Investors as Shareholders: Rights and Obligations

1. Investors as Shareholders: Rights and Obligations By LEE SWEE SENGAdvocate & Solicitor LLB.LLM,MBA Certified Mediator sweeseng@tm.net.my www.leesweeseng.com ©copyright

2. Basis of shareholder’s Rights •  Statutes: e.g. Companies Act 1965, Securities Commission Act 1993, Securities Industry Act 1983, etc. • Non-statutory regulation: e.g. Code on Corporate Governance 2000. • Contractual: e.g. Memorandum & Articles of Association. • Case laws: local and common law.

3. Division of powers between Directors and Shareholders • The precise scope of the powers of each organ is defined by the company’s articles of association, general principles of company law and the Companies Act 1965. • Directors usually have the power to manage the business of the company, with the members being entitled to vote only on limited matters expressly reserved to them by the articles of association or the Companies Act.

4. General Shareholders Rights • Right to a dividend, if declared • Attendance at meetings and voting rights • Option of removing directors from office. • Power to appoint new directors. • Calling of meetings (Two or more holding not less than 10% shares, but not relating to matter than is within the power of the board).

5. General Shareholders Rights • Apply to wind up company (e.g. directors’ decision oppressive, just and equitable grounds). • Inspection of books of company e.g. registered kept by the company, copies of the audited profit and loss account, the balance sheet and reports by the auditors and the directors of the company, registers of members, directors, substantial shareholders, debenture holders, charges and holders of participatory interests.

6. General Shareholders Rights • “books” defined in s. 4 CA 1965 as includes any register or other record of information and any accounts or accounting records, however compiled, recorded or stored, and also includes any document. • e.g. s. 160 – rights to inspect register of members (with nominal fees and notification). S 160 (4) – guilty of offence if did not furnish copy requested. • Note: The law has omitted for any rights of access to the accounting records of the company. It is only available to directors and auditors.

7. General Shareholders Rights • e.g. s. 157 – entitled to be furnished with minutes of general meeting within fourteen days without charge. • e.g. s. 170 – entitled a copy of every profit and loss account and balance sheet (including every document required by law to be attached thereto).

8. General Shareholders Rights • Usually, there will be no charge for inspection but a nominal charge is usually required for making copies. • Members’ residual powers e.g. board of directors is unable to act, commence & prosecute legal proceedings where the wrongdoer controls the company, ratification of “honest” breach of directors’ duties.

9. Protecting Minority Shareholders The law shall endeavor to prevent action taken by the majority, for example: • To amend the company’s constitution in a way that is disadvantageous to the minority e.g. the constitution may contain a provision giving a class of minority members the rights to appoint its own director, which the majority seeks to delete from constitution.

10. Protecting Minority Shareholders • Alter the share capital of the company in a way that is disadvantageous to the minority e.g. the majority may vote to approve the issue of additional shares in the company to themselves with the specific objective of diluting the proportion of shares held by the minority. • Vote to approve the sale of assets of the company to themselves at a price which is below the market value of the assets.

11. Protecting Minority Shareholders • Amend the company’s constitution with the objective of forcing the minority to sell some or all of their shares at an unfair price. • Vote to approve certain benefits to themselves that are not available to the minority e.g. these may be loans or other financial benefits made available only to the majority members.

12. Remedies for dissatisfied minority shareholders • Withdraw their investment by selling their shares. •  Legal proceedings : • Personal action – where some personal individual rights has been infringed. S.33 CA 1965 provides that registered shareholders has the statutory rights to enforce the M + A the same effect as a statutory contract. • Representative action - where the same personal right of a number of shareholders has been infringed. Suing as a group.

13. Remedies for dissatisfied minority shareholders • Derivative action - A legal action is derivative when the person who brings the action relies not on a cause of action which belongs to them personally, but on a cause of action belonging to someone else. When we use the phrase “derivative action” in company law, it means an action brought by a member based on a cause of action which the company has, rather than a cause of action belonging to the member. Hanrahan, Ramsay & Stapledon, Commercial Applications of Company Law in Malaysia (CCH Asia Pte Ltd), p. 341.

14. Statutory remedies • taking legal action to obtain any of a wide range of remedies for oppressive conduct: s. 181; • seeking to wind up the company because it is just and equitable to do so, or because the directors are acting in their own interest: s. 218 (1)(f) and s. 218 (1)(i); • seeking an injunction from court to restrain the company from contravening certain provisions of the Companies Act: s. 132C(2) and s. 132E(4);

15. Statutory remedies • seeking to prevent a variation of any rights attached to the shares of the member: s. 65; • taking legal action for a breach of a common law duty owed by a director or other officer to the company.

16. Common law remedies • Enforcement of a personal right of a shareholder e.g. the right to vote where the majority or directors are attempting to take away. • Taking legal action because the majority members have, by exercising their voting power in an improper way, breached the equitable limitation on majority voting power.

17. Minority Shareholders’ Suits Foss v Harbottle (1843) – “proper plaintiff rule”. • Well-established principle: that if any wrong is done to a company by the directors, the only person who can bring an action against them to remedy the wrong is the company itself.

18. Minority Shareholders’ Suits • Here, the minority shareholders were denied any standing to remedy what they saw as a misapplication of the corporate funds by the directors of the company. Among the justifications offered for this rule are that such a rule will contain vexatious litigation, multiple suits and baseless actions brought by shareholders.

19. Exceptions to the Foss v Harbottle rule: Fraud Upon the Minority • Prudential Insurance Co. Ltd v Newman Industries Ltd (No. 2) • “There is an exception to the rule where what has been done amounts to fraud and the wrongdoers are themselves in control of the company. In this case, the rule is relaxed in favour of the aggrieved minority, who are allowed to bring a minority shareholders’ action on behalf of themselves and all others. ….

20. Exceptions to the Foss v Harbottle rule: • …The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would never allow the company to sue.”

21. Exceptions to the Foss v Harbottle rule: • “Fraud” defined in Abdul Rahim bin Aki v Krubong Industrial Park (Melaka) Sdn Bhd [1995] 3 AMR 3050 CA, as absolutely nothing whatsoever to do with the actual fraud or deception at common law. It has a wider definition which includes appropriation of the company’s money, property or opportunities, majority obtaining a benefit at the expense of the company and majority’s attempt to prevent an action being brought.

22. Exceptions to the Foss v Harbottle rule: Illegal or ultra vires act • Such an act cannot be rectified by the majority of members. It is considered acts which were beyond the objects and powers set out in the memorandum and may also be illegal and criminal acts of the company. Personal rights infringed • e.g. Membership rights originating from the Act, memorandum and articles of the company or a separate members’ agreement are beached.

23. Exceptions to the Foss v Harbottle rule: • Abdul Rahim b. Aki v Industrial Park (Melaka) Sdn Bhd -court accepted the existence of ‘justice of the case’. • s.181 - oppression or unfair act by the directors or majority.

24. Exceptions to the Foss v Harbottle rule: • Malaysian courts have appreciated the ‘unfairness’ grounds in s 181(1)(b); Re Kong Thai Sawmill (Miri) Sdn Bhd; Kong Thai Sawmill (Miri) Sdn Bhd & Ors v Ling Beng Sung (1978) 2 MLJ 227. • Applicant (for relief under s.181) must prove oppression or a disregard of a member’s interest.

25. Recent Example of Malaysian Case Leong Yew Chin v Rahman Hydraulic Tin Bhd & 12 Ors - Kuala Lumpur High Court Suit No: D4-22-988-2001 • Facts: Besides seeking other declarations, the Plaintiff seeks a declaration that company did not have power in law to accept the loan facilities of RM250 million and therefore could not be the debtor. Since it is not a debtor, the purchase of vesting certificate of its assets by Danaharta is null and void.

26. Recent Example of Malaysian Case Defendants argued that Mr. Leong failed to obtain Danaharta’s consent by virtue of s.41 (1)(e) of the Act AND at all material times, he was not a registered shareholder of RHTB. Held: Plaintiff’s claim was struck off. Plaintiff appeal.  Main issue is whether the Plaintiff has the locus standi to commence this action. Case is still pending.

27. Removal of directors Under s 128 CA: Removal of directors. Can be done via : • Resolution by special notice, s 153, CA • By convening of extraordinary general meeting on requisition, s 144, CA • By calling of meetings, s 145, CA

28. Removal of director • Transposed to s. 128(1) of our Act the proper meaning of "A public company may by ordinary resolution remove a director ..." means that a simple majority of the shareholders of the company may vote to remove a director and no agreement made by the directors or the company can fetter that right.

29. Removal of director • The Courts will not interfere with the statutory right of shareholders to remove directors: Soliappan v Lim Yoke Fan [1968] 2 MLJ 21; Dato' H.M. Shah & Ors. v. Dato' Abdullah b. Ahmad [1991] 1 MLJ 91 - a Supreme Court decision which applied s. 128(1) and upheld the shareholders' right to terminate the appointment of the executive chairman and managing director of the company in the 9 month of a three-year contract with the company appointing him to those positions: Tuan Ishak Ismail v Leong Hup Holdings & Or Appeals [1996] 1 CLJ 393

30. Cases in Malaysia – Removal of directors • Rationale for seeking removal of directors could be due to safeguarding the substantial interest of a major shareholder. Hence nominee directors of the substantial shareholders were placed there. An eg of such application by TESB, a wholly owned subsidiary of Telekom Malaysia Berhad where TESB seeks to remove some of the directors in TRI and nominate its own representation to the board of TRI.

31. Cases in Malaysia – Removal of directors • Shareholders in turn could turn to court to seek an injunction restraining the Company from acting upon or exercising any rights or powers pursuant to Sections 144 and 145 CA or to seek an injunction against the removal of directors. See Kuala LumpurHigh Court Originating Petition No: D6-26-70-03 Ang Siew Kian & Chan Poh Ngo v Wing Tiek Holdings Bhd, Anjur Wawasan Sdn Bhd & Lembaga Tabung Haji

32. Requisition by shareholders (s 144, CA) • Requisition shall state the objects of the meeting and shall be signed by the requisitionists and deposited at the registered office of the company. The requisition need not be under corporation’s seal; Roxy Electric Industries (Malaysia) Bhd v Syarikat Nominee Bumiputra Sdn Bhd [1989] 3 MLJ 231.

33. Requisition by shareholders (s 144, CA) • Upon receipt of requisition the director must convene an extraordinary general meeting not later than two months. • If the directors do not convene a meeting within 21 days, the requisitionists may do so themselves (s 144(3)) within 3 months.

34. Requisition by shareholders (s 144, CA) • Any reasonable expenses incurred by the requisitionists in calling the meeting are to be paid by the company, which may reimburse itself out of any sums due to the defaulting directors by way of fees or other remuneration: sub-s (4).

35. Requisition by shareholders (s 144, CA) • If it is impracticable to call a meeting in accordance with the Act or the articles, the court may order a meeting to be called upon application of any director or of any member who would be entitled to vote at the meeting or of the personal representative of any such member, and may make such orders as are necessary to provide for its conduct: (s 150)

36. Cases utilizing s 144 • Removal of directors; • Removal and proposed nomination of auditors (Eksons Corpn Bhd) • Convene EGM for purpose of considering if thought fit passing with or without modification resolution to exempt obligation to undertake any mandatory offers that could arise (Magnum Corpn Bhd)

37. Eg of a notice under s 144 NOTICE OF EXTRAORDINARY GENERAL MEETING NOTICE IS HEREBY GIVEN THAT an Extraordinary General Meeting of the Company will be held pursuant to Section 144 of the Companies Act, 1965 at [location] on [date] at [time] for the purpose of considering and if thought fit to pass the following ordinary resolutions:-

38. Call for meetings s 145 • Meetings called by shareholders as provided by the articles where it may provide that the directors have power to convene extraordinary general meetings. • The section gives members holding of at least 10% of the voting rights in the company, the power to convene a meeting themselves.

39. Call for meetings s 145 • Differs from s 144 in that the directors are not involved in this section. • At least 14 days’ notice must be given of meetings other than a meeting to pass a special resolution.

40. Eg of a notice under s 145 "We, HLB Nominees (Tempatan ) Sdn Bhd (Company No.47697-U) and Mr. Cheong Heng Choy (NRIC No.571002-10-5287), holders of not less than one-tenth of the paid-up share capital of SJA Berhad ("Company") intend to convene an extraordinary general meeting of SJA Berhad ("Meeting") pursuant to Section 145 of the Companies Act 1965 on 2 July 2003.

41. Eg of a notice under s 145 (cont) • The objects of the Meeting are as follows:-To Appoint with Immediate Effect by way of Ordinary Resolution the Following Persons as Directors of the Company:-

42. Member’s rights • Right to vote. Suspended only when the member has not paid all calls or other sums payable by him in respect of his shares and if the shares in question are preference shares – s 148, CA

43. Member’s rights – receiving and approving accounts • Ambiguity – whether members have the right to reject the resolution or to receive and adopt the accounts tabled before them at an AGM. • Words such as ‘receiving and adopting’ the accounts but with no other action required by the shareholders

44. Member’s rights – receiving and approving accounts • AGM cannot be asked to vote on a motion to ‘approve’ or ‘adopt’ the accounts, because they are the accounts of the directors and not of the members • If asked on a motion to ‘approve’ or ‘receive’ the accounts, the fact still remains that the directors have already discharged their statutory obligaiton to lay the accounts before the AGM (Perspectives on Corporate Governance & Management Vol 2, MAICSA)

45. Obstacles of enforcing minority shareholders’ rights • Very costly. • Locus standi. • For a derivative action, damages will be awarded to the company instead of the complaining shareholders.

46. Other Relevant Obstacles to Shareholders’ rights • Right of access to accounting records of the company not provided. Only available to directors and auditors – s 167, CA. Thus, shareholders are often oblivious to exact financial affairs.

47. Other Relevant Obstacles to Shareholders’ rights • Strong dominance of families over ownership structure of companies. • Evidence shows that East Asian companies has strong degree of family control over choice of electing directors. Studies show in the top families in each of these countries controlled between 18% and 58% of the total listed corporate assets Classens, S., Djankov, Sand Lang, L., “Separation of Ownership from Control of East Asian Firms”, (2000) Journal of Financial Economics, Vol. 58, 81.

48. Suggested Solutions • Class action – a union of people will have a bigger force and put pressure on the directors/majority. At least creating a wall for them to scale. • Minority Shareholders watchdog group (MSWG) – pressure group can make a lot of noise in the press. • the MSWG assisted in publicizing shareholders’ concern over Sunrise ESOS (see http://www/hmetro.com.my/Current_News?B Times/Monday/MinorityWrite/2003112322242)

49. Suggested Solutions English Law Commission’s Consultation Paper • Partial abrogation of Foss v Harbottle and the creation of a new derivative action. • Allowing shareholders in small companies the right to have their shares purchased where they have been wrongly excluded from the management. • Streamlining and more effective “case management” of shareholders action.

50. Suggested Solutions • 4.Introduce three new model regulations into Table A to assist shareholders to help themselves and minimize litigation i.e. • A shareholder exit article for smaller companies; • An arbitration and alternative dispute resolution regulation; • Share-valuation machinery where shareholders are being bought out by the remaining shareholders and no agreement can be reached on value. See Samser Kamar Abdul Latif, “Minority Shareholders Remedies – Proposal for Reform for Malaysia (2000) CLJ.