Shareholder Derivative Action Steps

Your client, WZS Berhad, a public listed company in Malaysia has several disputes as *% shareholder in a company called Angleterre Sdn. Bhd. (“Angleterre”), with the minority shareholder (*%) known as CSS Pte. Ltd., a company incorporated in Singapore. The disputes are ongoing and involve arbitration proceedings between the shareholders of Angleterre. You are informed that the shareholders of Angleterre had entered into a Shareholders Agreement in * that purportedly set the following terms: a. That the Board of Angleterre shall comprise of * Board members with CSS Pte. Ltd. appointing * Board members and WZS Berhad appointing * board members; b. No reserve matters were stated in the Shareholders Agreement; and c. That any disputes arising from the Shareholders Agreement shall be resolved by arbitration to the Asian International Arbitration Centre in Kuala Lumpur and be determined by * arbitrator.

In January *, WZS Berhad, having majority shareholding proceeds to appoint * board members to the board of Director of Angleterre, thus increasing the number of board seats to * seats. This essentially changes the voting dynamic of the board of directors of Angleterre. Incidentally the contents of the Shareholders Agreement are not reflected in the Constitution of Angleterre. This owing to the fact that the shareholders had never undertake to amend the Constitution of Angleterre. The Constitution does not set a maximum number of board members. CSS Pte. Ltd. immediately filed for an injunctive relief in the Kuala Lumpur High Court to seek to restrain WZS Berhad from appointing the * new directors of Angleterre. Parties thereafter mediated their dispute, and a Consent Judgment was entered, where WZS Berhad may maintain the * new directors, but only * may vote in a board meeting of Angleterre.

The parties then referred the dispute with regards to their right to appoint directors to arbitration. That dispute is ongoing and centres on the premise of whether or not the Shareholders Agreement or the Constitution of Angleterre takes precedence with regards to the rights of shareholders to appoint board members. The Chief Executive Officer and the Legal Manager of Angleterre thereafter instruct the company secretary of Angleterre to remove * of the WZS Berhad appointed board members from the board of Angleterre. The company secretary refuses to do so initally, but shortly thereafter removes the * of the WZS Berhad appointed board members from the board of Angleterre. The board of directors, now under the control of CSS Pte. Ltd., thereafter, undertakes management of Angleterre and proposes that Angleterre take a US Dollar * million loan from a Singaporean company. It is not known whether said lending entity has a moneylending or financial services license.

The loan is to be secured by both tangible and intangible assets (intellectual property) of Angleterre. In the event Angleterre defaults on its loan repayment obligations, the charged assets shall be transferred on owned by the singaporean entity to dispose off as it deems fit and to recover the money due to it. It is to be noted here that Angleterre’s business is the manufacturing of silicon chips and the industry it is in is heavily reliant on novel intellectual property, which Angleterre has developed and is used to make silicon chips and sell the said chips to its customers. WZS Berhad is extremely worried as to the dangers such a loan represents. It says that Angleterre taking on this loan will severely affect its interests in Angleterre, both monetarily and reputationally.

It says that as it stands, Angleterre does not have the cash flow to repay this loan and the loan maybe a ploy for CSS Pte. Ltd. to backdoor acquire the tangible assets and intangible assets of Angleterre in the event the ongoing arbitration decision is not in CSS Pte. Ltd’s favour. Angleterre is a company valued at RM * billion.

WZS Berhad appoints you to act on their behalf to prevent Angleterre from obtaining the USD * million loan and seeks your advise and strategy to prevent it.

With regards to the above matter, to act as WZS Berhad lawyer, How can a shareholder initiate a derivative action against another shareholder? Justify arguments with legal principles and case law.

With regards to the above matter, to act as WZS Berhad lawyer, what are the steps for a shareholder, which is WZS Berhad to initiate a derivative action against another shareholder? Justify arguments with legal principles and case law.