Case_Study_Corporate_Law

CASE STUDY CORPORATE LAW
Case overview

Good Foods Sdn Bhd (the company) was incorporated in 2000. The company’s sole object clause provides that the principal activity of the company is catering. Nelly and Rosman, who are chefs by profession, are the directors and together they hold 85% of the shares in the company, the remaining 15% of the shares being held by eight other shareholders.

The company has been doing extremely well since it was incorporated. Nelly and Rosman are keen to expand the business of the company. They are planning to set up a culinary school and have been advised that the company will have to amend its object clause before it can successfully embark into the new venture.

The facilitate the new venture, the company will need to acquire a new building. Nelly and Rosman do not wish to convert the company into a public company for this purpose. Instead, they have borrowed RM 2,000,000.00 from Ocean Bank. As security for the loan, they have charged a piece of land owned by the company to Ocean Bank.

Nelly and Rosman also propose to pass a resolution to issue additional shares to existing shareholders, where they will be required to double their shareholdings in the company.

Nelly and Rosman also propose that the name of the company be changed from Good Foods Sdn Bhd to Heavenly Foods Sdn Bhd.

Nelly and Rosman have called for an extraordinary general meeting to pass the following resolutions, namely,

(i) to amend the objects clause to include the business of running a culinary school;

(ii) to issue additional shares by requiring all shareholders to double their shareholdings in the company; and

(iii) to change the name of the company from Good Foods Sdn Bhd to Heavenly Foods Sdn Bhd.

Chitra is one of the shareholders in the company. She is against all of the above proposed changes and will vote against the resolutions at the meeting. Chitra is also of the view that the loan from Ocean Bank is null and void because there is no provision in the company’s memorandum of association allowing the loan.

Chitra seeks your advice as to whether :-

(a) she may successfully block the passing of each of the three proposed resolutions; and

(b) she is correct in her argument that the above loan from Ocean Bank is null and void and has no effect.

Chitra seeks your advice as to whether :-

(a) she may successfully block the passing of each of the three proposed resolutions; and

Ans. It is important to bear in mind that the relation between the company and its shareholders and the relation between the shareholders inter-se is primarily contractual in nature. The memorandum and articles of association of the company constitute the core of this contract and the corporate law provides the framework within which the contracts operate. The essence of this contractual relationship is that each shareholder is entitled to a share in the profits and assets of the company in proportion to his shareholding. Flowing from this is the fact that the Board and the management of the company have a fiduciary responsibility towards each and every shareholder and not just towards the majority or dominant shareholder.






Before discussing whether Chitra can succesfully block the passing of the resolution- first we need to take the following facts into consideration:
The operations of Malaysian companies are regulated by:

• the Companies Act 1965;

• the memorandum and articles of association of the company; and

• internal guidelines and codes, where applicable.

Corporate governance in Malaysia is generally regulated by the following laws, rules and regulations:

• the Corporate Governance Code;

• the Listing Requirements;

• the Companies Act;

• the Securities Industry Act;

• the Securities Commission Act 1993; and

• the Futures Industry Act 1993.

Shareholders’ Rights

Meetings

Pursuant to the Companies Act a shareholders’ meeting may be convened:

• by two or more members holding not less than one-tenth of the issued share capital of a company, and

• by the requisitionists, where the directors of the company have failed to convene a meeting, without justification, having been properly requested to do so.

Resolutions

Unless a special resolution is required (which must be passed by a majority of at least three-quarters of the members voting in person or by proxy), a decision by majority vote (ie, ordinary resolution) will suffice. Under the Companies Act, special resolutions are required for a reduction in share capital, among other things.

So, although Nelly and Ruslan possess the majority of shares in the company- they might have the right for taking a major decision like amending the memorandum of association but they’ll have to take care of the minority share holders like Chitra who have lower percentages of shares.

Protection of minority shareholders

Chitra-as a Minority shareholders in Malaysia may enforce her rights under common law or statute, provided the relevant criteria have been met.

In this case, Chitra can seek the following remedies-

As far as statutory remedies are concerned, shareholders may file a petition for cessation of or a remedy against oppression of the minority under Section 181 of the Companies Act where:

• the company’s affairs are being conducted or the directors’ powers exercised in an oppressive manner or in disregard of the interests of shareholders; or

• a resolution of the shareholders, debenture holders or any class thereof has been passed or is proposed, or an act of the company has been executed or is threatened, which is unfairly discriminatory or prejudicial to one or more shareholders.

The shareholders may also petition to have the company wound up pursuant to Section 218 of the Companies Act on the grounds that the directors have acted in their own interests rather than those of the shareholders as a whole, or in any other manner which appears unfair or unjust to other shareholders.
The remedy available to minority shareholders under common law is the derivative action, which enables a shareholder to bring an action for the benefit of the company in certain circumstances. A shareholder may institute a derivative action irrespective of whether he was a shareholder at the time the alleged wrongs were committed. However, the derivative action cannot be continued once he ceases to be a shareholder.

Institutional investors as shareholders

It is not uncommon for institutional shareholders to have a substantial shareholding (ie, voting rights amounting to not less than 5 per cent of all voting shares in the company-in this case Chitra), in Malaysian listed companies. The role played by these investors varies from company to company, ranging from an active managerial role to a relatively passive non-intervening role confined to attending and voting at general meetings. There are also cases in which companies issue to institutional investors, particularly statutory and government bodies, a ‘golden share’ (generally with the power to veto any decisions made by the company). While there are no laws, regulations or codes of corporate governance specifically governing the conduct of institutional investors in Malaysia, the Corporate Governance Code stipulates that significant shareholders have a responsibility to make considered use of their votes.

Management structure and the role of directors

The Companies Act requires directors to act honestly and use reasonable diligence in the discharge of their duties at all times. It further prohibits the improper use of information obtained by virtue of their position as directors to obtain, directly or indirectly, an advantage for themselves or for others, or to cause harm to the company.

Directors also owe fiduciary duties to the company to:

• act in good faith in the company’s interests;

• exercise due care and skill in the discharge of their duties; and

• avoid conflict between their duties and their private interests, among other things.

Persons who have been convicted of certain offences (including failure to discharge duties as directors under the Companies Act) may not be involved in the management of a company for a period of five years thereafter, without leave from the court. A person who has been a director of two or more companies which have gone into liquidation within five years of each other may also be disqualified for a similar period by order of the court.

Chitra can further consider the following rights she has as a minority shareholder:

Voting Rights

(i) Ten percent: The approval of at least 10% of the shareholders is required for the requisition of an extraordinary general meeting for an application to the Company Law Board (CLT) for relief, if there is oppression or mismanagement (as defined in the Companies Act, 1956 by the majority shareholders.

(ii) Fifty-one percent: The approval of a minimum of 50% of the shareholders is required for an ordinary resolution, including for alteration of the share capital; declaration of dividend; election, removal, and remuneration of directors; approval of annual accounts; appointment of external auditors; appointment of other officers; and other routine matters relating to the conduct of a company.

(iii) Seventy-five percent: At least 75% of the shareholders must approve a matter before it is passed as a special resolution, including for capital increases, alteration in the memorandum and articles of the company, changing the registered office address of the company from one state to another, change in the name of the company, buy-back of shares, proposed mergers or liquidation. Therefore, a minority shareholder with more than 25% voting rights would have the ability to block special resolutions.

Hence Chitra can’t block the resolution unless some of her other 7 counterparts(75%) claims the action of ruslan and nelly as unjustifiable and harmful to the company in regarding the change of name, starting a new venture and aquisition of financial debts.

V. Qualified Minority

Minority shareholders with qualified minority may initiate action against decisions of the majority in a court of law. According to section 399 of the act, a qualified minority consists of at least one hundred shareholders or one tenth of the total number of shareholders, whichever is less, or any shareholder(s) holding one-tenth of the issued share capital of the company fully paid-up. Moreover, minority shareholders who hold more than 25% of the shares will have the ability to obstruct special resolutions, seek intervention of the CLT and, therefore, impede the functioning of the company at some level.

(b) she is correct in her argument that the above loan from Ocean Bank is null and void and has no effect.
Ans. If the majority of the shareholders(75%) were not informed prior to the borrowing of 2000,000.00 Chitra can claim that the loan from Ocean bank is void and has no effect.

Under Companies Act 1965-

Directors must disclose to the board the nature and extent of their interests. In addition, where a transaction involves the interests of directors or substantial shareholders (including connected persons), the company must announce the transaction and in some cases obtain the prior approval of the shareholders’ general meeting. Such interested parties must abstain from deliberating and voting on the matter at board level or in the shareholders’ general meeting, as the case may be.

Subject to limited exceptions, the following related-party transactions are prohibited under the Companies Act:

• the acquisition of shares or assets of another company in which a director or substantial shareholder, or a connected person, has a substantial shareholding, unless those shares or assets have been held for at least three years;

• loans and the provision of guarantees or security for loans to directors of the company or a related company; and

• loans and the provision of guarantees or security to persons connected to directors of the company or its holding company.

In addition, substantial property transactions and the payment of compensation to directors for loss of office may only be effected with the shareholders’ prior approval.

So, Chitra can block the resolution if she thinks that the company and it’s stake holders will be significantly harmed by the actions

References

Shanthy, Concise principles of company law in Malaysia School of Business, Monash University Malaysia.
Malaysian Company Act 1965
International Comapny and Commecial law review [online]; Available on:
http://www.cameiralaw.com/contents/File/100/main/C_Governance_Minority_Shareholders.pdf
{ last Accessed on the 29th of May’2010}
Disruptive power to the minority by shireen muhiudeen[online]; Available on:
http://biz.thestar.com.my/news/story.asp?file=/2010/4/24/business/6120099&sec=business
Shareholder rights and remedies in close corporations: Oppression, fiduciary duties, and reasonable expectations; Tuesday, April 1 2003; Robert C; Journal of Corporation Law [online]; Available on:
http://www.allbusiness.com/legal/laws/1058708-1.html