Students Manuals Iqs Law c09

7/27/2019 Students Manuals Iqs Law c09

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Corporate Governance

ICSA IQS Corporate Law 240

CHAPTER 9

CORPORATE GOVERNANCE

Chapter Objectives

After the completion of this chapter you should be able to understand amongst

other things:

the division of powers within a company

the meaning and effect of corporate governance

procedure for the appointment and removal of directors, company

secretaries and other officers of the company

proceedings at board meetings

the different types of directors

whether loans can be given to directors

The function of the company secretary

1.0 The initial directors (at least two) are specifically named and appointed in the

memorandum or articles: s 122(3). The directors collectively are referred to as a

board of directors.

DIVISION OF POWERS WITHIN A COMPANY

2.1 The board of directors and general meeting are both organs of the company with

their respective powers determined by the Act and articles.


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2.2 The general meeting has specific powers but the residual powers vest with the

directors.

2.3 If the members in general meeting disapprove of the actions of the board they can

alter the articles to deprive the directors of some of their powers or they can

exercise the power given to them by the articles to vote in directors whose

policies they approve.

The Power of management

2.4 Articles usually confer wide powers of management of a company's affairs on the

board of directors.

2.5 A common example of such a provision is Table A, art 73. It specifies that the

directors manage the companys business.

2.6 The MSEB LR gives shareholders of listed companies a role in significant

management decisions.

2.7 For, example, Rule 10.06 requires informed shareholder approval if a listed

company proposes to enter into a transaction which involves the acquisition or

disposal of assets with a value which exceeds twenty-five per cent of the

company's equity share capital.

General meeting cannot override management decisions

2.8 A question often arises whether the general meeting of members can override the

directors and involve itself in the management of their company.


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2.9 The general principle was established in the early English case ofAutomatic Self-

Cleansing Filter Syndicate Co vCuninghame where it was held that the members

can not interfere with directors decision.

2.10 The principle that members in general meeting cannot override management

decisions made by the board was confirmed in a different context in the English

case ofJohn Shaw &Sons (Salford) Ltd v Shaw [1935] 2 KB 113.

Powers of general meeting limited by articles

2.11 The inability of the general meeting to interfere with the powers of the directorsconferred by the articles was affirmed in the case ofRe Chi Liung & Son Ltd;

Tong Chong Fah v Tong Lee Hwa & Ors.

Statutory Powers vested in the General meeting

2.12 While the general power of management is exercised by or under the direction of

the companys directors, there are certain specific provisions in the Act stipulating

that directors may not exercise certain powers without the approval of the

company in general meeting. The important statutory powers of the general

meeting include the following:

Disposal or acquisition of

companys main undertaking-s

132C

The directors shall not enter into any transaction

for the acquisition of an undertaking or property of

substantial value, or the disposal of a substantial

portion of the companys assets which would

materially and adversely affect the companys

financial position, unless the proposal has been

approved by the general meeting.


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Acquisition or disposal of

substantial non-cash assets-s 132E

Certain property transactions of a substantial

value, between directors and their companies are

voidable at the instance of the company, unless the

company in general meeting ratifies the

transactions within a reasonable time. Transactions

entered into in breach of s 132E are voidable at the

instance of the company and the directors are

liable for severe criminal penalties

Issue of shares by directors-s 132D With the exception of shares issued as

consideration for the acquisition of shares or assets

by the company, any share issue of shares by

directors requires the prior approval of the general

meeting.

Payments made to directors upon

retirement or resignation-s 137

Proposed benefits to directors by way of

compensation for the loss of office or retirement

from office must be disclosed to the members. The

payment of such benefits is unlawful unless they

are approved by the members in general meeting.

Ratification by General Meeting

2.13 If the directors purport to exercise a power, which should properly have been

exercised by the general meeting, their action can be ratified by an ordinary

resolution of the general meeting and the improper exercise of power becomes

valid.

2.14 For example, Table A, art 98 vests the power to declare dividends to the company

in general meeting.


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2.15 If, contrary to that provision, the dividend is declared by the directors it is invalid

until ratified by the members in general meeting.

Separation of Ownership and Management

2.16 The practice whereby companies confer a wide power of management on the

board of directors results in separation of management and ownership. Ownership

vests in the members.

2.17 In the case of large, public companies it is essential that management vests in the

board of directors.

2.18 Where there are a large number of shareholders, it would quickly become

unworkable if the general meeting had the power to manage the company.

2.19 In most listed companies the responsibility for overseeing the day-to-day business

operations is in the hands of senior executives who are salaried employees.

2.20 The most senior executive may be designated the chief or principal executive

officer, under whom there may be a number of subordinate managers.

2.21 Persons employed in an executive capacity are included within the definition of

"officer" under s 4 of the Act, although apart from the chief executive officer,

they are not necessarily directors of the company.

2.22 The function of the board of directors in larger companies is to set goals and

policies for the company, to oversee the conduct of the company's business in

order to identify principal risks and to ensure the implementation of appropriate

systems to manage those risks.


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2.23 In the case of small private companies, the directors and shareholders of such

companies are often the same people and in practice there is no separation of

management and ownership.

2.24 These may have evolved from sole traders or partnerships and even after

incorporation, they continue to function in a similar manner as before.

2.25 However, to meet the requirements of the Act, the distinction between members

in general meeting and directors is maintained even if in many cases it is a

fictitious distinction.

CORPORATE GOVERNANCE

3.1 The development of increased interest in corporate governance reflects higher

expectations by the investment community for greater effort by listed public

companies to develop their own structures and procedures to ensure appropriate

standards of corporate behaviour.

3.2 The emphasis is on self-regulation rather than legislation.

3.3 Corporate governance mechanisms have the purpose of monitoring and

controlling the management of corporations so as to result in more effective

management and to enhance shareholder value.

3.4 The successful implementation of corporate governance principles enables a

corporation to balance the need for managerial risk-taking and entrepreneurial

abilities with mechanisms and procedures for monitoring and setting policy so

that the actions of management correspond with the interests of shareholders and

other interests in the community.


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3.5 The movement towards greater scrutiny of corporate governance issues has

developed worldwide in response to the globalisation of capital markets.

3.6 It is widely believed that mobile global capital will be increasingly invested in

corporations which are well managed, best maximise long-term shareholder

interests and follow corporate governance best practice.

3.7 It is important that corporate governance processes are revealed so that investor

confidence is enhanced by assurance that appropriate monitoring occurs and

procedures are in place.

Finance Committee Report on Corporate Governance

3.8 In March 1999 the Finance Committee released its Report on Corporate

Governance, which contained 70 recommendations pertaining to three broad

areas:

the development of the Malaysian Code on Corporate governance

outlining a set of principles and best practice for corporate governance for

listed companies

reform of laws and regulations concerning the duties of directors and

officers, improving disclosures, enhancing the rights of shareholders and

improving the value of company meetings

training and education for the corporate sector, particularly in improving

the skills and qualifications of directors.


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3.9 The Finance Committee will continue in existence to oversee the implementation

of its recommendations to enhance corporate governance.

The Malaysian Code on Corporate Governance

3.10 The role of the Code is to guide boards of listed companies by clarifying their

responsibilities and providing prescriptions strengthening the control exercised by

boards over their companies

Meaning of Corporate Governance

3.11 The Finance Committee adopted the following definition for the purpose of the

establishment of the Code on Corporate Governance:

Corporate governance is the process and structure used to direct and manage the

business and affairs of the company towards enhancing business prosperity and

corporate accountability with the ultimate objective of realising long term

shareholder value, whilst taking into account the interests of other shareholders.

3.12 The Finance Committees Report is set out in four parts, as follows:

Principles-Part 1 sets out broad principles of good corporate governance for

Malaysia. The objective is to allow companies to apply these flexibly and with

common sense to the varying circumstances of individual companies.

Best Practices in Corporate Governance-Part2 sets pit best [practices for

companies. It identifies a set of guidelines or practices intended to assist

companies in designing their approach to corporate governance.


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Exhortations to other participants-part 3 is not addressed to listed companies but

to investors and auditors to enhance their role in corporate governance. They are

purely voluntary.

Explanatory notes and mere best practice- part 4 provides explanatory notes to

the principles and practices set out in parts 1 and 2 and 3. Part 4 also sets out best

practices directed at listed companies that do not require companies to explain

circumstances justifying departure form best practices-mere best practices.

3.13 The recommendations of the Malaysian Code on Corporate Governance were

incorporated into Part E, Chapter 15 of the MSEB LR, which was reissued in

January 2001.

3.14 Directors of listed companies are required by virtue of paragraph 15.26(a) of the

Listing Requirements to include in their annual report a narrative statement of

how they apply the principles set out in Part I of the Code to their particular

circumstances.

3.15 This is to ensure sufficient disclosure so that investors and others can assess

companies performance and governance practices, and respond in an informed

way.

3.16 Compliance with the best practice guidelines of the Code is not

mandatory.

3.17 However, paragraph 15.26 (b) of the Listing Requirements requires companies to

explain any circumstances justifying departure from such best practices and the

alternative to the best practice principles, if any, the company has adopted.


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THE BOARD OF DIRECTORS

Powers of the board

4.1 The board of directors generally have wider powers than the general meeting of

members.

4.2 This is because the articles typically provide directors with wide management

powers: Table A, art 73.

4.3 The general meeting, though, is able to control the exercise of the board's powers

indirectly through its power of appointment.

4.4 In Chan Choon Ming v Low Poh Choon & Ors, VC George JCA said that

the directors - have powers conferred on them to manage the

company.

4.5 The articles also usually confer various specific powers on the board of

directors.


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Management Directors have power to manage the business of the company.

Table A, art 73 specifies that they may exercise all powers of the

company except those specifically conferred on the company in

general meeting by the Act or the articles themselves

Delegation of

powers

The board usually has specific powers in the articles to delegate its

management function. Unless its articles provide otherwise, the

directors may delegate any of their powers to a committee of

directors, a director, an employee or any other person. Frequently,

the board will appoint one of its members to the office of managing

director: Table A, art 91. The board may delegate any of its powers

to the managing director: Table A, art 93.

Issue shares Once the company is incorporated the directors have the power to

issue further shares subject to such rights and restrictions as they

think fit: Table A, art 2.

Registration of

Transfer of shares

When a member wishes to transfer shares to another, the articles

often give directors the right to refuse to register the transfer: Table

A, art 22.

Negotiable

instruments andreceipts

A necessary adjunct to the power of management is the ability to

pay debts and give receipts on the company's behalf. Table A, art77 specifies that the company's cheques, other negotiable

instruments and receipts are to be signed, drawn, accepted and

endorsed by any two directors or in such other manner as the board

directs.

Calling Meetings All companies must hold a general meeting of its members at least

once in every calendar year: s 143. The articles may bestow the

power of convening general meetings on the directors.

Common seal Every company is required to have a common seal: s 16(5). The

common seal when affixed to a document and authenticated by the

appropriate officers represents the company's signature. The seal is

affixed to deeds, certain instruments such as transfers of land, share

certificates, and formal agreements. Table A, art 96 provides that


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every document to which the seal is affixed shall be signed by two

directors, a director and secretary or a director and some other

person appointed by the directors. Art 96 also specifies that the

directors must provide for the safe custody of the seal, which must

only be used, with their authority.

Dividends The power to declare dividends is granted to the company in

general meeting: Table A, art 98. This power is qualified by art 98

in that the dividend must not exceed the amount recommended by

the board. This enables directors to control the amount of

dividends

Proceedings of the board

Meetings

4.6 The management of the company's business is usually vested in the board of

directors collectively and not in individual directors, though sometimes, the boardmay delegate its powers to a managing director.

4.7 Table A, art 79 enables the directors to meet together as a board and regulate their

meetings as they think fit.

4.8 A person elected by the directors must chair directors meetings: Tab A, art 85. To

constitute a valid directors meeting requires more than the directors meeting

together informally to discuss the companys affairs.

4.9 According to the case ofPatch v Kennedy, a discussion between directors will not

amount to an effective directors meeting unless the directors are aware, before

proceeding to business that the occasion is to be a directors meeting. Informal


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meetings are common in the case of small companies where the directors and

shareholders are identical.

4.10 In order to expedite the decision-making process in these companies. Directors

may also make valid informal decisions without calling a proper meeting. The

consent of all directors is required in the case of such informal decisions of the

board.

Resolutions

4.11 Directors make decisions at directors meetings by passing resolutions. Tab A, art

A provides that a directors resolution shall be decided by a majority of directors

present and voting.

4.12 Tab A, art 88 further specifies that in the event of an equality of votes the

chairman has a casting vote, in addition to any vote they have in their capacity as

a director.

4.13 Powers conferred upon directors are conferred upon them collectively as a board;

therefore notice of an intended resolution must be given to every member of the

board. If this were not the case there could be a situation where the company was

managed by a clique and not by the board:Khoo Chan Yam v Gan Miew Chee @

Gan Gan Chua Poh & Ors 6 [2000] MLJ 20.

Resolutions without meetings

4.14 Whilst it is usual for directors to meet together to conduct board meetings this is

not always practical, particularly, as we noted above, in the case of small private

companies.


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4.15 Directors may therefore pass resolutions without a meeting being held by passing

a circulating resolution.

4.16 Accordingly, Table A contemplates that directors need not be physically

present in order to meet.

4.17 If all directors sign a document in favour of a resolution, that resolution is deemed

to have been passed at a board meeting held on the day it was signed. Tab A, art

90 allows for such a resolution to consist of several documents in like form, each

signed by one or more directors.

Notice of meetings

4.18 The company's articles regulate meetings, however the frequency of board

meetings is usually a matter for the directors to decide.

4.19 It is common practice for large public companies to hold meetings at regular

intervals.

4.20 Table A, art 79, however, enables a director at any time to requisition the

secretary to convene a board meeting.

4.21 Unless the articles provide otherwise, the general rule is that directors must

receive notice of board meetings and of the agenda to be discussed, in sufficient

time to enable them to attend. Notice of each meeting is not necessary, however,

if the articles or the directors set regular fixed meetings.

4.22 The Court of Appeal inAik Ming Sdn Bhd v Chang Ching Chuen, held that unless

the articles of a company provide otherwise, a meeting convened without any

notice at all is a nullity and all the business conducted at the meeting is void.


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4.23 The Court has discretionary power under s 355 of the Act to make an order

declaring that proceedings are valid notwithstanding such irregularity or

deficiency where substantial injustice would result from the invalidation of

proceedings at the meeting.

4.24 Section 355 (2) (a) vests in the Malaysian High Court the original discretion to

make a validation order.

Quorum

4.25 The articles usually specify how many directors constitute a quorum for a

valid board meeting.

4.26 A quorum is the minimum number of directors required for a valid meeting.

4.27 Table A, art 83 leaves the decision of the number necessary to constitute a

quorum to the directors themselves. In the absence of such a determination, a

board meeting requires a quorum of two directors.

4.28 A meeting cannot be constituted by one member and any resolutions purported to

be passed at such a meeting are invalid: United Investment & Finance Ltd v Tee

Chin Yong & Ors.

4.29 Statutory requirements with respect to minutes of directors meetings are those set

out in ss 156 and 157.

4.30 Section 156 (1) requires the company to keep minutes of meetings of directors,

signed by the chairman of the meeting.

4.31 Minutes, entered into books kept for that purpose, are to be taken as evidence of

the proceedings to which the minutes relate: s 156(2).


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4.32 These minutes must be kept at the companys registered office and shall be open

to the inspection of any member without charge: s 157(1).

Delegation of powers by the board

4.33 The articles bestow general and specific powers on the board. It has long been

held that unless there is some provision in the memorandum or articles to the

contrary, the board cannot delegate its powers to others: Totterdell v Fareham

Blue Brick Co.

4.34 In the above case of small private companies, it may be that there is no necessity

for delegation of the board's powers.

4.35 However, even in such cases it is not unusual for the articles to enable the board

to delegate broad powers to one or more of their number.

4.36 In the case of large companies there is a trend toward compartmentalisation

whereby the board delegates its powers inrelation to specific matters to particular

directors or as is increasingly common, to committees of directors.

4.37 For example, it is not uncommon for a director with accounting expertise to be

delegated the task of management of the company's financial affairs.

4.38 An increasingly common trend is for the board of public companies to be divided

among directors to whom day-to-day management has been delegated and

directors who do not take an active role in the daily management of the company

but participate in broader policy decisions. There is thus a distinction between

executive and non-executive directors.


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4.39 Non-executive directors are frequently appointed because of their experience in

business affairs or because their reputations add prestige to the company.

DIRECTORS

Definition

5.1 A director of a company is defined in s 4 as a person who is appointed to the

position of a director or alternate director regardless of the name given to their

position.

5.2 A director is not just a person formally appointed to the office. The s 4 definition

also regards certain persons to be directors even though they are not validly

appointed.

5.3 Unless the contrary intention appears, a person who is not validly appointed as a

director is also regarded as a director if:

the directors are accustomed to act in accordance with the persons

instructions or wishes (shadow director); or

they act as an alternate or substitute director.

De facto directors

5.4 A director is, by virtue of s 4, not just a person formally appointed to the office.

The definition also includes person who claim and purport to act as directors.


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5.5 Such persons are sometimes referred to as de facto directors and are subject to

the same statutory and fiduciary duties as directors who have been validly

appointed.

5.6 For example, in Corporate Affairs Commission v Drysdale, Drysdale was

appointed as a director to fill a casual vacancy on the board. The articles

provided that such a director could only hold office until the next annual

general meeting at which he or she was permitted to stand for re-election.

Drysdale's retirement or re-election was, however, not considered at the general

meeting. Consequently, under the articles, he was no longer a director of the

company. Nevertheless, he continued to participate in the management of the

company as if he were a director. The High Court of Australia held that,

despite the defect in his appointment, he was deemed to be a director and

subject to various fiduciary and statutory duties of directors.

5.7 It seems that a person who acts as a controller of the company, whether or not

they are held out or claim to be a director may be regarded as a de facto director:

Mistmorn Pty Ltd v Yasseen.

Shadow directors

5.8 The s 4 definitions also includes persons who act as shadow directors. These are

persons whose instructions or wishes are customarily followed by the directors of

a company,Re Hydrodam (Corby) Ltd.

5.9 Section 4(2) provides that a person who merely gives advice to the directors in his

or her professional capacity is not to be regarded as a "director" for the purposes

of s 4(1),Yap Sing Hock & Anor v PP.


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Types of directors

5.10 The most common types of directors within the board are:

managing directors;

chairman of directors;

governing directors;

executive and non-executive directors;

alternate or substitute directors;

associate directors; and

nominee directors.

5.11 A company is required to keep a register of directors, managers and secretaries

under s 141. The register must contain particulars of directors and their consent

in writing for appointment: s 141(2). This register is open to inspection by

members and any other person: s 141(5

Managing directors

5.12 Many companies appoint a managing director to be their chief executive officer

and manage their day-to-day business.

5.13 Table A, art 91provides for the board of directors to delegate some of its functions

to a managing director. Under art 93 the managing director has such of the

board's powers as are conferred by the directors.

Chairman of directors

5.14 Neither the Act nor the Table A articles bestow any special authority on the

chairman of directors who is merely the director appointed to chair and exercise

procedural control over directors meetings: Table A, art 85; and sign the minutes:


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s 156. In practice, however, the chairman is often given special powers and in

large public companies the position carries great prestige :AWA Ltd v Daniels

Governing directors

5.15 It is unusual for public companies to have a governing director. Some private

companies, which are formed to operate a family business, provide for the

nomination of a governing director: Re Chi Liung & Son Ltd; Tong Chong Fah v

Tong Lee Hwa & Ors.

Executive and Non Executive directors

5.16 Executive directors are full-time employees of the company.

5.17 Their main role is to carry out the day-to-day management of the companys

business. In this respect they comprise the senior management of the company.

5.18 In the case of large listed companies, the style and complexity of the business

means that the board of directors must delegate substantial control of the

companys activities to its management.

5.19 Non-executive directors have an important role to play in bringing an independent

view to the boards deliberations.

5.20 They should consider the interests of the company as a whole rather than

any sectional interest.

5.21 It is widely seen as a crucial aspect of good corporate governance that listed

company board comprise a number, if not a majority of non-executive directors.


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5.22 The effectiveness of company boards as monitors of management is enhanced by

the appointment of a significant number of non-executive directors.

Alternate or substitute directors

5.23 If a director of a company is unable for any time to act as a director, he or she

may appoint an alternate or substitute director.

5.24 A director of a public company, however, can only assign his or her office if

approved by a special resolution of the company: s 138(1).

5.25 It is more common for the articles to provide a mechanism for the appointment of

an alternate or substitute director.

5.26 Under Table A, art 82, a director may, with the approval of the board, appoint

another to be an alternate or substitute director in his or her place during such

period as is thought fit.

5.49 The appointment of an alternate director does not constitute an assignment of the

office of director: s 138(2).

5.28 An alternate director is entitled to notice of, and to vote at, board meetings. He or

she is an officer of the company and is subject to all the duties of directors.

Anaray Pty Ltd v Sydney Futures Exchange Ltd

5.29 The practice of appointing alternate directors may come to be regarded as

incompatible with the principles set out in the Code on Corporate Governance.

Those principles highlight the importance of all directors having a continuous and

informed role in the administration of the company and for appointments to the

board to be made in accordance with formal and transparent procedures.


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Associate directors

5.30 Some companies adopt the practice of appointing their junior executives as

associate directors. This is done to increase the status of the person appointed. In

some cases associate directors are appointed to act in an advisory capacity

because of their expertise in a particular area. The articles usually limit the

powers of an associate director. Under Table A, art 94 the associate's right to

attend or vote is subject to the board's approval.

Nominee directors

5.31 Sometimes a director is appointed to represent the interests of particular

shareholders or creditors on the board of directors.

5.32 A holding company usually has power to appoint officers to the board of its

subsidiary companies and frequently, they share the same boards. Where

directors are appointed to represent the interests of a particular group, they are

called nominee directors.

Committee of members

5.33 Companies with relatively large numbers on the board may decide that various

management functions be delegated to committees of directors.

5.34 Table A, art 86 provides that committees of directors exercise such powers as are

conferred by the board.

5.35 Any powers so exercised are deemed to have been. exercised by the board.

Committees of directors are often delegated the task of overseeing the company's

large-scale borrowings or construction of a particular project.


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5.36 Where powers are delegated to a committee, the committee only as power to act

within the scope of the powers delegated :Datuk Haji Harun bin Haji Idris & ors

v Public Prosecutor

Appointment of directors

5.37 Section 122 requires every company to have at least two directors.

5.38 The first directors must be appointed by being named in the memorandum or

articles: s 122(3).

5.39 The company cannot be registered unless this is done: s 16(7).

5.40 The Act does not set out the manner in which directors may be subsequently

appointed. The articles generally regulate this.

5.41 Under Table A, art 63 directors so appointed retire from office at the first annual

general meeting.

5.42 The articles of a company formed to take over the business of a sole trader or a

partnership frequently name the vendor of the business as its first director.

5.43 That person is often also named as a governing or managing director to ensure

continued control over the company.

Consent

5.44 A director must consent in writing to holding the position.


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5.45 Section 123(1) of the Act provides that a person shall not be named as a director

or proposed director in the memorandum or articles or in a prospectus of the

company unless they have consented in writing and the consent lodged with the

Registrar.

5.46 Failure to comply with s 123 does not mean that an appointment is invalid. A

person may still be regarded as a de facto director notwithstanding that the

formalities of consent have not been complied with.

Appointment by general meeting

5.47 The general meeting usually makes subsequent appointments of

directors: Table A, art 66.

5.48 Provision is usually made for the directors to appoint someone to fill a casual

vacancy: Table A, art 68.

5.49 In the case of public companies, where appointment of directors is by the general

meeting, each director must be individually appointed by separate resolution.

5.50 More than one director may be appointed by a single resolution if the

general meeting has first unanimously agreed to a resolution to that effect:

s 126(1).

5.51 This section prevents the voting in of a director who was on a joint ticket with

another who had strong support.

5.52 The appointment of a director in contravention of this section is void: S 126(2).


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Who may be appointed as a director?

5.50 A director must be a natural person of full age: s 122(2).

5.51 Any provision in the memorandum or articles of a company which was in force

prior to the commencement of the Act and which operated to constitute a

corporation as a director is to be construed as if it authorised that corporation to

appoint a natural person in its stead: s 122(4).

5.52 On the commencement of the Act any corporation which held office as director of

a company shall cease to hold office and the vacancy may be filled as a casual

vacancy in accordance with the articles: s 122(5).

5.53 Every director must have his principal or only place of residence within Malaysia:

s 122(1).

5.54 The term residence is not defined in the Act but has been held to mean

residence in one place with some degree of continuity:Fong Poh Yoke & Ors v

The Central Construction Company (Malaysia) Sdn Bhd[1998] 4 CLJ Supp 12.

5.55 Presumably temporary or accidental absences will not preclude a person from

being a director.

Share qualification of directors

5.56 The articles of a company often require a director to hold a minimum number of

shares in the company. This required number of shares is called the director's

share qualification.

5.57 A share qualification serves two purposes.


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5.58 It provides directors with an added incentive to ensure the financial success of

their company. It is also attractive to shareholders to see that directors are risking

their own money as well as that of the members.

Persons disqualified from acting as a director

5.58 The Companies Act and Securities Industry Act (SIA) contain a number of

provisions under which directors may be disqualified.

Automatic disqualification Convicted person S 130 (1) CA

Disqualification by court

order

Directors of insolvent

companies

Breach of KLSE Listing

Rules

s 130A CA

s 100 (1) (kk) SIA

5.59 An undischarged bankrupt who acts as director of, or directly or indirectly takes

part in the management of a company, except with the leave of the court is guilty

of an offence: s 125(1).

5.60 The Act does not provide for the removal or disqualification from office of the

bankrupt.

5.61 The articles usually provide that the office of director shall become vacant if the

director becomes bankrupt or enters into any arrangement or composition with

creditors: Tab A, art 72.


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5.61 The acts of a person disqualified from the office of director are still binding on the

company: s 127 Asia Commercial Finance (M) Bhd v Pasadena Properties

Development Sdn Bhd

Managing a Corporation

5.62 The meaning of management of a company for the purpose of the

disqualification provisions is not defined in the Act. The Australian case of

Commissioner for Corporate Affairs v Bracht(1989) 7 ACLC 40, held that a

bankrupt participated in the making of decisions that affected a substantial part of

the companys business and was therefore involved in managing the corporations.

Automatic Disqualification

5.63 A person who has been convicted of certain offences cannot be a director,

promoter or in any way take part in management of a company, within five years

of conviction or release from prison, without leave of the court: s 130(1). The

specified offences include: (i) an offence in connection with the promotion,

formation or management of a corporation; (ii) any offence involving fraud or

dishonesty punishable by imprisonment for a period of three months or more, (iii)

offences under ss 132, 132A and 303 of the Act.

Disqualification by Court Order

5.64 Section 130A provides creditors with additional protection from persons who

continually set up companies which fail.

5.65 This section enables the Registrar and the Official Receiver to apply for court

orders prohibiting certain persons from being a director or from being in any way

concerned in or taking part in the management of a corporation for a period of

five years from the date of the order, without leave of the court.


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5.66 Under this section, a person may be prohibited if he or she was a director of two

or more insolvent companies in the previous five years an the court determines

that persons conduct as a director makes him or her unfit to be concerned in the

management of a company.

5.67 A person applying for leave must give not less than ten days' notice to the

Registrar and the Registrar must be made a party to the proceedings: s 130(2).

5.68 The burden of proving that leave should be granted is on the applicant.

5.69 Section 100(1) of the Securities Industry Act 1983 allows an application to the

High Court by the Securities Commission or by a stock exchange for an order

removing a person form the position of director of a public company for such time

as the Court thinks fit.

5.70 The application may be made where a person has committed an offence in

relation to dealing in securities or has contravened the listing requirements of the

stock exchange.

Vacation of office

Under the Act

5.71 The Act provides various grounds upon which the office of director becomes

vacant:

where a director has not obtained the share qualification within two

months of appointment or has ceased to hold the share qualification. He


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or she may be reappointed after obtaining the qualification: s 124(1) and

(4).

in the case of a public company or subsidiary of a public company, where

a director attains the age of 70 years, the director's office is vacated at the

conclusion of the next annual general meeting: s 129(2). The person may,

however, be reappointed in subsequent years but the maximum duration of

the appointment can only be from one annual general meeting to the next.

Where the director seeks such reappointment the director must disclose his

or her age and the general meeting must pass a special resolution

approving the appointment.

Under the articles

5.72 Where the articles provide for the appointment of a director for a specified period

of time, the appointment ceases at the expiration of that time and the position

becomes vacant.

5.73 The articles usually specify additional grounds for vacation of the office of adirector. Under Table A, art 72 the office becomes vacant if a director.

ceases to be a director by virtue of the Act;

becomes bankrupt or makes any arrangement or composition with his

creditors generally;

becomes prohibited from being a director by reason of any order made

under the Act;

becomes of unsound mind or a person whose person or estate is liable to

be dealt with in any way under the law relating to mental disorder;


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resigns his or her office by notice in writing to the company;

for more than six months is absent without permission of the directors

from meetings of the directors held during that period;

without the consent of the company in general meeting holds any other

office of profit under the company except that of managing director or

manager; or

is directly or indirectly interested in any contract or proposed contract with

the company and fails to declare the nature of his interest in manner

required by the Act.

Termination of appointment as director

5.74 A director may be appointed for such a term as is provided by the articles.

5.75 Table A, art 63 requires a proportion of the directors to retire from office in

rotation. A retiring director is then eligible for re-election.

5.76 This ensures that management of the company retains continuity by allowing

most directors to remain in office for more than one year.

5.77 To meet the needs of particular companies, the articles may allow directors to be

appointed for life, for an indefinite term or a certain prescribed term.

5.78 Where a director is appointed for a particular term, at the expiration of that term

the appointment is terminated.


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5.79 A director may also resign from office.

5.80 Table A,art 72(c) provides that the office of a director becomes vacant if the

director resigns from office by notice in writing to the company.

Removal of directors

5.81 The general meeting of shareholders can only remove a director if empowered to

do so by the articles. Most articles have a provision to this effect.

5.82 Table A, art 69 empowers the company to remove any director before the

expiration of the term of office by ordinary resolution.

5.83 If the articles confer no such power, a special resolution would first be necessary

to alter the articles to provide the necessary authority.

5.84 In the case of public companies, s 128 provides that the general meeting may, by

ordinary resolution, remove a director before the expiration of his or her period in

office.

5.85 Removal in this manner is permitted despite anything to the contrary contained in

the articles or in a separate agreement between the director and the company:

Tuan Ishak Ismail v Leong Hup Holdings Bhd & Ors.

5.86 Section 128 attempts to give shareholders of public companies some control over

the composition of the board of directors. It prevents directors who are opposed

by the majority of shareholders from remaining in office.

5.86 A resolution for the removal of a director by the general meeting under s 128

requires special notice of 28 days to be given.


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5.87 This notice must also be given to the director concerned who is given the right to

be heard on the resolution at the meeting, irrespective of whether he or she is a

member: s 128(2).

5.88 The director may also require the company to send copies of his or her

representations regarding the removal to every member of the company: s 128(3).

5.89 In Solaiappan v Lim Yoke Fan, the Federal Court considered whether the special

notice requirements for the removal of directors under s 128 applied where the

companys articles provided for a lesser period

5.90 The vacancy created by the removal of a director may be filled at the general

meeting at which he or she was removed or it may be filled by the directors as a

casual vacancy under Table A, art 68: s 128(5).

5.90 Section 128 only applies to the removal of directors of public companies. In the

case of private companies, the articles govern the procedure for removal of

directors.

5.91 Table A, art 69 provides that a company may remove a director by ordinary

resolution.

5.92 The board notwithstanding anything in the articles or any agreement cannot

remove a director of a public company to that effect: s 128(8).

5.93 Section 128(2) only applies where removal is by resolution and not by other

means specified in the company's articles.

5.94 For example, in Tien Ik Sdn Bhd & Ors v Kuok Khoon Hwong Peter, the

company's articles allowed a director to be removed by serving notice, in

accordance with its art 85(f) and signed by a majority of directors, to that effect.


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The Supreme Court held that s 128(2) of the Act does not apply to the removal

of a director by notice under which the director was required to vacate his office

as director but may apply to cases where the director is removed

5.95 Section 128 permits a public company in general meeting to remove all appointed

directors, despite its reference to a singular director.

5.96 This would not result in a breach of s 122(1) which requires every company to

have at least two directors where it is proposed to immediately replace the

removed directors:

5.97 In Malaysia, the High Court has held that it is acceptable for a company to have

only one director so long as he or she takes steps to appoint another or others

within the grace period allowed by the Act: Wong Kim Fatt v Leong & Co Bhd.

5.98 Where a director is removed prior to the expiry of his term, the question arises

whether he can restrain the company from so acting or obtain damages for

wrongful dismissal.

5.99 A director cannot prevent the company from exercising its right to remove him.

The equitable remedies of injunction and specific performance are not granted to

enforce personal relations on unwilling parties: Noor Aini binte Majid v Pentex

Sdn Bhd.

6 PAYMENT AND OTHER BENEFITS TO DIRECTORS

6.1 One consequence of the fact that directors stand in a fiduciary relationship with

respect to the company will be discussed.


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6.2 Table A, art 70 provides that directors may receive such remuneration as is from

time to time determined by the company in general meeting. That article also

sanctions the payment of travelling and other expenses properly incurred by the

directors in connection with the company's business.

6.3 The payment of excessive remuneration to directors may constitute oppressive or

prejudicial conduct under s 181, especially where dividends are not paid or

reduced to a small amount.

6.4 This may be unfairly detrimental to a shareholder who is prevented from being a

director.

Unless there is evidence of oppression is not the function of the court to question

whether payments or remuneration sanctioned by the company are excessive or

improper: Low Tien Sang & Sons Holding Sdn Bhd & Ors v How Kem Chin &

Ors (High Court, Kuala Lumpur).

Disclosure

6.5 Information concerning directors remuneration must be contained in the financial

statements laid before the annual general meeting of all companies.

6.6 The annual return, lodged by all companies, except exempt private companies,

with the Registrar and placed on the public record also contains the companys

financial statements: s 165, Eight Schedule Part 11.

6.7 In order to comply with the accounts requirements of the Ninth Schedule of the

Act, the profit and loss statement must set out the total amount paid to directors as

remuneration for their services to the company or its subsidiaries.


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Loans to directors

6.8 A specific type of contract, which may be entered into by a director with his

company is a loan to the director from the company.

6.9 Section 133 restricts the giving of such loans to directors by 'Companies other

than exempt private companies: s 133(1).

6.10 This recognises that small, tightly held companies, in which the directors and

shareholders are mostly the same people, often find it useful to lend to their

directors. Where the interests of directors and shareholders closely coincide,

there is little likelihood of abuse in the company granting loans to directors.

6.11 In the case of larger companies, which may directly or indirectly raise money

from the public, however, s 133 aims to prevent directors improperly using the

funds of the company.

6.12 This may arise where the terms of the loan are more favourable to the director

than would be commercially available elsewhere.

6.13 Even where the terms of the loan are similar to those available commercially, the

policy of the section is that the director should borrow from those available

outside sources and not from the company.

6.14 Section 133A prohibits a company, other than an exempt private company, from

making a loan to any person connected with a director of the company.

6.15 Section 122A states that, for the purposes of Div 2 of Pt V, a person shall be

deemed to be connected with a director if he or she is -

(a) a member of that director's family; or


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(b) a body corporate which is associated with the director; or

(c) a trustee of a trust (other than an employee share scheme or pension); or

(d) a partner of that director or a partner of a person connected with that

director.

6.16 "Member of that director's family" is defined in s 122(2) to include the spouse,

parent, child (including adopted child and stepchild), brother, sister and the

spouse of his or her child, brother or sister.

6.17 A body corporate is associated with a director for the purposes of s 122A(1)(b) in

the following cases: s 122A(3):

(i) the body corporate is accustomed to act on the directions, instructions or

wishes of that director; or

(ii) that director has a controlling interest in the body corporate; or

(iii)that director or persons connected with that director or that director and

person connected with that director are entitled to exercise or control the

exercise of not less than 15 per cent of the votes attached to voting shares

in the body corporate.

6.18 Also included within the prohibition of s 133A are guarantees and the provision

of security given by a company in connection with a loan made to a person

connected to a director by any other person.

6.19 Exceptions to the prohibition set out in ss 133 and 133A include:

loans made by a company to a related corporation;


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provision of funds to meet expenditure incurred for the purposes of the

company or to enable an officer of a company properly to perform his or

her duties. The provision of such funds is subject to approval by the

general meeting of the company. Full disclosure must be made at the

general meeting: s 133(2)(a). This requirement is also necessary for the

following exceptions:

the provision of funds to a full time employee of a company or its holding

company to purchase a home. The provision of such funds is also subject

to approval of the general meeting of the company as outlined above;

a loan made by a company to a director who is a full time employee of the

company or a related corporation where the company at a general meeting

has approved a scheme for the making of such loans and the loan is made

in accordance with the scheme. This allows a company to make loans as

part of an employees incentive scheme; and

loans made by a company engaged in the business of lending money,

where the loan is in the ordinary course of its business. Thus, for

example, a bank may make loans to its directors. Where a company

makes a loan, gives a guarantee or provides security in contravention of ss

133 or 133A, the company is not guilty of an offence but any director, ofthe company who gave the authorisation is guilty of an offence.

6.20 Loans coming within the exceptions still require disclosure in the annual

companys financial statements in accordance with the Ninth Schedule of the Act.

6.21 In addition, directors in default are jointly and severally liable to indemnify the

company against any loss arising from for loans, guarantees or security made

without company approval under s 133: s 133(3).


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Consequences of breach of s 133

6.22 The company retains the right to recover the loan or its liability under a guarantee

or security where the prohibition under ss 133 or 133A is breached: ss 133(5) and

133A(3).

6.23 This overcomes the common law rule that the parties to an illegal contract are not

assisted by the courts to enforce any rights under the contract.

6.24 Given the right of recovery, the Federal Court later held that a guarantee or

security given in breach of the s 133 (1) prohibition is valid and not void: Co-

operative Central Bank Ltd v Feyen Development Sdn Bhd.

Compensation for loss of office

6.25 Section 137 attempts to limit the power of the board of directors to pay

compensation to a director for loss of office. At common law, directors are under

a duty to exercise their powers in good faith. Section 137 goes further in

safeguarding the interests of shareholders.

6.26 It is unlawful for a company to make a payment or give any benefit to a director

by way of compensation for the loss of office or retirement from office unless

particulars of the proposed payment have been disclosed to the members of the

company and approved by the general meeting: s 137(1).

6.27 Certain payments set out in s 137(5) are "exempt benefits" which are not subject

to the prohibitions of s 137(1).


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THE COMPANY SECRETARY

7.1 Every company is required to have at least one secretary: s 139(1).

7.2 The Act only prescribes one as the minimum number.

7.3 A company may, however, have more than one secretary. Large companies often

have a secretary, as well as assistant or deputy secretaries.

7.4 The term "secretary", unlike "director, is not defined in the Act.

7.5 However, a secretary of a company is included within the s 4 definition of

officer and is subject to the statutory duties of officers and agents under s 132

of the Act.

Appointment of secretaries

7.6 Section 139(1A) requires the first secretary of the company to be named in the

memorandum or articles. The office of secretary must not be vacant for more

than one month at any one time: s 139(1B).

7.7 Table A, art 95 provides that a secretary of the company holds office on such

terms and conditions, as to remuneration and otherwise, as the directors

determine.

7.8 Section 139(3) states that secretaries are to be appointed by the directors; the

procedure is not laid out.

7.9 Presumably it is by a resolution of the board. In the case of small private

companies, it has been recognised by the courts that certain formalities need not


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be strictly complied with where all the shareholders have consented or

acquiesced.

7.10 InNorthside DevelopmentsPty Ltd v Registrar-General(1987) 5 ACLC 642, a

private company, whose only function had been to hold land, was managed by

one director and his accountants.

7.11 One of the accountants, Horder, had acted as secretary despite no formal

appointment.

7.12 The Australian equivalent of s 139(3) did not specify how the appointment of a

secretary was to be made; however, it was held that the directors and shareholders

had all acquiesced to Horder exercising the office of secretary and the directors

were regarded as having done that in which they had all acquiesced.

On the other hand, Horder's purported successor was held not to have been

appointed. A notice filed with the Corporate Affairs Commission [the Companies

Registry] purporting to show a change of secretary provides prima facie evidence

but cannot stand in the face of actual evidence. Directors who leave management

to one director cannot be assumed to have delegated authority to the one director

to appoint whomever he wished as secretary without prior consultation.

7.13 Though the Act is silent, Table A, art 95 states that the directors have the power to

remove the secretary.

7.14 A secretary may normally resign on reasonable notice to the company, that is, to

the board of directors.

7.15 In the Northside Developments case, resignation notified to a de facto managing

director without authority to accept it was held to be invalid.

7.16 A director of a company may also be its secretary.


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7.17 However, s 139(5) specifies that where a provision requires something to be done

by a director and a secretary, that requirement is not satisfied if it is done by the

person who is both director and secretary.

7.18 A person may be a secretary of more than one company and may have

other employment.

7.19 Section 141 requires the company to keep a register of its directors,

managers and secretaries.

7.20 With respect to the secretary, the register must specify his or her full name,

residential address and other occupation, if any.

7.21 Under s 141(6) the company is required to lodge with the Registrar:

within one month after its incorporation, a return containing the

particulars of the register of secretaries;

within one month after a secretary is appointed, a return containing the

secretary's full name, address and other occupation (if any); and

within one month after a person ceases to be a secretary, a return

notifying that fact.

Who may be appointed as a secretary?

7.22 A secretary must be a natural person of full age: s 139(1).


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7.23 The secretary, or if there is more than one, each of them, must name his or her

principal or only place of residence in Malaysia: s 139(1).

7.24 The secretary who is ordinarily so resident is required to be present at the

company's registered office either in person or by an agent or clerk during the

hours when the office is required to be open and accessible to the public: s 139(3).

7.25 A company secretary must be:

a member of a professional body or any other body prescribed by the

Minister; or

licensed by the Registrar of Companies: s 139A.

7.26 The Finance Committee recommended that formal and ongoing training be

required for public company secretaries to ensure compliance with the Code on

Corporate Governance.

7.27 This recommendation recognises the crucial role of the company secretary inadvising the board of its compliance with the Code and with other relevant laws

and rules, particularly securities and banking laws.

7.28 Additionally, the Committee recommended that company secretaries must also be

educated on their independence regarding giving advice without fear or favour.

7.29 A person cannot act as a secretary if he or she is:

an undischarged bankrupt;

convicted of any of the following offences:


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(a) those in connection with the promotion, formation or management of a

corporation;

(b) those involving fraud or dishonesty where the punishment is imprisonment

for a period of three months or more;

(c) those involving dishonesty and lack of reasonable diligence in the

discharge of director's duties:

(d) insider trading; and

(e) those involving situations where proper company accounts are not kept; or

no longer a member of a body prescribed by the Minister under s 139B; or

no longer holding a licence to act as company secretary issued by the

Registrar of Companies: s 139c(l).

Function of a secretary

Administrative role

7.30 The nature of the secretary's duties varies from company to company.

7.31 Responsibilities are imposed upon the secretary by the Act, the articles or the

appointing board of directors.

7.32 The courts' present view of the function of a company secretary has changed from

that held in the late 19th and early 20th centuries.


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7.33 Secretaries were initially regarded as persons of low status and authority

in the company.

7.34 In Newlands v NationalEmployers Accident Assoc, the functions of a secretary

were described as clerical and ministerial only. In Bamett, Hoares & Co v

South LondonTramways Co., the secretary was regarded as a mere servant of

the company. This is no longer the present view. The office of secretary,

particularly in large companies, is now regarded as a position of importance

with significant responsibilities and influence.

7.35 Salmon LJ in the case ofPanorama Developments (Guilford) Ltd vFidelis

Furnishing Fabrics Ltd, described a secretary as the company's chief

administrative officer.

7.36 A company secretary is now also seen as having customary authority to bind the

company to certain contracts with outsiders.

7.37 The customary authority of a secretary includes the authority to enter into

contracts connected with the administration of a company and the counter-signing

of the affixation of the companys seal pursuant to a resolution of the board of

directors. It does not extend to entering into commercial transactions decided

upon by the secretary:Mohamed b Othman v Abdul Shattar b Abdul Rahim .

Responsibility imposed by the board

7.38 The company secretary's role in the company is not managerial or

executive.

7.39 Apart from statutory duties, he or she undertakes functions which are assigned by

the articles or by contract of service, or as is usually the case, by the directors.


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7.40 This is illustrated in Wong Kim Fatt v Leong & Co Sdn Bhd & Anor. The

company had two shareholders. The majority shareholder, acting in accordance

with his rights under the articles requisitioned for the purchase of the shares of

the plaintiff, the shareholder. One of the grounds on which the plaintiff

opposed this compulsory acquisition was that the company's secretaries had no

authority to issue the notice of requisition of his shares. Chang Min Tat J

dismissed this argument, holding that the secretaries were carrying out the

instructions of the other director, which were given properly and in accordance

with the company's articles.

7.41 In many instances, the secretary is responsible for the preparation of the

company's accounting records.

7.42 This responsibility is not imposed by the Act, but rather the board of directors.

7.43 A secretary who assumes that responsibility may be made liable as an officer in

default under s 370(3).

7.44 InDeputyCommr. for Corporate Affairs v Stokes, the Commissioner argued that

the secretary was responsible to ensure the company maintained accounting

records that correctly record and explain its transactions and financial position

under the Australian Uniform Companies Act equivalent of s 167. The court

rejected this argument. Burt CJ held that directors have the responsibility to

ensure the company's compliance with accounting records. In order to

ascertain whether the secretary is an officer in default in respect of a failure to

keep accounts, the proper approach is to determine what obligations the

secretary assumes in each particular case.


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Statutory Responsibilities

7.45 Some provisions of the Act specify that a breach renders the officers in default

guilty of an offence.

7.46 Section 370(3) provides that an officer in default is one who is in any way

knowingly and wilfully guilty of the offence or authorises or permits the

commission of the offence.

7.47 Accordingly, the Act makes the secretary prima facie responsible for:

the maintenance of the company's registered office in accordance with s

119;

the lodgement of returns with the Registrar of the particulars of directors,

managers and secretaries required by s 141;

the lodgement of the company's annual return with the Registrar in

accordance with s 165.

Some of the main duties of a secretary.

7.48 The list is not exhaustive:

to carry out the functions of the chief administrative officer of the

company;

to ensure that the necessary registers required to be kept by the Act are

established and properly maintained;


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to ensure that all returns required to be lodged with the Registrar are

prepared and filed within the appropriate time limits;

to organise and attend meetings of the shareholders and directors,

including the sending out of notices, the preparation of agendas etc;

to be conversant with meeting procedures;

to ensure that the company's books of accounts are kept in accordance

with the Act and that the annual accounts and reports are prepared in the

form and at the time required by the Act;

to supervise the company's share capital generally, including the

preparation of allotment letters, issue of share certificates, etc;

to supervise the preparation of tax returns etc;

to attend to the company's insurance requirements; and

to be conversant with statutory requirements.

7.49 The articles may also impose responsibilities on the secretary.

7.50 A document upon which the company's seal is affixed must be signed by a

director and countersigned by a secretary: Table A, art 96.


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DEFECTIVE APPOINTMENTS

8.1 Both the Act and the articles impose formal requirements with respect to the

appointment and qualification of directors.

8.2 In some cases directors or secretaries may act despite the fact that there is a

technical defect in their appointment.

8.3 Section 127 deals with the problem of defective appointments.

8.4 The acts of directors, managers or secretaries are valid notwithstanding any defect

that may afterwards be discovered in their appointment or qualification: s 127.

8.5 Table A, art 89 similarly validates the acts of the board of directors or committees

of directors.

8.6 The court also has power to validate contraventions of the Act: s 355.

8.7 This power does not extend to validating acts which are void and therefore anullity:Aik Ming Sdn Bhd v Chang Ching Chuen [1995] MLJ 770.

8.8 Section 127 applies to validate acts of directors, managers and secretaries which

may affect not only the shareholders but also outsiders.

8.9 In so far as that section affects outsiders, it is governed by the rule in Royal

British Bank v Turquand

8.10 Under s 124(3) and art 72 the office of director is vacated if a director does not

have the required share qualifications, becomes bankrupt or becomes prohibited

from being a director by reason of any order of court.


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8.11 Section 127 validates the acts of such directors notwithstanding any defect that

may afterwards be discovered in his or her appointment or qualification.

8.12 In Asia Commercial Finance (M) Bhd v Pasadena Properties Development Sdn

Bhd[1991] 1 MLJ 111, the High Court held that a person disqualified under s 125

had no capacity to affirm an affidavit on behalf of the company. However, the

court did not consider the application of s 127, which provides that the acts of a

person disqualified from the office of director are still binding on the company.

8.13 Section 127 does not, however, apply to validate acts of directors who in fact

were never appointed to the office or who continue to act after their term has

expired

Students Manuals Iqs Law c09

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