Malaysia – Members’ Rights For Management Review.

24 July, 2019

 

Introduction

 

One of the key changes introduced by the Companies Act 2016 (“CA 2016”) is the introduction of the members’ rights for management review under section 195 of the CA 2016 (“Section 195”). Section 195 reads as follows:

 

“195. Members’ rights for management review 

 

1. The chairperson of a meeting of members of a company shall allow a reasonable opportunity for members at the meeting to question, discuss, comment, or make recommendation on the management of the company. 
2. A meeting of members may pass a resolution under this section which makes recommendations to the Board on matters affecting the management of the company.
3. Any recommendation made under subsection (2) shall not be binding on the Board, unless the recommendation is in the best interest of the company, provided that —
   1. the rights to make recommendations is provided for in the constitution; or
   2. passed as a special resolution.”

 

Section 195 was considered by the High Court in Majlis Amanah Rakyat (MARA) v Dato’ Abd Rahim bin Abd Halim¹.

 

Brief facts 

 

A conflict arose between the directors and shareholders of Med-Bumikar Mara Sdn Bhd (“Med-Bumikar”) over UMW Holdings Berhad’s offer to purchase the 49.5% shares held by Med-Bumikar in MBM Resources Berhad (“MBMR”) at a consideration of RM2.56 per share (“UMW Offer”).
 
MARA owned 29.18% shares in Med-Bumikar whilst the remaining shares in Med-Bumikar were held by other minority shareholders. MBMR (which was 49.5% owned by Med-Bumikar) held 22.58% interest in Perusahaan Otomobil Kedua Sdn Bhd (“Perodua”).
 
On 8 March 2018, the board of directors of Med-Bumikar (“the Board”) consisting of seven directors resolved to appoint an independent financial advisor to advise the Board on the UMW Offer. Meanwhile, MARA issued a requisition notice (“Requisition Notice”) to the Board to convene an extraordinary general meeting (“EGM”) to pass the following two ordinary resolutions: 

 

1. to accept the UMW Offer (“EGM Resolution 1”); and
2. to appoint two additional directors (“MARA-aligned Directors”) to the Board (“EGM Resolution 2”) (collectively, “the EGM Resolutions”). 

 

On evaluating the UMW Offer, the financial advisor took the view that the UMW Offer was fair but not reasonable. It made no recommendation on the acceptance or rejection of the UMW Offer. However, upon receiving the advisor’s evaluation, the Board resolved at a meeting of directors dated 26 March 2018 to decline the UMW Offer; and to reject the Requisition Notice.
 
The Board also resolved through a circular resolution to appoint two additional directors to the Board, resulting in a total of nine directors — being the maximum number of directors permitted under Med-Bumikar’s constitution.
 
Notwithstanding the rejection of the Requisition Notice, MARA convened an EGM pursuant to section 313(1) of the CA 2016 and both the EGM Resolutions were unanimously carried by the shareholders present and voting, as the shareholders resolved to accept the UMW Offer and to appoint the MARA-aligned Directors to the Board.
 
MARA then initiated proceedings to invalidate the Boards’s appointment of the two additional directors via circular resolution. The Board and Med-Bumikar counterclaimed for, amongst others, a declaration that the management and control of the business and affairs of Med-Bumikar were within the exclusive purview of the Board.

 

Decision of the High Court

 

Although the Board had the power to appoint additional directors pursuant to Med-Bumikar’s constitution, the Court held that the power was not exercised for a proper purpose as the real reason of the Board’s appointment of the two directors was to prevent MARA from appointing the MARA-aligned Directors. Therefore, the appointment of the two directors by the Board was invalid.
 
In respect of the EGM Resolution 1, the Court held that it is not open to the shareholders in the EGM to bind the Board to act in a particular manner. Section 211(1) of the CA 2016 provides that the business and affairs of a company shall be managed by, or under, the direction of the Board.

 

Further, pursuant to section 211(2) of the CA 2016, subject to the CA 2016 and the constitution of the company, th Board has all the powers necessary for, amongst others, the management of the business and affairs of the company.

 

In addition, Article 118 of the Med-Bumikar constitution provides that the management and control of the business and affairs of the company shall be vested in the directors.

 

The power to manage a company is vested in the directors². However, as stated in section 211(2) of the CA 2016, such power is subject to the CA 2016 and the constitution of the company³. Section 195 allows shareholders to participate in the company’s management provided that the following requirements under section 195(3) of the CA 2016 are satisfied:

 

1. the right to make a recommendation must be provided for in the company’s constitution;
2. the recommendation must be passed as a special resolution; and
3. the recommendation must be in the best interests of the company.

 

Consequently, shareholders of companies which do not adopt a constitution pursuant to section 31(1) of the CA 2016 should take note that their recommendation to the directors would not be binding as the default provisions in the CA 2016 on the rights and obligations of the company, directors and shareholders do not allow members in a general meeting to direct the Board on the management of the company.

 

Therefore, for a recommendation to be binding on the Board, shareholders should get the company to adopt a constitution or to amend its constitution so that it expressly provides for the right for shareholders to make a recommendation.

 

Notwithstanding the High Court’s decision in MARA v Dato’ Abd Rahim, it remains unclear as to how the provision(s) in the company’s constitution should be drafted to provide shareholders with the right to make a binding recommendation, and whether the scope of the recommendation can be qualified by the other parts of a company’s constitution.

 

Therefore, from the shareholders’ perspective, the relevant provision(s) should be drafted in the widest possible terms and closely based on Section 195.

 

Directors should note that they must not adhere to the shareholders’ recommendation blindly as the recommendation must be in the best interests of the company. Directors owe a duty to the company under section 213(1) of the CA 2016 to exercise their powers for a proper purpose and in good faith in the best interest of the company. Therefore, directors must exercise their judgment to ascertain if the shareholders’ recommendation is made in the best interests of the company.

 

It remains to be seen as to how the courts would interpret the best interests of the company in the context of Section 195. One approach is for the courts to apply the standard expected of directors who must act in the company’s best interests as the test of best interest in the context of Section 195. This is because the binding recommendation will still need to be implemented by the directors and, accordingly, the best interests test under Section 195 should be the same.

 

If this is the case, the best interests test under Section 195 will contain both subjective and objective elements⁴. The subjective element is whether the director considers that the exercise of his or her discretion is in the best interest of the company⁵; while the objective element in the test is “whether an intelligent and honest man in the position of the director of the company concerned, could in the whole of the existing circumstances have reasonably believed that the transactions were for the benefit of the company”⁶.

 

Conclusion

 

Shareholders must ensure that the prescribed requirements under section 195(3) of the CA 2016 are satisfied before they can make a binding recommendation to the company’s board of directors. Directors must ensure that their actions pursuant to the binding recommendation are performed in the best interests of the company.

 

 

For further information, please contact:

 
Lee Yuan Yao, Shearn Delamore & Co​

yuanyaolee@shearndelamore.com

 

1. [2019] 7 MLJ 381.
2. Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra v Petra Perdana Bhd [2018] 2 MLJ 177.
3. Section 211(2) CA 2016.
4. [2018] 2 MLJ 177.
5. In re Smith & Fawcett, Limited [1942] Ch 304.
6. Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62.