A Review of the Companies Bill 2013 - Part III

A REVIEW OF THE COMPANIES BILL 2013 - PART III

Sheba and Ai Hsian continue our review of the Companies Bill 2013

We commenced our review of the Companies Bill 2013 ("Bill") in Legal Insights 3/13 and 4/13. We continue our review by examining the provisions of the Bill that relate to directors and meetings.

DIRECTORS

"Shadow Director"

The Bill defines a "director" to include "any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the majority of directors of a corporation are accustomed to act ..."

According to the Corporate Law Reform Committee ("CLRC"), the corresponding definition of a "director" in the Companies Act 1965 ("CA") makes it practically impossible to hold a person accountable to the company since it must be proven that the entire board (i.e. every director) is accustomed to act in accordance with that person's instructions or directions.

The inclusion of the word "majority" is in line with the recommendations of the CLRC and reduces the requisite threshold for establishing that a person is a "shadow director".

Requirements for "Directors"

Clause 195 of the Bill sets out the requirements of a director. The Bill permits a private company to have only one director (clause 195(1)(b)), and a public company to have at least two directors (clause 195(1)(c)). The minimum number of directors must ordinarily reside in Malaysia, i.e. have his principal or only place of residence in Malaysia (clauses 195(3) and (4)).

The CA does not specify the minimum age for a director but requires him to be "of full age". This is clarified in clause 195(2) of the Bill which expressly requires a director to be at least 18 years of age.

The Bill also removes the age limit of 70 years for directors of a public company and its subsidiaries prescribed in section 129 of the CA.

Share Qualification

Section 124 of the CA, which prescribes the time-frame for a director to fulfil the shareholding qualification, if any, specified in the articles of association of his company, will be removed by the Bill. As a result, a company which intends to impose any share qualification on its directors will have to incorporate such requirement in its constitution.

Resignation of Directors

The articles of association of a company usually confer a right on a director to resign from office. Regulation 72(e) of Table A (Fourth Schedule) of the CA ("Table A") provides that a director's resignation takes effect by him giving written notice of his resignation to the company. There is no requirement for any further act, such as acceptance by the company, unless provided otherwise by the articles.

However, an issue that a director may face is that his resignation is not made public, and in some cases, the necessary information or documents (i.e. the updated return in the particulars of the directors in Form 49) are not lodged by the company with the Registrar. This issue arises as the CA only allows the company, and not the director who has resigned, to file the Form 49. As a result, this may cause difficulties to the director who still remains on record as a director despite his resignation.

The Bill introduces a provision which states that a notice of resignation given by a director is effective when it is delivered to the company or at a later time specified in the notice (clause 207(3)). This, however, does not address the foregoing issue as regards the notification of such resignation to the Registrar. The Hong Kong Companies Ordinance (section 464(3)) and the Singapore Companies Act (Cap 50) (section 173(6A)) have addressed this by allowing the resigning director to lodge the requisite notice with the Registrar if he has reasonable grounds to believe that the company will not do so.

Directors' Duties, Responsibilities and Penalties

The provisions of the CA as regards directors' duties and responsibilities (such as the duty to exercise powers for a proper purpose and to act in the best interest of the company) are generally mirrored in the Bill. However, the penalties under the Bill for contravention of such provisions have increased significantly. For example, a director who fails to exercise his powers in the best interest of the company will be liable to imprisonment for a term up to 10 years or a fine up to RM10 million or both.

Proceedings of the Board of Directors

Subject to a company's constitution, the provisions in the Fourth Schedule of the Bill will govern the proceedings of the board of directors (clause 228). The Fourth Schedule of the Bill is a more concise version of the corresponding provisions in Table A.

Directors' Remuneration

The CA does not have any specific provision to regulate the manner or quantum of remuneration for directors as this is generally left to the company to determine (see regulation 70 of Table A which provides that the remuneration of directors shall from time to time be determined by the company in general meeting).

The Courts usually do not intervene in this matter as it is deemed to be a management matter to be determined in accordance with a company's articles of association (see Re Halt Garage (1964) Ltd [1982] 3 All ER 1016 and Low Tien Sang & Sons Holding Sdn Bhd & Ors v How Kem Chin & Ors [2000] 2 MLJ 334).

Among the changes to be introduced under the Bill are the requirement for directors' remuneration to be approved by the members of a company and the right to inspect directors' service contracts.

Clause 229(1) of the Bill requires the remuneration and any benefit payable to a director of a public company to be approved at a general meeting.

In the case of a private company, subject to its constitution, the board may approve such remuneration and benefits (clause 229(2)). If the members of a private company who hold at least 10% of the total voting rights consider that the payment is not fair to the company, they may within one month after being notified of such payment, require the directors to pass a resolution either by way of a members' written resolution or at a general meeting to approve the payment (clause 229(4)).

Clauses 231(1) and (2) of the Bill require a public company to keep available for inspection a copy of every director's service contract (including any amendments thereto) with the company or with its subsidiaries at its registered office. Copies of such contracts must be retained and kept available for inspection for at least one year after its termination or expiry (clause 231(3)).

According to clause 230(1) of the Bill, a "service contract" is a contract under which (a) a director of the company undertakes personally to perform services (as director or otherwise) for a public company or its subsidiary; or (b) services (as director or otherwise) that a director of a public company undertakes personally to perform are made available by a third party to a public company or its subsidiary.

Clause 232 of the Bill sets out the minimum requirements for the inspection of contracts. According to this clause, every contract required to be kept under clause 219 shall be open to inspection by a member holding at least 5% of the total paid up capital of a public company having share capital, or at least 10% of the members of a public company not having share capital.

The reference to clause 219 (which relates to disclosure by a director of contracts in which he has an interest) in clause 232 appears to be a cross-referencing error as it is inconsistent with paragraph 1.40 of the CLRC's Consultative Document on Clarifying and Reformulating the Directors' Role and Duties which recommends that a director's service contract be made available for inspection by members.

The codification of shareholders' approval for directors' remuneration and the right of inspection of service contracts are timely as they serve to minimise conflicts of interest in relation to directors' remuneration. These provisions will complement the provisions of the Main Market and ACE Market Listing Requirements which require a listed company to disclose the remuneration of all directors in its annual report. In addition, the listing requirements only permit fees payable to directors to be increased pursuant to a resolution passed at a general meeting.

GENERAL MEETINGS

Ordinary resolution

The Bill introduces a definition of an "ordinary resolution", that is, a resolution which is passed by a simple majority of members who are entitled to vote and do vote (clause 286). The Act does not have a corresponding provision.

The Bill also provides that, subject to the provisions of the constitution of a company, any matter that may be passed by ordinary resolution may also be passed by special resolution (clause 286(4)).

Special resolution

The essence of section 152(1) of the CA, which lays down the requirements of a special resolution, is retained in clause 287 of the Bill save for the omission of the minimum notice period of 21 days. The new provision is divided into sub-clauses to distinguish between voting by a show of hands, by poll and by written resolution. Clauses 287(2) and (5) of the Bill include an additional requirement that a special resolution must be expressly stated to be a special resolution.

There appears to be an inconsistency in clause 287 as sub-clause (1) sets the threshold at "more than 75%" whereas sub-clauses (3) and (4) set the threshold at "not less than 75%". This inconsistency must be reconciled by the Companies Commission of Malaysia ("CCM").

General rules on voting

The Bill purports to adopt the provisions on the rules on voting contained in section 147(1)(c) of the CA, that is, on a show of hands, every member is to have one vote for every share held by him (clause 288(c)(ii)); and on a poll, every member is to have one vote for every share held (clause 288(c)(iii)). There is an error in clause 288(c)(ii) in that on a show of hands, every member should have only one vote regardless of the number of shares held by him.

Clause 288(c)(i) provides that in relation to a written resolution, every member is to have one vote for every share held by him.

Vote by proxy

The Bill provides that a proxy may vote on a show of hands if he is the only proxy appointed by a member (clause 289(1)). This provision is welcomed as it avoids a situation where the articles of association permit a member to appoint more than one proxy but do not specify how these proxies are to vote on a show of hands.

Clause 289(2) also clarifies that where a member appoints more than one proxy, the appointment is invalid if the member does not specify the proportions of his holding which are to be represented by each proxy.

Votes of joint holders

The Bill provides, inter alia, that the vote of joint holders of shares in a company is not valid if the joint holders do not exercise their vote in the same way (clause 290(2)(b)). This is a departure from regulation 55 of Table A which provides that the vote of the most senior joint holder who casts a vote shall be accepted to the exclusion of the votes of the other joint holders, and that seniority shall be determined by the order in which the names of the joint holders appear in the register of members.

DISPENSATION OF AGM FOR PRIVATE COMPANIES

A major change to the existing regime is that the Bill dispenses with the requirement for a private company to hold an annual general meeting ("AGM").

The rationale behind this change stems from the idea that AGMs for a private company are unnecessarily burdensome, particularly where members are actively involved in managing the company. As the members of such a company have access to the corporate information of the company, AGMs serve little purpose.

The requirement for a public company to hold AGMs is retained to ensure that members who are not actively involved in the management of the company are given the opportunity to discuss matters relating to the company with the directors. These are set out in clauses 338 to 341 of the Bill.

Clause 306(3) of the Bill contains a safeguard to protect minority shareholders of a private company as it provides that members holding at least 5% of paid-up capital may request the directors to hold a physical meeting if (i) more than 12 months have lapsed since the last meeting convened under the clause; and (ii) the proposed resolution is not vexatious or frivolous.

Incidental Matters relating to the "No-AGM" regime

New provisions have been introduced in the Bill in consequence of the introduction of the "no-AGM" regime for private companies.

A private company is required to circulate its financial statements and reports to its members within six months of its financial year end (clause 255(1)).

Auditors of a private company, who are usually appointed during an AGM under the CA, are now appointed by the board (for newly incorporated companies) and subsequently by members by way of ordinary resolution (clauses 262(3) and (4)). The appointments must be effected at least 30 days before the end of the period for the submission of the financial statements to the Registrar.

The retirement of directors of a private company, which is currently being carried out during an AGM under the CA, is to be decided by the members by way of written resolution under the Bill (clause 204(2)).

Finally, the annual returns of a private company are now required to be lodged with the CCM within 30 days from each anniversary of its incorporation date (clause 67(1)). Under the CA, annual returns are required to be lodged within one month of the AGM.

WRITTEN MEMBERS' RESOLUTIONS NO LONGER UNANIMOUS

Section 152A of the CA requires written resolutions of members to be passed by unanimous approval of the members. The Bill relaxes this requirement and allows ordinary and special resolutions of a private company to be passed as written resolutions with the same threshold (i.e. simple majority and 75%) as those applicable to resolutions at a physical meeting (clause 301(4)).

A written resolution may be proposed by a director or a member (clause 292(1)) but cannot involve the removal of a director or an auditor before the expiration of his term of office (clause 292(2)).

The proposed changes to written resolutions under the Bill are to be welcomed as they promote the efficacy of written resolutions and dispense with the burden of holding physical meetings. These provisions should be extended to unlisted public companies to enable such companies that only have a few members, to dispense with the inconvenience of holding physical meetings.

Circulation of written resolution

Where a written resolution is proposed by the board, the resolution is to be circulated to every eligible member (clause 296(1)). However, where a written resolution is proposed by a member (being a member who holds a total of 5% of the total voting rights of all eligible members), he may require the company to circulate the resolution for it to be moved as a written resolution (clause 297(1)).

A written resolution requested by a member may be circulated with a statement of a maximum of 1000 words on the subject matter of the resolution (clause 297(3)).

A resolution may be moved as a written resolution unless it is inconsistent with any law or the company's constitution, or is defamatory, frivolous or vexatious (clause 297(2)).

Unless a company otherwise resolves, the expenses incurred in circulating a written resolution requested by a member are to be borne by the member who made the request. The company is not obliged to circulate the resolution until a sufficient sum has been deposited with the company to meet such expenses (clause 299).

A company is not required to circulate a written resolution requested by a member if the court, upon the application by the company or a person who claims to be aggrieved, is satisfied that the rights under clause 297 are being abused. The court may order the member who requested for the written resolution to pay the whole or part of the costs incurred by the company in the application even if such member is not a party to the proceedings (clause 300).

Procedure for signifying agreement to written resolution

Clause 301 of the Bill sets out the procedure for passing a written resolution. The company must first receive an authenticated document from the member which identifies the relevant resolution and indicates that member's agreement to the resolution. The document may be sent in hard copy or electronic form.

The member's agreement, once signified, cannot be revoked. A written resolution will be passed once the required majority of eligible members have signified their agreement to it.

Unless otherwise provided in a company's constitution, a proposed written resolution will lapse if the required majority has not been obtained within 28 days from the circulation date. Any agreement of a member after the expiry of that period will be ineffective (clause 302).

PASSING RESOLUTIONS AT GENERAL MEETINGS

Power to convene general meetings

The Bill places the power to convene meetings with the board (clause 305). Regulation 44 of Table A which confers the right on any director to convene an extraordinary general meeting and section 145(1) of the CA which confers the right on two or more members who satisfy the criteria set out in that section to convene a general meeting have been omitted from the Bill.

Requisition

The right of members to requisition a general meeting under section 144 of the CA is retained (clause 306). The time frame to convene a meeting has been abridged in that the board is required to convene the meeting within 14 days and hold such meeting within 28 days from the date of issue of the notice to convene the meeting (clause 307(1)). Presently, section 144(1) requires the board to hold the meeting within two months from receipt of the requisition notice.

As in section 144 of the CA, the requisitionists are empowered to call and hold the meeting if the board fails to do so (clause 308(1)).

Court ordered meetings

The power conferred on the court to order a general meeting under section 150 of the CA is retained in clause 309 of the Bill with minor differences.

Notice requirements for general meeting

The Bill requires at least 14 days' notice (or such longer period specified in the constitution) to be given by both private and public companies for meetings; and in the case of the latter, at least 21 days' notice for an AGM (clauses 311(1) and (2)). It is unclear whether the requirement under section 152 of the CA for 21 days' notice to be given in respect of a special resolution applies to the Bill.

The requirements for convening a meeting by short notice in section 145(3) of the CA are retained save that in the case of a private company, the percentage has been reduced from 95% to 90% unless the company's constitution specifies a higher percentage not exceeding 95% (clause 311(5)).

Unlike the CA, the Bill sets out the manner in which notice of meetings are to be given to members (clause 313). Unless otherwise provided by a company's constitution, the Bill permits notice of meetings to be given by e-mail or publication on the company's website (clauses 313 and 314).

The Bill also requires a notice of meeting to be given to every member (including a person entitled to the share upon death or bankruptcy of a member), every director and the company's auditor (clause 315).

A company is now required to state the general nature of the business to be transacted at every general meeting (clause 316(1)(b)). Regulation 45 of Table A only requires the general nature of business to be given in respect of special business (and not ordinary business to be transacted at AGMs) (see regulation 46 of Table A).

Circulation of member's statement

In line with the "no-AGM" regime for private companies, clause 319 of the Bill, which corresponds with section 151 of the CA in allowing members to require the company to circulate a written statement not exceeding 1000 words in relation to matters to be discussed at an AGM, will apply only to public companies.

PROCEDURE AT MEETINGS

Multiple venues

Section 145A of the CA permits a company meeting to be held in two or more places within Malaysia using instantaneous communication technology. Clause 323 of the Bill liberalises this provision by dispensing with the requirement for the venue(s) to be within Malaysia. However, the chairman is required to be at the main venue of the meeting, which must be in Malaysia.

Quorum

The requirement in section 147(1)(a) of the CA that at least two members (or such higher number as is stipulated in the constitution) are required to constitute a quorum is retained in the Bill (clause 324(2)). The Bill expands on this by providing that in the case where a company only has one member, the quorum shall be one (clause 324(1)).

The Bill also clarifies that where a member appoints more than one representative or proxy, they shall be counted as one member for the purpose of quorum (clause 324(3)).

Chairman

The provisions for appointment of a chairman of a meeting under section 147(1)(b) of the CA and regulation 51 of Table A have been substantially retained in the Bill, subject to two interesting changes, namely that (i) a proxy may be appointed as chairman (unless prohibited by a company's constitution) (clause 332); and (ii) where a company's constitution expressly states the person who is to be chairman, the members shall not have a right to elect a chairman (clause 325(2)).

Corporate representative

As in the case of section 147(3)(a) of the CA, a member which is a body corporate may by resolution of its board or other governing body authorise a person or persons to represent that member at a general meeting (clause 329(1)). If a corporation appoints more than one representative, their exercise of power on behalf of that member shall not be valid if the representatives do not exercise the power in the same way (clause 329(4)(b)).

Proxies

The Bill abolishes the requirement that a proxy must be a member or qualified person specified in section 148(1)(b) of the CA (clause 330(1)). If a member of a company having share capital wishes to appoint more than one proxy, the member is required to specify the proportion of his holding which each proxy represents (clause 330(2)).

The Bill introduces a new provision which governs the termination of a person's appointment as proxy (clause 334).

DECISIONS OF SOLE MEMBER

Clause 344(1) of the Bill requires a member who is the sole member of a company to provide the company with details of any decision taken by it which may be taken at a general meeting of the company and has effect as if it had been agreed at a general meeting, unless the decision is made by way of a written resolution. Failure by the member to do so will not affect the validity of the decision taken (clause 344(3)).

RECORDS OF RESOLUTIONS AND MEETINGS

Clause 342 of the Bill requires a company to maintain for not less than seven years, records of all written resolutions, minutes of proceedings at general meetings and details of decisions provided to the company under clause 344. Unless the contrary is proved, such records are deemed to be evidence of proceedings held and decisions taken (clause 343).

A member is entitled to inspect the records mentioned in clause 342 without charge (clause 345(3)). However, this provision appears to be less comprehensive than section 157(2) of the CA which allows a member to request for copies of those records, subject to payment.

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SUBJECT MATTER: COMPANY LAW

WRITERS' NAMES: SHEBA GUMIS (L) & LEE AI HSIAN (R)

WRITERS' PROFILES:

Sheba is an Associate in the Corporate Division of Skrine. She graduated from Universiti Teknologi Mara in 2009.

Ai Hsian is an Associate in the Corporate Division of Skrine. She graduated from National University of Malaysia in 2010.

 

 
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