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UNIVERSITI PUTRA MALAYSIA
LEGAL PROTECTION OF MINORITY SHAREHOLDERS IN IRAN AND MALAYSIA
MOHAMMAD REZA ESHGHI
GSM 2016 29
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LEGAL PROTECTION OF MINORITY SHAREHOLDERS IN IRAN AND
MALAYSIA
By
MOHAMMAD REZA ESHGHI
Thesis Submitted to the Graduate School of Management, University Putra
Malaysia, in Fulfilment of the Requirements for the Degree of
Doctor of Philosophy
March 2016
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All material contained within the thesis, including without limitation text, logos, icons,
photographs and all other artwork, is copyright material of Universiti Putra Malaysia
unless otherwise stated. Use may be made of any other material contained within the
thesis for non-commercial purposes from the copyright holder. Commercial use of
material may only be made with the express, prior, written permission of Universiti
Putra Malaysia.
Copyright © Universiti Putra Malaysia
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DEDICATION
This thesis is dedicated to:
My family who accompanied me for ages particularly for seven years in doing this PhD
research
And
Absolutely my very greatest, very best and most wonderful friends of all time,
And,
My Supervisory committee who kindly taught very useful lesson in doing this study
And
Teachers who always affected my mind and memory;
Especially Prof Shaik Mohd Noor Alam S M Hussein who passed away in middle of
this research
May God blesses them
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Abstract of thesis presented to the Senate of Universiti Putra Malaysia in fulfilment of
the requirements for the degree of Doctor of Philosophy
LEGAL PROTECTION OF MINORITY SHAREHOLDERS IN IRAN AND
MALAYSIA
By
Mohammad Reza Eshghi
March 2016
Chairman: Associate Professor Dr. Suhaimi Ab Rahman
Faculty: Graduate School of Management, UPM
Minority shareholders today have an important role in the mobilization of savings,
financial growth, and economic development of each country. Hence, enhanced
minority shareholder protection is important, as it is associated with higher valuation of
corporate assets and with more developed capital markets. As such, the rights of
minority shareholders, i.e. the right to seek information, the right to voice an opinion
and the right to seek redress are not fully protected be that in Malaysia or Iran. In fact,
the law grants majority shareholders a widespread control over company that is capable
of causing abuse and injustice towards minority shareholders. The general objective of
this study is to formulate acceptable standards of minority shareholder’s protection and
to ascertain the current position of minority shareholders in both countries.
Subsequently, the adequacy of the existing legal framework and its enforcement to
protect three basic rights of minority shareholders have been investigated by using
qualitative, doctrinal, theoretical and functional legal methods. Through these methods,
the study gives a sufficient accurate explanation on the relevant issues in each
jurisdiction and addresses the related issues effectively to fulfil the social needs. The
findings of this study acknowledge that Malaysia has attempted to enhance the
minority shareholder protection in the transformation program in achieving equality in
corporate ownership, good governance and sustainable business development after the
1997 Asian crisis whilst Iran has little attended to achieve the mission. However, the
current provisions of company law in both countries have not completely overcome the
conflict of interest between majority- minority shareholders because the focus is on
director/ shareholder conflict of interests. There is still much room for company law
reform in Malaysia and Iran in this area.
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Abstrak tesis yang dikemukakan kepada Senat Universiti Putra Malaysia sebagai
memenuhi keperluan untuk ijazah Doktor Falsafah
Oleh
Mohammad Reza Eshghi
Mach 2016
Pengerusi : Profesor Madya Dr. Suhaimi Ab Rahman
Fakulti : Graduate School of Management, UPM
Pemegang saham minoriti hari ini mempunyai peranan yang penting dalam
menggembleng simpanan, pertumbuhan kewangan, dan pembangunan ekonomi setiap
negara. Oleh itu, peningkatan perlindungan terhadap pemegang saham minoriti dilihat
penting kerana ia berkait dengan peningkatan nilai aset korporat dan pasaran modal
yang lebih maju. Dalam konteks ini, hak pemegang saham minoriti, iaitu, hak untuk
mendapat maklumat, hak untuk menyatakan pendapat dan hak untuk mendapat
pembelaan tidak dilindungi sepenuhnya sama ada di Malaysia atau Iran. Sebenarnya,
undang-undang memberikan kawalan yang meluas kepada pemegang saham majoriti
ke atas syarikat yang mampu menyebabkan penderaan dan ketidakadilan terhadap
pemegang saham minoriti. Objektif umum kajian ini adalah untuk merangka piawaian
yang standard untuk perlindungan pemegang saham minoriti dan untuk menentukan
kedudukan semasa pemegang saham minoriti di kedua-dua negara. Seterusnya,
kerangka undang-undang yang sedia ada dan penguatkuasaannya untuk melindungi tiga
hak asas pemegang saham minoriti di atas telah diselidik dengan menggunakan kaedah
kualitatif, doktrinal serta teori dan praktikal undang-undang. Melalui kaedah ini, kajian
ini memberikan penjelasan yang cukup tepat mengenai isu-isu yang berkaitan dan
menyelesaikan isu-isu berkenaan secara berkesan bagi memenuhi keperluan sosial.
Hasil kajian ini mendapati bahawa Malaysia telah cuba untuk meningkatkan
perlindungan pemegang saham minoriti dalam program transformasi bagi mencapai
kesaksamaan dalam pemilikan korporat, tadbir urus yang baik dan pembangunan
perniagaan yang mapan selepas krisis Asia 1997 manakala Iran telah membuat sedikit
perubahan untuk mencapai misi. Walau bagaimanapun , peruntukan semasa undang-
undang syarikat di kedua-dua negara tidak benar-benar mengatasi konflik kepentingan
antara pemegang saham minoriti-majoriti kerana tumpuan lebih diberikan kepada
konflik pengarah / pemegang saham kepentingan. Masih terdapat banyak ruang
reformasi undang-undang syarikat boleh dilakukan di rantau ini.
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AKNOWLEDGEMENT
This research effort represents a culmination of advice and great support of many
people to whom I am deeply grateful. I wish to express my utmost appreciation and
deepest gratitude. I wish to express my utmost appreciation and deepest gratitude to my
thesis supervisory committee members. I would like to acknowledge their patience,
guidance, and willingness to share their knowledge, skills, and time and experience.
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I certify that a Thesis Examination Committee has met on 23 March 2016 to conduct
the final examination of Mohammad Reza Eshghi on his thesis entitled “A
Comparative Study of The Legal Protection of Minority Shareholders in Iran and
Malaysia” in accordance with the Universities and University Colleges Act 1971 and
the Constitution of the Universiti Putra Malaysia [P.U.(A) 106] 15 March 1998. The
Committee recommends that the student be awarded the degree of Doctor of
Philosophy.
Members of the Thesis Examination Committee were as follows:
Foong Soon Yau, PhD
Professor / Director, Thesis Based Programme
Putra Business School
(Chairman)
Zahira Mohd Ishan, Phd
Senior Lecturer / Deputy Director
Intellectual Property Protection Division
Putra Science Park
Unversiti Putra Malaysia
(Internal Examiner)
Hasani Mohd Ali, PhD
Associate Professor
Faculty of Law
Universiti Kebangsaan Malaysia
(External Examiner)
Andrew Campbell, PhD
Professor
School of Law
University of Leeds
Leeds, LS2 9JT
United Kingdom
(External Examiner)
______________________________
PROF. DR. M. IQBAL SARIPAN
Deputy Vice Chancellor (Academic &
International)
Universiti Putra Malaysia
Date:
On behalf of,
Graduate School of Management
Universiti Putra Malaysia
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This thesis was submitted to the Senate of the Universiti Putra Malaysia and has been
accepted as fulfilment of the requirements for the degree of Doctor of Philosophy. The
members of the Supervisory Committee were as follows:
Suhaimi Abdul Rahman, PhD
Associate Professor
Faculty of Economics and Management
Universiti Putra Malaysia
(Chairman)
Adilah Abd Razak, PhD
Senior Lecturer
Faculty of Economics and Management
Universiti Putra Malaysia
(Committee Member)
Dato’ Aishah Bidin, PhD
Professor
Faculty of Law
Universiti Kebangsaan Malaysia
(Committee Member)
______________________________
PROF. DR. M. IQBAL SARIPAN
Deputy Vice Chancellor (Academic &
International)
Universiti Putra Malaysia
Date:
On behalf of,
Graduate School of Management
Universiti Putra Malaysia
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Declaration by graduate student
I hereby confirm that:
• This thesis is my original work;
• Quotations, illustrations and citations have been duly referenced;
• This thesis has not been submitted previously or concurrently for any other degree at any other institutions;
• Intellectual property from the thesis and copyright of thesis are fully-owned by Universiti Putra Malaysia (Research) Rules 2012;
• written permission must be obtained from supervisor and the office of Deputy Vice-Chancellor (Research and Innovation) before the thesis is published (in the
form of written, printed or in electronic form) including books, journals, modules,
proceedings, popular writings, seminar papers, manuscripts, posters, reports,
lecture notes, learning modules or any other materials as stated in the Universiti
Putra Malaysia (Research) Rules 2012;
• there is no plagiarism or data falsification/fabrication in the thesis, and scholarly integrity is upheld as according to the Universiti Putra Malaysia (Graduate
Studies) Rules 2003 (Revision 2012-2013) and the Universiti Putra Malaysia
(Research) Rules 2012. The thesis has undergone plagiarism detection software.
Signature: _____________ Date: ___________________
Name and Matric No.: Mohammad Reza Eshghi / GM02919
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Declaration by Supervisory Committee
This is to confirm that:
• the research conducted and the writing of this thesis was under our supervision;
• supervision reponsibilities as stated in Rule 41 in Rules 2003 (Revision 2012 – 2013) were adhered to.
Signature : ______________________________________
Name of Chairman
of Supervisory
Committee : Assoc. Prof. Dr. Suhaimi Abd Rahman
Signature : ______________________________________
Name of Member
of Supervisory
Committee : Dr. Adilah Abd Razak
Signature :_______________________________________
Name of Member
of Supervisory
Committee : Prof. Dato’ Dr. Aishah Bidin
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TABLE OF CONTENTS
ABSTRACT iv
ABSTRAK v
AKNOWLEDGEMENT vi
APPROVAL vii
DECLARATION ix LIST OF ABBREVIATIONS xvi LIST OF STATUTES xvii LIST OF CASES xviii
CHAPTER
1 INTRODUCTION 1 1.1 Background of the Study 1 1.2 Problem Statements 4 1.3 Research Objectives 6 1.4 Research Questions 7 1.5 Significance of the Study 7 1.6 Limitations and Scope of Study 8 1.7 Research Methodology 9 1.7.1 Data Collection and Data Analyses 9 1.7.2 Comparative Study 9
1.7.2.1 Functional Method 10 1.8 Summary 13
2 LITERATURE REVIEW 15 2.1 Introduction 15 2.2 Weak Minority Shareholder Protection 17 2.2.1 Malaysia 17 2.2.2 Iran 17 2.3 Expropriation of Minority Shareholders’ Rights 19 2.4 Separation of Ownership from Control 19 2.5 Agency Theory 20 2.6 Shareholder Primacy Theory 21 2.7 Stakeholder Theory 21 2.8 Majority Rule 23 2.8.1 Malaysia 23 2.8.2 Iran 27 2.9 Concentrated Ownership Structure 29 2.9.1 Malaysia 29 2.9.2 Iran 30 2.10 Inadequate Legal Framework and Enforcement 31
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2.10.1 Malaysia 31 2.10.2 Iran 32 2.11 Shareholder Activism 34 2.11.1 Malaysia 34 2.11.2 Iran 35 2.12 Summary 36
3 SHAREHOLDER RIGHTS 38 3.1 Introduction 38 3.2 Shareholder 38 3.2.1 Minority Shareholder 39 3.2.2 Majority Shareholder 40 3.3 The Concept of Minority Shareholder Protection 41 3.4 Shareholder Ownership Rights 42 3.4.1 Malaysia 42
3.4.1.1 Rights to Approve Share Capital 42 3.4.1.2 Information Rights 43 3.4.1.3 Distribution Rights 44 3.4.1.4 Class Rights 44 3.4.1.5 Winding up Rights 45
3.4.2 Iran 45 3.4.2.1 Rights to Approve Share Capital 45 3.4.2.2 Information Rights 46 3.4.2.3 Financial Rights 47 3.4.2.4 Class Rights 47 3.4.2.5 Winding up Rights 48
3.5 Shareholder Participation Rights 48 3.5.1 Malaysia 48
3.5.1.1 Appointing and Removing Directors 48 3.5.1.2 Approving Directors Remuneration 49 3.5.1.3 Approving Certain Transactions 49 3.5.1.4 Ratification Voting Power 50
3.5.2 Iran 50 3.5.2.1 Appointing and Removing Directors 51 3.5.2.2 Approving Directors Remuneration 51 3.5.2.3 Approving Certain Transactions 51 3.5.2.4 Ratification of Certain Transactions 52
3.6 Limitation to Voting Power 52 3.7 Minority Shareholders Rights 53 3.8 Minority shareholder Remedies 54 3.8.1 Malaysia 54
3.8.1.1 The Oppression Remedy 54 3.8.1.2 Common Law and Statutory Derivative Action 54 3.8.1.3 Just and Equitable Ground for Winding-up 55
3.8.2 Iran 55 3.8.2.1 Personal Action 56 3.8.2.3 Winding-up for Valid Reasons 56
3.9 Summary 57
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4 MINORITY SHAREHOLDER PROTECTION AT COMPANY
MEETINGS 58 4.1 Introduction 58 4.2 Minority Rights to Call a Meeting 58 4.2.1 Malaysia 58 4.2.2 Iran 62 4.3 Minority Right to Set the Agenda of Shareholders’ Meeting 63 4.3.1 Malaysia 63 4.3.2 Iran 66 4.4 Minority Right to Vary Class Rights 67 4.4.1 Malaysia 67 4.4.2 Iran 70 4.5 Minority Right to Appoint and Remove Board of Directors 72 4.5.1 Malaysia 72 4.5.2 Iran 75 4.6 The Mandatory Bid Rule 76 4.6.1 Malaysia 77 4.6.2 Iran 84 4.7 Limitation of Substantial Property Transactions 86 4.7.1 Malaysia 86 4.7.2 Iran 90 4.8. Limitation of Related Party Transactions 92 4.8.1 Malaysia 92 4.8.2 Iran 97 4.9 Equitable Limitation on Majority Voting Power 100 4.9.1 Malaysia 100 4.9.2 Iran 103 4.10 Limitation on Majority’s Power to Ratification 105 4.10.1 Malaysia 105 4.10.2 Iran 107 4.11 Summary 108
5 MINORITY SHAREHOLDER REMEDIES 110 5.1 Introduction 110 5.2 Malaysia 111 5.2.1 Oppression Remedies 111 5.2.2 Common Law, and the Statutory Derivative Action 117 5.2.3 Just and Equitable Ground for Winding-up 123 5.2.4 Statutory Injunction Remedy 126 5. 3 Iran 129 5.3.1 Minority Personal Action 129 5.3.2 The Statutory Derivative Action 133 5.3.3 Winding up for Valid Reasons 138 5.4 Summary 141
6 CONCLUSION AND RECOMMENDATIONS 142 6.1 Introduction 142 6.2 Findings and Recommendations 143 6.2.1 Minority Shareholders Protection at General Meetings 143
6.2.1.1 Minority Shareholder Rights to Call a Meeting 144 6.2.1.2 Minority Right to Set the Agenda of Shareholders’
Meeting 144
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6.2.1.3 Minority Right to Vary Class Rights 145 6.2.1.4 Minority Right to Appoint and Remove Board of
Directors 146 6.2.1.5 Mandatory Offer and Compulsory Acquisition in
Takeovers and Mergers 146 6.2.1.6 Limitation of Substantial Property Transactions 147 6.2.1.7 Limitation of Related Party Transactions 148 6.2.1.8 Equitable Limitation on Majority Voting Power 149 6.2.1.9 Limitation on Majority’s Power to Ratification 149
6.2.2 Minority Shareholder Remedies 150 6.2.2.1 Personal Remedy 150 6.2.2.2 Derivative Action 151 6.2.2.3 Winding up Remedy 152 6.2.2.4 Statutory Injunction Remedy 152
6.3 Implications of the study 153 6.3.1 Theoretical Implication 153 6.3.2 Practical Implication 153 6.4 Suggestions for Future Research 154
REFERENCES 155
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LIST OF ABBREVIATIONS
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AGM Annual General Meeting
AOA Articles of Association
BMLR Bursa Malaysia Listing Requirements
CA Malaysian Companies Act 1965
CLRC Malaysian Corporate Law Reform Committee
CMSA Malaysian Capital Markets and Services Act 2007
FCC French Commercial Code
EGM Extraordinary General Meeting
GM General Meeting
ICC Iranian Commercial Code 1969
ICMA Iranian Capital Markets Act 2005
ICPC Iranian Civil Procedure Code 1982
OECD Organization for Economic Co-operation and Development
MBR Mandatory Bid Rule
RPTs Related Party Transactions
TSELR Tehran Stock Listing Rules
UKCA UK Companies Act 2006
LIST OF STATUTES
Australia
Australian Uniform Companies Act 1961
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Australian Corporations Act 2001
Canada
Canadian Business Corporation Act 1985
France
French Commercial Code 2006
Hong Kong
Hong Kong Companies Ordinance 2014
Iran
Iranian Commercial Code 1933
Iranian Civil Procedure Code 2000
Iranian Commercial Code 1969
Iranian Capital Market Act 2005
TSE Listing Rules
Malaysia
Listing Requirements of the Buras Malaysia Securities Berhad 2015
Malaysian Capital Markets and Services Act 2007
Malaysian Capital Markets and Services (Amendments) Act 2015
Malaysian Code on Takeovers and Mergers 2010
Malaysian Code on Takeovers and Mergers (Amendments) 2015
Malaysian Securities Commission Act of 1993
Malaysian Securities Commission (Amendment) Act 2015
Malaysian Companies Act 1965
Malaysian Companies (Amendment) Act 2007
New Zealand
New Zealand Companies Act 1993
Singapore
Singapore Companies Act 1967
LIST OF CASES
Abdul Rahim bin Aki v Krubong Industrial park (Melaka) Sdn Bhd & Ors [1995] 3
MLJ 417
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Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656
Alor Janggus Soon Seng Trading Sdn Bhd v Sey Hoe Sdn Bhd & Ors [1995] 1 CLJ 461
Australian Resources Corp v Van Reesema (1988) 13 ACLR 261
Avel Consultants Sdn Bhd v Mohamad Zain Yusof & Ors [1985] 2 MLJ 209
Biala Pty Ltd v Mallina Holdings Ltd (1993) 11 ACSR 1,082
Brown v British Abrasive Wheel Co Ltd [1919] 1 Ch 290
Burland v Earle [1902] AC 83
Celcom (Malaysia) Berhad v Mohd Shuaib Ishak [2010] 7 CLJ 808
Chang Ching Chuan & Ors.v Aik Ming (M) Sdn Bhd & Ors [1992] 2 MLJ 583
Chew Sang Hal v. Intan Kinabalu Sdn Bhd & Ors [2011] 1 LNS 1357
Chio Tan Seng & Ors v Chong Chai Huat & Ors (1997) 4 CLJ Supp 16
Citco Banking Corporation NV v Pusser’s Ltd [2007] UKPC 13
Cook v Deeks [1916] 1 AC 554
Cumbrian Newspapers Group Ltd v Cumberland and Westmorland Herald Newspaper
and Printing Co Ltd [1970] AC 1099
Dafen Tinplate Co Ltd v Llanelly Steel Co [1907] Ltd [1920] 3 Ch 124
Daniels v Daniels [1987] Ch 406
Dato’ Azizi Yom Ahmad & Anor v. Seacera Tiles Bhd & Ors [2013] 5 CLJ 605
Dato’ Hamzah Abdul Majid & Anvar v Wembley Industries Holdings Bhd [1998]
MLJU 443
Donahue v. Rodd Electrotype Co. of New Eng (1975) 328 N.E.2d 505
Ebrahimi v Westbourne Galleries [1972] 2 All ER 492
Edman v Ross (1922) SR (NSW) 351
Edwards & Anor v. Halliwell & Ors [1950] 2 All E.R
Edwards v Halliwell [1950] 2 All ER 1064
Elder v. Elder & Watson Ltd. (1952) SC 49
Expo Holding Sdn Bhd v Toyo Ink Group Bhd [2013] 1 LNS 1127
Foo Fatt Chuen v Axis Identity Group International Sdn Bhd & Ors [2011] 1 LNS
1584
Foss vs. Harbottle (1843) 2 Hare 461; 67 E.R. 189
Gambotto v WCP Ltd (1995) 182 CLR 432
Genisys Integrated Engineers Pte Ltd v Uem Genisys Sdn Bhd & Another Case [2006]
8 CLJ 164
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Grant v UK Switchback 11Railways Co (1888) 40 Ch D 135.
Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512
Guan Seng Co Sdn Bhd v Tan Hock Chuan (1990) 2 CLJ 761
Hendrick international Hotel and Resorts Pte Ltd v Hotels & Properties Sdn Bhd
[2003] 2 CLJ 445
Hilder v Dexter [1902] AC 747
HLB Nominees (Tempatan) Sdn Bhd v SJA Bhd & Anor [2005]1CLJ 23
Ho Hup Construction Company Bhd v Bukit Jalil Development Sdn Bhd & Ors (No 2)
[2012] 1 CLJ 649
Hogg v Cramphorn Ltd. & Ors [1967] 1 Ch. D. 254
Hoole v Great Western Railway Co (1867) 3 Ch 262
Howard Smith Ltd v Ampol Ltd [1974] AC 821
IDC V Cooley [1972] 2 All ER 162
In the matter of Tahansan Sdn Bhd [1984] 1 MLJ 204
Irvine v Union Bank of Australia (1877) 2 App 366
Izzap Ltd v. Sanmarau Overseas Marketing Sdn Bhd & Anor [2011] 2 CLJ 220
KFC Holding (Malaysia) Bhd v. Yoong Nim Chor [2009] 1 LNS 1756
Knightswood Nominees Pty Ltd v Shervin Patoral Co Ltd (1989) 7 ACLC 536
Koh Jui Hiong & Ors v Ki Tak Sang [2014] 2 CLJ 40
Kook v Deeks [1916] 1 AC 554
Lee Ah Tee v Ong Tiow Pheng [1984] 1 MLJ 107
Lee Chow Meng v Public Prosecutor [1978] 2 MLJ 36
Lim Foo Yong v PP [1976] 2 MLJ 259
Lim Hean Pin v Thean Seng Co Sdn Bhd [1992] 2 MLJ 10
Lim King Kow v Polywell Enterrise Sdn Bhd & Ors [2006] 4 CLJ 907
Loh Eng Leong & 2 ORS v. Lo MU Sen & Song (Sdn) Bhd & 2 ORS [2002] 1 LNS 273
Looh Siong Chee v Numix Engineering Sdn Bhd & Ors [2015] 7 CLJ 561
Mac Dougall v. Gardiner (1875), 1 Ch. D. P 13 and Miles L. J.; Gray v. Lewis (1873),
8 Ch App
Man Hing v Eramara Jaya Sdn Bhd & Ors [ 1998] 7 MLJ 528
Menier v Hooper’s Telegraph Works (1974) 9 Ch App 350
MUI Plaza Sdn Bhd v. Hong Leong Bank Berhad [1998] 6 MLJ 203
Ng Hoy Keong v Chua Choon Yang & Ors [2011] 4 CLJ 545
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Ngurli Ltd v McCann (1953) 90 CLR 425 at 439
Nik Ismail Bin Tengku Besar Indra Raja & Anor v Petra Perdana Berhad [2010]
MLJU 1195
Nor Mahani; M/s Hong & Fong v Tan Koon Heo; M/s K H Tan & Co [2012] 1 LNS 97
Northern Counties Securities v Jackson & Steeple Ltd [1974] 1 WLR 1133
North-West Transportation Co Ltd v Beatty (1887) 12 App 589
O’Neill v Phillips and Re Saul D Harrison & Sons Plc [1999] 1 WLR 1092
Omega Securities Sdn Bhd v Yeoh Lee Hoe [2003] 1 AMR 426
Oon Ah Baa, Dato’ Boon Pak Leong & Ors v Eagle & Pagoda Brand Teck Aun
Medical Factory Sdn.Bhd & Ors [2004] 2 MLJ 329
Owen Sim Liang Khui v Piasau Jaya Sdn Bhd & Anor [1996] 4 CLJ 716
Padiberas Nasional Bhd v Formula Timur Sdn Bhd [2009] 8 CLJ 508
Paidiah Genganaidu v Lower Perak Syndicate Sdn Bhd [1974] 1 MLJ 220
Pavlides v Jensen [1956] Ch 565
Pender v Lushington (1877) 6 Ch D 70
Petaling Tin Bhd v Lee Kian Chan & Ors (1994) 4 MSCLC 91
Peter’s American Delicacy Co Ltd v Heath (1939) 61 CLR 457, 481
Petrotech Logistics Pte Ltd [1982] 2 MLJ 212
Pharm Malaysia Bhd v. Dinesh Kumar Jashbhai Nagjibha Patel & Ors [2004] 7 CLJ
465
Piercy v S. Mills & Co Ltd [1920] 1Ch 77
PP v Dato Haji Mohamed Muslim bin Haji Othman [1983] 1 MLJ 245
Primus Malaysia Sdn. Bhd V Rin Kei Mei & Ors [2012] 1 CLJ 176
Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204
Puan Sri Datin Seri Grace Choong Foong Meng v Michael Chie Hock Meng & Ors
[2009]1 LNS163
Public Bank Bhd Bhd v Metro Constraction Sdn Bhd [1991] 2 MLJ 56
Punt v Symons & Co Ltd (1903) 2Ch 506
Quin & Axtens Ltd v Salmon [1909] AC 442
Ramakrishnan Rajeswari & Anor v Syarikat V. K. Kalyanansundram Sdn Bhd & Ors
[2015] 1 LNS 168
Re Ariadne Australia Ltd (1989-1990) 2 ACSR 791
Re Chi Liung & Son Ltd [1968] 1 MLJ 97
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Re Humes Ltd (1987) 5 ACLC 64
Re Kong Thai Sawmill (Miri) Sdn Bhd v Long Bong Sung [1978] 2 MLJ 227
Re petrotech Logistic Pte Ltd [1982] 2 MLJ 212
Re Tahansan Sdn Bhd [1984] 1 MLJ 204
Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378
Salomon v. Salomon &Co [1987] AC 22
Sarawak Building Supplies Sdn Bhd v Director of Forest & Co [1991] 1 MLJ 211
Sidebottom v Kershaw Leese & Co Ltd [1920] 1 Ch 154
SJA Bhd & Anor v HLB Nominees (Tempatan) Sdn Bhd [2002] 7 CLJ 580
Sysmex (Malaysia) Sdn Bhd v. Sia Kee Chow & Ors [2013] 8 CLJ 120
Tan Guan Eng & Anor v Ng Kweng Hee & Ors [1992] 1 MLJ 487
Tan Kian Hua v Color Image Scan Sdn Bhd & Ors [2004] 6 CLJ 174
Teoh Peng Phe v Wan & Co [2001] 5 CLJ 222
Tinios v French Caledonia Travel services Pty Ltd (1994) 12 ACLC 622
Tuan Haji Ishak bin Ismail v. Leong Hup Holdings Berhad [1996] 1 MLJ 661
Unico Holdings Berhad v Lee Sack Choon & Ors [2009] MLJU 1483
United Engineers (Malaysia) Bhd v Seow Boon Cheng & Anor [2001] 6 MLJ 511
Varusay Mohd Shaikh Abdul Rahman v SVK Patchee Bros (M) Sdn Bhd [2002] 3 MLJ
674
Whitehouse v Carlton Hotel Pty Ltd [1986-1987] 162 C.L.R. 285
Yukilon Manufacturing Sdn Bhd & Anor v Dato' Wong Gek Meng & Ors [1998] 4 CLJ
319
Zhong Mei Sdn Bhd v. Chia Hoon Seng & Ors [2009] 9 CLJ 612
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1
CHAPTER 1
1 INTRODUCTION
Minority shareholders today have an important role in savings mobilization, financial
growth, and economic development of each country. In recent years, a number of
studies have shown that enhanced minority shareholder protection is associated with
higher valuation of corporate assets along with established and valuable capital
markets. Based on the afore reason, many studies have suggested that minority
shareholders deserve legal protection for equitable reasons as well as adequacy
considerations (Boros, 1998a; Kang, 2015; La porta, Lopez, Shleifer, & Vishny, 2002;
Shakya, 2014).
Legal systems in general, provide shareholders irrespective of majority or minority, the
rights that are associated to the shares. These privileges may include the rights to have
information on basic company performance; distribution of dividends; distribution of
company property upon liquidation; to participate in decision making at company
meetings; to alienate shares with transfer; to elect and remove directors and auditors; to
approve fundamental corporate changes as well as shareholder’s remedies and actions.
However, since in most jurisdictions around the world, the ownership of shares
is concentrated in the hands of a few shareholders; the states, families, or institutional
investors, controlling shareholders may expropriate minority shareholders’ rights at
company meetings and in case of remedies. Consequently, minority shareholder
protection continues as a common problem in company law debates.
Three reasons are identified for lawmakers and policy makers to attain in strengthening
the minority shareholders’ rights in a country. Firstly, creating an environment of
fairness and trust for the conduct of business can create a more profitable and less risky
business. Secondly, if a legal system does not provide sufficient minority shareholder
protection compared with other legal systems, not only local investors but also foreign
investors may not invest in the country. Therefore, local investors may increase their
investments in foreign companies that provide adequate minority shareholders
protection. Finally, since the difference between majority shareholders and minority
shareholders is in accordance to the number of shares in possession, a legal system
should deal with minority shareholders with fair and equitable manner.
1.1 Background of the Study
Berle and Means (1932) addressed the separation of ownership and control as well as
the conflict of interest in US firms. The conflict of interest between shareholders and
directors are explained in terms of agency theory. This theory indicates the different
mechanisms to monitor corporate managers’ actions in the principals or shareholders’
interests (Jensen & Meckling, 1976).
However, the classical Berle and Means view was revised by La Porta et al. (1998).
The authors argued that concentrated ownership occurs even in large US corporations
and it is normal in the international corporations. In most jurisdictions around the
world, the ownership of shares are by a few shareholders, whether states, families, or
institutional investors. The authors found that strong legal protection of minority
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shareholders is an important factor to increase the firm’s valuation and to develop the
stock market in a country. Klapper and Love (2004) also stated that in countries with
poor minority shareholder protection, corporations should use provisions in articles of
association (AOA) to enhance their performance and assessment. Nevertheless, many
developing countries such as Malaysia and Iran have a controlling shareholders’
system. There are several integral problems, such as investor protection, unfair self-
dealing, and expropriation of minority shareholders by the controlling shareholders.
These countries are characterized as weak law jurisdictions in minority shareholders
protection (Kang, 2015).
Accordingly, one of the most important factor that influence minority shareholder
protection in these countries is the corporate ownership structure particularly the nature
of the agency problem where the primary conflict is between the controlling
shareholders and minority shareholders. In view of that, there is strong relationship
between share ownership structure and types of legal strategies to control agency costs.
In fact, different agency costs depend on the different ownership structure. One
ownership structure may cause greater agency costs than another. Overall, the social,
political, cultural, economic environment and importantly legal system have a direct
impact on ownership structure of a country. The size of the firm, market instability and
capital structure also may influence ownership structure specifically. As a result,
selecting the proper ownership structure may reduce the agency costs in a corporation
(Kraakman, 2009; Nili, 2014; Ramsay & Blair, 1993; Rogers, Dami, Ribeiro, &
Ferreira De Sousa, 2007).
Since the financial crisis in 1997, most Asian countries, including Malaysia and Iran
have been strengthening their law and regulatory practises on minority shareholders’
protection to increase confidence of shareholders in the financial markets. Weak
minority shareholders’ protection, insufficient enforcement of the shareholders’ rights,
lack of transparency and inadequate disclosure of information have been notable by
critics in the financial crisis in 1997 (Airaksinen, 2000; P. K. Liew, 2007).
The Malaysian Companies Act 1965 (the CA), which was modelled based on the
English Companies Act 1948 and the Australian Uniform Companies Act 1961, as the
main legislation providing common shareholders’ protection. It has been amended
more than 30 times to keep in tandem with the latest development in the corporate
sector and to ensure that Malaysian businesses can compete internationally. The
Malaysian Corporate Law Reform Committee (CLRC), established on 17 December
2003 for review of the CA to improve its function in a cost-effective, consistent,
transparent and competitive business situation in line with international standards of
investor protection. The amendment of the CA (the Amendment Act 2007) was a
noticeable effort by the Malaysian legislature to raise the standard and adequacy of the
country’s minority shareholder protection (Aishah, 2007). The CLRC issued 12
consultative documents to review the provisions in the CA regulating a company’s
substantial property transactions with its directors and loans to directors, directors‟ role
and duties and members‟ rights and remedies. The CLRC Final Report was issued in
early 2009. Thus, there is a continuing process to enhance the better function and
practices of companies in Malaysia (Chan, 2010b).
Another important step was the enactment of the Capital Markets and Services Act
(CMSA) 2007. This act replaced the Securities Industry Act 1983, Futures Industry Act
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1993, and Part IV of the Securities Commission Act of 1993 (MSCA). The main
provisions of the CMSA and MSCA regarding minority shareholders are the regulation
of takeovers and mergers particularly the mandatory bid rule (MBR). Both acts require
that takeover take place in an efficient competitive and informed market. Both acts
also provide some rights for minority shareholders in takeover and mergers. The
Malaysian Code on Takeovers and Mergers 1998 was also contained the regulation of
takeover in Malaysia. This Code provided that minority shareholders rights in
takeovers and mergers should be protected. Shareholders must be treated fairly and the
oppression of minority shareholders is very unacceptable. Later, The Malaysian Code
on Take-overs and Mergers 2010 (MCTM) replaced the Malaysian Code on Take-overs
and Mergers 1998. This new Code also requires fair and equal treatment to all
shareholders in particular minority shareholders in a take-over offer, merger or
compulsory acquisition. Finally, regulation Listing Requirements took effect from
January 2001 to improve the standard of directors and officers and develop effective
internal governance and enforcement in publicly listed firms.
On the other hand, the Iranian Commercial Code 1969 (ICC) is the primary source that
provides comparative shareholder protection in Iran. In March 1969, an amendment to
the Iranian Commercial Code consists of 300 articles and 28 notes were enacted into
the law providing Iran with a modern company law. The Amendment provides a
comprehensive scheme of requirements concerning finance and the public sale of
stock, including relatively precise specifications with respect to the required
documentation. The ICC provides more definite and comprehensive provisions on
management responsibility and procedural requirements to protect the rights of
minority shareholders. However, this legal system diligently reflects the French Civil
law that has been taken from the 1807 French Commerce Code. Unfortunately, the ICC
still holds its original form since the year 1969 unlike the FCC that has undergone
many amendments and modernizations.
Reforming the ICC has been one of the greatest issues that have involved discussions
of scholars of business law, corporate management, economics, accounting, finance,
and organizational behaviour during last two decades. In May 2003, the Iranian
Cabinet required the Ministry of Commerce to prepare a draft of the new Commercial
Code. After a year, the Ministry presented early draft of this Bill by engaging some
university scholars and other experts. The Cabinet approved the new Commercial Bill
on June 2005 to take the first step toward modernization of Iran’s 70-year old
Commercial Code.
Despite using the scholars and experts to make devise the Commercial Code, there are
many problems in this Bill and there have been critically debated on the Bill since 2003
(e.g. Ghaninejad, 2008; Mohammadi, Ghalibaf, & Moshki, 2009; Pasban, 2010 ;
Samadhi, 2009) . In 2013, the Parliament declared the final draft of the Code as the
Commercial Code of 2013, which is discussing in the Parliament at the time of doing
this research, and it is not final for commercial application in Iran. Therefore, the
provisions of the ICC 1967 are still applicable for joint stock companies.
Iran does not have a Malaysian style mandatory bid and takeover code. Takeover and
merger have not much been attended by Iranian legislators. The ICC has not also
provided any provision of takeovers and mergers as well as mandatory bid rule and
compulsory acquisitions for joint stock companies. In case of lacking the special law,
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general provisions say no majority can decide on the merger of companies. Therefore,
dissolving a joint stock company seemed a legitimate way to solve the problem of
takeovers and mergers that imposes some costs on the company and its shareholders.
1.2 Problem Statements
Minority shareholder protection in the economic development of a country highlighted
after the Asian Financial Crisis of 1997 where controlling shareholders perceived to
have benefitted at the expense of minority shareholders (Aishah, 2003; La porta et al.,
2002; Rachagan & Sulaiman, 2014; Rashidah & Salim, 2010). The problem arises
when the majority of share capitals are placed in the hands of controlling shareholders.
Minority shareholders must accept the decisions of the majority shareholders at
company meetings and board meetings according to the majority rule. Once the
minority shareholders disagree with majority shareholders or are faced with any abuse
of controlling shareholders may elect to sell their shares, which is not possible in all
situations. In such circumstances, minority shareholders may turn to the law to protect
their rights at company meetings or refer to the courts to seek redress. Therefore, the
adequacies of the provision of minority shareholder rights at company meetings and
judicial enforcement of company law are very important to protect the minority rights.
In Malaysia and Iran, the laws governing minority shareholder protection can be found
in some Acts and Codes, which in chapter 1.1. However, one of the most important
factors that influence minority shareholder protection in these countries is the agency
problem that arises from the nature of the corporate ownership structure. In this type of
problem, the primary conflict is between the controlling shareholders and minority
shareholders. Since the company law in both the company law focus on the
shareholder primacy rule, the law provides the excessive power for controlling
shareholders. Overall, the company law currently in place does not provide full
protection for minority shareholders regarding the enforcement of minority shareholder
rights at company meetings and judicial enforcement of minority shareholder’s rights.
The current provisions are subjects to some ambiguities and shortcomings that lead to
weak minority shareholder protection as an important factor in evaluating the company
law in both countries.
For example, in Malaysia, the inadequacy of the provisions to protect minority
shareholders rights at company meeting is found in sections 65,144, 145, 151 and 180
of the CA. Under section 65(1) of the CA and Art 4 of the Table A, shareholders who
have at least 75% of the votes are entitled to vary or cancel the class shares. However,
firstly, where there is no equivalent of Art 4 of the Table A, section 65(1) 1 of the CA
does not apply. Secondly, majority shareholders by passing a special resolution may
alter the AOA that may damage the rights of the minority class as illustrated in
Australian Resources Corp v Van Reesema (1988) 13 ACLR 261. Thirdly, shareholders
of companies without share capital are not similarly provided under section 65 of the
CA. Finally, the article does not provide higher majority than 75% majority to establish
the class rights.
Furthermore, the certain right of minority shareholders in calling company meeting and
setting agenda to the company meetings provided by sections 144, 145 and 151 of the
CA is not practicable easily. The beginning requirement to call a meeting is high. A
single shareholder who holds 10% of capital shares or is entitled to vote at GM cannot
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convene a meeting under section 145 of the CA. The directors may refuse the minority
shareholders requisitions because they believe the purpose of the meeting is not in
accordance to the authority of such meeting. The board of directors can still convene
the meeting even if the stipulated time within which to convene the meeting has lapsed.
Finally, if a company does not adopt Article 87 of Table A, minority shareholders are
not entitled to practice the right of set an agenda to an AGM under section 151(1) of
the CA because of term ‘unless the company otherwise resolves’.
Section 180 of the CA also has inadequacies to protect minority shareholders at
company meetings. There is not clarity regarding terms of the fair proposed acquisition
and bona fide proposed acquisition. The section is not also matched with the new
provisions of section 222 of the CMSA 2007 and its Amendment 2015 in terms of the
alternative methods and definitions.
In Malaysia, the current judicial enforcement of company law also has shortcomings to
protect minority shareholders where minority shareholders refer to the courts to seek
the redress. These shortcomings are seen where minority shareholders apply the
oppression remedy under section 181(1) of the CA, or common law and statutory
derivative action under section 181A of the CA, or winding up remedy under section
218 of the CA and the statutory injunction remedy under section 368A of the CA. For
example, only a member whose name emerges on the register of the company as a
member at the petition time can apply the oppression remedy under section 181(1) of
the CA, as illustrated in Koh Jui Hiong & Ors v Ki Tak Sang [2014] 2 CLJ 401,. The
section has some ambiguities in defining of its terms. It is not applicable in situations
where directors breached their fiduciary duties or misappropriated money belonging to
the company. The element of commercial fairness of the conduct of the company is not
considered.
Minority shareholders have difficulties to win the common law derivative action
because they must prove that there are ‘fraud on minority’ and ‘wrongdoing control’
under the rule in Foss v Harbottle and Salomon v Salomon cases. As was noted in
Abdul Rahim Aki v Krubong Industrial Park Sdn Bhd [1995] 3 MLJ 417, 431. 21
proving ‘fraud’ and ‘control’ was an onerous burden, and the meaning of those terms
was uncertain. Other problems to bring the common law derivative action are
ratification, cost issue and access to information. Although the introduction of the
statutory derivative action i.e. new sections 181A to 181E of the CA in 2007 was a
noticeable effort to solve the common law derivative action, it does not significantly
improve the position of minority shareholders. The factors that the court will take into
account for ratification are not clear. In addition, it is not clear the possibility of
multiple actions in a subsidiary or any related company. It is also not clear shareholder
can apply the statutory derivative action to pre-Amendment (retrospect) wrongdoings
or not as in decision of the Federal Court in Lee Chow Meng v Public Prosecutor
[1978] 2 MLJ 36. It is uncertain whether it includes directors’ negligence or directors’
duties of care, skill and diligence (Rashidah & Salim, 2010; Salim & Gurdial Kaur,
2013).
In Iran, the inadequacy of the provisions to protect minority shareholders rights at
company meeting is found in articles 42, 91,92 ,93,95, and 96 of the ICC. The
threshold requirement (50%) under articles 42 and 93 to vary the class rights is low.
There is no provision under articles 42 and 93 of the ICC to entrench the class rights by
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a higher majority. Some shareholders of the class who have not consented to variation
or cancellation their class shares cannot apply the court to have the variation or
abrogation cancelled. The certain right of minority shareholders in calling company
meeting and setting agenda to the company meetings provided by articles 91and 95 of
the ICC is not practicable easily. The threshold requirement (20 %) too high to be
achieved. Minority shareholder’s right to call a meeting is not practicable in case of
removing directors. Furthermore, there is no provision in takeovers and mergers, as
well as MBR and compulsory acquisition. Therefore, dissolving a joint stock company
seemed a legitimate way to solve the problem of takeovers and mergers that imposes
some costs on the company and its shareholders.
In Iran such as Malaysia, the current judicial enforcement of company law also has
shortcomings to protect minority shareholders where minority shareholders refer to the
courts to seek the redress. The personal action under article 270 of the ICC faces some
obstacles in limitation time, legal fees and penal provisions for all violation of the
stated article. Bringing a derivative action under articles 276 and 277 of the ICC is a
difficult task because minority shareholders who own at least 20% of the total shares of
the company can apply the derivative action. The worse is that the costs of the
proceedings must be borne by minority shareholders. There is lack of any provision
that empowers the court to order or direct the company to supply further information or
evidence relating to the case. Winding up a company, which is a personal rights
mechanism to protect the minority shareholders under articles 5, 41, 201 and 270 of the
ICC, lacks any alternative provisions to activate the company in a situation of deadlock
because of a breakdown in mutual trust between shareholders. These articles are
ambiguous regarding timeframe to bring the action. The ICC also lacks the injunction
remedy so that it may prevent to speed up and give greater protection to minority
shareholders, to safeguard their interests and to save costs of minority shareholders.
The feasibility of the provisions regarding majority controllers-minority shareholder’s
relationship is vital to prevent any abusive conduct by controlling shareholders and to
avoid any oppression on the minority shareholders. Equally important is the
formulation of the acceptable standard of minority shareholder protection in company
meetings and minority shareholder remedies as a means of check and balance. By
solving the problems, the country's businesses will be competitive and better equipped
in dealing with future challenges in the business environment.
1.3 Research Objectives
The general objective is to formulate adequacy of minority shareholder’s protection
under the Malaysian and Iranian Law.
The specific objectives of the study are as follows:
1- To ascertain the present position of minority shareholders protection in both Malaysia and Iran.
2- To examine the adequacy of the existing legal framework and its enforcement to protect basic rights of minority shareholders at company meetings in
Malaysia and Iran.
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3- To identify whether there is any inadequacy in the legal and judicial system of either jurisdiction in minority shareholder remedies.
4- To evaluate differences and similarities between the existing legal framework and its enforcement in minority shareholder protection for determining better
law in both countries.
5- To suggest and recommend amendments to the law and regulations that provides a basis for improvement protection of minority shareholder in both
countries.
1.4 Research Questions
The research will answer these questions:
1 - What is the present position of minority shareholders protection in both
Malaysia and Iran?
2 - How adequate are the existing legal framework and its enforcement in
protecting basic rights of minority shareholders at company meetings?
3 - What is the inadequacy of the legal and judicial system of either
jurisdiction in minority shareholder remedies?
4 - What are the differences and similarities between the existing legal framework and
its enforcement in minority shareholder protection?
5 - Which countries provide better law in protecting minority shareholders?
6- What recommendations are there for improvement of legal framework and its
enforcement to protect basic rights of minority shareholders in Malaysia and Iran?
Hence, the merits of mechanisms that both legal systems provide minority shareholders
protection could be useful in the amendment of corporate law in the future.
1.5 Significance of the Study
Understanding adequacy of jurisprudence without comparative law is not possible
(Paton, 1972, p. 14). Most jurisdictions throughout the world are confronted with
similar problems in legal characteristics and business corporations (Kraakman, 2009).
This study is a comparative research on minority shareholders’ protection of Malaysia
and Iran.
Malaysia and Iran stand out as good choices for this comparative study:
Regarding “The same pattern of development theory,” Iran and Malaysia are among the
two Asian and Muslim countries. Both countries have transformed from an agricultural
economy into an industrial economy for the last 50 years. Since both countries are
involved in some international organizations such as the Organization of Islamic
Cooperation, D8 countries, and ASEAN Trade Centre, they have shown interest in
developing their connections in various aspects especially in the business section. As a
result, this comparative research might resolve the incidental and divisive
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dissimilarities regarding minority shareholder protection of two nations sharing similar
stage of culture and economic development. This research may also strengthen the
relationship of both country, not in political, social or moral aspects, but in issues that
occur because of temporary and conditional events (Zweigert & Kötz, 1998).
The most important aim of comparative law is to offer a better understanding and
familiarity of the legal rule and the institution (Sacco, 1991). This study may assist
business’ managers and other interested persons on a clear understanding of corporate
law and legal rules for better business performance in the future. This research on
minority shareholder protection of Malaysia and Iran is also apt because they share
various key features. Malaysia and Iran have a high degree of corporate ownership
concentration and both jurisdictions have tried to control the corporate markets. They
have also reformed and developed their company law by adopting corporate law reform
in the sense that most large business enterprises can protect the minority shareholders
in the likelihood of crises in the future.
1.6 Limitations and Scope of Study
In evaluating minority shareholder protection in Iran and Malaysia, this comparative
research addresses what particular roles need to better protection of minority
shareholders in Iran and Malaysia. The focus is on three basic rights of minority
shareholders; i.e. right to seek information, rights to voice an opinion and the right to
seek redress. Accordingly, the study analyses relevant regulatory provisions to
determine the current protection of minority shareholders in both countries. As this
thesis uses a doctrinal approach to address minority shareholder protection in these
countries, focusing on an analysis of relevant legislation, regulation and case law, the
relevant academic literature will also be identified and critically assessed.
This study focuses on the shareholders’ decisions rights at company meetings and its
legal development in Iran and Malaysia. This issue is selected because company law in
Iran and Malaysia contains a number of provisions geared towards ensuring
shareholders involvement ex ante with respect to situations where there is a conflict of
interest between shareholders and managers, in other words, where the agency costs are
highest. In this situation, the shareholders may take an action via the GM rather than
the courts. Minority shareholders could be well protected, if the company law provides
effective rules regarding, the requisition of the meeting of shareholders, the members’
resolutions, appointing the board by traditional voting or by the cumulative voting, the
court’s power to order the meetings, company transactions as well as takeovers and
mergers, mandatory bid rule (MBR) and compulsory reacquisitions.
The second focus is on the judicial enforcement of minority shareholders. The study
analyses and compares the minority shareholders personal actions, reprehensive actions
and derivative action in both company laws. Therefore, the similarities and differences
between the minority shareholders remedies and derivative action in Iran and Malaysia
will be highlighted.
The final focus is on the conclusion and recommendation of this research. Overall, this
thesis comprises of six chapters. The first chapter contains the research background,
problem statements, research objectives, significance of the study and methodology.
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1.7 Research Methodology
This study uses qualitative legal research. In qualitative legal research, doctrinal or
theoretical approach is important. In this approach, the researcher utilizes interpretive
tools or legal reasoning to assess legal rule and legal problems, and provide useful
recommendations for further development of the law (Siems, 2015). The basic aim of
doctrinal legal research is to discover, explain, examine, analyses and present, in a
systematic form, facts, principles, provisions, concepts, theories or the working of
certain laws or legal institutions (AnwarulYaqin, 2007).
Furthermore, doctrinal legal research could be conducted in comparative legal research
that engages comparative study of comparable laws or legal institutions from different
jurisdictions. It is useful to learn failures and achievements of the compared jurisdictions
(Huchinson & Duncan, 2012). The researcher provides a systematic exposition of the
rules governing minority shareholders’ rights in Malaysia and Iran, to analyse
relationship between these rules, to explain areas of difficulties and to predict further
development of minority shareholder protection in both countries. There are useful
experiences of company law in Malaysia protecting minority shareholders that company
law of Iran can learn to improve her minority shareholder protection. On the other hand,
some useful experiences of company law of Iran in this area may be applicable to
Malaysia.
1.7.1 Data Collection and Data Analyses
There are some acts, codes, and cases in both legal systems, which could be compared
as primary sources for this study. The CA, the Malaysian Capital Market and Services
Act 2007, the common law and Malaysian cases as well as the ICC, the ICPC 1982, the
uniformity votes and Iranian cases are some examples of them. There are also vast and
growing published and non-published materials that have been written pertaining
minority shareholder protection in the world including legal dictionaries, legal reports,
textbooks, law reform and policy papers, loose-leaf services, journal articles as
secondary data. The focus is on the enforcement mechanisms law in protecting minority
shareholders and their functional equivalent to evaluate differences and similarities
between these rules, to isolate underlying problems, to determine better law for further
development of minority shareholder protection in Malaysia and Iran.
1.7.2 Comparative Study
Comparative study should resolve the unintentional and discordant differences in the
laws of countries at comparable stages of cultural and economic development to
decrease the divergences in law. (Zweigert & Kötz, 1998, p. 2). Comparative legal
research is an aspect of doctrinal legal research, which is used for analysing legal rules,
principles or doctrines and law cases by the application of power of reasoning (Vibhute
& Aynalem, 2009, p. 70). In tandem to the afore description, the aim of this micro-
comparison research is inquiring or finding out the theoretical concepts of the rules and
principles in an attempt to discover or improve the relevant concepts, theories, principles
and application of the rules to improve minority shareholders’ rights in Iranian and
Malaysian legal systems.
This study is a micro comparison about comparing one aspect of law i.e. minority
shareholder protection in at least two jurisdictions of Malaysia and Iran. In addition,
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this research is interested in undertaking comparative law to examine the laws of Iran
and Malaysia to provide ideas and views for future legal development. Reference to
other jurisdictions such as the UK and Australia, which Malaysian company law is
originated from, would be necessary in areas where it is lacking. There are useful
experiences on other common law jurisdictions such as New Zealand, Hong Kong, and
Canada to seek better laws for improvement of minority shareholder protection.
Scholars and lawmakers have also referenced to these countries when they recommend
amending the company law in Malaysia (CLRC, 2007a; Pascoe & Aisha, 2008;
Rashidah & Salim, 2010). For Iranian company law, reference to other jurisdictions
such as French law and other civil law systems, which Iranian company law is
originated from, would be necessary in areas where it is lacking.
A comparative study begins with basic questions that the researcher tries to answer
conducting this study. Questions such as whether better laws occur in other legal
systems? How has a problem been controlled and solved in other legal systems? Are
the existing national laws the best possible laws? Then, the study chooses which
system has enough resources to solve the problem. The economic and cultural common
ground are almost the same and have similar stages in development of both countries.
In addition, the legal unity can be provided and transplanted. All in all, comparative
law involves a particular legal issue, a particular legal problem, different jurisdictions,
enriching the legal system with a new idea, principles, legal perspective, experience
and other possible solutions (Siems, 2015).
1.7.2.1 Functional Method
The basic methodological principle of all comparative law is that of functionality. The
functional method has become as an essential element of comparative law. It can be said
that it is the most, perhaps the only fruitful method of comparative law. In this method,
one aspect of two or more legal systems and their judicial decisions, which are
functionally equivalent, could be compared by researcher (Michaels, 2005). In order to
identify the similarities and differences in the legal characteristics and legal problems of
minority shareholders rights in Iran and Malaysia, this study compares the
comprehensive legal framework of corporate law in both countries that are functionally
equivalent. By using this method, this study answers some questions such as what
aspects of minority shareholder protection in both countries are covered and what aspect
remains uncovered. This assists the study to gain sufficient theoretical and factual
background to develop jurisprudential framework in the area. Furthermore, another
question such as what particular corporate problem is addressed in particular countries is
answered. This assists the study to analyses basic issues of shareholder rights to identify
similarities and differences between general shareholders’ rights and specific minorities’
shareholders rights. Functional method helps the study to analyse the enforcement of
certain minority shareholder rights at company meetings in Malaysia and Iran. Finally,
adequacy of enforcement of the minority shareholders remedies, which have functional
equivalent in Iran and Malaysia, is evaluated.
The functional method is useful in micro-comparison rather than macro-comparison.
The former is the study of a specific institution, topic, or problem, which exists within
legal systems such as minority shareholder protection in Iran and Malaysia. Macro-
comparison, on the other hand, refers to the study of two or more entire legal systems
(Cruz, 2007). In addition, the functional method could be the idea, in which it does not
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make any sense to compare things unless they are comparable. The legal system or
business corporation has a fundamentally similar set of legal features as well as similar
legal problems but the problems are solved by quite different methods, though very
frequently with similar results in all jurisdictions (Siems, 2015). Consequently,
protection of the minority shareholders is, primarily, considered the same issue in
almost every jurisdiction including Malaysia and Iran (Kraakman, 2009; Mantysaari,
2005; Zweigert & Kötz, 1998).
In functional method, the researcher tries to give a sufficiently accurate view known as
the ‘true and fair view’ of the solution in each jurisdiction. The social needs in related
issue by legal rules are also attempted. The social needs and legal rules which can be
useful to solve the problems of minority shareholder protection in different
jurisdictions are identified (Mantysaari, 2005).
Many vital issues arise in this comparative research, such as the relationship between
Western-inspired law and local traditions of Islamic law (Foster, 2006). Malaysia and
Iran have the same background in making Company Laws. Company laws in both
country are modelled upon the Australian Uniform Companies Act 1961 (for Malaysia)
and French Commercial Code (FCC) (for Iran). In other words, the CA is an example
of compulsory legal transplantation because of colonial rule and the ICC is an example
of voluntarily legal transplantation because Iranian lawmakers chose the French model
when code was deduced.
Malaysia and Iran differ in choosing common law and civil law systems. The Common
Law, a system traditionally developed in England adopted and applied in the common
and business law jurisdictions, including Malaysia. Under this system, heavy reliance is
placed on case law and judicial precedents and the legal philosophy is derived from
judicial reasoning. Freedom of the courts lie in what they think is the best rule limited
by precedent. Though the superior courts have power to depart from an established
precedent, such power is used very sparingly because many people have regulated their
affairs on ratio decidedness. Thus, it is prudent to call for legislative intervention (Cruz,
2007).
Malaysia has two broad legal sources; primary and secondary. Primary sources of law
include case law or law that is entirely judicial decisions based and legislation or
materials that the lawmakers approve in statutes, federal and state subsidiary legislation
such as acts of parliament, state enactments, orders, regulations, rules, bylaws,
proclamations and notifications. On the other hand, secondary legal sources include
legal encyclopaedias, case digests, legal citatory, annotators, legal dictionaries,
textbooks, as well as periodicals which aid in the finding, evaluating and understanding
of the various primary materials (Edzan, 2000).
The doctrine of binding precedent has an important role in the Malaysian legal system.
The concept of a binding precedent has remained the common law originated doctrine.
The first conception is stare decisis, which specifies that lower courts forced to put into
practice the legal principles instituted by higher courts in earlier cases. Another notion
could be ration decidendi. This accurately means the views of acquiring such decision.
Conversely, if there is no accessible precedent, it is the obligation of the courts to
affirm the law such as the case would become the original precedent (Edzan, 2000).
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This study will be confined to business law and companies’ law in France, adopted and
applied in the common and business law jurisdictions, including Iran. Under this
system, heavy reliance is rule based and tries to find solutions to the problems before
the court. This system ponders about the accessible enacted rules and statutes applied
to a specified situation. The system also has a liking for planning and regulating
everyday matters as broadly as possible (Zweigert & Kötz, 1998).
There are five principal sources of law in Iran: Islamic law, constitution, legislation,
judicial precedent, custom and doctrine. It is worth to note that, custom and doctrine,
encyclopaedias, case digests, legal dictionary, annotators, legal dictionaries, textbooks
and so on are the secondary sources of law in Iran.
Under the doctrinal civil law provision, a court is required to take past decisions into
account only if there is sufficient “uniformity vote” in the previous case law (Fon &
Parisi, 2006). Following this doctrine, judicial procedures, in a general idea, refer to the
“uniformity vote” of General Board of Supreme Court of Iran. It is same as case law
that applies to the Malaysian legal system. In particular, the concept of the judicial
precedent, decisions of public and provincial courts and branches of the Supreme Court
after being decisive are only binding on the parties and beneficiaries in their relevant
cases and they are not binding on other courts. In other cases, the judges may rely and
shall vote considering them. Therefore, these decisions are secondary sources of law in
Iran.
Custom is a practice that is followed habitually over a long period. Business or
commercial custom is a set of rules, disciplines, and commercial habits that have been
practised by merchants and companies and always have the interest and respect
between them. Therefore, custom is a secondary source of legal issues in Iran. Where
there are no clear law and regulations, it practices and serves as rules of law in business
matters. In fact, in some cases custom has accepted the norm and influenced the laws.
According to Article 3 of the Iranian Civil Procedure Code (ICPC), the courts obligate
to pass judgment in conformity with the law where current laws are unclear,
ambiguous, and contradictory; and if there is no law for that case, the courts must
decide according to the spirit of the law as determined by custom applying in that case.
Doctrine or legal scholars and scientists discuss all aspects of law in their articles and
books. In addition, they analyse the strengths, weaknesses, and ambiguous points of
law and regulations in their writings. As a result, their viewpoints can be drawn as a
source of law that can be used and cited as a secondary source. Doctrine is not
authoritative in Iranian courts, but the Council may use it. As a result, it influences the
courts and legislators (Erfani, 2008).
The merits of mechanisms that those legal systems provide minority shareholders
protection could be useful in the amendment of corporate law in the future. This
research seeks to study the difficulties driven by weak minority shareholder protection
and mechanisms introduced by company laws and other regulations of Malaysia and
Iran in their attempt to strike a balance between shareholders and managers on one
side, and between controlling shareholders and minority shareholders, on the other.
First, it tries to show the wrongdoing that is a result of an inflexible and rigid
understanding of company laws by the board of directors or controlling shareholders. It
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will also result in an appreciation of the problems that might arise for minority
shareholders.
Secondly, it examines the existing reconciliation mechanisms in the two company laws
of Malaysia and Iran in order to identify their strengths and /or weaknesses thereby to
provide recommendations to improve those mechanisms. Thirdly, it points up the
strengths of certain Malaysian company laws particularly relevant cases of corporate
law regarding this relationship that might be of use to its Iranian counterpart. They also
assist the Iranian company law to establish not only efficiently, but also a working
framework which benefits the boards of directors, majority, and minority shareholders.
Finally, it is expected that this comparative analysis of the corporate laws of Iran and
Malaysia would be helpful to enhance minority shareholder protection and reform the
directors-shareholders, majority-minority shareholders’ relationship in these two
countries. The findings of this thesis would be useful for company law of Iran as well
as Malaysia due to the similarities in the social-cultural environment and corporate
ownership structure.
1.8 Summary
Although the provisions elaborating formal minority shareholder protections are
existence in Malaysia and Iran, the fact is that the company law currently in place does
not provide full protection for minority shareholders regarding their three basic rights;
i.e. right to seek information, rights to voice an opinion and the right to seek redress.
The provisions are subject to some ambiguities and shortcomings that lead to weak
minority shareholder protection as an important factor in evaluating the company law in
both countries.
This research aims to investigate the adequacy of laws regarding minority shareholder
rights in Iran and Malaysia. In addition, it aims to provide proper solutions to overcome
the shortcomings of the rules in Iran and Malaysia. By solving the problems, Malaysian
and Iranian legislators and governments will enable the country's businesses to be
competitive and better equipped in dealing with future challenges in the business
environment.
Malaysia and Iran stand out as good choices for this comparative study because these
two Asian and Muslim countries have transformed from an agricultural economy into an
industrial economy for last fifty years. Both these countries are involved in many
international organizations such as the Organization of Islamic Cooperation, D8
countries, and ASEAN Trade Centre. Therefore, this research is hoped to strengthen
minority shareholder protection that is considered a core mechanism for attracting both
foreign and domestic investors.
In this qualitative legal research, doctrinal or theoretical approach is important. The
researcher tries to provide a systematic exposition of the rules governing minority
shareholders rights in Malaysia and Iran, to analyse the relationship between these rules,
to explain areas of difficulties and to predict further development of minority
shareholder protection in both countries. In this comparative legal research, functional
method, which is the only fruitful method of comparative law, one aspect of two legal
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systems i.e. minority shareholder protection, which are functionally equivalent, is
compared by the researcher (Michaels, 2005; Zweigert & Kötz, 1998).
CHAPTER 2
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