Mohd Shuaib Ishak v Celcom (Malaysia) Berhad

A commentary by Claudia Cheah on the first reported case in Malaysia under Section 181A of the Companies Act

 

 

The case of Mohd Shuaib Ishak v Celcom (Malaysia) Berhad [2008] 1 LNS 314 is the first reported decision in Malaysia where leave was granted to an individual shareholder to commence a statutory derivative action.

 

A derivative action is an action to enforce the company’s rights which is typically brought by a minority shareholder on behalf of the company. It is a creature of equity which has just received statutory recognition in the form of the new section 181A of the Companies Act, 1965 ("Act"), which came into force on 15 August 2007.

 

 

FACTS

The Plaintiff, a former shareholder of Celcom (Malaysia) Berhad ("Celcom") applied for leave to sue the directors of Celcom, Telekom Malaysia Bhd ("Telekom") which is the ultimate holding company of Celcom, the directors of Telekom and Celcom’s independent advisor, Alliance Investment Bank Berhad. The Plaintiff proposed to file the action on behalf of Celcom based on the facts set out below.

 

By an Amended and Restated Supplemental Agreement ("ARSA"), Celcom and DeTeAsia agreed that Celcom would not merge its business or accept a significant new shareholder without the consent of DeTeAsia, failing which Celcom would procure a Buy Out Offer for DeTeAsia at a price of US$1.84 (approximately RM7.00) per Celcom share owned by DeTeAsia.

 

Telekom and Telekom Enterprise (and parties acting in concert) wished to merge Celcom’s business with Telekom’s cellular business and to take over Celcom. In furtherance of that objective, Telekom which has effective control of Celcom, caused Celcom to enter into an agreement ("SPA") whereby Celcom agreed to acquire from Telekom, 100% of equity interest in TM Cellular Sdn Bhd.

 

Under the SPA, Celcom agreed to issue Celcom shares to Telekom in satisfaction of the purchase consideration. This gave rise to an obligation on Telekom and Telekom Enterprise as well as parties acting in concert to extend a Mandatory General Offer ("MGO") for all the remaining shares in Celcom. The offer price under the MGO was RM2.75 per share. At this price, the total cost for Telekom to take over Celcom would be RM3.67 billion.

 

The aforesaid transaction was carried out without the consent of DeTeAsia in breach of the ARSA. Had Celcom sought the consent of DeTeAsia, such consent may have been refused and Celcom would then be obliged to procure a Buy Out Offer at RM7.00 per Celcom share held by DeTeAsia. If DeTeAsia had received RM7.00 per share, the MGO would have had to be at RM7.00 per share instead of RM2.75 per share. This would mean that Telekom would have to pay RM9.34 billion instead of RM3.67 billion to take over Celcom.

 

DeTeAsia brought a claim against Celcom for breach of the ARSA and was awarded substantial damages and costs amounting to US$232,999,745.80.


The main beneficiaries of the wrongdoings have been Telekom, Telekom Enterprise and parties acting in concert as they succeeded in taking over Celcom at a relatively low price and the burden to pay DeTeAsia was passed on to Celcom. The main losers have been Celcom, which had to pay substantial damages to DeTeAsia and the shareholders of Celcom who should have received RM7.00 per share instead of RM2.75 under the MGO.

 

 

FINDINGS BY THE HIGH COURT

The High Court Judge examined the concept of a ‘statutory derivative action’ under sections 181A, 181B and 181E of the Act. After reviewing the authorities from other common law jurisdictions which have similar statutory provisions, the learned Judge held that the requirements which had to be satisfied before leave is granted for the commencement of a statutory derivative action are as follows:

 

(a) the Plaintiff must be a ‘complainant’ within the meaning of section 181A(4);

(b) the Plaintiff must have given 30 days written notice to the directors of his intention to apply for leave of Court under section 181A;

(c) the Plaintiff must be acting in good faith; and

(d) that it appears prima facie to be in the best interest of the company that leave be granted.

 

The Plaintiff satisfied requirement (a) as he is a former shareholder holding 500,000 shares in Celcom. The leave application related to the circumstances in which the Plaintiff ceased to be a shareholder as he had been compelled under the MGO to sell all his shares at RM2.75 per share to Telekom.

 

The Plaintiff also satisfied requirement (b) as he had given the requisite notice to the directors of Celcom.

 

In respect of requirement (c), the Court was satisfied that the Plaintiff was acting in good faith as he sought to remedy what he genuinely believed to be unlawful and illegal actions of those who have caused Celcom to suffer loss. The Court noted that although the Plaintiff may be acting out of self-interest to maximise the value of his shares in Celcom, such self-interest did not mean that the Plaintiff was acting in bad faith.

 

The Court observed that anything which benefits the company will indirectly benefit the shareholders by increasing the share value and that it would be difficult to imagine a situation in which a shareholder would not have any self-interest in wanting the company to prosecute an action which is in its interest to prosecute.

 

In respect of requirement (d), the Court took the stand that it should not embark on substantial issues on merits at the leave stage. For the purpose of granting leave, it is sufficient to show a prima facie arguable case that it is in the best interest of the company to file the proposed action. The Plaintiff need not show that the proposed action is likely to succeed.

 

The Court held that from the evidence adduced by the Plaintiff, it was apparent that there was a breach of fiduciary and statutory duties by the directors of Celcom, which acted at the behest of Telekom without any regard to the interests of Celcom. There was also evidence which suggested that the proposed defendants had made fraudulent and/or negligent misrepresentations and had conspired to injure Celcom and its shareholders.

 

The Court was of the view that if the proposed action is successful, Celcom may recover well in excess of RM1 billion in damages against the proposed defendants, the MGO and the SPA would have to be unwound and Celcom would be restored to its position of being an independent company with its own successful cellular business, instead of just being a subsidiary of Telekom. This would prima facie significantly improve Celcom’s financial and business position.

 

The Court rejected the Defendant’s contention that it would not be in the best interest of Celcom to unwind the entire transaction as it has moved on with its corporate exercise. The Court ruled that no illegal act can be immune from challenge merely because it has been completed and unwinding it would be too troublesome.

 

The Court also rejected the Defendant’s contention that no appeal on management decisions should be entertained if the directors considered the matter and honestly decided that it would not be in the company’s interest to commence or defend the action. The Court held that the ‘business judgment rule’ is irrelevant in an action involving breaches of duties by directors.

 

As the Plaintiff has satisfied all the necessary requirements, the Court granted leave to the Plaintiff to institute the proposed action.

 

 

CONCLUSION

This case is noteworthy as the Judge has set out the requirements that have to be fulfilled to obtain leave to commence a statutory derivative action. It also demonstrates the Court’s readiness to recognise the rights of individual shareholders to remedy any wrongs done to the company. It appears that the Court is no longer loath to interfere with a company’s internal management on the ground that majority prevails.

 

This case certainly serves as a wake up call for directors and majority shareholders to carefully consider how they handle a company's affairs as their decisions can be subject to scrutiny by minority shareholders who have now acquired a statutory right to challenge the same in court if the requirements under section 181A of the Act are satisfied.

 

 

CLAUDIA CHEAH ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 

 
ACCOLADES & AWARDS

Skrine Retains Who’s Who Legal Accolade for Malaysia

On 15th May 2017, the Who’s Who Global Awards was held in London, United Kingdom and Skrine was conferred the Award:

Malaysia Law Firm of the Year 2017

Skrine previously received this Award in 2013, 2014, 2015 and 2016.

>> READ MORE

SKRINE Clinches Top Honours at ALB Malaysia Law Awards 2017

On 6th April 2017, the Asian Legal Business Malaysia Law Awards was held and SKRINE was named

Malaysia Law Firm of the Year 2017

SKRINE also bagged 5 other awards

>> READ MORE

Asialaw Profiles 2017

The Asialaw Profiles has ranked Skrine as Outstanding Firm and particularly highlighting the following practice areas:

Outstanding Firm

  • Competition & Antitrust
  • Corporate/M&A
  • Dispute Resolution
  • Energy & Natural Resources
  • Intellectual Property
  • IT, Telco & Media
  • Project & Infrastructure

>> READ MORE

PDPA NOTICE

English | Bahasa Malaysia