Director Duties, Shareholder Rights And Board Powers With Regard To The Malaysian Companies Act 2016: A Case Study Discussion And Approach

By Author: Premkumar Nadarajan.
Total Articles: 26
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XYZ Berhad (XYZ), is a public-listed investment holding company. In turn, XYZ owned approximately 63.99% of the shares of the public-listed entity, XYZ Energy Berhad (XYZEB).Both companies had been registered and incorporated under Companies Act 1965.Three possible defendants ( if a court action is taken) were previously directors of XYZ. The first was the Executive Chairman and CEO, while the second and third likely Defendants were non-executive directors. The starting point of the dispute was a particular shareholders’ resolution of XYZ. The shareholders had passed an ordinary resolution imposing certain restrictions on the directors for XYZ to sell the XYZEB shares. Some of the restrictions were that any sale was for cash and with a maximum 10% discount. This general mandate imposed by the shareholders were renewed annually by the shareholders in general meetings. XYZ experienced cash flow problems. The XYZ directors decided to sell a significant number of the XYZEB shares that the company owned. This was in order to quickly raise funds to alleviate the cash flow problems. The sale was carried out through two divestments ...
... of the XYZEB shares. The sale of these shares did not require any statutory approval of the shareholders as it was not a substantial portion of the company’s assets. However, this sale did not comply with the restrictions set out in the shareholders’ mandate. Eventually, there was a shareholder dispute at XYZ. This led to the Defendants being removed as directors of the company. With new management in place, XYZ’s Directors intends to file a suit against the now-removed directors. While perusing the wordings of the Articles of Association of the company, the present directors found these important phrases: “…business of the company shall be managed by the directors….being not inconsistent with the aforesaid regulations or provisions as may be prescribed by the company in general meeting. “Before going to court, the new directors of XYZ come to you for advice on the following matters: i) criteria of disqualification of a director under the Companies Act 2016.Under section 198(1) of Companies Act 2016, a person shall not hold office as a director if the person: is an undischarged bankrupt (s198 (1) (a)); has been convicted of an offence relating to the promotion, formation or management of a corporation. ( s198(1)(b) ) ;has been convicted of an offence involving bribery, fraud or dishonesty ( s198(1)(c) );has been convicted of an offence under section 213,217,218,228 and s539 ( s198(1) (d) );has been disqualified by the Court under s199. ( s198(1)(e) ).Under section 199, the Registrar can apply to court for an order to disqualify a person from acting as a director if: within the last five years, the person has been a director of two or more companies which went through liquidation resulting from the company being insolvent due to his conduct as a director which contributed wholly or partly to the liquidation ( s199(1)(a) );due to his contravention of the duties of a director ( s199(1)(b) );due to his habitual contravention of the 2016 Act. (s199 (1) (c)).Advice is also required on the director’s duty pertinent to this question under the Companies Act 2016 and the possible legal issue in this question. A director is required at all times to exercise his powers in accordance with the 2016 Act for a proper purpose and in good faith in the best interest of the company ( s213(1) ).In acting in the best interest of the company, the said director is in the capacity of a fiduciary or trustee ( Court of Appeal in Zaharen bt Zakaria v. Redmax Sdn Bhd & Other Appeals [2016] 5 MLJ 91, CA).The issue is whether the ex-directors had breached s213(1) by failing to act in the best interest of the company when the shareholders having passed certain resolutions to set a limit on the divestment of certain company assets namely the shares XYZ held in XYZEB;The directors exceeding these limits when divesting the shares; therefore the direct issue here is whether as a general proposition, can shareholders pass resolutions to decide on matters within the directors power of management ( Automatic Self-Cleansing Filter Syndicate Co Ltd v. Cunningham [1906] 2 Ch 34 ) Since both companies were incorporated and registered under the 1965 Act, the question arises as to whether the Articles of Association are still relevant under the 2016 Act. For companies with memorandum and articles of association (M & A) which were incorporated under Companies Act 1965, according to section 619(3) of the 2016 Act, their M & A remains valid and enforceable unless otherwise resolved by the company. The said companies may decide whether to revoke entirely the M & A or amend certain clauses. If the existing company decides to revoke the existing M& A and NOT have a specific constitution, the company must pass a resolution to that effect. In that scenario, under section 31(3) of the 2016 Act, the company, each director and member shall have the rights, powers, duties and obligations as set out in the Companies Act 2016. Similarly, a company must also pass a resolution to amend any part of its constitution should the company wish to harmonise its constitution with the provisions of the 2016 Act. Under the general transitional provisions (section 619(3)) existing companies may contract out from its M& A by passing a resolution to that effect. If the company wants to amend, abolish or alter its constitution, then the company must pass a separate resolution each for i) amending the constitution ii) abolish the constitution; or iii) alter its M& A or constitution by simultaneously replacing them entirely with a new constitution ( section 36(1) of the 2016 Act )If the company had upon the onset of the 2016 Act abolished the constitution pursuant to section 36 Companies Act, the company can adopt a new constitution at a later date , by passing a resolution as per section 32 of the 2016 Act. The date of adoption shall be the date of the resolution. The resolution must be a special resolution and a copy lodged with the Registrar of Companies within 30 days of the adoption. (section 32 Companies Act 2016)Last but not least it is necessary to discuss as to whether the shareholders at the end of the day override the management powers of the Board. The factual circumstances of this question is very similar to the Federal Court case of Tengku Dato’ Ibrahim Petra Tengku Indra Petra v. Petra Perdana Berhad & Another Case [2018] 1 MLRA 263. (Petra case) ( Court of Appeal decision found in [2015] 8 CLJ 856 CA.The Federal Court in the Petra case restored the conventional position that shareholders in general meeting cannot control the power of management conferred by the articles of association or a board of directors. Shareholders can only do so by altering the articles to take away the powers of the board. Alternatively, if the opportunity arises, the shareholders can refuse to re-elect the directors whose actions they disapprove. This legal position is further reinforced by section 211 of the Companies Act 2016 ( previously section 131B of the 1965 Act ) Section 131B of the 1965 Act was inserted to emphasise that the “business and affairs of a company must be managed by or under the direction of the board of directors. Such management of the company is related to the statutory business judgement rule presently in section 214 of the 2016 Act (section 132(1B) of Companies Act 1965), the Federal Court in the Petra case stated that the court would not second guess the merits of a commercial/business judgement made by directors as long as the directors acted bona fide. The Federal Court in the Petra case did note that under the present 2016 Act , section 195(3)(b) states that if the shareholders pass a special resolution and it is in the best interest of the company, such a recommendation would be binding on the directors.

lecturer at a private learning institution ( UTAR).