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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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