Slide 1

COMPANY LAW BAB 2202/LAW 2034

DIRECTORS AND OFFICERS OF THE COMPANY

DIRECTORS AND OFFICERS OF THE COMPANY

Officers of a companyDirectorsSUNWAY UNIVERSITY

Officers of a corporation

1. Director2. Secretary3. Executive Officer4. Receiver & Manager5. Liquidator

SUNWAY UNIVERSITYOfficers of a corporationMalaysia: Code on Corporate Governance 2000 and 2007Intro Para 1.3- The Code aims to set out principles and best practices on structures and processes that companies may use in their operations towards achieving the optimal governance framework.Intro Para 4.1 Compliance (cross reference to paragraph 15.26 KLSE Listing requirements)SUNWAY UNIVERSITYBoard of directorsBoard of directors (BOD) - managing the companys business - Table A art 73Para 4.72 of CGRE pg. 96 the ultimate responsibility for the board is to create value for shareholders and therefore what is in the best interests of the company should also be in the best interest of the owners [shareholders]

SUNWAY UNIVERSITYBoard of directorsThe powers include power to borrow money, to handle the financial affairs, to sign cheques, promissory notes etc., to appoint the companys agents Table A art 74-77Code: Part 2 AA I & para. 4.17 responsibilities incl. reviewing & adopting a strategic plan etc.SUNWAY UNIVERSITYDirectorsDefinitionS. 4(1)Types of DirectorsExecutive director normally referred to as full-time directorNon-executive director sometimes referred to as a part-time directorManaging directorThe alternate director like a proxy but is a full directorDe facto director informal director (any person occupying the position of directorby whatever name called)Shadow director a puppeteer (a person in accordance with whose directions or instructions the directors are accustomed to act.)

SUNWAY UNIVERSITYAppointmentsS 122 (1) at least 2 directors, 1 a residentS 122(3) The first directors named in the MemorandumFurther appointments Articles; typically, through AGM

SUNWAY UNIVERSITYOther mattersS 138(1) a director may assign his office to another (for public listed companies it has to be approved by a special resolution)S 123(1) consent to be appointed is requiredTable A art 91 appointment of MDAppointments to the Board: Part 1 IV V; Part 2 VIII-XIIICode: Part 4 p 4.18 Chairman; CEO4.23 independent 4.24non-executiveSUNWAY UNIVERSITYQualificationsa human; of full age & capacity - S 122(2)Table A art 71 share qualification to be obtained within 2 months (s 124 (4)) or resigns (s 124(3))S 127 any defect in appointment does not annul the acts

SUNWAY UNIVERSITYRestrictionsS 125(1) - Undischarged BankruptsNot fit to manage a limited liability company- Re Altim Pty Ltd [1968] 2 NSWLR 762Offender is penalised but the capacity to act for the company is not deprived s 127

SUNWAY UNIVERSITYDisqualificationS 130 automatic disqualification/or by court order for 5 years for a person convicted of offences in connection of the promotion formation or management of a corporation; or any offence involving fraud or dishonesty: due to untrustworthinessS 130A disqualification by court order for a person who was a director of 2 companies which went liquidation within 5 years of one another and were insolvent at the time of liquidation: due to the unfitness to manage effectivelySUNWAY UNIVERSITYResignation/RetirementS 129 Age limit of 70 for public cos. Unless reelected under s 129Resignation Table A art 72(e) by noticeRetirement in rotation- Table A art 72Or for a specified period; upon the happening of specified events. Eg Re consolidated Nickel Mines [1914] 1 Ch 883; Re Zinotty Properties [1984] 3 All ER 754122(6) retirement is subject to the requirement of minimum 2 directors in office

SUNWAY UNIVERSITYRemovalRemoval Table A art 69: by special resolutionAmounting to a breach if under a contract of service: Southern Foundaries v Shirlaw [1940] 2 All ER 445; No contract no compensation: Dato Khalid v Kelantan Match Factory (1981) 1 CLJ 171; A contract for life is subject to a satisfactory performance : Khoo Chiang Poh v Cosmic Insurance (unreported)

SUNWAY UNIVERSITYRemovalThe power is vested in the GM: Table A art 69

S 128(1) - for Public co. by an ordinary resolution regardless of M&A or any agreement to the contrary

S 128 co-exists with any other powers: Soliappan v Lim Yoke Fan [1968] 2 MLJ 21 (Articles prevailed)

The s 128s right to remove cannot be superseded by rights under s 181: Tuan Haji Ishak v Leong Hup Holdings [1996]

SUNWAY UNIVERSITYCompensation for loss of officeS 137(1) no compensation is requiredUnless under a contract of service approved by the GM - s 137(5)(b)Payment is approved by the GM - s 137(1)(a)Alternatively by way of pension not > the last 3 years of emoluments - s 137(5)(d)Unless the agreement is a consideration made before the appointment s 137(5)(e)

SUNWAY UNIVERSITYDirectors dutiesEfficiency arguments call for centralised management Board of DirectorsRules developed in common law for directors, at first, by analogy with the rules applying to trusteesDirectors duties: duties of loyalty and duties of care. The main risks which shareholders run when management of the company is delegated to the board.Duties of loyalty: based on fiduciary principlesDuties of skill and care: based on the principles of the law of negligence.

SUNWAY UNIVERSITYTo Whom?Company?The interests of a company, as an artificial person, cannot be distinguished from the interests of the persons who are interested in it. Per Nourse LJ in Brady v Brady [1988] BCLC 20 at 40Evershed MR in Greenhalgh v Ardene Cinemas [1951] Ch 286Shareholders? (members) have the strongest incentive to monitor the board effectively.The duties are owed to the shareholders collectively as a whole, not individually.

SUNWAY UNIVERSITYTo Whom?3. CreditorsAs the company nears insolvency, the interests at stake are those of creditors.West Marcia Safetywear Ltd v Dodd [1988] BCLC 250 cf. Re Welfab Engineers Ltd [1990] BCLC 833: when insolvency threatens, the directors may not take a course of action which will leave the creditors in a worse position, but they are not bound to give creditors interests absolute prioritySUNWAY UNIVERSITYTo Whom?Dictum of Street CJ in Kinsela v Russel Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 222.The creditors become prospectively entitled, through the mechanism of liquidation, to displace the power of the directors and the shareholders to deal with he companys assets.But, the directors do not owe any duties to the creditors individually: Re Pantone 485 Ltd [2002] 1 BCLC 266. The creditors are as a group where their interests constituting the companys interests as insolvency approaches.

SUNWAY UNIVERSITYTo Whom?4. Employees and other stakeholders?5. The Community?6. Society?7. Commercially justifiableto what extent is this important?

SUNWAY UNIVERSITYs.131 CA 1965Disclosure 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

SUNWAY UNIVERSITYs.131 CA 1965Disclosure of interests in contracts, property, offices, etcSection 131(4)Declaration of interest may be made by:-General notice given to the directors At the directors meeting orDirector takes reasonable steps to ensure it is brought up and read at the next directors meeting

SUNWAY UNIVERSITYs.131 CA 1965Disclosure of interests in contracts, property, offices, etcS131(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 (related party transactions) with the company and where such interest may be regarded as not material.

SUNWAY UNIVERSITYs.131 CA 1965Disclosure of interests in contracts, property, offices, etcAccording 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.SUNWAY UNIVERSITYs.131 CA 1965Disclosure of interests in contracts, property, offices, etcS131(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.

S131(8)Penalty:Imprisonment for seven years or one hundred and fifty thousand ringgit or both

SUNWAY UNIVERSITYSection 131A-Interested director not to participate or voteS131A(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.

SUNWAY UNIVERSITYSection 131A-Interested director not to participate or voteInterested 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 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.

SUNWAY UNIVERSITYSection 131A-Interested director not to participate or voteS131A(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

S131A(4) A director who knowingly contravenes this section shall be guilty of an offence against this ActPenalty: Imprisonment for five years or one hundred and fifty thousand ringgit or both.

SUNWAY UNIVERSITYSection 131BFunctions and Powers of the BoardS131(B) (1) The business and affairs of a company must be managed by, or under the direction of, the board of directors. (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.

SUNWAY UNIVERSITYSection 131BFunctions and Powers of the BoardS131B places the functions and powers of the Board of Directors on a statutory footing.

The duties of Board of Directors are now clarified.

SUNWAY UNIVERSITYSection 132(1) Fiduciary Duty of LoyaltyThe 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

SUNWAY UNIVERSITYSUNWAY UNIVERSITYSection 132(1) Fiduciary Duty of LoyaltyOld Section 132(1): -

In the discharge of duties, director shall at all times:- AND Act honestlyUse reasonable diligenceSection 132(1) Fiduciary Duty of LoyaltyS132(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.

SUNWAY UNIVERSITYSUNWAY UNIVERSITYPosition after the amendment to Section 132(1)New S132(1) :-A director of a company shall at all times exercise his powers: - AND

In good faith in the companys best interestFor proper purposeGeneral Penalty SectionS132(3)an officer or agent or officer of the Stock Exchange who commits a breach of this section shall be-

liable to the company for any profit made by him or for any damage suffered by the company as a result of the breach; andguilty of an offence against this Act Penalty: Imprisonment for five years or thirty thousand ringgit

SUNWAY UNIVERSITYSection 132(1A) Duties of Care, Skill and DiligencePosition 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.

SUNWAY UNIVERSITYSUNWAY UNIVERSITYSection 132(1A) Duties of Care, Skill and Diligence The Common Law PositionThe 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.

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

SUNWAY UNIVERSITYSection 132(1A) Duties of Care, Skill and DiligenceDespite 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.SUNWAY UNIVERSITYSection 132(1A) Duties of Care, Skill and DiligenceProblems 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.

SUNWAY UNIVERSITYSection 132(1A) Duties of Care, Skill and DiligenceThe 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 experience which the director in fact has.

SUNWAY UNIVERSITYSection 132(1A) Duties of Care, Skill and Diligencewhere 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 to the minimum standard.

SUNWAY UNIVERSITYSUNWAY UNIVERSITYSection 132(1B) Business Judgment Rule in MalaysiaMischief behind the Business Judgment Rule

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.

Section 132(1B) Business Judgment Rule in MalaysiaWhere 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.Courts are badly equipped and should not substitute its judgment for that of the directors.The Malaysian model is taken from:S180(2) Australian Corporations Act 2001

SUNWAY UNIVERSITYSection 132(1B) Business Judgment Rule in MalaysiaS132(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-

SUNWAY UNIVERSITYSection 132(1B) Business Judgment Rule in MalaysiaS132(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;

SUNWAY UNIVERSITYSection 132(1B) Business Judgment Rule in Malaysia(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

SUNWAY UNIVERSITYSection 132(1B) Business Judgment Rule in MalaysiaSection 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 companySUNWAY UNIVERSITYSection 132(1B) Business Judgment Rule in MalaysiaS132(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.

SUNWAY UNIVERSITYBusiness Judgment Rule in the UKThe 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.

SUNWAY UNIVERSITYBusiness Judgment Rule in the USOtis & Co. v Pennsylvania R.Co., 61 F. Supp. 905 (D.C Pa. 1945)The federal district court ruled that: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

SUNWAY UNIVERSITYBusiness Judgment Rule in the USIn 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..SUNWAY UNIVERSITYBusiness Judgment Rule in the USSummary 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 decisionSUNWAY UNIVERSITYBusiness Judgment Rule in SingaporeVita Health Laboratories Pte Ltd and Others v PangSeng Meng [2004] 4 SLR 162; [2004]SGHC 158The 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 good faith made incorrect commercial decisions..

SUNWAY UNIVERSITYSection 132(1E)Nominee DirectorSection 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 to his duty to his nominator

SUNWAY UNIVERSITYSection 132(1E)Nominee DirectorThe 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.

SUNWAY UNIVERSITYDuties to avoid Conflict of InterestThe Common Law PositionSituations of conflict

i)When a director makes a personal profit while acting in his position.

Regal (Hastings) Ltd v Gulliver [1942] 1 ALL ER 378Held: -Directors are fiduciary and is not allowed by equity to profit from his position.

SUNWAY UNIVERSITYDuties to avoid Conflict of Interestii)Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461Conflict 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.

SUNWAY UNIVERSITYDuties to avoid Conflict of Interestiv) Avel Consultants Sdn Bhd v Mohd Zain Yusof [1995] 4 MLJ 146 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 (other than the company

SUNWAY UNIVERSITYDuties to avoid Conflict of Interestiv)Meehan 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 (e.g., bribe)

SUNWAY UNIVERSITYDuties to avoid Conflict of Interestv)Yukilon Manufacturing Sdn Bhd v Dato Wong Gek Meng & Ors [1998] 7 MLJ 551 Held: -conflict arose where a director competes with the company.SUNWAY UNIVERSITYDuties to avoid Conflict of InterestThe Position in MalaysiaThe 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 officeThe old S132(1) does not expressly refer to the common law situations of conflict.

SUNWAY UNIVERSITYSection 132(2)-Duties to avoid Conflict of InterestThe new S132(2) 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.

SUNWAY UNIVERSITYOther MattersDeletion of S132A and S132B because of the existence of adequate insider trading provisions under the Securities Industries Act 1983 (now consolidated under the Capital Markets and Services Act 2007)SUNWAY UNIVERSITYOther MattersSection 132C -Approval of company required for disposal by directors of companys undertaking or propertyS132E -Substantial property transaction by director or substantial shareholderSection 134 - Register of Directors Shareholdings etcS140 and Directors and Officers Insurance (D&O Insurance)SUNWAY UNIVERSITYOther MattersS145A - Location of Annual General MeetingS167A - System of Internal ControlS172A - Duty to inform upon ceasing to hold office as an auditorS 74 - Scope of Auditors DutiesS174A - Auditors and other persons to enjoy qualified privilege in certain circumstancesSUNWAY UNIVERSITY