The Novel Laws On Shareholders’ Meetings Affecting Minority Shareholders In Malaysia

Abstract

The purpose of this paper is to examine the potential impact of “Written Resolution” and “No Annual General Meeting” concepts on the minority shareholders in a private company. It surveys the state of the law on shareholders’ meeting as a form of corporate governance before the new concepts were introduced by the Companies Act 2016 on 31st January 2017 and compares it with the latter This paper argues that the new concepts should not have been introduced without any protective measures being provided for the minority shareholders in a private company as a matter of good corporate governance. In this respect, references will be made to similar law on the new concepts and safeguards introduced in the Singapore Companies Act and other similar laws in the Commonwealth countries such as Australia. This paper seeks to identify protective measures for law reform purposes. It will also explore potential practical measures being employed and potential problems faced by private companies registered before the coming into force of the Companies Act 2016, where the annual general meetings are part of its corporate governance system.

Keywords: Companies Act 2016minority shareholdersno annual general meetingprivate companieswritten resolutions

Introduction

In Malaysia, the Companies Act 2016 (“CA 2016”), was gazetted on 15th September 2016 and, save for the corporate rescue provisions on judicial management and corporate voluntary arrangement together with the provision on registration of company secretaries, came into force on 31st January 2017. It represents a comprehensive overhaul of its company law by repealing the Companies Act 1965 (“CA 1965”) and introduces novel areas of law for private companies in the form of “written resolutions” and “No Annual General Meeting” (“No AGM”) concepts which have a large bearing on the law on shareholders’ meetings. Shareholders are one of two organs of a company, the other one being the directors, the decisions of which become that of the company which is in law, a separate legal entity. In Continental Tyre & Rubber Co (Great Britain) Ltd v Daimler Co Ltd (1915) 1 KB 893, p. 916, it is said that a company has ‘neither body, parts nor passions… Apart from its corporators, it can have neither thoughts, wishes, nor ‘intentions, for it has no other mind than the minds of the corporators’. The decisions of a company in general are resolved and made by the directors at board meetings and by the shareholders at an annual general meeting (“AGM”) and general meetings. The Singapore Court of Appeal in Gabriel Peter & Partners (suing as a firm) v Wee Chong Jin & Ors (1998) 1 SLR 374, p. 385, observed that: “It is a fundamental concept in company law that the company acts through its organ. The two organs of the company are the board of directors and the members of the company in general meeting. The acts of the two organs are deemed to be acts by the company itself. The decisions of the members are expressed through resolutions passed in general meeting. Similarly, decisions of the board of directors are reflected in the resolutions of the board. A board resolution is passed by a simple majority of the directors present at the board meeting”. Under section 143 of CA 1965, all companies, private and public companies limited by shares, are required to hold AGMs: i. the first one must be held within 18 months of its incorporation; ii. Subsequent AGM must be held once in every calendar year; and iii. Each subsequent AGM must be held not more than 15 months after the last preceding AGM. The importance of having an AGM, especially to the minority shareholders, lies in the type of business being conducted as laid down by the law in sections 169 and 172 of CA 1965 and model article 46 in the 4th Schedule of CA 1965 (“Table A”), which are as follows: i. the laying of the audited financial statements of the company as well as the directors’ report on the performance of the company; ii. Declaration of dividends to be paid to the shareholders; iii. Election of directors in place of those retiring; and iv. The appointment and fixing of the remuneration of the auditors. The basis for the company having an AGM was explained by Holland J in the New Zealand case, In the matter of The South British Insurance Company Ltd (1980) ACLC 34419, p. 34421: “An Annual Meeting of the shareholders of a company is an important event. Not only is there a statutory obligation on the company to call such a meeting, it contracts with its shareholders by its articles of Association that it will do so. It is the one occasion in the year when the shareholders have a right to meet the Directors or their representatives and to question them on the company’s accounts, the Directors’ Report and the company’s position and prospects. In addition they have a right to vote on, and if appropriate discuss, resolutions as to dividends and the election of Directors”. The explanation of Holland J was premised on the situation where the shareholders are not the directors of the company and thus, would not be in a position to gain access to information regarding the audited financial statements and performance of the company including those of the directors. In many private companies, in practice, not all shareholders are directors of the companies, especially those who are in the minority.

Problem Statement

While the directors are given powers to run and manage the companies, their appointment and removal are ironically, subject to the wishes of shareholders. In a private company, the controlling shareholders would invariably appoint themselves as directors and leave the minority shareholders in a different camp stranded without a say in the management of the company. The ability of a company to function and operate is based on the majority rule and a shareholder’s power to vote is not a fiduciary power and therefore a shareholder owes no duty to anyone on the exercise of his power to vote (Tuan Haji Ishak Bin Ismail & Ors v Leong Hup Holdings Bhd, (1996) 1 MLJ 661, p. 696; Paidiah Genganaidu v The Lower Perak Syndicate Sdn Bhd & Ors, (1974) 1 MLJ 220, p. 221). This is the crux of the problem faced by a minority shareholder in a private company. The principle of majority rule rests on superiority in shareholdings rather than on the superiority in physical numbers. However it is more accurate to ascribe to the superior group as having ‘control’ in the company even though they may not have the 51% shares since the shareholders in the opposing group may not be united. The concept of ‘control’ was accepted by Edgar Joseph Jr (as he then was) in Tan Guan Eng v Ng Kweng Hee [1992] 1 MLJ 487, p. 499, to “embrace a broad spectrum of positions within a company and that control could arise as the result of indifference or apathy”. It is recognised that in Malaysia, the substantial shareholder usually controls the company through his or her involvement in the board and/or management (Mohd Sulaiman & Rachagan, 2017, pp. 216-217).The shareholders’ meetings provide opportunities for the shareholders to meet and debate issues with a view to passing resolutions which form the basis of the decisions of companies. The manner in which the fate of any proposed resolution is decided depends on the votes cast by the shareholders at the meeting. The framework of the law generally provides each shareholder with one vote per share and the outcome of the voting process is determined by a majority of the shareholders who are eligible to vote, as observed by the Federal Court in Paidiah Genganaidu v The Lower Perak Syndicate Sdn Bhd & Ors (1974) 1 MLJ 220, p. 221: “What is beneficial to the company as a whole is usually a matter for the shareholders to decide. Largely it is a matter of opinion. Where opinions differ, as might well be the case here, the opinion of the majority must, of course prevail. This is because the minority have by their contract with the company agreed to submit to the will of the majority”. The position of minority shareholders are vulnerable and it is through meetings with access to information on the audited financial statements of the company and the accountability of the directors in answering questions that their interests may have some protection, given that very little protection is left without having to resort to court for the remedies provided under statute such as oppression proceedings. Raja (2014, p. 163), regarded the majority rule as creating an opportunity to oppress minority shareholders. While Talbot (2013, p. 167) in her writings opined that one of the key areas in company law for corporate governance is minority shareholders’ protection and noted (2013, p.42) that the doctrine of ultra vires used to have potential significance to deliver corporate governance for the minority shareholders but it has been removed which is a sign of further erosion of the protection afforded to minority shareholders. In Malaysia, section 21 of the CA 2016 grants companies with unlimited capacity to carry on or undertake any business or activity thus making redundant the doctrine of ultra vires. Thus, any further erosion of minority shareholders’ protection is a setback for corporate governance.

Research Questions

The CA 2016 was passed based on recommendations made by the Corporate Law Reform Committee (“CLRC”) (Abdul Aziz, 2012), which was established by SSM (Companies Commission of Malaysia) on 17th December 2003 to undertake the task of company law reform, which resulted in several reports being published, in the form of twelve Consultative Documents. Other than those reports, ‘no comprehensive study has been undertaken on the Act [CA 1965] since its enactment in 1965 (Joshi, 2016). On the matters pertaining to the law on shareholders meeting, the CLRC came up with a detailed study in the form of Consultative Document No. 3 (2006). The Consultative Document No.3 relates to the shareholder engagement process, particularly in the area of shareholders meetings and other avenues to facilitate shareholders engagement. The principal issues covered by the study include the process of shareholders meeting such as the calling of a meeting, rights of shareholders in the meeting process and appointment of proxies. Due to the common company law ancestry as shared with the UK, Australia, New Zealand and Singapore, the CLRC in conducting its study referred to the changes made in the company law in those countries with particular reference to the recommendations made in their respective company law reform reports. Although the law on shareholders’ meetings in Malaysia has been discussed in local literature (Salim & Ong, 2009) with references to the Consultative Document No.3 however certain issues such as “Written Resolution” and “No AGM” were not mentioned but it is now part of the law in the CA 2016. Thus, local material on the concepts of “Written Resolutions” and “No AGM” are seriously lacking. Accordingly, the research question that arises from this paper is whether the “Written Resolutions” and the “No AGM” concepts will reduce the rights of minority shareholders in private companies.

Purpose of the Study

Companies are generally of two types, private and public. Under section 2 of the CA 2016, private company means either a company which was incorporated as a private company under this Act or a company incorporated as a private company under the CA 1965. A common feature of a private company under the CA 2016 in section 42 and the CA 1965 in section 15, is that the limit of its membership is set at not more than fifty shareholders. The CA 2016 changes the present law on shareholders’ meetings with the introduction of ‘Written Resolutions’ and ‘No AGM’ for private companies only, even though the membership can reach a maximum of fifty shareholders. Those changes brought about are significant in that statistically about 99 per cent of the total local companies registered per year with the Malaysian Companies Registry are private companies. The Annual Report of Suruhanjaya Syarikat Malaysia (“SSM”) (Companies Commission of Malaysia) (2014, p. 182) provided the following statistics set out in Table 1 . The aim of this paper is to examine the potential impact of “Written Resolutions” and “No AGM” concepts on the rights of minority shareholders in a private company.

Research Methods

The methodology employed in this paper is doctrinal – “doctrinal research” is described as a core legal research method which involves “research into the law and legal concepts” (Hutchinson and Duncan, 2012, p. 85). The approach taken is based on evaluating the provisions contained in the CA 2016 by reference to case reports, wordings in the particular provisions in the Act and their interpretation as well as legal literature including but not limited to books, journals and law reform reports or consultation documents. The methods used in this paper are a historical and comparative study of similar company laws in other Commonwealth countries such as the UK, Singapore and Australia. This is done for obvious reasons that the changes made by the CA 2016 have been made after a study was conducted on the various law reform reports completed in those countries accompanied by resulting changes in their company law legislation. An examination of the CA 2016 using the comparative method will show whether the particular provisions such as the “written resolution” and “no AGM” are suitable for private companies and the minority shareholders in Malaysia. In the process of the examination, it will address the concerns of the law reformers in other countries on the use of similar provisions. The historical method gives an understanding of the position and the rationale in having an AGM and will provide a platform to evaluate the drastic change made to eliminate altogether the obligatory requirement of AGMs for private companies, more so without any safeguards for the minority shareholders.

Findings

Conclusion

Both the new concepts of law introduced by the CA 2016, “Written Resolutions” and “No AGM” may be useful for small private companies with five or so shareholders. In such small sized companies, the shareholders are also acting as directors or have roles to play in its management. Since they are directly involved in the decision-making process of the companies, they are in a better position to have access to all the relevant documents or the personnel in the company. In the larger private companies, it would be unwieldy to accommodate all shareholders onto the board of directors with the consequence of only a handful of shareholders serving the board of directors. For these companies, the minority shareholders’ position are considerably weakened by those two new law concepts which have found favour in the western countries such as the UK and Australia. On the matter of using the UK company law model as a point of reference, it is noteworthy to reproduce these comments made on the UK company law in the New Zealand Law Commission report of 1989, which preferred the Canadian company law model as a reference to reform its company law (Patfield, 1995, p. 208): “With United Kingdom company law now increasingly influenced by European law, it no longer provides an obvious model for us.” Similarly, in Singapore, the amendments to the Companies Act have relied less on the UK company law developments and are more of a product to suit the local conditions (Wang, 2014, pp. 28 & 31). It has been noted that additional factors accounting for the difference in the corporate laws in other Commonwealth countries such as Australia and India as compared with that in the UK include the differences in the political and cultural make-up of each country (Anderson et al., 2012, p. 200). The Singapore model has tempered the drastic nature of the two new types of law, in the case of “Written Resolutions” by allowing a single shareholder or shareholders with at least five per cent of the total voting rights of the shareholders to timely demand for a meeting where debates will ensue on the appropriateness of passing the proposed resolution with the earlier passed written resolution being invalid after the demand is made. In the other case of “No AGM”, a single shareholder, is empowered to have an AGM called in a particular year even after AGMs are previously dispensed with by unanimous consent. The Singapore model has balanced the interests of all shareholders by requiring a unanimous resolution for dispensation of AGMs. Further, the decisions on whether AGMs are to be dispensed with, should be left to the shareholders rather than have it abolished, recognizing the importance of the AGM as an accountability mechanism. The Singapore model is more appropriate to be adopted in Malaysia since it has taken into account the interests of both the majority/controlling and minority shareholders bearing in mind the need for good corporate governance to restrict the hands of controlling shareholders in emerging countries such as Malaysia (Uzma, 2016, p. 304). Therefore, the potential impact of the novel law of “Written Resolutions” and “No AGM” is a further erosion of the rights of minority shareholders in private companies and these concerns should be addressed at future law reforms. The law reformers need not look far for a solution, after all those safeguards were proposed by the CLRC, which was adopted from the Singapore model.

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