When Do You Need Shareholders’ Approval?

If you are a director of a company or a shareholder in one, you would have noticed that there are certain instances which require the approval of shareholders. Under the Companies Act 2016, the following actions taken by the company, or its directors require shareholder approval:

a. Section 75: Allotment of shares in the company, granting of rights to subscribe for shares and converting any security into shares

b. Section 223: Disposal by directors of company’s undertaking or property

c. Section 228: Transactions with directors, substantial shareholders or connected persons

In this article, we examine the scope of the required shareholders’ approval as well as the recent Court of Appeal decision of Concrete Parade Sdn Bhd v Apex Equity Holdings Bhd & Ors [2021] MLJU 1540 which appears to have further strengthened the position of shareholders in such decisions.

Section 75: Allotment of shares in the Company, granting of rights to subscribe for shares and converting security of shares

“75. (1) Unless the prior approval by way of resolution by the company has been obtained, the directors of a company shall not exercise any power –

1. To allot shares in the company;
2. To grant rights to subscribe for shares in the company;
3. To convert any security into shares in the company; or
4. To allot shares under an agreement or option or offer.”

From the reading of section 75, it is rather clear that the approval of shareholders is mandatory if a director seeks to allot shares, grant rights to subscribe for shares, and even to convert security of shares (Rayston Resources Sdn Bhd v LGB Engineering Sdn Bhd & Ors [2020] 7 MLJ 627).

Failure to obtain shareholders’ approval may cause any issuance of shares made or about to be made void (WTK Realty Sdn Bhd v The Personal Representative of the Estate of Wong Kie Nai (deceased) & Anor [2015] MLJU 351).

Section 223: Disposal by directors of company’s undertaking or property

Under section 223, a director requires the approval of shareholders when entering into an arrangement or transaction of a substantial asset or when such an arrangement or transaction is being carried into effect. In this regard, section 223(1) provides that:

“223. (1) Notwithstanding anything in the constitution, the directors shall not enter or carry into effect any arrangement or transaction for:

a. The acquisition of an undertaking or property of a substantial value; or

b. The disposal of a substantial portion of the company’s undertaking or property unless:

1. The entering into the arrangement or transaction is made subject to the approval of the company by way of a resolution; or
2. The carrying into effect of the arrangement or transaction has been approved by the company by way of a resolution.”

From the reading of section 223(1)(b), the word ‘or’ seems to connote that as long either limb (i) or (ii) is satisfied, section 223(1)(b) is deemed to be complied with. In other words, the substantial transaction would be valid if shareholders approval is obtained either:

a. Before the entering into an arrangement/transaction; or

b. Before the execution of an arrangement/transaction.

However, the recent Court of Appeal case of Concrete Parade Sdn Bhd v Apex Equity Holdings Bhd & Ors [2021] MLJU 1540 has now construed section 223 in a manner which the word ‘or’ is read as ‘and’. This means that in order to comply with section 223, a company entering into an arrangement/transaction will have to ensure that:

a. the entry is arrangement/transaction is made subject to shareholders’ approval; and

b. the implementation/carrying into effect of the arrangement/transaction also receives the prior approval of shareholders.

The Court of Appeal in Concrete Parade therefore concluded that following another Court of Appeal decision of Pioneer Haven Sdn Bhd v Ho Hup Construction Co Bhd & Anor and Other Appeals [2012] 3 MLJ 616, directors have an incumbent duty to inform and obtain approval from shareholders of any intention to both “enter into” and “carry into effect” an acquisition or disposal of substantial assets. This is to ensure that companies are prohibited from parting with any of its substantial assets without approval of the shareholders.

As for the interpretation of ‘substantial’ under section 223, section 223(3) essentially provides that a substantial transaction includes transactions where:

a. The value of the transaction exceeds 25% of the total assets of the company;

b. The net profits of the transaction, after deducting all charges except taxation and excluding extraordinary items, attributed to it amounts to more than 25% of the total net profit of this company; or

c. The value of the transaction exceeds 25% of the issued share capital of the company.

The Federal Court decision of Tan Chee Hoe & Sdn Bhd v Code Focus Sdn Bhd [2014] 3 MLJ 301, also affirms the position that the approval of shareholders is a mandatory statutory requirement which must be complied with. If directors fail to obtain shareholders’ approval for transactions which are governed by this section, they could be made liable in criminal proceedings. This is set out in section 223(7) which provides:

“Any director who contravenes this section commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or to a fine not exceeding three million ringgit or to both.”

Section 228: Transactions with directors, shareholders or connected persons

Section 228 imposes a requirement for shareholders’ approval to be obtained for certain transactions involving directors of substantial shareholders. If approval is not obtained by way of a special resolution, the transaction would be deemed void (see Bellini Resources (M) Sdn Bhd v Mohamad Zaini Md Taha [2020] 1 LNS).

“228. (1) Subject to subsection (2) and section 229, a company shall not enter or carry into effect any arrangement or transaction where a director or a substantial shareholder of the company or its holding company, or its subsidiary, or a person connected with a director or substantial shareholder-

a. Acquires or is to acquire shares or non-cash assets of the requisite value, from the company; or

b. Disposes of or is to dispose of shares or non-cash assets of the requisite value, to the company,

Unless –

1. The entering into the arrangement or transaction is made subject to the approval of shareholders at a general meeting; or
2. The carrying into effect of the arrangement or transaction had been approved by shareholders at a general meeting.”

However, unlike in stringent position in Concrete Parade, the High Court in Kam Thai Eng Linda & Anor v Kam Woon Wah & Ors [2020] 1 LNS 2124, held that section 228 only requires shareholders’ approval before an agreement or transaction is carried out/executed and not before the arrangement or transaction is entered into.

Analysis: Does the balance tip in favour of shareholders or directors?

It is clear that the above sections were drafted to keep companies or directors accountable to their shareholders. This is to ensure that major decisions made by the directors involving substantial assets and shares are made in the best interest of the company’s shareholders. There have been multiple instances in which directors have abused their powers in a rather cunning manner, such as in the case of Howard Smith v Ampol Petroleum Ltd and others [1974] AC 821 where the directors sought to allot shares in a manner which altered the majority shareholding in favour of the directors themselves.

It is therefore of no surprise that the balance is tipped in favour of shareholders as it is the shareholders who stand to suffer greatly if the powers of directors in such major transactions are unchecked.

On the other hand, do these stringent rules stifle the day-to-day business administrations or suffocate directors by forcing them to obtain shareholders approval for every single transaction? Not likely.

The provisions under the Companies Act 2016 clearly regulate substantial transactions and issues of shareholding – issues which would directly impact the interests of shareholders. No such restrictions are placed when it comes to everyday decisions of a company.

All this means is that directors must be more cautious and aware of the legal position pertaining to shareholders’ approval in such transactions. The legal positions of sections 75, 223 and 228 are all intended to act as a safeguard against the generally wide powers of directors.

Further examples of cases which show where the balance is tilted towards will be discussed during our webinar on 07.10.2021 at 8.00pm. Interested? Register here.