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Implications of some Recent Amendments to the Companies Act 1965

LEE SWEE SENG


LLB, LLM, MBA Advocate & Solicitor Notary Public, Trademark, Patent Agent Certified Mediator sweeseng@tm.net.my www.leesweeseng.com

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An Overview of the Companies Act 1965


Reviewing the major changes to the Act Identifying key areas of the Act pertinent to

corporations
Understanding how the major amendments

will affect your business

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An Overview of the Companies Act 1965


Assessing the practical implications of the

Companies (Amendment) Act 2007


Addressing

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

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Categories of Amendment
The amendments shall fall into the

following categories:
a. Reviewing the Companies Act in relation to

Directors and Officers Sections to be addressed: S131, S132, S132A, S132B, S132, S132C, S132E, S134

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Categories of Amendment
b. Meetings and Proceedings

Sections to be addressed: S145 and S145A


c. Accounts and Audit

Sections to be addressed: S167A, S172A, S174, S174A

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


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


Section 131(1) provides that:

every director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company, shall, as soon as practicable after the relevant facts have come to his knowledge, declare the nature of his interest at a meeting of the directors of the company
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Section 131-Disclosure of interests in contracts, property, offices, etc


Section 131(4)

Declaration of interest may be made by:General notice given to the directors

At the directors meeting

or

Director takes reasonable steps to ensure it is brought up and read at the next directors meeting

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


The Corporate Law Reform Committee

(CLRC) is of the view that S131 should be retained.

A Consultative Document on Review of Provisions Regulating Substantial Property Transactions, Disclosure Obligations and Loans toLee Swee Seng & Corporate Law Reform Committee for the Directors by the Co Companies Commission of Malaysia, Vol 9, July 2007 at page 86

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


S131(2) provides that a director does not

have to declare his interest in a company contract if the interest is of him being a shareholder or creditor of a corporation, which is interested in a contract or proposed contract with the company and where such interest may be regarded as not material

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


Section 131 (7A) provides that:

For the purpose of this section, an interest of the spouse of a director of a company (not being herself or himself a director of the company) and an interest of a child, including adopted child or stepchild, of a director of the company (not being himself or herself a director of the company) in the shares or debenture of the company, shall be treated as an interest in the contract and proposed contract Lee Swee Seng & Co

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


Illustration to Section 131 (7A):

Where interests in shares and debentures shall treated as interest in the contract and proposed contract: Directors
spouse

Interest of
Directors child

Stepchild

Adopted Child

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


It is an established commercial practice to

couple materiality of interest with the 5% threshold derived from S69D Companies Act 1965

A Consultative Document on Review of Provisions Regulating Substantial Property Transactions, Disclosure


Obligations and Loans to Directors by the Corporate Law Reform Committee for the Companies Commission of Malaysia, Vol 9, July 2007 at page 86

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


However,

the CLRC noted that the interpretation is a matter of convenience and should not be stated as a principle of law

What is crucial is whether the interest gives

rise to a material interest.

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


Therefore, even if the interest is less than the

5% threshold, that interest must be disclosed if it gives rise to a conflict of interest

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


According to Tan Bok Seong v Sin Be Seng

& Co (Port Weld) Sdn Bhd [1995] 4 CLJ 795, if the director proves that the other directors are aware of his interest, then, that director need not formally declare his interest.

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


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

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


Lim Foo Yong v PP [1976] 2 MLJ 259

The Facts (contd): The Defendant was charged under S131(1) CA, 1965 for failing to declare the nature of his interest at the Directors Meeting of UMSM, that he is interested in a contract between UMSM and BG
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Section 131-Disclosure of interests in contracts, property, offices, etc


Lim Foo Yong v PP [1976] 2 MLJ 259

Sessions Court: Convicted the Defendant based on the following circumstantial evidence: i) in the Companies concerned, the Defendant was shown to have direct or indirect influence through his family members;
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Section 131-Disclosure of interests in contracts, property, offices, etc


Lim Foo Yong v PP [1976] 2 MLJ 259

Sessions Court: Convicted the Defendant based on the following circumstantial evidence: ii) at or about the time of execution of the contract, the defendant and his family agreed to sell their shares in UMSM and agreed to acquire shares in BG
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Section 131-Disclosure of interests in contracts, property, offices, etc


Lim Foo Yong v PP [1976] 2 MLJ 259

Sessions Court: Convicted the Defendant based on the following circumstantial evidence: iii) the Defendant resigned from the Board of UMSM just before the demand for specific performance of the contract was received by BG
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Section 131-Disclosure of interests in contracts, property, offices, etc


Lim Foo Yong v PP [1976] 2 MLJ 259

Sessions Court: Convicted the Defendant based on the following circumstantial evidence: iv) the secret profits that would accrue to BG on the execution of the contract
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Section 131-Disclosure of interests in contracts, property, offices, etc


Lim Foo Yong v PP [1976] 2 MLJ 259

High Court Quashed the conviction as the circumstantial evidence did not point irresistibly to the guilt of the accused i) The Sessions Court President failed to consider the personal guarantee given by the defendant to UMSM
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Section 131-Disclosure of interests in contracts, property, offices, etc


Lim Foo Yong v PP [1976] 2 MLJ 259

High Court Quashed the conviction as the circumstantial evidence did not point irresistibly to the guilt of the accused ii) The Sessions Court President failed to consider that the sale price in the contract was fixed by the government
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Consequences of Contravening Section 131


S131(7B) CA 1965 provides that:

Where a contract or proposed contract is entered into in contravention of this section, the contract or proposed contract shall be voidable at the instance of the company except if it is in favour of any person dealing with the company for any valuable consideration and without actual notice of the contravention.
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Consequences of Contravening Section 131


S131(7B) CA 1965

The word voidable suggests that the contract or proposed contract entered into in contravention of S131 can be ratified by the company

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Consequences of Contravening Section 131

S131(8)

Penalty:
Imprisonment for seven years or one hundred and fifty thousand ringgit or both

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


S131A(1) provides that:

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


S131A(1)
Counted only to make a quorum Shall not participate in any discussion Shall not vote

Interested Director

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Section 131A-Interested director not to participate or vote


the meaning of shall not participate PP v Dato Haji Mohamed Muslim bin Haji Othman [1983] 1 MLJ 245 The facts: The accused was a member of the State Executive Council and was present at the EXCO meeting which approved his application for State Land.
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Section 131A-Interested director not to participate or vote


the meaning of shall not participate PP v Dato Haji Mohamed Muslim bin Haji Othman [1983] 1 MLJ 245 The facts (c0ntd): The accused failed to declare his interest during the said EXCO meeting which approved his application for land.
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Section 131A-Interested
director not to participate or vote
the meaning of shall not participate PP v Dato Haji Mohamed Muslim bin Haji Othman [1983] 1 MLJ 245 Held: Hashim Yeop A Sani J The accuseds physical presence at the EXCO meeting was sufficient for him to be regarded to have used his public position for his advantage.Swee Seng & Co Lee

Section 131A-Interested
director not to participate or vote
the meaning of shall not participate PP v Dato Haji Mohamed Muslim bin Haji Othman [1983] 1 MLJ 245
The accused was charged under Section 2 of the Emergency (Essential Powers) Ordinance, No 22 of 1070 for corrupt practice.

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Section 131A-Interested
director not to participate or vote
the meaning of shall not participate PP v Dato Haji Mohamed Muslim bin Haji Othman [1983] 1 MLJ 245 Punishment for corrupt practice
Section 2(1) of the Emergency (Essential Powers) Ordinance, 1970 ..guilty of an offence and shall be liable to imprisonment for a term not exceeding fourteen years or to a fine not exceeding twenty thousand ringgit or to both.
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Section 131A-Interested
director not to participate or vote
the meaning of shall not participate PP v Dato Haji Mohamed Muslim bin Haji Othman [1983] 1 MLJ 245 Definition of corrupt practice
Section 2(2) Emergency (Essential Powers) Ordinance, 1970 any act done by any Member or officer, whereby he has used his public position or office for his pecuniary or other advantage.
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Section 131A-Interested
director not to participate or vote
the meaning of shall not participate PP v Dato Haji Mohamed Muslim bin Haji Othman [1983] 1 MLJ 245 Definition of corrupt practice
Now, Section 2(2) Emergency (Essential Powers) Ordinance, 1970 is superceded by the Anti-Corruption Act 1997

Section 131A-Interested
director not to participate or vote
S58 Anti-Corruption Act 1997 (General Penalty):

shall be liable to a fine not exceeding ten thousand ringgit or to imprisonment for a term not exceeding two years or to both

Section 131A-Interested director not to participate or vote


the meaning of shall not participate
Sarawak Building Supplies Sdn Bhd v

Director of Forest & Co [1991] 1 MLJ 211 The Facts: The interested directors were absent from the meeting which passed the resolution on the subject matter.

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Section 131A-Interested director not to participate or vote


the meaning of shall not participate
Sarawak Building Supplies Sdn Bhd v

Director of Forest & Co [1991] 1 MLJ 211 Haidar J: The absence of certain directors from the meeting did not mean that their absence gave the other directors the licence to proceed with the meeting and to pass the purported resolution..
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Section 131A-Interested director not to participate or vote


the meaning of shall not participate
Sarawak Building Supplies Sdn Bhd v

Director of Forest & Co [1991] 1 MLJ 211 Haidar J: (contd) ..their presence was necessary to constitute proper quorum if they had interest in any contract or arrangement, they shall not vote. If they vote, their votes shall not be counted..

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Section 131A-Interested director not to participate or vote


the meaning of shall not participate Reconciling Dato Haji Mohamed Muslim bin Haji Othman (supra) and Sarawak Building Supplies Sdn Bhd (supra)
Interested directors merely sign their presence to make a quorum, and then excuse themselves from the meeting. They need not be physically present at the meeting
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Section 131A-Interested director not to participate or vote


Section 131A does not apply to private

companies. Therefore, the situation where all directors, due to their interest, are conflicted out from voting does not arise

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Section 131A-Interested director not to participate or vote


S131A(2) provides that:

Subsection (1) shall not apply to(a) a private company unless it is a subsidiary to a public company; (b) a private company which is a whollyowned subsidiary of a public company, in respect of any contract or proposed contract to be entered into by the private company with the holding company or with another whollyowned subsidiary of that same holding company;
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Section 131A-Interested director not to participate or vote


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

Section 131A-Interested director not to participate or vote


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


S131A(3)

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

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Section 131A-Interested director not to participate or vote


Comments to S131A(3)

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

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Section 131A-Interested director not to participate or vote


S131A(4)

A director who knowingly contravenes this section shall be guilty of an offence against this Act Penalty: Imprisonment for five years or one hundred and fifty thousand ringgit or both.
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Section 131B
Functions and Powers of the Board
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Section 131B Functions and Powers of the Board


S131(B)

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

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Section 131B Functions and Powers of the Board


S131(B)
(2) The board of directors has all the powers necessary for managing and for directing and supervising the management of the business and affairs of the company subject to any modification, exception or limitation contained in this Act or in the memorandum or articles or association of the company.
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Section 131B Functions and Powers of the Board


S131B places the functions and powers of the Board of Directors on a statutory footing. The duties of Board of Directors are now clarified
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Section 132
Duty and Liability of Officers
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Section 132(1)
Fiduciary Duty of Loyalty
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Section 132(1) Fiduciary Duty of Loyalty


The common law position

Re Smith & Fawcett Ltd [1942] Ch304 Directors must exercise their discretion bona fide in what they consider - not what a court may consider - is in the interest of the company.. Directors must not exercise their powers for any collateral purpose
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Section 132(1) Fiduciary Duty of Loyalty


The common law position

Fiduciary duty of loyalty comprises of duties bona to: Act Exercise AND fide in the
interest of the Company powers for proper purpose

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Section 132(1) Fiduciary Duty of Loyalty


Old Section 132(1): -

In the discharge of duties, director shall at all times:Act honestly

AND

Use reasonabl e diligence

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Section 132(1) Fiduciary Duty of Loyalty


Mischief behind the old S132(1)

i) The word honestly is not defined.

ii) Criminal liability only arises if it can be


proven that the director is aware that the conduct is not in the companys best interest.
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Section 132(1) Fiduciary Duty of Loyalty


Mischief behind the old S132(1)
iii) S132(1) is contrary to the common law position because: (a) At common law, a director must comply with both the best interest of the company requirement and also with the proper purpose test. (b) There is no requirement that the director had acted fraudulently or with deliberate intent to obtain personal advantage.
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Section 132(1) Fiduciary Duty of Loyalty


Kea Holdings Pte Ltd v Gan Boon Hock [2000] 3 SLR 129
The Facts: A director suggested for orders to be cancelled even though he knew that there were buyers
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Section 132(1) Fiduciary Duty of Loyalty


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

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Section 132(1) Fiduciary Duty of Loyalty


In Multi-Pak Singapore Pte Ltd v Intraco

Ltd [1994] 2 SLR 282 Held: The word 'honestly' does not mean that a director would only be in breach of duty if he had acted fraudulently. It means to act bona fide in the interests of the company. In exercising their discretion, the directors should only act to promote or advance the interest of the company.
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Position after the amendment to Section 132(1)


New S132(1):A director of a company shall at all times exercise his powers: In good faith in the companys best interest

AND
For proper purpose

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Position after the amendment to Section 132(1)


New S132(1):Therefore, if a director exercises his power: In good faith in the companys best interest For BUT collateral purpose

The director will still be liable under the new S132(1)


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Position after the amendment to Section 132(1)


New S132(1):The phrase best interest of the company

is not statutorily clarified in order to maintain flexibility

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Position after the amendment to Section 132(1)


There is no need to prove dishonest intent

because: i) the word honestly is replaced with the statement exercise his powers for a proper purpose and in the best interest of the company
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Position after the amendment to Section 132(1)


Examples where the Directors had acted in

the best interest of the company BUT the transaction was motivated by some improper purpose: Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 The Facts: The Directors allotted shares to a company which had made a takeover bid. The Directors argued that the allotment& was made to obtain Lee Swee Seng Co

Position after the amendment to Section 132(1)


Howard Smith Ltd v Ampol Petroleum

Ltd [1974] AC 821 Held: The power to issue shares may be exercised for reasons other than raising capital provided those reasons relate to a purpose benefiting the company as a whole.

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Position after the amendment to Section 132(1)


Howard Smith Ltd v Ampol Petroleum

Ltd [1974] AC 821 Held: However, on the facts, the Directors had improperly exercised their powers, as the effect of the share issue was to reduce the majority holding of two other shareholders who made a rival bid. The power to issue shares was used for a purpose of maintaining control of the company in the hands of the
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General Penalty Section

S132(3) provides that an officer or agent or officer of the Stock Exchange who commits a breach of this section shall be(a)liable to the company for any profit made by

him or for any damage suffered by the company as a result of the breach; and (b)guilty of an offence against this Act Penalty: Imprisonment for five years or thirty thousand ringgit
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Section 132(1A)
Duties of Care, Skill and Diligence
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Section 132(1A) Duties of Care, Skill and Diligence


Position before Section 132(1A) The duty to act with care and skill is derived from common law.
The old Section 132(1) is silent as to the

standard of care, and skill required of a director. It merely prescribes that a director has a duty to act honestly and use reasonable diligence.

Lee Swee Seng & Co A Consultative Document on Clarifying and Reformulating the Directors Role and Duties, by the Corporate Law Reform

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


The Common Law Position The leading decision is Re City Equitable Fire Insurance Co Ltd (1925) CH407 where it was held that In discharging the duties of his position..a Director must..act honestly; but he must also exercise some degree of both skill and diligence.. so long as a Director acts honestly he cannot be made responsible in damages unless guilty of gross or inculpable negligence in a business sense.
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Section 132(1A) Duties of Care, Skill and Diligence


Developments in the Commonwealth Jurisdiction In New Zealand, Section 137 of the

New Zealand Companies Act 1993 provides that a company director must carry out his directorial functions with such care, skill and diligence that would be exercised by a reasonable director in the circumstances of the former.
A Consultative Document on Clarifying and Reformulating the Directors Role and Duties, by the Corporate Law Reform Lee Swee Seng & Co Committee

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


In the UK, the law has moved towards an

objective assessment of the standard of care required of directors, as reflected in section 174 of the UK Companies Act 2006 which codifies Norman v Theodore Goddard (1991) BCLC 1028 and Re DJan of London Ltd (1993) BCC 646

A Consultative Document on Clarifying and Reformulating the Directors Role and Duties, by the Corporate Law Reform Lee Swee Seng & Co Committee

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


Despite these developments, the position

in Malaysia remained to be Re City Equitable Fire Insurance, as the court in Abdul Mohd Khalid v Datuk Haji Mustapha Kamal (2003) 5CLJ 85, had cited obiter Re City Equitable Fire Insurance as the applicable authority for directors duty of care and skill.

Lee Swee Seng & Co A Consultative Document on Clarifying and Reformulating the Directors Role and Duties, by the Corporate Law Reform

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


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

A Consultative Document on Clarifying and Reformulating the Directors Role and Duties, by the Corporate Law Reform Committee for the Companies Commission of Malaysia, August 2006 at pages 44-48 Lee Swee Seng & Co

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


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

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


where

a director has additional knowledge, skill and experience, that director will be assessed against a reasonable person who has that additional knowledge, skill and experience.

The actual knowledge and experience of

a director is to be considered in addition


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


Mischief behind the Business Judgment Rule
i) Sections 131, 132C, 132D, 132E, 133, 133A, provide for sanctions that follow if a director breaches his duties. As a result, an honest director is discouraged from engaging in vigorous business activities. This hampers maximum investment returns.
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Section 132(1B) Business Judgment Rule in Malaysia


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

Section 132(1B) Business Judgment Rule in Malaysia

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

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Section 132(1B) Business Judgment Rule in Malaysia


S132(1B) of the Malaysian Companies Act

1965 provides that:-

A director who makes a business judgment is deemed to meet the requirements of the duty under subsection (1A) and the equivalent duties under the common law and in equity if the director-

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Section 132(1B) Business Judgment Rule in Malaysia


S132(1B) CA 1965 (a) makes the business judgment in good faith for proper purpose; (b) does not have a material personal interest in the subject matter of the business judgment;
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Section 132(1B) Business Judgment Rule in Malaysia


S132(1B) CA 1965 (c) Is informed about the subject matter of the business judgment to the extent the director reasonably believes to be appropriate under the circumstances; and (d)Reasonably believes that the business judgment is in the best interest of the company
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Section 132(1B) Business Judgment Rule in Malaysia


Comments on S132(1B) CA 1965:
The overriding requirement is that the

Directors must make a conscious decision or exercise a conscious judgment


If the Directors failed to make a conscious

decision or exercise a conscious judgment, the Business Judgment Rule will not extend its protection. Lee Swee Seng & Co

Section 132(1B) Business Judgment Rule in Malaysia


Section 132(6) defines business judgment to

mean: any decision on whether or not to take action in respect of a matter relevant to the business of the company

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Section 132(1B) Business Judgment Rule in Malaysia


S132(1C) permits the director to rely on

expert advice but that reliance would only be considered reasonable if the director has made an independent assessment of the reports, advice, opinions and data received from the experts and consultants employed to provide them

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The Business Judgment Rule in Other Jurisdictions


Business Judgment Rule

in the United States


Two common formulations:-

1. Case-law formulation 2. American law Institutes Formulation


http://www.javeriana.edu.co/Facultades/C_Juridicas/pub_rev/documents/6-Laguado.pdf FACTORS GOVERNING THE APPLICATION OF THE BUSINESS JUDGMENT RULE: AN EMPIRICAL STUDY OF THE U.S, U.K, AUSTRALIA AND THE E.U. BY CARLOS ANDRES LAGUADO GIRALDO ISSN 0041-9060 AT PAGES 121-125

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Business Judgment Rule in the United States


1. Case Law Formulation
The Business Judgment Rule originated from

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


Case Law Formulation
Otis & Co. v Pennsylvania R.Co., 61 F. Supp. 905 (D.C Pa. 1945)
The federal district court ruled that: the directors had acted in good faith and were not

liable to the shareholders mistakes or errors in the exercise of honest business judgment do not subject the officers and directors to liability for negligence in the discharge of their appointed duties
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Business Judgment Rule in the United States

Case Law Formulation


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

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Business Judgment Rule in the United States


Case Law Formulation
The Disney Litigation

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

Business Judgment Rule in the United States

Case Law Formulation


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

Case Law Formulation


The Disney Litigation
The court concluded that the directors are liable as they

failed to make any good faith attempt to fulfill their fiduciary obligations in the hiring and termination of Ovitz.

The Disney Litigation shows that American Courts have

increasingly displayed an apparent willingness to review the substance of business decisions, contrary to the Business Judgment Rule
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Business Judgment Rule in the United States


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

Business Judgment Rule in the United States


American Law Institutes Formulation Courts are not under obligation to adopt Restatement sections as the Restatements sections are not binding authority
However, Restatement sections are highly

persuasive.

http://encyclopedia.thefreedictionary.com/American+Law+Institute

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The Restatement Section under the American Law Institutes Formulation


S 4.01(c) of the Business Corporations Act provides that: () (c) A director or officer who makes a business judgment in good faith fulfills the [duty of care] if the director or officer: (1) is not interested in the subject of his business judgment; (2) is informed with respect to the subject of the business judgment to the extent the director or officer reasonably believes to be appropriate under the circumstances; and (3) rationally believesLee Swee Seng & Co that the business judgment is in the best interests of the corporation.

Business Judgment Rule in the United States

Business Judgment Rule in the United States


American Law Formulation Institutes
Summary to S 4.01(c) Business Corporations Act

For the rule to apply, the director must: i) have made a decision; ii) be free of self interest in the judgment; iii) adopt the decision under informed basis; and iv) have rational basis for the decision
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Differences between American Institutes Law Formulation and Delaware Case Laws
American Institutes Law Formulation

the burden of proving the elements of the rule lies on the directors

Case law Formulation

the rule acts as a presumption in favor of the directors, it is for the plaintiff to rebut the existence of those elements. Delawares doctrine is more generous to directors.
http://www.javeriana.edu.co/Facultades/C_Juridicas/pub_rev/documents/6-Laguado.pdf

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Business Judgment Rule in UK?


The Company Law Reform Steering Group

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

Lee Swee Seng & Co

Directors Duties in UK
S172 (1) UK Companies Act 2006 provides

that a director has a duty to promote the success of the company having regard to (a) the likely consequences of any decision in the long term (b) the interests of the companys employees

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Directors Duties in UK
S172 UK Companies Act 2006

(c)

the need to foster the companys business relationships with suppliers, customers and others, the impact of the companys operations on the community and the environment

(d)

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Directors Duties in UK
S172 UK Companies Act 2006

(e)

The desirability of the company maintaining a reputation for high standards of business conduct, and The need to act fairly members of the company as between

(f)

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Directors Duties in UK
S173(1) of the UK Companies Act 2006 provides that : A director of a company must exercise independent judgment.

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Business Judgment Rule in Singapore


Vita Health Laboratories Pte Ltd and Others v Pang Seng Meng [2004] 4 SLR 162; [2004]SGHC 158

The court should be slow to interfere with commercial decisions taken by directors and should not substitute its own decisions in place of those made by honest directors. ..it is not the function of the court to punish and censure director, who have, in
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Section 132(1E)
Clarifying the Position of a Nominee Director
Lee Swee Seng & Co

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


Australian Companies and Securities Law Review Committee, Nominee Directors and Alternate Directors Discussion Paper No 7(1987) para 101 Definition of nominee director An individual independent of the method of their appointment, in the performance of their office, act in accordance with some understanding, arrangement or status which gives rise to an obligation to the appointor
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Section 132(1E) Clarifying the Position of a Nominee Director


Example of conflict of interest between the company and the nominator
Scottish Co-operative Wholesale Society Ltd. V Meyer [1959] AC 324 The facts: The Scottish Co-operative Wholesale Society Ltd set up Scottish Textile & Manufacturing Co Ltd and appointed three of its directors to the Board of the Scottish Textile & Manufacturing Co Ltd
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Section 132(1E) Clarifying the Position of a Nominee Director


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

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


Example of conflict of interest between the company and the nominator
Scottish Co-operative Wholesale Society Ltd. V Meyer [1959] AC 324 Held: When the realignment of shareholding was under discussion, it was the duty of the three directors to the textile company to get the best possible price for any new issue of its shares, whereas their duty to the co-operative society was to obtain the new shares at the lowest possible price.
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Section 132(1E) Clarifying the Position of a Nominee Director


Example of conflict of interest between the company and the nominator
Scottish Co-operative Wholesale Society Ltd. V Meyer [1959] AC 324 Held: The duty of the three directors to the textile company was to do their best to promote its business and to act with complete good faith towards it; and
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Section 132(1E) Clarifying the Position of a Nominee Director


Example of conflict of interest between the company and the nominator
Scottish Co-operative Wholesale Society Ltd. V Meyer [1959] AC 324 Held: not to disclose their knowledge of its affairs to a competitor, and not even to work for a competitor, when to do so might operate to the disadvantage of the textile company
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Section 132(1E) Clarifying the Position of a Nominee Director


Example of conflict of interest between the company and the nominator Scottish Co-operative Wholesale Society Ltd. V Meyer [1959] AC 324 Held: The three Directors had put their duty to the cooperative society above their duty to the textile company by doing nothing to defend the interests of the textile company against the conduct of the co-operative society.
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Section 132(1E) Clarifying the Position of a Nominee Director


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


The CLRC noted that there are different views

within the common law in relation to nominee directors duties and obligations.

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The Common Law Approach


The Strict Approach

Overseas-Chinese Banking Corp Ltd & Anor v Justlogin Pte Ltd & Anor [2004] 2 SLR 675 A nominee director is required to act in the best interest of the company which they serve.
Lee Swee Seng & Co

The Common Law Approach


The Strict Approach

Overseas-Chinese Banking Corp Ltd & Anor v Justlogin Pte Ltd & Anor [2004] 2 SLR 675
Nominee Director can only act in the interest of his appointor where: Interest of appointor

does conflict with


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Interest of NOT company

The Common Law Approach


The Strict Approach

Walker v Winbourne[1976] 50 AJLR 446; Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62 In a corporate group structure the best interest of the company may include the interest of the members of the corporate group or the holding company
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Adjusted Fiduciary Duty Approach


Nominee Directors can act in the best interest

of the nominator where:


S131(2) & (3) New Zealand 1993 S187 Australian Corporations Act 2001

Companies Act

There were prior approval by the shareholders

It does not affect the companys ability to pay its creditors

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Adjusted Fiduciary Approach in New Zealand


Applicable

to

corporate

group

structure
Extended to joint venture company

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Adjusted Fiduciary Approach in New Zealand


New Zealand Companies Act 1993
Whollyowned subsidiary Constitution allows Nominee Director to act in the best interest of the Holding Company Nominee Director can act in the best interest of the Holding Company, even if it is not in the best interest of the whollyowned subsidiary if

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Adjusted Fiduciary Approach in New Zealand


New Zealand Companies Act 1993
Non Whollyowned subsidiary Constitution allows Nominee Director to act in the best interest of the Holding Company Nominee Directors can act in the best interest of the Holding Company even if it is not in the best interest of the wholly-owned subsidiary

if

Prior approval of shareholders of the subsidiary has been obtained


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Adjusted Fiduciary Approach in Australia


Only applies to wholly-owned subsidiary Section 187 Australian Corporations Act 2001

provides that a director of a wholly-owned subsidiary can act in the interest of the holding company and will be taken to have acted in the best interest of the subsidiary if the Constitution of the subsidiary expressly authorises the director to act in the best interest of the holding company and the director acts in good faith in the best interest of the holding company; and the subsidiary is solvent or will not become insolvent because of that directors act.
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The Position in Malaysia


Section 132(1E)-Clarifying the Position of a Nominee Director
Section 132(1E) provides that:

A director, who was appointed by virtue of

his position as an employee of a company, or who was appointed by or as a representative of a shareholder, employer or debenture holder, shall act in the best interest of the company and in the event of any conflict between his duty to act in the best interest of the company and his duty to his nominator, he shall not subordinate his duty to act in the best interest of the company Co his duty to his to Lee Swee Seng &

The Position in Malaysia


Section 132(1E)-Clarifying the Position of a Nominee Director
The phrase shall not subordinate his duty

under Section 132(1E) is worded in the negative.


Therefore, as a final result, the companys

best interest will prevail over the interest of the nominator.

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


The Common Law Position
Situations of conflict

i) When a director makes a personal profit while acting in his position. Regal (Hastings) Ltd v Gulliver [1942] 1 ALL ER 378 Held: Directors are fiduciary and is not allowed by equity to profit from his position.

Lee Swee Seng & Co

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


The Common Law Position
Situations of conflict

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

Lee Swee Seng & Co

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


The Common Law Position
Situations of conflict

ii)Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 Held: The contract was void. Conflict arose when the company enters into a contract, arrangement or transaction in which a director has interest in, and that director does not disclose his interest to the company. Lee Swee Seng & Co

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

The Common Law Position


Situations of conflict

iii) Avel Consultants Sdn Bhd v Mohd Zain

Yusof [1995] 4 MLJ 146 Facts:The director had set up another firm to compete for contracts with the company.

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

The Common Law Position


Situations of conflict

iii) Avel Consultants Sdn Bhd v Mohd Zain

Yusof [1995] 4 MLJ 146 Held:Conflict arose where a director uses or exploits an asset (including business opportunity and corporate information) treated as the companys property, for his own purpose or the purpose of any one else
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Section 132(2)-Duties to avoid Conflict of Interest

The Common Law Position


Situations of conflict

iv) Mahesan v Malaysian Government Officers Co-operative Housing Society [1978] 1 MLJ 149 Held: conflict arose where a director receives a benefit in some other way in connection with the exercise of his powers as a director (eg bribe)
Lee Swee Seng & Co

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


The Common Law Position
Situations of conflict

v) Yukilon Manufacturing Sdn Bhd v Dato Wong Gek Meng & Ors [1998] 7 MLJ 551 Held: conflict arose where a director competes with the company.

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


The Position in Malaysia

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

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


The Position in Malaysia

The old S132(1) does not expressly refer to

the common law situations of conflict.

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


The new S132(2) provides that:

A director or officer of a company shall not, without the consent or ratification of a general meeting(a)use the property of the company; (b)use any information acquired by virtue of his position as a director or officer of the company;
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New S132(2)
(c) use his position as such director or officer; (d) use any opportunity of the company which he

became aware of, in the performance of his functions as the director or officer of the company; or

(e) engage in business which is in competition with the company to gain directly or indirectly, a benefit for himself or any other person, or cause detriment to the company

Lee Swee Seng & Co

New S132(2) This new provision amounts to a restatement of the common law conflict of interest situation.
It assists directors in appreciating situations

of conflict which may cause them to act in breach of their duty to the company.

A Consultative Document on Clarifying and Reformulating theCo Lee Swee Seng & Directors Role and Duties by the Corporate
Law Reform Committee for the Companies Commission of Malaysia August 2006 at page 66

Deletion of S132A and S132B


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Deletion of S132A and S132B


S132A and S132B attempted to codify

the misuse of corporate information and was directed at various insider trading conduct.
The CLRC is of the view that S132A and

S132B is redundant and should be deleted because of:Lee Swee Seng & Co

Deletion of S132A and S132B


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

Lee Swee Seng & Co

S132B
Capital Markets and Services Act 2007
Part V Market Misconduct and other Prohibited Conduct Section 174(a) This Part shall apply to(a) in respect of securities(i) acts and omissions occurring within Malaysia in relation to securities of any body corporate which is formed or is carrying on business or is listed within or outside Malaysia; and
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S132B
Capital Markets and Services Act 2007
Part V Market Misconduct and other Prohibited Conduct Section 174(a) This Part shall apply to(a)in respect of securities(ii) acts and omissions occurring outside Malaysia in relation to securities of any body corporate which is formed or is carrying on business orSeng & Co is listed within Lee Swee

Section 188 Capital Markets and Services Act 2007


S188 provides that:

(1) A person is an insider if that person(a) possesses information that is not generally available which on becoming generally available a reasonable person would expect it to have a material effect on the price or
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Section 188 Capital Markets and Services Act 2007


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

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Section 188 Capital Markets and Services Act 2007


(2) An insider shall not, whether as principal or agent, in respect of any securities to which information in subsection (1) relates(a) acquire or dispose of, or enter into an agreement for or with a view to the acquisition or disposal of such securities; or (b) procure, directly or indirectly, an acquisition or disposal of, or the entering into an agreement for or with a view to the acquisition or disposal of such securities.
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Section 188 Capital Markets and Services Act 2007


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

Section 188 Capital Markets and Services Act 2007


S188(3) (a) acquire, dispose of, or enter into an agreement with a view to the acquisition or disposal of, any securities to which the information in subsection (1) relates; or (b) procure a third person to acquire, dispose of or enter into an agreement with a view to the acquisition or disposal of, any securities to which the information in subsection (1) relates.
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Section 188 Capital Markets and Services Act 2007


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

Lee Swee Seng & Co

Section 188 Capital Markets and Services Act 2007


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

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Section 132CApproval of company required for disposal by directors of companys undertaking or property
Lee Swee Seng & Co

Section 132C-Approval of company required for disposal by directors of companys undertaking or property
Old S132C(1):
notwithstanding anything in a companys memorandum or articles, the directors shall not carry into effect any proposal or execute any transaction for(a) the acquisition of an undertaking or property of a substantial value; or (b) the disposal of a substantial portion of the companys undertaking or property

Lee Swee Seng & Co

Section 132C-Approval of company required for disposal by directors of companys undertaking or property
Old S132C(1):
which would materially and adversely affect the performance or financial position of the company, unless the proposal or transaction has been approved by the company in general meeting

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Section 132C-Approval of company required for disposal by directors of companys undertaking or property
Mischief behind the Old S132C(1):

i)

Directors were not prepared to say that a transaction would adversely affect the performance or financial position of a company.

ii) The old S132C permitted adverse transaction as long as the transaction has been approved by the company in a general meeting.

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Section 132C-Approval of company required for disposal by directors of companys undertaking or property
Mischief behind the Old S132C(1):

Dato Toh Kian Chuan v Swee Construction and Transport Company (Malaya) Sdn Bhd [1995] 1 LNS 317
The Facts: A minority shareholder sought to set aside an agreement for the sale of a piece of land. He alleged that the land was sold at an undervalue.
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Section 132C-Approval of company required for disposal by directors of companys undertaking or property
Mischief behind the Old S132C(1):

Dato Toh Kian Chuan v Swee Construction and Transport Company (Malaya) Sdn Bhd [1995] 1 LNS 317
Held: The old S132C permitted such transactions as the approval of the company in general meeting had been obtained.
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Section 132C-Approval of company required for disposal by directors of companys undertaking or property

The New S132C(1) has removed the

requirement that the transaction must adversely affect the performance or financial position of the company

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Public Listed Companies


S132C(1A) provides that:

For the purpose of subsection (1), in the case of a company where all or any of its shares are listed for quotation on the official list of the Stock Exchange as defined in the Securities Industry Act 1983, the term substantial value or substantial portion shall mean the same value prescribed by the provision in the listing requirements of the Exchangewhich relates to acquisition or disposals by a company or its subsidiaries to which such provisions applies; and (b) which would require the approval of shareholders at a general meeting in accordance with the provisions of such listing requirements
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(a)

The meaning of substantial value


Rule

10.06 (1) of the Listing Requirements of Bursa Malaysia provides that: For a transaction where any one of the percentage ratios is equal to or exceeds 25%, the listed issuer must obtain the approval of its shareholders in general meeting..
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percentage ratios

The meaning of substantial value

Rule 10.02(h) provides that percentage ratios means the figures, expressed as a percentage, resulting from each of the following calculations:(i) the value of the assets which are the subject matter of the transaction, compared with the net assets of the listed issuer;
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The meaning of substantial value

(ii)

percentage ratios
net profits (after deducting all charges and taxation and excluding extraordinary items) attributable to the assets which are the subject matter of the transaction, compared with the net profits of the listed issuer;

Rule 10.02(h)

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percentage ratios

The meaning of substantial value

Rule 10.02(h)

(iii) the aggregate value of the consideration given or received in relation to the transaction, compared with the net assets of the listed issuer; (iv) the equity share capital issued by the listed issuer as consideration for an acquisition, compared with the equity share capital Lee Swee Seng & Co previously in issue;


(v)

percentage ratios

The meaning of substantial value

Rule 10.02(h)

the aggregate value of the consideration given or received in relation to the transaction, compared with the market value of all the ordinary shares of the listed issuer;

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The meaning of substantial value

percentage ratios

Rule 10.02(h)

(vi) the total assets which are the subject matter of the transaction compared with the total assets of the listed issuer;

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The meaning of substantial value

percentage ratios

Rule 10.02(h)

(vii) in respect of joint ventures, business transactions or arrangements, the total project cost attributable to the listed issuer compared with the total assets of the listed issuer or in the case where a joint venture company is incorporated as a result of the joint venture,
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The meaning of substantial value

percentage ratios
the total equity participation of the listed issuer in the joint venture company (based on the eventual issued capital of the joint venture company) compared with the net assets of the listed issuer. The value of the transaction should include shareholders loans and guarantees to be given by the listed issuer; or
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Rule 10.02(h)(vii) contd

The meaning of substantial value

percentage ratios
aggregate original cost of investment of the subject matter of the transaction divided by the net assets of the listed issuer, in the case of a disposal and where the acquisition of the subject matter took place within last 5 years;

Rule 10.02(h) (viii) the

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Private Limited Companies


S132C(1B) provides that;

In the case of any company other than a company to which subsection (1A) is applicable, an undertaking or property shall be considered to be of a substantial value and a portion of the companys undertaking or property shall be considered to be a substantial portion if(a) its value exceeds twenty-five per centum of the total assets of the company
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Private Limited Companies


S132C(1B) (b) the net profits (after deducting all charges except taxation and excluding extraordinary items) attributed to it amounts to more than twentyfive per centum of the total net profit of the company; or (c) its value exceeds twenty-five per centum of the issued share capital of the company,
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Differences between old S132C and new S132C


The Old S132C(3) provides that:

A transaction entered into in contravention of subsection (1) shall, in favour of any person dealing with the company for valuable consideration, and without actual notice of the contravention be as valid as if that subsection has been complied with

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Differences between old S132C and new S132C


The new S132C(3) provides that:

Where an agreement or transaction is carried into effect in contravention of subsection (1), the arrangement of transaction shall be void except in favour of any person dealing with the company for valuable consideration and without actual notice of the contravention.

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Differences between old S132C and new S132C


Therefore,

previously the transaction is presumed valid in favour of any person dealing with the company for valuable consideration, and without actual notice of the contravention.

Now, the transaction is void and cannot be

ratified, except in favour of any person who deals with the company for valuable consideration and without actual notice of the contravention
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Section 132E
Substantial Property Transaction by director or substantial shareholder

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S132E-Substantial property transaction by director or substantial shareholder


S132E(1) provides that:

..a company shall not carry into effect any arrangement or transaction where a director or substantial shareholder of the company or of its holding company, or a person connected with such a director or substantial shareholder(a) acquires or is to acquire shares or non cash assets from the company; or (b) disposes of or is to dispose of shares or non cash assets of the requisite Lee Swee Seng & Co value, to the company

S132E-Substantial property transaction by director or substantial shareholder Definition of substantial shareholder


According to Rule 1.01 of the Listing

Requirements of Bursa Malaysia, it has the same meaning as S69D Companies Act 65

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S132E-Substantial property transaction by director or substantial shareholder


S69D(1) Companies Act 1965 a person has substantial shareholding in the company if he has interest or interests in one or more voting shares in the company and the nominal amount or aggregate of the nominal amounts of those shares is not less than 5% of the aggregate of the nominal amounts of all the voting shares in the company

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S132E-Substantial property transaction by director or substantial shareholder


S69D(2)Companies Act 1965
a person has substantial shareholding in company, being a company the share capital of which is divided into two (2) or more classes of the shares if he has interest or interests in one or more voting shares included in one of those classes and the nominal amount of that share, or aggregate of the nominal amounts of those shares is not less than 5% of the aggregate of the nominal amounts of all the voting shares included in that class.
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S132E-Substantial property transaction by director or substantial shareholder


S69D(3) Companies Act 1965

a person who has substantial shareholding is a substantial shareholder in that company

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S132E-Substantial property transaction by director or substantial shareholder


Definition of persons connected with such a

director or substantial shareholder

S 132E(7) provides that: for the purposes of subsection (1)(a) persons connected with a substantial shareholder shall have the same meaning as that assigned to a person connected with a director in Section 122A save that all references therein to a director shall be read as a reference to a substantial shareholder
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S132E-Substantial property transaction by director or substantial shareholder


S122A CA 1965 provides that: (1) For the purposes of this Division a person shall be deemed to be connected with a director if he is
(a) (b) with a member of that directors family; a body corporate which is associated that director

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S132E-Substantial property transaction by director or substantial shareholder


S122A CA 1965 provides that:
(c ) a trustee of a trust (other than a trustee

for an employee share scheme or pension scheme) under which that director or member of his family is a beneficiary; or
(d) a partner or that director or a partner of a

person connected with that director

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S132E-Substantial property transaction by director or substantial shareholder


S122A(3) CA 1965 provides that:
In paragraph (1)(a) a member of that directors family shall include his spouse, parent, child (including adopted child and stepchild), brother, sister and the spouse of his child, brother of sister.
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S132E-Substantial property transaction by director or substantial shareholder


S122A(3) CA 1965

member of that directors family

spouse

parent s

broth er
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sister

S132E-Substantial property transaction by director or substantial shareholder


S122A(3) CA 1965

member of that directors family

Brother - in-law

Sisterin-law

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S132E-Substantial property transaction by director or substantial shareholder


S122A(3) CA 1965

member of that directors family

Child
Including adopted child and step child

Son-in law Daughte r- in law


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Differences between the Old S132E(2) and the New S132E(2)


The Old S132E(2) provides that: An agreement entered into in contravention of subsection (1) and any transaction entered into in pursuance of the arrangement (whether by the company or any other person) shall be voidable at the instance of the company unless the arrangement and transaction are, within reasonable period, ratified by the company in general meeting, and also, if the arrangement and transaction are for the transfer of an asset to or by a director of its holding company or a person who is connected with such director, by a resolution of Lee Swee Seng & Co the holding company in general meeting

Differences between the Old S132E(2) and the New S132E(2)


The new S132E(2) provides that: An arrangement or transaction which is carried into effect in contravention of subsection (1) shall be void, unless there is prior approval of the arrangement or transaction(a) by a resolution of the company at a general meeting; or (b) by a resolution of the holding company at a general meeting, if the arrangement or transaction is in favour of a director or substantial shareholder of its holding company or a person connected with such Lee shareholder director or substantial Swee Seng & Co

Differences between the Old S132E(2) and the New S132E(2)


S132E(3) provides that:

The resolution of the company or its holding company at the general meeting of the company or its holding company to consider the arrangement or transaction shall be subject to the director, substantial shareholder or person connected with such director or substantial shareholder, as the case may be, abstaining from voting on the resolution whether or not to approve the arrangement or transaction
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Differences between the Old S132E(2) and the New S132E(2)


Previously, the transaction entered into in

contravention of subsection(1) is voidable and can be ratified by the Company within a reasonable period.
Now,

the transaction is entered into in contravention of subsection (1) is void and cannot be ratified by the company

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Deletion of Section 132G


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Deletion of Section 132G


S 132G(1) provides that:

Notwithstanding the provision of S132C and 132E, a company shall not enter into any arrangement or transaction to acquire the shares or assets of another company in which a shareholder or director of the acquiring company, or a person connected to such shareholder, or director, has a substantial shareholding.. unless the arrangement or transaction was entered into three years after such shareholder, director or connected person as the case may be, first held the shares in that other company or after the assets were first acquired by the said company, as the case may be
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Deletion of Section 132G


S132G(2) provides that: an arrangement or transaction entered into in contravention of subsection (1) shall be void and any consideration given for the shares or assets shall be recoverable accordingly Intention of Section 132G to prohibit asset shuffling whereby shareholders could inject newly acquired assets into listed companies at excessively high value thereby adversely affecting the interests of minority shareholders.
1. Budget 2006: To abolish Section 132G of Companies Act at http://www.theedgedaily.com/cms/contents.jsp Lee Swee Seng & Co

Deletion of Section 132G


Problems with Section 132G
Legitimate

transactions are stifled since shareholders approval in general meeting could not save such transactions.

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Effect of the deletion of Section 132G


Companies can now under take mergers &

acquisitions and restructure their business.

The safeguards to the abuse which S132G

was aimed at can be found in the other provisions of Companies Act such as S131, S131A and S132C
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Section 134
Register of Directors Shareholdings
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Amendments to Section 134 Register of Directors Shareholdings etc


Section 134(1) provides that:

A company shall keep a register showing with respect to each director of the company particulars of(a) shares in the company or in a related corporation being shares in which the director has an interest and the nature and extent of that interest;
Lee Swee Seng & Co

Amendments to Section 134 Register of Directors Shareholdings etc


(b) debentures of or participatory interest made available by the company or a related corporation being debentures or participatory interests in which the director has an interest and the nature and extent of that interest;

Lee Swee Seng & Co

Amendments to Section 134 Register of Directors Shareholdings etc


(c) rights or options of the director or of the director and other person or persons in respect of the acquisition or disposal of shares in, debentures of or participatory interests made available by the company or a related corporation; and

Lee Swee Seng & Co

Amendments to Section 134 Register of Directors Shareholdings etc


(d) contracts to which the director is a party or under which he is entitled to a benefit being contracts under which a person has a right to call for or make delivery of shares in, debentures of or participatory interests made available by a company or a related corporation

Lee Swee Seng & Co

Amendments to Section 134 Register of Directors Shareholdings etc


Section 134(12) is amended by inserting the

following: (c) a reference to an interest of the spouse of a director of a company (not being herself or himself a director of the company) and an interest of a child, including adopted child or stepchild, of a director of the company (not being himself a director of the company) in the shares or debentures of the company, shall be treated as the interest of the director in the shares or
Lee Swee Seng & Co

Amendments to Section 134 Register of Directors Shareholdings etc


Therefore, interest of a spouse and a child,

including adopted child and stepchild is included in the interests that a director must disclose

Lee Swee Seng & Co

Amendments to Section 134 Register of Directors Shareholdings etc


The method of disclosure of shareholdings

S135 (1) A director of a company shall give notice in writing to the company(a) of such particulars relating to shares, debentures, participatory interests, rights, options and contracts as are necessary for the purposes of compliance with section 134;
Lee Swee Seng & Co

Amendments to Section 134 Register of Directors Shareholdings etc


The method of disclosure of shareholdings

S135 (1)A director of a company shall give notice in writing to the company(b) of particulars of any change in respect of the particulars referred to in paragraph (a) of which notice has been given to the company including the consideration, if any, received as a result of the event giving rise to the change;
Lee Swee Seng & Co

Amendments to Section 134 Register of Directors Shareholdings etc


The method of disclosure of shareholdings

S135 (1)A director of a company shall give notice in writing to the company(c) rights or options of the director or of the director and other person or persons in respect of the acquisition or disposal of shares in, debentures of or participatory interests made available by the company or a related corporation; and
Lee Swee Seng & Co

Amendments to Section 134 Register of Directors Shareholdings etc


The method of disclosure of shareholdings

S135 (1)A director of a company shall give notice in writing to the company(d) contracts to which the director is a party or under which he is entitled to a benefit being contracts under which a person has a right to call for or to make delivery of shares in, debentures of or participatory interests made available by the company or related corporation
Lee Swee Seng & Co

Amendments to Section 134 Register of Directors Shareholdings etc


The method of disclosure of shareholdings

S134(5) Within 3 days after receiving notice from a director under 135(1)(a), the company shall enter in its register in relation to the director the particulars in S134(1) including the number and description of shares, debentures, participatory interests, rights, options and contracts to which the notice relates and in respect of shares, debentures, participatory interests, rights, or options acquired or contracts entered into after he Lee became a director- Swee Seng & Co

Amendments to Section 134 Register of Directors Shareholdings etc


The method of disclosure of shareholdings

S134(5) (a) the price or other consideration for the transaction, if any, by reason of which an entry is required; and (b) the date of(i) the agreement of the transaction or if it is later, the completion of the transaction; or (ii) where there was no transaction, the occurrence of the event by reason of which an entry is required to be made under this section. Lee Swee Seng & Co

Section 140
Directors and Officers Insurance (D&O Insurance)
Lee Swee Seng & Co

S140 and Directors and Officers Insurance (D&O Insurance)


D&O insurance is a means of mitigating

personal liabilities for directors and officers. The issue is whether an insurance contract taken by the company or by the director is void under S140 CA 1965
Lee Swee Seng & Co

S140 and Directors and Officers Insurance (D&O Insurance)


The CLRC noted that in jurisdictions where

D&O insurance is valid: i) It may be taken by a company where the company purchases and maintains insurance to insure against any loss or damage suffered by the company as a result of claims taken by third parties arising out of an officers or directors act or omission, as seen in S199A Corporations Act 2001;
A Consultative Document on Clarifying and Reformulating the Directors Role and Duties by the Lee Swee Seng & Co

S140 and Directors and Officers Insurance (D&O Insurance)


ii) It may be taken by a company to reimburse the company for loses it has suffered as a result of indemnifying the insured person where the company is obliged to indemnify the officer or director, as seen under Section 310(3)(a) of the United Kingdom Companies Act 1985;

A Consultative Document on Clarifying and Reformulating the Directors Role and Duties by the Lee Swee Seng & Co Corporate Law Reform Committee for the Companies Commission of Malaysia, Vol 5 at pages 82-84

S140 and Directors and Officers Insurance (D&O Insurance)


iii)
It may be taken by the company where the company purchases and maintains insurance to insure against any loss or damage suffered by the company due to a directors breach of any duty that he owes to the company; It may be taken by the director to insure against personal liabilities in relation to his duties as a director that he owes towards the company
A Consultative Document on Clarifying and Reformulating Co Directors Role and Duties by the Lee Swee Seng & the Corporate Law Reform Committee for the Companies Commission of Malaysia, Vol 5 at pages 82-84

iv)

Officers Insurance (D&O Insurance)


The

CLRC recommends that D&O Insurance should be clarified in the Companies Act , that the company may be allowed to purchase or maintain insurance or to indemnify its officer or auditor for cost, expenses and liability incurred by that officer or auditor in defending an action commenced by a third party (the third party being a person other than the company)
A Consultative Document on Clarifying andSwee Seng & Co Directors Role and Duties by the Lee Reformulating the Corporate Law Reform Committee for the Companies Commission of Malaysia, Vol 5, at pages 82-84

S140 and Directors and Officers Insurance (D&O Insurance)


However, the company should not be

allowed to purchase or maintain insurance for officers in relation to any liability or breach of duty owed to the company.
The

CLRC is also of the view that shareholders should be informed of the insurance or indemnity given.
A Consultative Document on Clarifying and Reformulating the Directors Role and Duties by the Corporate Law Reform Committee for the Companies Commission of Malaysia, Vol 5, at pages 82-84 Lee Swee Seng & Co

S140 and Directors and Officers Insurance (D&O Insurance)


However, the recommendations were

not incorporated into the Companies (Amendment) Act 2007, as Section 140 remain unchanged.

Lee Swee Seng & Co

S140 and Directors and Officers Insurance (D&O Insurance)


S140(1) provides that: Any provision, whether contained in the articles or in any contract with a company or otherwise, for exempting any officer or auditor of the company from, or indemnifying him against, any liability which by law would otherwise attach to him in respect of any negligence default breach of duty or breach of trust of which he may be guilty in relation to the Lee void company, shall be Swee Seng & Co

S140 and Directors and Officers Insurance (D&O Insurance)


S140(2) Notwithstanding anything in this section a company may pursuant to its articles or otherwise indemnify any officer or auditor against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in connection with any application in relation thereto in which relief is under this Act granted to him by Swee Seng & Co Lee the Court

Section 145
Meetings and Proceedings
Lee Swee Seng & Co

Meetings and Proceedings


Section

145 Companies Act 1965 confers power upon shareholders to convene a general meeting if two or more members holding not less than 1o per cent of the issued share capital desire the holding of a general meeting.

A Consultative Document on Engagement with Shareholders by the Corporate Law Reform Lee of Malaysia, & Co Committee for the Companies Commission Swee Seng February 2006 at page 21

Notice Period of General Meetings in Malaysia


S145(2) provides that:

A meeting of a company or of a class of members, other than a meeting for the passing of a special resolution, shall be called by notice in writing of not less than fourteen days or such longer period as is provided in the articles
Lee Swee Seng & Co

Notice Period of General Meetings in Other Jurisdictions


Hong Kong
Section 114(1) and Section 116(1) of the Hong Kong Companies Ordinance provides as follows:

In the case of an AGM, 21 days notice in writing passing a special resolution, 21 days
Lee Swee Seng & Co

In the case of a general meeting for

Notice Period of General Meetings in Other Jurisdictions


In the case of a meeting which is neither

an AGM nor a meeting for the passing of a special resolution, 14 days in writing where the company is other than a limited company and 7 days notice in the case of an unlimited company

A Consultative Document on Engagement with Shareholders by the Corporate Law Reform Committee for the Companies Commission of Malaysia, February 2006 at page 27 Lee Swee Seng & Co

Notice Period of General Meetings in Other Jurisdictions


Australia
Section 249H(1) Australian Corporations

Act 2001 prescribes that at least 21 days notice must be given for a meeting of a companys members.
Section 249HA Australian Corporations

Act 2001 prescribes that a minimum period of 28 days notice is required to be given notwithstanding anything in the companys Lee Swee Seng & Co constitution

Position in Malaysia
The

Finance Committee on Corporate Governance recommended that the Companies Act 1965 and the Listing Requirements of Bursa Malaysia Securities Berhad be amended to extend the notice period for Annual General Meetings from 14 days to 21 days.1 This is to enable nominees to obtain and submit proxy votes and assist in greater participation in such meetings
2

Malaysia, Report on Corporate Governance, (February 1999), Chapter 6 at paras 2.1.7 to 2.1.11

2 A Consultative Document on Engagement with Shareholders by the Corporate Law Reform Committee for the Companies Commission of Malaysia, February 2006 at page 27 Lee Swee Seng & Co

S145(2A) Companies Act 1965


S145(2A) provides that:

Notwithstanding subsection (2), the annual general meeting of a public company shall be called by a notice in writing of not less than twenty-one days before the annual general meeting or such longer period as is provided in the articles
Lee Swee Seng & Co

S145(3) Companies Act 1965


S145(3) provides that:

A meeting shall, notwithstanding that it is called by a notice shorter than is required by subsection (2) or (2A) be deemed to be duly called if it is so agreedin the case of a meeting called as the annual general meeting, by all the members entitled to attend and vote thereat; or
Lee Swee Seng & Co

(a)

S145(3) Companies Act 1965


in the case of any other meeting, by a majority in number of the members having a right to attend and vote thereat, being a majority which together holds not less than ninetyfive per centum in nominal value of the shares giving a right to attend and vote or, in the case of a company not having a share capital, together represents not less than ninety-five per centum of the total voting rights at that meeting of all the members
Lee Swee Seng & Co

(b)

S145A
Location of Annual General Meeting
Lee Swee Seng & Co

Location of the Annual General Meeting


The former S145A provides that:

Where any meeting (including an adjourned meeting) is required to be held under this Division it shall be held in the State where its registered office is situated
Therefore, AGM can only be held in the

states where the company is registered


Lee Swee Seng & Co

Location of the Annual General Meeting


The CLRC recommends that changes be made

to the Companies Act 1965 to facilitate the use of technology that allows shareholder a reasonable opportunity to participate in the conduct of general meeting at two or more locations.
The primary venue must still be in Malaysia to

ensure applicability of Malaysian laws.

Lee Swee Seng & Co

Location of the Annual General Meeting


The new S145A provides that:

A company shall hold all meetings of its members within Malaysia and may hold a meeting of its members within Malaysia at more than one venue using any technology that allows all members a reasonable opportunity to participate

Lee Swee Seng & Co

S167A
System of Internal Control
Lee Swee Seng & Co

Section 167A System of Internal Control


Section 167A provides that:

Except as otherwise provided for in the listing requirement of a Stock Exchange in relation to companies whose shares are listed for quotation on the Stock Exchange, the directors of a public company or a subsidiary of a public company shall have in place a system of internal control that will provide a reasonable assurance thatLee Swee Seng & Co

Section 167A System of Internal Control


(a) assets of the company are safeguarded

against loss from disposition; and

unauthorized

use

or

(a) All transactions are properly authorized and

that they are recorded as necessary to enable the preparation of true and fair profit and loss accounts and balance sheets and to give a proper account of the assets. Penalty: Imprisonment of six months or ten thousand ringgit or both
Lee Swee Seng & Co

S172A
Duty to inform upon ceasing to hold office as an auditor
Lee Swee Seng & Co

Section 172A Duty to inform upon ceasing to hold office as an auditor


Pursuant to Section 172(5)Companies Act

1965, an auditor who is to be removed from office may submit a written representation to the company and request that the written representation be sent to every member who is entitled to receive the notice of the meeting.
However, there is no similar provision in the

case of resignation
A Consultative Document on AuditorsLee Swee Responsibilities by the Corporate Law Reform Roles and Seng & Co

Section 172A Duty to inform upon ceasing to hold office as an auditor


The CLRC recommends that: a resignation statement should be submitted

to the company and the company should to make the statement available to the shareholders

Lee Swee Seng & Co

Section 172A Duty to inform upon ceasing to hold office as an auditor


The CLRC recommends that: statement must state the reasons for the

resignation or removal or where the auditor considers that there are no circumstances in connection with his ceasing to hold office that need to be brought to the attention of members or creditors
Lee Swee Seng & Co

Section 172A Duty to inform upon ceasing to hold office as an auditor


Section 172A provides that:

Where an auditor has made written representations to the company pursuant to subsection 172(5) or if an auditor gives notice to the directors of the company of his desire to resign as auditor of the company pursuant to subsection 175(15),
Lee Swee Seng & Co

Section 172A Duty to inform upon ceasing to hold office as an auditor


Section 172A (contd): he shall within seven days of the submission of the written representations or the submission of his notice of resignation submit a copy of the written representation or his written explanation of his resignation, to the Registrar and, to the Stock Exchange where the company is a company whose shares or debentures are listed on the official list of a Stock Exchange as defined in the Securities Industry Act 1983 Swee Seng & Co Lee

Section 174
Scope of Auditors Duties
Lee Swee Seng & Co

Section 174 Scope of Auditors Duties


Section 174(2) of the Companies Act 1965 specifies the general duty on auditors to:Report to shareholders on whether the

companys accounts give a true and fair view of the companys affairs

Lee Swee Seng & Co

Section 174 Scope of Auditors Duties


Section 174(2)
Determine

whether the companys accounts have been prepared according to the standards issued by the Malaysian Institute of Accountants (MIA)

Lee Swee Seng & Co

Section 174 Scope of Auditors Duties


Section 174(8)

If an auditor in the course of the performance of his duties as auditor of a company, is satisfied that(a) there has been a breach or nonobservance of any provisions of this Act; and

Lee Swee Seng & Co

Section 174 Scope of Auditors Duties


Section 174(8) (b) the circumstances are such that in his opinion the matter has not been or will not be adequately dealt with by comment in his report on the accounts or consolidated accounts or by bringing the matter to the notice of the directors of the company or, if the company is a subsidiary, of the directors of its holding company, he shall forthwith report the matter in
Lee Swee Seng & Co

Section 174 Scope of Auditors Duties


The Finance Committee on Corporate

Governance has recommended that auditors should be placed under further obligation to report fraud, dishonesty and other serious breaches to the relevant authority.
If acting without malice, auditors should be

accorded protection from defamation suits


The Finance Committee on Corporate Governance-Report on Corporate Governance February 1999 at page 31 Lee Swee Seng & Co

Section 174 Scope of Auditors Duties


Today, Section 174(8A) provides that:-

In addition to subsection (8), if an auditor in the course of performance of his duties as an auditor of a public company or a company controlled by a public company, is of the opinion that a serious offence involving fraud or dishonesty is being or has been committed against the company or this Act by officers of the company, he shall forthwith report the matter in writing to the Registrar
Lee Swee Seng & Co

Section 174 Scope of Auditors Duties


Section 174(8A) Penalty: Imprisonment for seven years or two hundred and fifty thousand ringgit or both

Lee Swee Seng & Co

Section 174 Scope of Auditors Duties


Section 174(8B) provides that:

No duty to which an auditor to a company may be subjected to shall be regarded as having been contravened by reason of his reporting the matter referred to in subsection (8A) in good faith to the Registrar

Lee Swee Seng & Co

Section 174 Scope of Auditors Duties


Section 174(8C) provides that:

For the purpose of subsection (8A) (a) a company is presumed, unless the contrary is established, to be controlled by a public company if the public company is entitled to exercise or control the exercise of not less than fifteen per centum of votes attached to the voting shares of the company; and
Lee Swee Seng & Co

Section 174 Scope of Auditors Duties


Section 174(8C) (b) a serious offence involving fraud or dishonesty means the offence that is punishable by imprisonment for a term that is not less than two years or the value of the assets derived or likely to be derived or any, loss suffered by the company, member or debenture holder

Lee Swee Seng & Co

Section 174 Scope of Auditors Duties


Section 174(8C)(b) contd from the commission of such an offence exceeds two hundred and fifty thousand ringgit and includes offences under section 364 (false and misleading statements), 364A (false reports), 366 (fraudulently inducing persons to invest money) and 368 (fraud by officers).

Lee Swee Seng & Co

Section 174A
Auditors and other persons to enjoy qualified privilege in certain circumstances
Lee Swee Seng & Co

Section 174A Auditors and other persons to enjoy qualified privilege in certain circumstances
S174A is amended by inserting subsection

(2A) which provides that: No auditor shall be liable to be sued in any court or be subject to any criminal or disciplinary proceedings for any report under section 174 submitted by the auditor in good faith and in the intended performance of any duty imposed on the auditor under this Act
Lee Swee Seng & Co

Conclusion
The Companies (Amendment) Act 2007

has incorporated the following: i. codified Directors Duties as seen in Section 132 ii.laid down the functions and powers of the board iii.clarified the disclosure of interests in contracts, property, offices etc. iv.clarified the provision on substantial property transaction
Lee Swee Seng & Co

Conclusion
The Companies (Amendment) Act 2007

has incorporated the following: v. Amended the provision on calling of meetings and incorporated the holding of meetings using technology vi. Amended the auditing process and laid down a mandatory requirement for public companies to set up a System of Internal Control.
Lee Swee Seng & Co

The End Thank you


Assisted by Patricia Boo LLB(Hons) London, CLP
Lee Swee Seng & Co

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