Rights of Members under the Companies Act

Introduction
 One of the aims of the Companies Act 2016 is to strengthen members’
rights.
 A member of the company is entitled to the rights conferred on him by
Companies Act 2016 and the company constitution.
 Section 33(1) says that the constitution has the effect of a contract between
company and members and between the members themselves and bind
them to the extent as if the documents “had been signed and sealed by each
members and contained covenants on the part of each members to observe
all the provision of constitution.

Member rights
 There are 2 main organs in a company :
• the members; and
• the board of directors (BOD).
 Management of the company is vested in the hands of the BOD
 Once the person’s name has been registered in the company’s register of
member, he will enjoy certain rights under CA 2016:
1. Right to attend & vote at the meeting
2. The member is entitled to receive notice of meeting of members under
Section 101(2)(b) & Section 321(1). Any intentional omission will
invalidate the meeting
3. Right to question, discuss, comment and make recommendation on the
management of the company under Section 195.
4. Section 102(2)(c) grant the rights for members to receive dividends
declared by the company. Company may issue ordinary shares with
different entitlement to dividends under Section 71(2). Their
entitlement will be stated in the company’s constitution or in
accordance with the terms on which the shares were issued.
5. He may appoint another person as his proxy to attend, participate, speak
and vote at the member’s meeting under Section 334.
6. There are certain decisions of the company that require approval of
members. When the directors cause the company to enter into a
substantial value transaction without obtaining the prior approval of the
members, Section 223 and 228 allow the members to apply to court to
restrain the company.
 7. If the company’s affairs are being conducted or the director’s power are
being exercised in a manner which is oppressive to the member, the
member may take action against the company under Section 346.
8. The member may also reserve a right to take action when the company
has been wronged provided that he had fulfilled the condition
prescribed in Section 347 and 348.
9. The member is entitled to take step and petition to wind the company
under Section 464 and 465.

Common Law Position

Foss v Harbottle [1843] 67 ER 189

 There was a conflict between majority & minority.
 The majority shareholders passed a resolution that is not in the best interest
of the company, which the minority disagreed because the majority
shareholders had wrongly applied the company’s property.

 There are 2 rules that have been developed:

1. Internal management rule
 If company officers have committed an irregularity & this irregularity
can be ratified in general meeting, then no individual member sue in
respect of the irregularity.
2. Proper plaintiff rule (majority rule)
 If a wrong has been done to the company, then it is the company itself
has the right to sue & not the member

 The majority rule stands for the proposition that the decisions and choices
of the majority will always prevail over those of the minorities as the
majority are holder the greater amount of shareholding than the minority.
 The minority shareholders are required to accept the decisions made by the
majority shareholders. In such circumstances, the minority shareholder
cannot ask for court intervention because Foss v Harbottle does not allow
the minority members who complain of a wrong done to the company
provided that the majority shareholders do not wish to take any action
against the wrong committed.

Exceptions in Foss v Harbottle

 General principle laid down in Foss v Harbottle appears to be harsh and
unjust with regard to minority shareholders. In order to mitigate this
harshness, four exceptions to the general principle have been laid down:
 Ultra vires acts
 Special majorities
 Personal rights
 Fraud on the minority
1. Ultra vires acts
 Taylor v National Union of Mineworkers
 In this case, it involves the support of an unlawful strike by the company.
 The court said that a member may by virtue of his right, sue against a
threatened unlawful act and may set aside an unlawful act by bringing a
derivative action.
 If an ultra vires acts has taken place, it is not required to wait for the proper
plaintiff to come in and the member has the right to sue.

 This is followed by the case of Simpson v Westminster Palace Hotel Co

 Ultra vires = illegal

 Smith v Croft
 When a transaction made by company violating the financial assistance
or capital maintenance provisions of the Companies Act.

2. Special majorities
An individual member is not prevented from suing if the matter is the one
which could validly be done or sanctioned, not by simple majority of the
members but only by some special majority.
 Edward v Halliwell
 It was stated in this case that the alleged act could have been done only by
a 2/3 majority and not by a simple majority and thus, the rule in Foss v
Harbottle could not be relied upon as the members were suing in their own
right only to protect their own rights in their capacity as members and were
not in fact suing in the right of the union.

3. Personal rights
Where the personal and individual rights of members of the plaintiff have been
invaded, the rule has no application at all.
 Pender v Lushington
 Company refused to accept plaintiff’s vote.
 The court held that the member an take action against company and
majority for the wrong done against him.

4. Fraud on minority
A situation where a ‘fraud on the minority’ has been committed by the majority
who themselves control the company.
 Allen v Gold Reefs of West Africa
 Generally, it must be bona fide in using the voting power for the benefit of
the company as a whole.
 Failing to use = fraud on minority
 The burden of proof is on the minority - Peters’ American Delicacy Co
Ltd v Heath

 Menier v Hooper’s Telegraph Works

 Menier, a minority shareholder, complained that there were self-interested
transactions between a majority member and the company.
 The court held that a minority shareholder’s action was properly bought in
these circumstances.

 Estmanco (Kilner House) Ltd v Greater London Council (abuse of

power/discrimination)
 A minority can bring a claim even in the absence of a complaint of fraud
and that in the absence of any remedy, an individual member may bring a
claim where the powers are used intentionally, fraudulently or negligently
by the directors in a way which proves beneficial to them and
disadvantageous to the individuals. 
 The court held that the abuse of power or discrimination against the wishes
of the minority shareholders, may constitute ‘fraud on minority.’
 Daniels v Daniels (negligence)
 3 minority shareholders claimed that Mr. & Mrs. Daniels (two directors
and majority shareholders) had acted negligently in making the company
sell land to Mrs. Daniels at a very low price although it was worth a lot
more money, it was held that the plaintiffs had the right to sue in such
circumstances. 

 Pavlides v Jensen
 In contrast, this case uphold the principle in Foss v Harbottle.
 The plaintiff claimed that the director negligently sold the company’s
property at a lower price than market price.
 The court held that was no fraud or personal advantage; the victim was
the company, and not the minority.

 Smith v Croft
 It is noteworthy that even where an individual member has the right to
bring a claim on behalf of the company under one of the exceptions to the
general principle, he may still be prevented from bringing a claim where
the wrongdoer has a sufficient level of control over the company and is
opposed to the litigation.
 In this case a minority had the right to bring a derivative action provided
that majority shareholders had no objection to the continuation of the
action.

In Malaysia, the above exception was followed in the case of Tan Guan Eng
& Anor v Ng Kweng Hee & Ors.

Procedures at common law

3 types of legal action available to a minority member to take action against a
majority member (wrongdoer) of a company at common law:
a. Personal action
b. Representative action
c. Derivative action

Personal action
 Pender v Lushington
 The action taken by member in personal capacity to enforce his personal
rights against the company.

Representative action
- Action taken by a member on behalf of himself as well as other
members who are affected by the wrong conduct of the company
through its directors and/or majority shareholders.
- This will avoid multiplicity of action regarding the same matter.
 Edwards v Halliwell
 Where the act requires special majority

Derivative action
- A derivative action is an action brought by a shareholder or director of a
company in the name of and on behalf of that company in respect of a
wrong done to the company.
- It is ‘derivative’ as the party bringing the action does not have the right
to sue, but such a right is ‘derived’ from that of the company.