Implications of some Recent Amendments to the Companies Act 1965

1
Implications of some Recent Amendments to
theCompanies Act 1965

• LEE SWEE SENGLLB, LLM, MBA
• Advocate SolicitorNotary Public, Trademark,
  Patent Agent
• Certified Mediator
• sweeseng_at_tm.net.my
• www.leesweeseng.com

2
An Overview of the Companies Act 1965

• Reviewing the major changes to the Act
• Identifying key areas of the Act pertinent to
  corporations
• Understanding how the major amendments will
  affect your business

3
An Overview of the Companies Act 1965

• Assessing the practical implications of the
  Companies (Amendment) Act 2007
• Addressing the implication of the new amendments
  to the Companies Act 1965 vide the amending law
  Act A1299, known as the Companies (Amendment) Act
  2007 which came into force on 15.8.2007

4
Categories of Amendment

• The amendments shall fall into the following
  categories
• Reviewing the Companies Act in relation to
  Directors and Officers
• Sections to be addressed S131, S132, S132A,
  S132B, S132, S132C, S132E, S134

5
Categories of Amendment

• Meetings and Proceedings
• Sections to be addressed S145 and S145A
• Accounts and Audit
• Sections to be addressed S167A, S172A, S174,
  S174A

6

• Section 131
• Disclosure of interests in contracts, property,
  offices, etc

7
Section 131-Disclosure of interests in contracts,
property, offices, etc

• Section 131(1) provides that
• every director of a company who is in any way,
  whether directly or indirectly, interested in a
  contract or proposed contract with the company,
  shall, as soon as practicable after the relevant
  facts have come to his knowledge, declare the
  nature of his interest at a meeting of the
  directors of the company

8
Section 131-Disclosure of interests in contracts,
property, offices, etc

• Section 131(4)
• Declaration of interest may be made by-
• or

General notice given to the directors
At the directors meeting
Director takes reasonable steps to ensure it is
brought up and read at the next directors meeting
9
Section 131-Disclosure of interests in contracts,
property, offices, etc

• The Corporate Law Reform Committee (CLRC) is of
  the view that S131 should be retained.
• A Consultative Document on Review of Provisions
  Regulating Substantial Property Transactions,
  Disclosure Obligations and Loans to Directors by
  the Corporate Law Reform Committee for the
  Companies Commission of Malaysia, Vol 9, July
  2007 at page 86

10
Section 131-Disclosure of interests in contracts,
property, offices, etc

• S131(2) provides that a director does not have to
  declare his interest in a company contract if the
  interest is of him being a shareholder or
  creditor of a corporation, which is interested in
  a contract or proposed contract with the company
  and where such interest may be regarded as not
  material

11
Section 131-Disclosure of interests in contracts,
property, offices, etc

• Section 131 (7A) provides that
• For the purpose of this section, an interest of
  the spouse of a director of a company (not being
  herself or himself a director of the company) and
  an interest of a child, including adopted child
  or stepchild, of a director of the company (not
  being himself or herself a director of the
  company) in the shares or debenture of the
  company, shall be treated as an interest in the
  contract and proposed contract

12
Section 131-Disclosure of interests in contracts,
property, offices, etc

• Illustration to Section 131 (7A)
• Where interests in shares and debentures shall
  treated as interest in the contract and proposed
  contract
• Interest of

Directors spouse
Stepchild
Directors child
Adopted Child
13
Section 131-Disclosure of interests in contracts,
property, offices, etc

• It is an established commercial practice to
  couple materiality of interest with the 5
  threshold derived from S69D Companies Act 1965
• A Consultative Document on Review of Provisions
  Regulating Substantial Property Transactions,
  Disclosure Obligations and Loans to Directors by
  the Corporate Law Reform Committee for the
  Companies Commission of Malaysia, Vol 9, July
  2007 at page 86

14
Section 131-Disclosure of interests in contracts,
property, offices, etc

• However, the CLRC noted that the interpretation
  is a matter of convenience and should not be
  stated as a principle of law
• What is crucial is whether the interest gives
  rise to a material interest.

15
Section 131-Disclosure of interests in contracts,
property, offices, etc

• Therefore, even if the interest is less than the
  5 threshold, that interest must be disclosed if
  it gives rise to a conflict of interest

16
Section 131-Disclosure of interests in contracts,
property, offices, etc

• According to Tan Bok Seong v Sin Be Seng Co
  (Port Weld) Sdn Bhd 1995 4 CLJ 795, if the
  director proves that the other directors are
  aware of his interest, then, that director need
  not formally declare his interest.

17
Section 131-Disclosure of interests in contracts,
property, offices, etc

• Lim Foo Yong v PP 1976 2 MLJ 259
• The Facts
• The Defendant was the managing director of
  United Malaysian Steel Mills Bhd (UMSM) and also
  an advisor to Ban Guan Ltd (BG).

18
Section 131-Disclosure of interests in contracts,
property, offices, etc

• Lim Foo Yong v PP 1976 2 MLJ 259
• The Facts (contd)
• The Defendant was charged under S131(1) CA, 1965
  for failing to declare the nature of his interest
  at the Directors Meeting of UMSM, that he is
  interested in a contract between UMSM and BG

19
Section 131-Disclosure of interests in contracts,
property, offices, etc

• Lim Foo Yong v PP 1976 2 MLJ 259
• Sessions Court
• Convicted the Defendant based on the following
  circumstantial evidence
• i) in the Companies concerned, the Defendant
  was shown to have direct or indirect influence
  through his family members

20
Section 131-Disclosure of interests in contracts,
property, offices, etc

• Lim Foo Yong v PP 1976 2 MLJ 259
• Sessions Court
• Convicted the Defendant based on the following
  circumstantial evidence
• ii) at or about the time of execution of the
  contract, the defendant and his family agreed
  to sell their shares in UMSM and agreed to
  acquire shares in BG

21
Section 131-Disclosure of interests in contracts,
property, offices, etc

• Lim Foo Yong v PP 1976 2 MLJ 259
• Sessions Court
• Convicted the Defendant based on the following
  circumstantial evidence
• iii) the Defendant resigned from the Board of
  UMSM just before the demand for specific
  performance of the contract was received by BG

22
Section 131-Disclosure of interests in contracts,
property, offices, etc

• Lim Foo Yong v PP 1976 2 MLJ 259
• Sessions Court
• Convicted the Defendant based on the following
  circumstantial evidence
• iv) the secret profits that would accrue to
  BG on the execution of the contract

23
Section 131-Disclosure of interests in contracts,
property, offices, etc

• Lim Foo Yong v PP 1976 2 MLJ 259
• High Court
• Quashed the conviction as the circumstantial
  evidence did not point irresistibly to the guilt
  of the accused
• i) The Sessions Court President failed to
  consider the personal guarantee given by the
  defendant to UMSM

24
Section 131-Disclosure of interests in contracts,
property, offices, etc

• Lim Foo Yong v PP 1976 2 MLJ 259
• High Court
• Quashed the conviction as the circumstantial
  evidence did not point irresistibly to the guilt
  of the accused
• ii) The Sessions Court President failed to
  consider that the sale price in the contract
  was fixed by the government

25
Consequences of Contravening Section 131

• S131(7B) CA 1965 provides that
• Where a contract or proposed contract is
  entered into in contravention of this section,
  the contract or proposed contract shall be
  voidable at the instance of the company except if
  it is in favour of any person dealing with the
  company for any valuable consideration and
  without actual notice of the contravention.

26
Consequences of Contravening Section 131

• S131(7B) CA 1965
• The word voidable suggests that the contract
  or proposed contract entered into in
  contravention of S131 can be ratified by the
  company

27
Consequences of Contravening Section 131

• S131(8)
• Penalty
• Imprisonment for seven years or one hundred and
  fifty thousand ringgit or both

28

• Section 131A
• Interested director not to
• participate or vote

29
Section 131A-Interested director not to
participate or vote

• S131A(1) provides that
• Subject to Section 131, a director of a company
  who is in any way, whether directly or
  indirectly, interested in a contract entered into
  or proposed to be entered into by the company
  shall be counted only to make a quorum at the
  board meeting but shall not participate in any
  discussion while the contract or proposed
  contract is being considered at the board meeting
  and shall not vote on the contract or proposed
  contract

30
Section 131A-Interested director not to
participate or vote

• S131A(1)

Counted only to make a quorum
Shall not participate in any discussion
Interested Director
Shall not vote
31
Section 131A-Interested director not to
participate or vote

• the meaning of shall not participate
• PP v Dato Haji Mohamed Muslim bin Haji Othman
  1983 1 MLJ 245
• The facts
• The accused was a member of the State Executive
  Council and was present at the EXCO meeting which
  approved his application for State Land.

32
Section 131A-Interested director not to
participate or vote

• the meaning of shall not participate
• PP v Dato Haji Mohamed Muslim bin Haji Othman
  1983 1 MLJ 245
• The facts (c0ntd)
• The accused failed to declare his interest
  during the said EXCO meeting which approved his
  application for land.

33
Section 131A-Interested director not to
participate or vote

• the meaning of shall not participate
• PP v Dato Haji Mohamed Muslim bin Haji Othman
  1983 1 MLJ 245
• Held
• Hashim Yeop A Sani J
• The accuseds physical presence at the EXCO
  meeting was sufficient for him to be regarded to
  have used his public position for his advantage.

34
Section 131A-Interested director not to
participate or vote

• the meaning of shall not participate
• PP v Dato Haji Mohamed Muslim bin Haji Othman
  1983 1 MLJ 245
• The accused was charged under Section 2 of the
  Emergency (Essential Powers) Ordinance, No 22 of
  1070 for corrupt practice.

35
Section 131A-Interested director not to
participate or vote

• the meaning of shall not participate
• PP v Dato Haji Mohamed Muslim bin Haji Othman
  1983 1 MLJ 245
• Punishment for corrupt practice
• Section 2(1) of the Emergency (Essential Powers)
  Ordinance, 1970
• ..guilty of an offence and shall be liable to
  imprisonment for a term not exceeding fourteen
  years or to a fine not exceeding twenty thousand
  ringgit or to both.

Lee Swee Seng Co
36
Section 131A-Interested director not to
participate or vote

• the meaning of shall not participate
• PP v Dato Haji Mohamed Muslim bin Haji Othman
  1983 1 MLJ 245
• Definition of corrupt practice
• Section 2(2) Emergency (Essential Powers)
  Ordinance, 1970
• any act done by any Member or officer, whereby
  he has used his public position or office for his
  pecuniary or other advantage.

Lee Swee Seng Co
37
Section 131A-Interested director not to
participate or vote

• the meaning of shall not participate
• PP v Dato Haji Mohamed Muslim bin Haji Othman
  1983 1 MLJ 245
• Definition of corrupt practice
• Now, Section 2(2) Emergency (Essential Powers)
  Ordinance, 1970 is superceded by the
  Anti-Corruption Act 1997

38
Section 131A-Interested director not to
participate or vote

• S58 Anti-Corruption Act 1997 (General Penalty)
• shall be liable to a fine not exceeding ten
  thousand ringgit or to imprisonment for a term
  not exceeding two years or to both

39
Section 131A-Interested director not to
participate or vote

• the meaning of shall not participate
• Sarawak Building Supplies Sdn Bhd v Director of
  Forest Co 1991 1 MLJ 211
• The Facts
• The interested directors were absent from the
  meeting which passed the resolution on the
  subject matter.

40
Section 131A-Interested director not to
participate or vote

• the meaning of shall not participate
• Sarawak Building Supplies Sdn Bhd v Director of
  Forest Co 1991 1 MLJ 211
• Haidar J
• The absence of certain directors from the
  meeting did not mean that their absence gave the
  other directors the licence to proceed with the
  meeting and to pass the purported resolution..

41
Section 131A-Interested director not to
participate or vote

• the meaning of shall not participate
• Sarawak Building Supplies Sdn Bhd v Director of
  Forest Co 1991 1 MLJ 211
• Haidar J (contd)
• ..their presence was necessary to constitute
  proper quorum if they had interest in any
  contract or arrangement, they shall not vote. If
  they vote, their votes shall not be counted..

42
Section 131A-Interested director not to
participate or vote

• the meaning of shall not participate
• Reconciling Dato Haji Mohamed Muslim bin Haji
  Othman (supra) and Sarawak Building Supplies Sdn
  Bhd (supra)
• Interested directors merely sign their presence
  to make a quorum, and then excuse themselves from
  the meeting. They need not be physically present
  at the meeting

43
Section 131A-Interested director not to
participate or vote

• Section 131A does not apply to private companies.
  Therefore, the situation where all directors, due
  to their interest, are conflicted out from
  voting does not arise

44
Section 131A-Interested director not to
participate or vote

• S131A(2) provides that
• Subsection (1) shall not apply to-
• (a) a private company unless it is a subsidiary
  to a public company
• (b) a private company which is a wholly-owned
  subsidiary of a public company, in respect
  of any contract or proposed contract to be
  entered into by the private company with the
  holding company or with another wholly- owned
  subsidiary of that same holding company

45
Section 131A-Interested director not to
participate or vote

• S131A(2)
• (c) any contract or proposed contract of
  indemnity against any loss which any director
  may suffer by reason of becoming or being a
  surety for a company
• (d) any contract or proposed contract entered
  into or to be entered into by a public company
  or a private company which is subsidiary of a
  public company, with another company in which
  the interest of the director consists solely of-

46
Section 131A-Interested director not to
participate or vote

• S 131A(2)(d)
• (i) in him being a director of the company and
  the holder of shares not more than the
  number or value as is required to qualify him
  for the appointment as a director or
• (ii) in him having an interest in not more than
  five per centum of its paid up capital.

47
Section 131A-Interested director not to
participate or vote

• S131A(3)
• where a contract or proposed contract is
  entered into in contravention of subsection (1),
  shall be voidable at the instance of the
  company except if it is in favour of any person
  dealing with the company for a valuable
  consideration and without actual notice of the
  contravention

48
Section 131A-Interested director not to
participate or vote

• Comments to S131A(3)
• The word shall be voidable seem to suggest
  that the contract entered into in contravention
  of subsection (1) can be ratified by the company.

49
Section 131A-Interested director not to
participate or vote

• S131A(4)
• A director who knowingly contravenes this
  section shall be guilty of an offence against
  this Act
• Penalty
• Imprisonment for five years or one hundred and
  fifty thousand ringgit or both.

50

• Section 131B
• Functions and Powers of the Board

51
Section 131BFunctions and Powers of the Board

• S131(B)
• (1) The business and affairs of a company must
  be managed by, or under the direction of, the
  board of directors.

52
Section 131BFunctions and Powers of the Board

• S131(B)
• (2) The board of directors has all the powers
  necessary for managing and for directing and
  supervising the management of the business and
  affairs of the company subject to any
  modification, exception or limitation contained
  in this Act or in the memorandum or articles or
  association of the company.

53
Section 131BFunctions and Powers of the Board

• S131B places the functions and powers of the
  Board of Directors on a statutory footing.
• The duties of Board of Directors are now
  clarified

54

• Section 132
• Duty and Liability of Officers

55

• Section 132(1)
• Fiduciary Duty of Loyalty

56
Section 132(1) Fiduciary Duty of Loyalty

• The common law position
• Re Smith Fawcett Ltd 1942 Ch304
• Directors must exercise their discretion bona
  fide in what they consider - not what a court may
  consider - is in the interest of the company..
• Directors must not exercise their powers for any
  collateral purpose

57
Section 132(1) Fiduciary Duty of Loyalty

• The common law position
• Fiduciary duty of loyalty comprises of duties
  to AND

Act bona fide in the interest of the Company
Exercise powers for proper purpose
58
Section 132(1) Fiduciary Duty of Loyalty

• Old Section 132(1) -
• In the discharge of duties, director shall at
  all times-
• AND

Use reasonable diligence
Act honestly
59
Section 132(1) Fiduciary Duty of Loyalty

• Mischief behind the old S132(1)
• i) The word honestly is not defined.
• ii) Criminal liability only arises if it can be
  proven that the director is aware that the
  conduct is not in the companys best interest.

60
Section 132(1) Fiduciary Duty of Loyalty

• Mischief behind the old S132(1)
• iii) S132(1) is contrary to the common law
  position because
• (a) At common law, a director must comply with
  both the best interest of the company
  requirement and also with the proper purpose
  test.
• (b) There is no requirement that the director
  had acted fraudulently or with deliberate
  intent to obtain personal advantage.

61
Section 132(1) Fiduciary Duty of Loyalty

• Kea Holdings Pte Ltd v Gan Boon Hock 2000 3
  SLR 129
• The Facts
• A director suggested for orders to be cancelled
  even though he knew that there were buyers

62
Section 132(1) Fiduciary Duty of Loyalty

• Kea Holdings Pte Ltd v Gan Boon Hock 2000 3
  SLR 129
• Held
• The director had breached his duty to act
  honestly

63
Section 132(1) Fiduciary Duty of Loyalty

• In Multi-Pak Singapore Pte Ltd v Intraco Ltd
  1994 2 SLR 282
• Held -
• The word 'honestly' does not mean that a
  director would only be in breach of duty if he
  had acted fraudulently. It means to act bona fide
  in the interests of the company. In exercising
  their discretion, the directors should only act
  to promote or advance the interest of the
  company.

Lee Swee Seng Co
64
Position after the amendmentto Section 132(1)

• New S132(1)-
• A director of a company shall at all times
  exercise his powers - AND

In good faith in the companys best interest
For proper purpose
65
Position after the amendmentto Section 132(1)

• New S132(1)-
• Therefore, if a director exercises his power
  - BUT
• The director will still be liable under the new
  S132(1)

In good faith in the companys best interest
For collateral purpose
66
Position after the amendmentto Section 132(1)

• New S132(1)-
• The phrase best interest of the company is not
  statutorily clarified in order to maintain
  flexibility

67
Position after the amendmentto Section 132(1)

• There is no need to prove dishonest intent
  because
• i) the word honestly is replaced with the
  statement exercise his powers for a proper
  purpose and in the best interest of the
  company

68
Position after the amendmentto Section 132(1)

• Examples where the Directors had acted in the
  best interest of the company BUT the transaction
  was motivated by some improper purpose
• Howard Smith Ltd v Ampol Petroleum Ltd 1974 AC
  821
• The Facts -
• The Directors allotted shares to a company which
  had made a takeover bid. The Directors argued
  that the allotment was made to obtain capital for
  the company.

69
Position after the amendmentto Section 132(1)

• Howard Smith Ltd v Ampol Petroleum Ltd 1974 AC
  821
• Held -
• The power to issue shares may be exercised for
  reasons other than raising capital provided those
  reasons relate to a purpose benefiting the
  company as a whole.

70
Position after the amendmentto Section 132(1)

• Howard Smith Ltd v Ampol Petroleum Ltd 1974 AC
  821
• Held -
• However, on the facts, the Directors had
  improperly exercised their powers, as the effect
  of the share issue was to reduce the majority
  holding of two other shareholders who made a
  rival bid. The power to issue shares was used for
  a purpose of maintaining control of the company
  in the hands of the Directors themselves.

71

• General Penalty Section
• S132(3) provides that
• an officer or agent or officer of the Stock
  Exchange who commits a breach of this section
  shall be-
• liable to the company for any profit made by him
  or for any damage suffered by the company as a
  result of the breach and
• guilty of an offence against this Act
• Penalty Imprisonment for five years or thirty
  thousand ringgit

72

• Section 132(1A)
• Duties of Care, Skill and Diligence

73
Section 132(1A) Duties of Care, Skill and
Diligence

• Position before Section 132(1A)
• The duty to act with care and skill is derived
  from common law.
• The old Section 132(1) is silent as to the
  standard of care, and skill required of a
  director. It merely prescribes that a director
  has a duty to act honestly and use reasonable
  diligence.
• A Consultative Document on Clarifying and
  Reformulating the Directors Role and Duties, by
  the Corporate Law Reform Committee for the
• Companies Commission of Malaysia, August 2006 at
  pages 44-48

74
Section 132(1A) Duties of Care, Skill and
Diligence

• The Common Law Position
• The leading decision is Re City Equitable Fire
  Insurance Co Ltd (1925) CH407 where it was held
  that In discharging the duties of his
  position..a Director must..act honestly but he
  must also exercise some degree of both skill and
  diligence.. so long as a Director acts honestly
  he cannot be made responsible in damages unless
  guilty of gross or inculpable negligence in a
  business sense.

75
Section 132(1A) Duties of Care, Skill and
Diligence

• Developments in the Commonwealth Jurisdiction
• In New Zealand, Section 137 of the New Zealand
  Companies Act 1993 provides that a company
  director must carry out his directorial functions
  with such care, skill and diligence that would be
  exercised by a reasonable director in the
  circumstances of the former.
• A Consultative Document on Clarifying and
  Reformulating the Directors Role and Duties, by
  the Corporate Law Reform Committee
• for the Companies Commission of Malaysia, August
  2006, Vol 5 at pages 44-48

76
Section 132(1A) Duties of Care, Skill and
Diligence

• In the UK, the law has moved towards an objective
  assessment of the standard of care required of
  directors, as reflected in section 174 of the UK
  Companies Act 2006 which codifies Norman v
  Theodore Goddard (1991) BCLC 1028 and Re DJan of
  London Ltd (1993) BCC 646
• A Consultative Document on Clarifying and
  Reformulating the Directors Role and Duties, by
  the Corporate Law Reform Committee
• for the Companies Commission of Malaysia, August
  2006 at pages 44-48

77
Section 132(1A) Duties of Care, Skill and
Diligence

• Despite these developments, the position in
  Malaysia remained to be Re City Equitable Fire
  Insurance, as the court in Abdul Mohd Khalid v
  Datuk Haji Mustapha Kamal (2003) 5CLJ 85, had
  cited obiter Re City Equitable Fire Insurance as
  the applicable authority for directors duty of
  care and skill.
• A Consultative Document on Clarifying and
  Reformulating the Directors Role and Duties, by
  the Corporate Law Reform Committee
• for the Companies Commission of Malaysia, August
  2006 at pages 44-48

78
Section 132(1A) Duties of Care, Skill and
Diligence

• Problems with the subjective test
• There is no minimum objective standard required
  of a director. Since the subjective standard of
  care varies according to the skill a director
  has, a director with no specific skill or
  expertise need not be accountable.

79
Section 132(1A) Duties of Care, Skill and
Diligence

• The position today
• Section 132(1A) Companies Act 1965 provides that
  a director of a company shall exercise reasonable
  care, skill and diligence with
• (a) the knowledge, skill and experience which
  may reasonably be expected of a director having
  the same responsibilities and
• (b) any additional knowledge, skill and
  experience which the director in fact has.

80
Section 132(1A) Duties of Care, Skill and
Diligence

• where a director has additional knowledge, skill
  and experience, that director will be assessed
  against a reasonable person who has that
  additional knowledge, skill and experience.
• The actual knowledge and experience of a director
  is to be considered in addition to the minimum
  standard.

81

• Section 132(1B)
• Business Judgment Rule

82
Section 132(1B) Business Judgment Rule in
Malaysia

• Mischief behind the Business Judgment Rule
• i) Sections 131, 132C, 132D, 132E, 133, 133A,
  provide for sanctions that follow if a director
  breaches his duties.
• As a result, an honest director is discouraged
  from engaging in vigorous business activities.
  This hampers maximum investment returns.

83
Section 132(1B) Business Judgment Rule in
Malaysia

• Mischief behind the Business Judgment Rule
• ii) Where a Director has made a genuine business
  judgment in good faith, he will be protected
  from liability for negligence even if these
  judgments turned out badly.
• iii) Courts are badly equipped and should not
  substitute its judgment for that of the
  directors

84
Section 132(1B) Business Judgment Rule in
Malaysia

• The Malaysian model is taken from
• S180(2) Australian Corporations Act 2001

85
Section 132(1B) Business Judgment Rule in
Malaysia

• S132(1B) of the Malaysian Companies Act 1965
  provides that-
• A director who makes a business judgment is
  deemed to meet the requirements of the duty under
  subsection (1A) and the equivalent duties
  under the common law and in equity if the
  director-

86
Section 132(1B) Business Judgment Rule in
Malaysia

• S132(1B) CA 1965
• (a) makes the business judgment in good faith
  for proper purpose
• (b) does not have a material personal interest
  in the subject matter of the business judgment

87
Section 132(1B) Business Judgment Rule in
Malaysia

• S132(1B) CA 1965
• (c) Is informed about the subject matter of the
  business judgment to the extent the director
  reasonably believes to be appropriate under the
  circumstances and
• (d) Reasonably believes that the business
  judgment is in the best interest of the company

88
Section 132(1B) Business Judgment Rule in
Malaysia

• Comments on S132(1B) CA 1965
• The overriding requirement is that the Directors
  must make a conscious decision or exercise a
  conscious judgment
• If the Directors failed to make a conscious
  decision or exercise a conscious judgment, the
  Business Judgment Rule will not extend its
  protection.

89
Section 132(1B) Business Judgment Rule in
Malaysia

• Section 132(6) defines business judgment to mean
• any decision on whether or not to take action
  in respect of a matter relevant to the business
  of the company

90
Section 132(1B) Business Judgment Rule in
Malaysia

• S132(1C) permits the director to rely on expert
  advice but that reliance would only be considered
  reasonable if the director has made an
  independent assessment of the reports, advice,
  opinions and data received from the experts and
  consultants employed to provide them

91
The Business Judgment Rule in Other Jurisdictions

• Business Judgment Rule in the United States
• Two common formulations-
• Case-law formulation
• American law Institutes Formulation
• http//www.javeriana.edu.co/Facultades/C_Juridica
  s/pub_rev/documents/6-Laguado.pdf
• FACTORS GOVERNING THE APPLICATION OF THE
  BUSINESS JUDGMENT RULE AN EMPIRICAL STUDY OF THE
  U.S, U.K, AUSTRALIA AND THE E.U. BY CARLOS
  ANDRES LAGUADO GIRALDO ISSN 0041-9060 AT PAGES
  121-125

92
Business Judgment Rule in the United States

• Case Law Formulation
• The Business Judgment Rule originated from Otis
  Co. v Pennsylvania R.Co., 61 F. Supp. 905 (D.C
  Pa. 1945) and was affirmed in Aronson v Lewis
  (1984)
• In Otis, a shareholders derivative action
  alleged that corporate directors failed to obtain
  the best price available in the sale of
  securities, resulting in the loss of nearly half
  a million dollars.

93
Business Judgment Rule in the United States

• Case Law Formulation
• Otis Co. v Pennsylvania R.Co., 61 F. Supp. 905
  (D.C Pa. 1945)
• The federal district court ruled that
• the directors had acted in good faith and were
  not liable to the shareholders
• mistakes or errors in the exercise of honest
  business judgment do not subject the officers and
  directors to liability for negligence in the
  discharge of their appointed duties

94
Business Judgment Rule in the United States

• Case Law Formulation
• In Aronson v. Lewis, (1984) the Court affirmed
  that the Business Judgment Rule is
• "a presumption that in making a business
  decision.. Directors.. acted on an informed
  basis, in good faith and in the honest belief
  that the action taken was in the best interest of
  the company..

95
Business Judgment Rule in the United States

• Case Law Formulation
• The Disney Litigation
• re The Walt Disney Company Derivative
  Litigation, 2003 WL 21267266 (Del. Ch. May 28,
  2003), concerned claims arising out of the hiring
  and termination of The Companys former
  president, Michael Ovitz. The plaintiff
  shareholders alleged that the defendant directors
  knowingly or intentionally breached their
  fiduciary duty of care to the corporation in both
  approving Ovitzs employment arrangement and
  failing to consider the terms of Ovitzs
  termination that were negotiated exclusively by
  Disneys Chief Executive Officer, and close
  friend of Ovitz for over 25 years, Michael
  Eisner.

96
Business Judgment Rule in the United States

• Case Law Formulation
• The Disney Litigation
• The plaintiffs also alleged that Ovitz breached
  his duty as an officer and director to the
  corporation by maximizing his own interest in his
  employment and termination negotiations at the
  expense of the corporation. The defendant
  directors and Ovitz moved to dismiss these claims

97
Business Judgment Rule in the United States

• Case Law Formulation
• The Disney Litigation
• The court concluded that the directors are liable
  as they failed to make any good faith attempt to
  fulfill their fiduciary obligations in the hiring
  and termination of Ovitz.
• The Disney Litigation shows that American Courts
  have increasingly displayed an apparent
  willingness to review the substance of business
  decisions, contrary to the Business Judgment Rule

98
Business Judgment Rule in the United States

• 2. American Law Institutes Formulation
• The American law Institute (ALI) was established
  in 1923 to promote clarification and
  simplification of American common law by
  publishing Restatements of the law.
• http//encyclopedia.thefreedictionary.com/Ameri
  canLawInstitute

99
Business Judgment Rule in the United States

• American Law Institutes Formulation
• Courts are not under obligation to adopt
  Restatement sections as the Restatements sections
  are not binding authority
• However, Restatement sections are highly
  persuasive.
• http//encyclopedia.thefreedictionary.com/America
  nLawInstitute

100
Business Judgment Rule in the United States

• The Restatement Section under the American Law
  Institutes Formulation
• S 4.01(c) of the Business Corporations Act
  provides that
• () (c) A director or officer who makes a
  business judgment in good faith fulfills the
  duty of care if the director or officer
• (1) is not interested in the subject of his
  business judgment
• (2) is informed with respect to the subject of
  the business judgment to the extent the director
  or officer reasonably believes to be appropriate
  under the circumstances and
• (3) rationally believes that the business
  judgment is in the best interests of the
  corporation.

101
Business Judgment Rule in the United States

• American Law Institutes Formulation
• Summary to S 4.01(c) Business Corporations Act
• For the rule to apply, the director must
• i) have made a decision
• ii) be free of self interest in the judgment
• iii) adopt the decision under informed basis and
  
• iv) have rational basis for the decision

102

• Differences between American Institutes Law
  Formulation and Delaware Case Laws
• American Institutes Law Formulation
• - the burden of proving the elements of the rule
  lies on the directors
• Case law Formulation
• - the rule acts as a presumption in favor of
  the directors, it is for the plaintiff to rebut
  the existence of those elements.
• - Delawares doctrine is more generous to
  directors.
• http//www.javeriana.edu.co/Facultades/C_Juridic
  as/pub_rev/documents/6-Laguado.pdf
• FACTORS GOVERNING THE APPLICATION OF THE
  BUSINESS JUDGMENT RULE AN EMPIRICAL STUDY OF THE
  U.S, U.K, AUSTRALIA AND THE E.U. BY CARLOS
  ANDRES LAGUADO GIRALDO ISSN 0041-9060 AT PAGES
  132-133

103
Business Judgment Rule in UK?

• The Company Law Reform Steering Group does not
  contemplate a statutory Business Judgment Rule.
• The duties of directors in UK is now expressed
  in very broad terms as reflected in S172 and
  S173(1) of the UK Companies Act 2006 (c.46)

104
Directors Duties in UK

• S172 (1) UK Companies Act 2006 provides that a
  director has a duty to promote the success of the
  company having regard to
• (a) the likely consequences of any decision in
  the long term
• (b) the interests of the companys employees

105
Directors Duties in UK

• S172 UK Companies Act 2006
• (c) the need to foster the companys
  business relationships with suppliers, customers
  and others,
• (d) the impact of the companys operations on
  the community and the environment

106
Directors Duties in UK

• S172 UK Companies Act 2006
• (e) The desirability of the company maintaining
  a reputation for high standards of business
  conduct, and
• (f) The need to act fairly as between members of
  the company

107
Directors Duties in UK

• S173(1) of the UK Companies Act 2006 provides
  that -
• A director of a company must exercise
  independent judgment.

108
Business Judgment Rule in Singapore

• Vita Health Laboratories Pte Ltd and Others v
  Pang Seng Meng 2004 4 SLR 162 2004SGHC 158
• The court should be slow to interfere with
  commercial decisions taken by directors and
  should not substitute its own decisions in place
  of those made by honest directors.
• ..it is not the function of the court to punish
  and censure director, who have, in good faith
  made incorrect commercial decisions..

109

• Section 132(1E)
• Clarifying the Position of a Nominee Director

110
Section 132(1E)Clarifying the Position of a
Nominee Director

• Australian Companies and Securities Law Review
  Committee, Nominee Directors and Alternate
  Directors Discussion Paper No 7(1987) para 101
• Definition of nominee director
• An individual independent of the method of
  their appointment, in the performance of their
  office, act in accordance with some
  understanding, arrangement or status which gives
  rise to an obligation to the appointor

Lee Swee Seng Co
111
Section 132(1E)Clarifying the Position of a
Nominee Director

• Example of conflict of interest between the
  company and the nominator
• Scottish Co-operative Wholesale Society Ltd. V
  Meyer 1959 AC 324
• The facts
• The Scottish Co-operative Wholesale Society
  Ltd set up Scottish Textile Manufacturing Co
  Ltd and appointed three of its directors to the
  Board of the Scottish Textile Manufacturing Co
  Ltd

Lee Swee Seng Co
112
Section 132(1E)Clarifying the Position of a
Nominee Director

• Example of conflict of interest between the
  company and the nominator
• Scottish Co-operative Wholesale Society Ltd. V
  Meyer 1959 AC 324
• The facts
• The co-operative society wanted to set up its
  own rayon department, competing with the business
  of the textile company.

Lee Swee Seng Co
113
Section 132(1E)Clarifying the Position of a
Nominee Director

• Example of conflict of interest between the
  company and the nominator
• Scottish Co-operative Wholesale Society Ltd. V
  Meyer 1959 AC 324
• Held
• When the realignment of shareholding was under
  discussion, it was the duty of the three
  directors to the textile company to get the best
  possible price for any new issue of its shares,
  whereas their duty to the co-operative society
  was to obtain the new shares at the lowest
  possible price.

Lee Swee Seng Co
114
Section 132(1E)Clarifying the Position of a
Nominee Director

• Example of conflict of interest between the
  company and the nominator
• Scottish Co-operative Wholesale Society Ltd. V
  Meyer 1959 AC 324
• Held
• The duty of the three directors to the textile
  company was to do their best to promote its
  business and to act with complete good faith
  towards it and

Lee Swee Seng Co
115
Section 132(1E)Clarifying the Position of a
Nominee Director

• Example of conflict of interest between the
  company and the nominator
• Scottish Co-operative Wholesale Society Ltd. V
  Meyer 1959 AC 324
• Held
• not to disclose their knowledge of its affairs
  to a competitor, and not even to work for a
  competitor, when to do so might operate to the
  disadvantage of the textile company

Lee Swee Seng Co
116
Section 132(1E)Clarifying the Position of a
Nominee Director

• Example of conflict of interest between the
  company and the nominator
• Scottish Co-operative Wholesale Society Ltd. V
  Meyer 1959 AC 324
• Held
• The three Directors had put their duty to the
  co-operative society above their duty to the
  textile company by doing nothing to defend the
  interests of the textile company against the
  conduct of the co-operative society.

Lee Swee Seng Co
117
Section 132(1E)Clarifying the Position of a
Nominee Director

• Example of conflict of interest between the
  company and the nominator
• Scottish Co-operative Wholesale Society Ltd. V
  Meyer 1959 AC 324
• Held
• By subordinating the interests of the textile
  company to those of the co-operative society,
  they conducted the affairs of the textile company
  in a manner oppressive to the other shareholders.
  

Lee Swee Seng Co
118
The Common Law approach

• The CLRC noted that there are different views
  within the common law in relation to nominee
  directors duties and obligations.

119
The Common Law Approach

• The Strict Approach
• Overseas-Chinese Banking Corp Ltd Anor v
  Justlogin Pte Ltd Anor 2004 2 SLR 675
• A nominee director is required to act in the
  best interest of the company which they serve.

120
The Common Law Approach

• The Strict Approach
• Overseas-Chinese Banking Corp Ltd Anor v
  Justlogin Pte Ltd Anor 2004 2 SLR 675
• Nominee Director can only act in the interest of
  his appointor where -
  does NOT
• conflict with

Interest of appointor
Interest of company
121
The Common Law Approach

• The Strict Approach
• Walker v Winbourne1976 50 AJLR 446
  Charterbridge Corp Ltd v Lloyds Bank Ltd 1970
  Ch 62
• In a corporate group structure the best interest
  of the company may include the interest of the
  members of the corporate group or the holding
  company

122
Adjusted Fiduciary Duty Approach

• Nominee Directors can act in the best interest of
  the nominator where
• S131(2) (3) New Zealand Companies
  Act 1993
• S187 Australian Corporations
  Act 2001

There were prior approval by the shareholders
It does not affect the companys ability to pay
its creditors
123
Adjusted Fiduciary Approach in New Zealand

• Applicable to a corporate group structure
• Extended to joint venture company

124
Adjusted Fiduciary Approach in New Zealand

• New Zealand Companies Act 1993
  
  if

Wholly-owned subsidiary
Nominee Director can act in the best interest of
the Holding Company, even if it is not in the
best interest of the wholly-owned subsidiary
Constitution allows Nominee Director to act in
the best interest of the Holding Company
125
Adjusted Fiduciary Approach in New Zealand

• New Zealand Companies Act 1993
  if

Nominee Directors can act in the best interest of
the Holding Company even if it is not in the best
interest of the wholly-owned subsidiary
Non Wholly-owned subsidiary
Constitution allows Nominee Director to act in
the best interest of the Holding Company
Prior approval of shareholders of the subsidiary
has been obtained
126
Adjusted Fiduciary Approach in Australia

• Only applies to wholly-owned subsidiary
• Section 187 Australian Corporations Act 2001
  provides that a director of a wholly-owned
  subsidiary can act in the interest of the holding
  company and will be taken to have acted in the
  best interest of the subsidiary if the
  Constitution of the subsidiary expressly
  authorises the director to act in the best
  interest of the holding company and the director
  acts in good faith in the best interest of the
  holding company and the subsidiary is solvent or
  will not become insolvent because of that
  directors act.

127
The Position in MalaysiaSection
132(1E)-Clarifying the Position of a Nominee
Director

• Section 132(1E) provides that
• A director, who was appointed by virtue of his
  position as an employee of a company, or who was
  appointed by or as a representative of a
  shareholder, employer or debenture holder, shall
  act in the best interest of the company and in
  the event of any conflict between his duty to act
  in the best interest of the company and his duty
  to his nominator, he shall not subordinate his
  duty to act in the best interest of the company
  to his duty to his nominator

Lee Swee Seng Co
128
The Position in MalaysiaSection
132(1E)-Clarifying the Position of a Nominee
Director

• The phrase shall not subordinate his duty under
  Section 132(1E) is worded in the negative.
• Therefore, as a final result, the companys best
  interest will prevail over the interest of the
  nominator.

Lee Swee Seng Co
129

• Section 132(2)
• Duties to avoid Conflict of Interests

130
Section 132(2)-Duties to avoid Conflict of
Interest

• The Common Law Position
• Situations of conflict
• i) When a director makes a personal profit while
  acting in his position.
• Regal (Hastings) Ltd v Gulliver 1942 1 ALL ER
  378
• Held -
• Directors are fiduciary and is not allowed by
  equity to profit from his position.

131
Section 132(2)-Duties to avoid Conflict of
Interest

• The Common Law Position
• Situations of conflict
• ii)Aberdeen Railway Co v Blaikie Bros (1854) 1
  Macq 461
• The Facts -
• The company entered into a contract to purchase
  goods from a business in which one of the
  Directors was a partner.

132
Section 132(2)-Duties to avoid Conflict of
Interest

• The Common Law Position
• Situations of conflict
• ii)Aberdeen Railway Co v Blaikie Bros (1854) 1
  Macq 461
• Held -
• The contract was void.
• Conflict arose when the company enters into a
  contract, arrangement or transaction in which a
  director has interest in, and that director does
  not disclose his interest to the company.

133
Section 132(2)-Duties to avoid Conflict of
Interest

• The Common Law Position
• Situations of conflict
• iii) Avel Consultants Sdn Bhd v Mohd Zain Yusof
  1995 4 MLJ 146
• Facts-
• The director had set up another firm to compete
  for contracts with the company.

134
Section 132(2)-Duties to avoid Conflict of
Interest

• The Common Law Position
• Situations of conflict
• iii) Avel Consultants Sdn Bhd v Mohd Zain Yusof
  1995 4 MLJ 146
• Held-
• Conflict arose where a director uses or
  exploits an asset (including business opportunity
  and corporate information) treated as the
  companys property, for his own purpose or the
  purpose of any one else (other than the company)

135
Section 132(2)-Duties to avoid Conflict of
Interest

• The Common Law Position
• Situations of conflict
• iv) Mahesan v Malaysian Government Officers
  Co-operative Housing Society 1978 1 MLJ 149
• Held -
• conflict arose where a director receives a
  benefit in some other way in connection with the
  exercise of his powers as a director (eg bribe)

136
Section 132(2)-Duties to avoid Conflict of
Interest

• The Common Law Position
• Situations of conflict
• v) Yukilon Manufacturing Sdn Bhd v Dato Wong Gek
  Meng Ors 1998 7 MLJ 551
• Held -
• conflict arose where a director competes with
  the company.

137
Section 132(2)-Duties to avoid Conflict of
Interest

• The Position in Malaysia
• The old S132(1) CA 1965 provides that
• A director shall at all times act honestly and
  use reasonable diligence in the discharge of his
  duties of his office

138
Section 132(2)-Duties to avoid Conflict of
Interest

• The Position in Malaysia
• The old S132(1) does not expressly refer to the
  common law situations of conflict.

139
Section 132(2)-Duties to avoid Conflict of
Interest

• The new S132(2) provides that
• A director or officer of a company shall not,
  without the consent or ratification of a general
  meeting-
• use the property of the company
• (b)use any information acquired by virtue of his
  position as a director or officer of the company

140

• New S132(2)
• use his position as such director or officer
• use any opportunity of the company which he
  became aware of, in the performance of his
  functions as the director or officer of the
  company or
• (e) engage in business which is in competition
  with the company
• to gain directly or indirectly, a benefit for
  himself or any other person, or cause detriment
  to the company

141

• New S132(2)
• This new provision amounts to a restatement of
  the common law conflict of interest situation.
• It assists directors in appreciating situations
  of conflict which may cause them to act in breach
  of their duty to the company.
• A Consultative Document on Clarifying and
  Reformulating the Directors Role and Duties by
  the Corporate Law Reform Committee for the
  Companies Commission of Malaysia August 2006 at
  page 66

142

• Deletion of
• S132A and S132B

143
Deletion of S132A and S132B

• S132A and S132B attempted to codify the misuse of
  corporate information and was directed at various
  insider trading conduct.
• The CLRC is of the view that S132A and S132B is
  redundant and should be deleted because of-
• A Consultative Document On Clarifying and
  Reformulating the Directors Role and Duties by
  the Corporate Law Reform Committee for the
  Companies Commission of Malaysia, Aug 2006, Vol
  5, at page 66

144
Deletion of S132A and S132B

• i) the existence of adequate insider trading
  provisions under the Securities Industries Act
  1983 (now consolidated under the Capital Markets
  and Services Act 2007 which came into force
  vide Act 671 which came into force on 28.9.2007)

145
Deletion of S132A and S132B Capital Markets and
Services Act 2007

• Part V
• Market Misconduct and other Prohibited Conduct
• Section 174(a)
• This Part shall apply to-
• in respect of securities-
• (i) acts and omissions occurring within Malaysia
  in relation to securities of any body corporate
  which is formed or is carrying on business or is
  listed within or outside Malaysia and

Lee Swee Seng Co
146
Deletion of S132A and S132B Capital Markets and
Services Act 2007

• Part V
• Market Misconduct and other Prohibited Conduct
• Section 174(a)
• This Part shall apply to-
• in respect of securities-
• (ii) acts and omissions occurring outside
  Malaysia in relation to securities of any body
  corporate which is formed or is carrying on
  business or is listed within Malaysia

Lee Swee Seng Co
147
Section 188 Capital Markets and Services Act 2007

• S188 provides that
• (1) A person is an insider if that person-
• (a) possesses information that is not
  generally available which on becoming
  generally available a reasonable person would
  expect it to have a material effect on the
  price or the value of securities and

148
Section 188 Capital Markets and Services Act 2007

• (b) knows or ought reasonably to know that
  the information is not generally available

149
Section 188 Capital Markets and Services Act 2007

• (2) An insider shall not, whether as principal
  or agent, in respect of any securities to which
  information in subsection (1) relates-
• (a) acquire or dispose of, or enter into an
  agreement for or with a view to the acquisition
  or disposal of such securities or
• (b) procure, directly or indirectly, an
  acquisition or disposal of, or the entering into
  an agreement for or with a view to the
  acquisition or disposal of such securities.

150
Section 188 Capital Markets and Services Act 2007

• (3) Where trading in the securities to which
  the information in subsection (1) relates is
  permitted on a stock market of a stock exchange,
  the insider shall not, directly or indirectly,
  communicate the information referred to in
  subsection (1), or cause such information to be
  communicated, to another person, if the insider
  knows, or ought reasonably to know, that the
  other person would or would tend to-

151
Section 188 Capital Markets and Services Act 2007

• S188(3)
• (a) acquire, dispose of, or enter into an
  agreement with a view to the acquisition or
  disposal of, any securities to which the
  information in subsection (1) relates or
• (b) procure a third person to acquire, dispose
  of or enter into an agreement with a view to the
  acquisition or disposal of, any securities to
  which the information in subsection (1) relates.

152
Section 188 Capital Markets and Services
Act 2007

• (4) A person who contravenes or fails to comply
  with subsection (2) or (3) commits an offence
  and is liable on conviction to a fine of not
  less than one million ringgit and to
  imprisonment for a term not exceeding ten years.

153
Section 188 Capital Markets and Services Act 2007

• (5) The Minister may make regulations in respect
  of any particular class, category or description
  of persons or any particular class, category or
  description of transactions, relating to
  securities, to whom or which this section does
  not apply

154

• Section 132C-
• Approval of company required for disposal by
  directors of companys undertaking or property

155
Section 132C-Approval of company required for
disposal by directors of companys undertaking or
property

• Old S132C(1)
• notwithstanding anything in a companys
  memorandum or articles, the directors shall not
  carry into effect any proposal or execute any
  transaction for-
• (a) the acquisition of an undertaking or
  property of a substantial value or
• (b) the disposal of a substantial portion of
  the companys undertaking or property

156
Section 132C-Approval of company required for
disposal by directors of companys undertaking or
property

• Old S132C(1)
• which would materially and adversely affect the
  performance or financial position of the company,
  unless the proposal or transaction has been
  approved by the company in general meeting

157
Section 132C-Approval of company required for
disposal by directors of companys undertaking or
property

• Mischief behind the Old S132C(1)
• i) Directors were not prepared to say that a
  transaction would adversely affect the
  performance or financial position of a company.
• ii) The old S132C permitted adverse
  transaction as long as the transaction has been
  approved by the company in a general meeting.

158
Section 132C-Approval of company required for
disposal by directors of companys undertaking or
property

• Mischief behind the Old S132C(1)
• Dato Toh Kian Chuan v Swee Construction and
  Transport Company (Malaya) Sdn Bhd 1995 1 LNS
  317
• The Facts -
• A minority shareholder sought to set aside an
  agreement for the sale of a piece of land. He
  alleged that the land was sold at an undervalue.

159
Section 132C-Approval of company requ