Case Study – Breach Of Shareholder Agreement = Oppression?

Brief summary of the case

Dato Cheah, owner, and director of ISM was the approach in 2006 to assist in the rehabilitation of an abandoned project located in KL called CN Gallery. As the land of the project was too small to be developed into a mixed-use commercial development of significant value, Dato Cheah conceived a plan by which the adjoining lots could be acquired (along with the CN Gallery land) and developed into a large-scale integrated commercial development. To achieve this, Dato Cheah:

1. Approach MHPB Capital (a parent company of Queensway Nominees and the rest of the companies sued by ISM), a company that gave loan facilities to the proprietor of CN Gallery Land and now owns the land (via one of its subsidiaries) as a result of the proprietor od CN Gallery land failing to settle its debt to enter into a joint venture with ISM to develop the land, in which:
   1. ISM would hold 30% of the equity in any joint venture company incorporated to undertake the project, while MPHB would hold the remaining 70%; and
   2. The funding for the joint venture companies was to be divided into a cash portion and a loan portion, apportioned on a 30:70 basis, in which ISM would be liable to contribute only 30% of the cash portion and the rest (including the total loan portion at a rate of interest of 8% pa.) will be funded by MHPB Capital and its subsidiaries.  
2. Acquired the adjoining lots using MHPB Capital subsidiaries (the parties being sued in this matter. This acquisition exercise took almost 6 years to complete;
3. Using yet another subsidiary to acquire all the lands that were acquired by the rest of the subsidiaries; and
4. Formalize ISM and MHPB Capital relationship by negotiating a shareholders’ agreement (which ultimately did not materialize and they relied heavily on oral agreements between them).

The dispute arose when (amongst others): 

1. There were alleges of instances of oppression against ISM and Dato Cheah;
2. MHPH suddenly ordered its subsidiaries to conduct a rights issue exercise which had the effect of diluting ISM’s shares in the subsidiary companies to fractions of one percent;
3. MHPB Capital demanded ISM contribute a certain sum of the purchase price for certain land that was acquired by MHPB Capital subsidiaries; 
4. ISM claims that the cash portion should be free of interest while MHPB Capital claims otherwise, citing the fact that the listing requirements of Bursa Malaysia and the relevant transfer pricing guidelines would have prevented MPHB from lending to a subsidiary or related company without charging interest.

Dato Ray was then made a director in all of the subsidiary companies. He proceeded with requesting the financial records and supporting documents of the subsidiary companies to determine whether the rights issue exercise was conducted appropriately during the extraordinary general meetings. Long story short, it was never fully complied with by the subsidiary companies. Hence the current grievance (amongst many other claims in the suit). 

Was the case for oppression made out against MHPB Capital?

Yes. The court arrived at this conclusion on three different and independent bases:

1. First, the relationship between the parties can be considered a quasi-partnership;
2. The subsequent demands contravened the original terms of the oral shareholders’ agreement between MHPB Capital and ISM; and
3. Even if the first two above can be ignored, there were differing treatment of interest on the cash portion.

Why? We shall look at it point by point.

1. On the fact that the court considered the relationship between the parties can be considered a quasi-partnership, the court noted that it is not within MHPB Capital rights to unilaterally dictate to ISM on how it ought to contribute to the funding requirements as such a decision could only have been made unanimously, by agreement between the shareholders. That was the basis upon which the parties had conducted their affairs up to that point, and it would have been inequitable for MPHB Capital to insist upon exercising its legal rights under the articles of association as a majority shareholder to require ISM to contribute advances in an amount that departed from their prior practice, which existed in from the get-go of this relationship. This argument applies, as the court noted, even if the relationship were not that of a quasi-partnership.
2. Similarly, even if the relationship were not that of a quasi-partnership, the subsequent demands (take the rights issue exercise for example), would have breached the terms of the oral agreement between ISM and MPHB Capital as the shareholding proportions should have been maintained at a 30:70 ratio. This exercise should have been made by consensus between the shareholders. The assent of ISM had not been sought for the proposal for the rights issues in this case, which meant that the manner in which the rights exercises were carried out contravened the oral agreement, even if ISM possessed the financial wherewithal to take up its rights entitlements.
3. Lastly, while there were disagreements and differing treatment of interest on the cash portion, the court noted (based on the fact), this could have been remedied by MHPB Capital bringing the matter up with ISM to sort out their differences/ mutually agree upon an acceptable solution. Instead, shareholders for both companies were given different treatments regarding interest on the case portion advanced by them respectively. To make matters worse, when Dato Ray requested the financial records and supporting documents of the subsidiary companies to determine whether the rights issue exercise was conducted appropriately during the extraordinary general meetings, the request was never fully complied with by the subsidiary companies. These two factors alone justified a finding of oppression of the rights of ISM as a shareholder in all of the joint venture/ subsidiary companies, of unfair discrimination against it, and of disregard of ISM’s rights shareholder.

In conclusion, the court found instances of minority oppression by MHPB Capital against ISM and sided with ISM.

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