Fraud on the Minority

By Taqyuddin Kadir

As discussed in the previous articles, the company law provides the minority shareholders with legal protection. Such protection is required due to the fact that Fraud on the Minority Shareholders is potentially excused or set aside by the Majority Shareholders through General Meeting of Shareholders mechanism. However, this mechanism will not result in fair resolution for the minority shareholders. Because, the application of Majority Rule Principle or One Share One Vote Principle always favor the majority shareholders including their nominated directors of the company.

Minority shareholders have the right to seek for remedies or legal protection using their derivative rights or taking derivative action in case that Fraud on the Minority Shareholders occurs. And, the directors shall be liable for any injury suffered by the company or minority shareholders. Derivative Action is a legal action may be taken by minority shareholder (at least 10 % shareholder) in the court, on behalf of the company against the direcor who fails to act in the best interest of the company and damages the company.

Director(s)' authority to represent the company doesn’t necessarily mean representing majority shareholders’ interest. Instead, the directors shall act in the best interest of the company with full responsibility and good faith. Failing to act in the best interest of the company may lead to personal liability, if such failure damages the company.

Putting in priority directors’ own personal interest or majority shareholders interest against the company’s interest, is both against fiduciary duty and may lead to the so called, “fraud on the minority shareholders”.

As we know, fraud on the minority shareholders normally exists in the form of; (i) the directors ignore and deny the right and interest of the minority shareholders and (ii) such director’s misconduct gives benefit to the majority shareholders and damages the company;