by selective persecution of innocent minority shareholder(s).

In conclusion, while there is a legal framework for minority oppression, the regulators also play a crucial role in supporting the claim of oppression via thorough investigations. After all, the systematic manner in which minority oppression occurs is usually against corporate governance best practices, an area that the Securities Commission and Bursa Malaysia are most concerned about.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.

The article was first published here.

Photo by Joshua Mayo on Unsplash.