Case Update: Bringing Oppression to Court on Equitable Considerations: Ho Sue San @ David Ho Sue San v Hovid Berhad & 2 Ors [2024] MLJU 1358

Case Update: Bringing Oppression to Court on Equitable Considerations: Ho Sue San @ David Ho Sue San v Hovid Berhad & 2 Ors [2024] MLJU 1358

Introduction

The case of Ho Sue San @ David Ho Sue San v Hovid Berhad & 2 Ors [2024] MLJU 1358 was an appeal brought to the Court of Appeal from the High Court, which in turn concerns an application made by the Appellant under Section 346(1)(b) of the Companies Act 2016 i.e an action mounted on minority oppression.

The brief facts of the case leading to the filing of the oppression action by the Appellant are as follows:-

  • The Appellant and the 3rd Respondent (TAEL) are major shareholders of the 1st Respondent company. The Appellant owns 33.99% and the 3rd Respondent holds a beneficial interest in 63.45%, with the 2nd Respondent acting as a custodian for the 3rd Respondent’s shares.
  • The Appellant founded the 1st Respondent company and took it public, becoming its largest shareholder of then then listed company. In or around October 2017, the Appellant and one private investment group known as TAEL Group (the 3rd Respondent), decided to privatize the company by purchasing public shares and delisting it.
  • It was the understanding between the Appellant and TAEL that TAEL would finance and fund the purchase of the public shares of the then listed company in order to realize the aim of bringing the company private.
  • On 12.10.2017 and 13.9.2018, the Appellant and TAEL entered into agreements (Agreement on Voluntary General Offer No. 1 (VGO-1) and Agreement On Voluntary General Offer No. 2 (VGO-2), respectively) as part of the aforementioned privatisation exercise. VGO-2 included provisions that each party shall be entitled to nominate two directors to the Board of the 1st respondent company (and two other companies).
  • Between August and October 2022, a fallout occurred between the Appellant and the 3rd Respondent regarding the finalization of a Shareholders Agreement (SHA), which had been under negotiation since 2017.
  • It is important to note that TAEL had initially informed the Appellant that its investment in the 1st Respondent company was for a five-year term, after which TAEL planned to exit.
  • After the five-year term ended, TAEL wanted to exit its investment, but the appellant prevented this because the SHA was not finalized. As a result, TAEL, through the 2nd Respondent as the shareholder, issued a Requisition Notice on 21.10.2022, calling for an Extraordinary General Meeting (EGM). The purpose of the EGM was to appoint 6 additional directors to the 1st Respondent company’s board, which would allow the 2nd Respondent to pass resolutions facilitating the sale of the 3rd Respondent’s beneficial shares in the company.
  • The Appellant felt that the conduct of issuing the Requisition Notice and the proposed Resolution if passed would have a cumulative oppressive effect against him. The thrust of the Appellant’s case is that in the event the resolution is successfully passed to appoint 6 more directors on to the Board of the 1st Respondent company, this would in effect be in breach of an “equitable bargain” between the parties (the Appellant and TAEL) in the VGO-2.

The Appellant’s primary objective in the High Court was to obtain a court order requiring TAEL to sell its beneficial shares in the 1st Respondent company to the Appellant, to resolve the deadlock between the parties.

Decision of the High Court

The High Court was faced with two key questions: (i) whether there was an equitable bargain between the parties in the first place? and (ii) if there was an equitable bargain, would the Appellant be entitled to rely on legitimate expectation to uphold that bargain?

On the first question, having considered the House of Lords decision in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, the High Court found that the shareholders of the 1st Respondent company were unlikely to have expectations beyond their strict legal rights as outlined in the governing documents and laws. Given that the 1st Respondent is a large company and TAEL (or the 3rd Respondent) was clearly profit-driven and not in the business for long-term investment, the High Court concluded that there was no personal relationship based on mutual confidence between the parties. It determined that this was not a case of a quasi-partnership, and thus, no equitable bargain existed that could give rise to any legitimate expectations or be breached.

Ultimately, the High Court answered both questions in the negative and dismissed the Appellant’s oppression action. Dissatisfied with the decision of the High Court, the Appellant appealed to the Court of Appeal.

Decision of the Court of Appeal

The Court of Appeal came to a split decision, with the majority deciding to dismiss the Appellant’s appeal.

In arriving to its decision, the majority of the Court of Appeal made the following salient observation / findings:-

  • The Appellant’s application relied on the second limb of Section 346 of the Companies Act 2016 (i.e Section 346(1)(b)) and was premised on the proposed resolution which it alleges unfairly discriminates or is otherwise prejudicial to the Appellant. The burden is on the Appellant to satisfy the court on the balance of probabilities that the proposed resolution unfairly discriminates against him or is otherwise prejudicial to him for the purpose of Section 346(1)(b) of the Companies Act 2016.
  • If an applicant wishes the court to consider equitable considerations (which the Appellant did), then the burden lies with the applicant to show there existed a relationship in the nature of a quasi-partnership beyond an association which is purely a commercial one.
  • In order to determine whether there is a relationship in the nature of a quasi-partnership, the court should consider the circumstances of the commercial relationship between the shareholders, including but not limited to whether there exist 1 or more of the 3 elements as propounded in Ebrahimi (supra).
  • In the event that the relationship between the shareholders is in the nature of quasi-partnership, then there is an added factor which members are obliged in law to observe, namely, to act in good faith to one another as per Pan-Pacific Construction Holdings Sdn Bhd v Ngiu-Kee Corporation (M) Bhd & Anor [2010] 6 CLJ 721.
  • If the commercial relationship between the shareholders is not in the nature of quasi-partnership, the strict legal rules of their association would apply, unless the conduct of the majority is an affront to commercial fairness.  It is only if the commercial relationship between the shareholders is one in the nature of quasi-partnership would the court be permitted to take into account equitable considerations.
  • In support of the Appellant’s contention that there existed an equitable bargain, the Appellant argued that it fulfilled all of the 3 elements under Ebrahimi (supra), namely:-
  • That “an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company”;
  • There exists “an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business.”; and
  • A “restriction upon transfer of the members’ interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.”.
  • However, having considered the above, the majority of the Court of Appeal found that the Appellant has failed to establish a relationship in the nature of quasi-partnership on all 3 elements. Therefore, the majority of the Court of Appeal was unable to take equitable considerations into account.

In summary, the Court of Appeal essentially found that the bargain, i.e., the VGOs, is purely a commercial bargain (not equitable bargain). There was purely a commercial agreement entered into between the Appellant and TAEL. The breach of the VGO-2, if any, is purely a contractual one. This was not enough to constitute a cause of complaint under Section 346 of the Companies Act 2016.

Conclusion

In conclusion, in cases of an oppression action under Section 346(1)(b) of the Companies Act 2016, whilst the Malaysian Courts appear to be willing to consider equitable considerations – it is important to note that an applicant must first be able to establish that the commercial relationship between the shareholders is in the nature of a quasi-partnership. In order to determine whether a commercial relationship is one of a quasi-partnership, Ebrahimi (supra) would act as a useful benchmark for applicants. It is also important to note that the elements listed under Ebrahimi (supra) are not exhaustive as noted by the Court of Appeal in its judgment (see paragraph 35 of the Judgment).

Author: Kevin Richard Nathan