Balancing act for directors under proposed law

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This article first appeared in The Edge Financial Daily, on October 19, 2015.

KUALA LUMPUR: The upcoming new Companies Bill may see company directors playing a balancing act between doing what is best for the entity and acting upon the demands of shareholders, said Skrine and Co partner Lee Shih.

“It’s not an easy balancing act to be done. But if you are speaking from the perspective of minority shareholders or even shareholders, I would say they will be welcoming these changes because there is more information, and the directors have to allow a platform for the shareholders to discuss, query, ask questions, even if it’s not contained specifically in any audited accounts.

“Free flow of information is quite welcomed,” Lee told The Edge Financial Daily after presenting his paper “New Companies Bill: Upcoming Changes and Impact on Directors and Shareholders” at the Malaysia Legal and Corporate Conference on Oct 7.

Although Lee welcomed the greater flow of information and interaction between the board and the shareholders, he warned of the possibility of shareholders abusing the new privileges to the detriment of the company and its operations.

“It may come to an extent where interaction may cross over to overzealous control by the shareholders against the directors because shareholders can act entirely in a selfish manner and still be in compliance with the law. As long as I have enough shares, I can vote a certain way. 

“There is a real possibility that the directors can be caught between a rock and a hard place.

“Even under the present law, there is a recent court decision that arose out of the Petra Perdana Bhd dispute that now suggests that shareholders even if they make certain decisions, certain resolutions, on the face of it, it has impact on business decisions or management decisions of a director.

“The courts have now kind of suggested that the directors’ ability to do business, deal with the company assets could be tied up or restricted by decisions made by shareholders. Now that is a departure [from the norm],” said Lee.

Lee was referring to the case of Petra Perdana versus Tengku Datuk Ibrahim Petra Tengku Indra Petra and three others. The Court of Appeal issued its grounds of judgement dated Aug 27, 2015.

The former directors of Petra Perdana were sued for breaching their duties in selling down the company’s stake in Petra Energy Bhd. The sale was against a resolution by shareholders to sell only 10% of Petra Perdana’s stake in Petra Energy. 

The Court of Appeal decided that the directors acted against the shareholders’ resolution of restricted sales. 

The court held that the directors had failed to act in the best interest of the company and in breach of the shareholders’ resolution and their duties. 

Remarking over this case, Lee advised that if the shareholders of a company were at loggerheads with any of the directors, the best move under the new bill is to call for a meeting and vote to sack the director while electing a new one.

For Lee, the bottom line is that the directors must still work in the best interests of the company and not just bow to the whims and wishes of shareholders.

“I think the ultimate decision maker should still be the directors. If shareholders are unhappy, the proper mechanism is to call for a meeting and vote out these directors, replace certain directors, and get the ones you feel are better and qualified to replace the old director.

“But the new directors if they come in, must act independently. 

“This is a key difference: no matter how a director could be an extension of the shareholder, [in] the law both in terms of what the act provides and cases say, the primary duty of the director is owed to the company and he cannot just obey the shareholders because then he will face all sorts of potential liabilities,” said Lee.

Nik Suriatul Bahiyah Nik Aman from the legal firm Kamarudin, Wee and Co, on the other hand, questioned the need for the new set of laws unless there are a lot of lacuna (loopholes) since the current law — the Companies Act — was passed in 1965.

“It is good to enhance (the law), but there must be a valid reason why it needs to be amended. It is better to maintain the existing law and not to amend or enact new laws unless necessary for instance, if there is lacuna in this area.

“However, our company law has been in existence since 1965. If there is lacuna in this area, yes, we may want for it to be amended or if it has to be enhanced due to certain reasons such as changes of policies,” said Nik Suriatul.

The new Companies Bill is expected to be tabled in Parliament this year. 

She also pointed out that there is no harm in enhancing extra protection for minority shareholders.

“Whether the minority shareholder might interfere with the board of directors, it should be settled in accordance "in the interest of the company". 

“One must remember that in any company, the interest of individuals whether minor or major shareholders cannot override the interest of the company. All we have to prove is that what the minor or major shareholders are doing, are in the interest of the company. 

“Hence, [there is] no harm with the bill in enhancing extra protection to the minor shareholder,” she said.

According to the Companies Commission of Malaysia’s (SSM) public consultation document on the new law, the new Companies Bill sets out the framework to replace the Companies Act. 

“The proposed provisions were drafted primarily based on policies which had been approved by the Cabinet on June 18, 2010, and derived from a four-year comprehensive corporate law review conducted by the SSM’s Corporate Law Reform Committee as well as based on the recommendations of the Accounting Issues Consultative Committee,” the document issued in July 2013, read.