Nota Terkini Company Law

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• INTRODUCTION-which of the following represents a company? A Farmasi Ibrahim B Melor Enterprise C Zali Sdn Bhd D Perniagaan Itikmas & Adik Beradik E Bank Islam Malaysia Berhad F Klinik Rahim, Said dan Wong

Transcript of Nota Terkini Company Law

Page 1: Nota Terkini Company Law

• INTRODUCTION-which of the following represents a company?

A Farmasi Ibrahim B Melor Enterprise C Zali Sdn Bhd D Perniagaan Itikmas & Adik Beradik E Bank Islam Malaysia Berhad F Klinik Rahim, Said dan Wong

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Companies

• The dominant form of business organisation

• Over half a million companies in Malaysia

• Created through a process of registration under statute – an “artificial legal person”

• Have special legal characteristics (discussed in Lecture 3)

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What is the purpose of companies?

• Traditionally, a means by which a large group of people with capital and management resources could come together to conduct an enterprise on an ongoing basis

• Now also widely used for small business and by individuals

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Small and large companies

• Most companies are small businesses

• In 2001, there were 809 companies listed on the Kuala Lumpur Stock Exchange (KLSE). (Listed companies are companies in which you can buy or sell shares through the KLSE.)

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The architecture of companies

• Capital structure– equity capital (shares)– debt capital

• Management structure– board of directors and other officers– members (shareholders)

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• Choice of form of business association

• Types of companies

• Registration of companies

• Listing on the KLSE

• Corporate groups

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Choice of form

• Distinguish between:– incorporated entities; and– unincorporated entities.

• Incorporated entities (corporations) are separate legal persons

• Unincorporated entities have no legal personality separate from their participants

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Incorporated entities

• “Corporation” is the general term. Definition in sec 4 of the Companies Act

• May be formed:– by special Act of Parliament– under an Act of Parliament conferring power

on some person to create corporations, eg. the Companies Act 1965

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Unincorporated entities

• sole trader

• general partnership

• limited partnership

• non-profit associations and clubs

• trusts

• syndicates and joint ventures

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• Some distinction between company, partnership and sole proprietorship

• -refer the notes

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Relevant considerations – choice of form

• In deciding the appropriate form, consider:– profit or non-profit– limited or unlimited liability– limits on size– ability to raise capital– formalities and expense– audit and reporting requirements– tax treatment

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Choosing a company (cont)

• Advantages:– can have more than 20 members (outsized

partnerships prohibited by sec 14)– limited liability– may be easier to raise capital – different tax treatment– company law as standard form contract– flexibility

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Choosing a company (cont)

• Disadvantages:– arguably, greater expense in formation and

compliance– publicity

• The decision must always depend on the individual circumstances of the business

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Types of companies

• Corporations formed under the Companies Act are “companies”

• Companies are classified:– by reference to basis and extent of the

members’ liability (sec 14(2))– as public or private

• Some provisions of the Companies Act apply only to certain types of companies (sec 14A)

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Types of companies

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Classification by reference to members’ liability

• Company limited by shares (sec 214(1))

• Company limited by guarantee (sec 14A)

• Unlimited company

• No liability company

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Classification as public or private

• Private companies– section 15:

• no more than 50 members• no fundraising activity requiring a disclosure

document under Part IV, Division 3, SCA

– may be a company limited by shares or an unlimited company with share capital – sec 15

– may be an exempt private company – sec 4(1)

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Classification (cont)

• Public companies:– everything other than private companies– section 4:

• companies limited by guarantee and no liability companies are always public companies

• companies limited by shares and unlimited companies with share capital may be public companies

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Registration of companies

• Lodge a Form 13A with ROC containing prescribed information

• Register the memorandum and articles (if any)

• Note restrictions on names. • Pre-registration conduct – promoters can

act for the company before it is registered – sec 35

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Corporate groups

• Often different aspects of the business are owned or carried out by different companies in a group

• Holding companies, subsidiaries and related bodies corporate – sec 6

• Controlled entities – sec 5(2)

• Circumstances where law recognises corporate groups

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Company Law – Lecture 3

• Definition of corporation – sec 4 of the Companies Act 1965

• The company as a separate legal entity

• Corporate capacity

• The doctrine of limited liability

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The separate legal entity doctrine

• The company is a legal person separate from its participants

• This means that:– its obligations and property are its own and

not those of its participants– its existence continues unchanged even if the

identity of the participants changes

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Merits of incorporation

• Limited liability

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Limited liability

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Limited liability

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Salomon v Salomon (1897)

Salomon

family

Pty Ltdcompany

shoe business

cash, debenture

20,001 shares

6 shares

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Salomon (cont)

• Issue – was Mr Salomon entitled to priority under the debenture over other, unsecured creditors of the company?

• Depends on whether the company and its controller are separate legal entities, and not agents or trustees for each other

• Court said yes

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Characteristics of companies

• Important features of companies arising from their separate legal personality– can incur obligations and hold rights, and sue

and be sued, in their own name– can contract with their controllers– have perpetual succession– are separate taxpayers– participants (may) have limited liability

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Companies are separate from their controllers

• Lee v Lee’s Air Farming Ltd: issue – could Mr Lee be both the controller of a company and its employee?

• Macaura v Northern Assurance: issue – was Mr Macaura the “owner” of property that belonged to a company controlled by him?

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Companies can enforce rights

• Vu Siew Chin v Wong Fah Yoon – issue : can incur liabilities and be sued

• Foss v Harbottle – issue : enforce rights in its own name

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• Lifting the veil/ exceptions• Some time the above principle can produce unsatisfactory results-

thus there are exceptions:• Number of members below 2-the person is personally liable• Responsibility for fraudulent trading-the person who knew the fraud

is personally liable• Publication of a name-when the name of the co is not published-the

person would be personally liable• Taxation-nationality of members may affect the national status of

the co• Holding and subsidiary co-the 2 co are separate legal entities,

however decisions show that they may also be treated as a single entity

• Evasion of legal obligation• To do justice-eg the director making secret profit

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Exceptions – piercing the corporate veil

• At common law (rare)– just and equitable ground – Tan Guan Eng &

Anor v Ng Kwong Hee– corporate form used to avoid an existing legal

duty – Gilford– company is the agent or partner of the

controller – Smith, Stone & Knight– principles underlying a particular law require

the veil to be pierced – Re Darby

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Exceptions (cont)

– position of group of companies – People Insurance Co Sdn Bhd v People Insurance Co Ltd

• Under the Companies Act, in the insolvent trading provisions in sec 304 and sec 36

• Other statutory exceptions:– sec 67(5) – financial assistance– sec 167 – profit and loss account

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Exceptions (cont)

– sec 121 – publication of name– sec 140(1) – Income Tax Act 1967

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Constitution of company

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Company Law – Lecture 5

• “Internal governance rules”/constitution comprising :

(a) memorandum of association; and

(b) articles of association

• Legal effect of the memorandum and articles of association.

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Constitution of company

• Sample memorandum

• Sample Article

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What are “internal governance rules” ?

• Rules agreed between the members to govern the internal workings of the company

• Typically deal with appointment, powers and removal of officers, meetings, classes of shares, dividends, transfer of shares, inspection of books

• Where can we find the internal governance rules for a company?– in the company’s memorandum and articles of

association

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Constitution

• A company can adopt a constitution

• Constitution contains customised internal governance rules for that particular company called: (a) The Memorandum of Association; and

(b) The Articles of Association.

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Adopting a constitution

• Memorandum must be lodged at the time of incorporation.

• Articles of Association can be lodged when the company is registered, or not.

• Adopting, amending or repealing the articles requires a special resolution.

• Memorandum may be altered by special resolution unless provisions therein state otherwise

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Model Articles of Association

• Table A, Fourth schedule of the Companies Act 1965

• Sec 30 of the Companies Act 1965

• Listed companies must have an articles of association that is consistent with the Kuala Lumpur Listing Requirements, Chapter 7

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Legal effect of the memorandum and articles of

association• Section 33 – statutory contract

– interpretation– rights of members and officers to enforce– consequences of non-compliance

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Legal effect of the memorandum and articles of

association (Cont)

• Not a contract with outsiders• Unenforceable by outsiders• Raffles Hotel

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Company Law – Lecture 10

• Types of directors

• Board composition

• Appointment, resignation, removal & disqualification of directors

• How boards operate in practice

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Types of directors

• Every company must have at least two directors, resident in Malaysia.

• Executive directors– CEO / managing director– Others (eg finance director)

• Non-executive directors– may or may not be “independent”

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Types of directors (cont)

• Chairperson

• Governing director

• Nominee director

• Alternate director

• “De facto” and “shadow” directors– sec 4– Standard Chartered Bank v Antico

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Malaysian Boards for listed companies

Independent NED

90% with 2 or more

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Board composition in Australia’s largest companies

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Appointment of directors

• Who can be appointed ?– someone who consents– human, not company– minimum 18 years old– not disqualified– if 70 years or older in a public company,

special rules apply

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Appointment of directors (cont)

• New companies– directors named in application

• Existing companies– check company’s articles of association

(see Lecture 7)

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Resignation / removal of directors

• Resignation– director needs to notify the company

• Removal– by other directors

• maybe in private companies (check articles)

– by members• private companies – check articles : Art 69• public companies – sec 128

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Disqualification of directors

• Grounds (reasons) :– automatically due to certain offences

where the person must obtain leave of court

– where court orders disqualification of directors of insolvent companies

– where the Securities Commission disqualifies under the SIA.

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How boards operate

• Delegation of powers to :– Board committees :

• eg audit, remuneration, nomination– CEO / managing director– Director, employee or other person

• Directors’ access to information :– common law (“information” – broader)– company’s books, in relation to legal

proceedings.

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How boards operate (cont)

• Meetings of directors– usually called “board meetings”– all directors must be told (“receive notice”)– a quorum requirement: articles of association– use of technology (e.g. video conf.,

telephone)– “paper meetings”

• Art 90

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Company Law – Lecture 11

• Duties of directors and other officers– Summary of the duties– Who owes the duties?– To whom are the duties owed?– Who enforces the duties?– Consequences of breaching a duty– The duty of care

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Summary of the duties

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Who owes the duties?• General law duties

– Directors– Senior executive officers– Why? Because they are “fiduciaries”

• Statutory duties– All statutory duties apply to directors– This includes “de facto” and “shadow”

directors (see Lecture 10)– Most statutory duties apply to “officers”

(sec 9) but not sec 132(1)

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To whom are the duties owed?

• Answer = the company

• In exceptional circumstances, a duty will be owed to an individual shareholder

– Brunninghausen v Glavanics

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Who enforces the duties?

• Statutory duties – Suruhanjaya Syarikat Malaysia (Companies Commission of Malaysia)

• Common law duties – the company (or liquidator if company is being wound up)

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What are the consequences of breaching a duty?

• Discussed in Lecture 13 • Breach of statutory duties may result in :

– a disqualification order– an order to pay a penalty –an order to pay compensation to the company = 132D(7)– an injunction = 132C, 132E– imprisonment

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What are the consequences of breaching a duty? (cont)

• Breach of a common law duty may result in the person paying compensation to the company, damages for breach of duty or giving an account of profit.

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Duty of care, skill & diligence

• Sources of the duty :– section 132(1)– common law– contract of employment – for executive

directors and other executive officers

• A director or other officer breaches this duty if he or she is “negligent”

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Duty of care (cont)

• Statutory duty – sec 132(1)

– A director shall at all times act honestly and use reasonable diligence in the discharge of his duties – Re City Equitable Fire Insurance

• The duty of care and skill• Use reasonable diligence• Can directors’ delegate?

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Duty of care (cont)

• What is the standard of care ?– Originally, under the common law, the

courts used a largely “subjective” test :• Took into account the background, skills and

experience of the director concerned• A director with little knowledge of his/her

company’s business, and little skill, was judged against the standard of someone with the same (poor) knowledge and skill

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Duty of care (cont)

• What is the standard of care? (cont)– Now :

• Daniels v AWA Ltd – common law• There is no “uniform” standard for all directors• But it is no longer a largely subjective test• The standard of care required of director “X” is

the care that a reasonable person doing X’s job in X’s company would exercise (a largely “objective” test)

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Duty of care (cont)

• Under the modern standard, is there any minimum requirement for all directors?– Yes (Daniels v AWA Ltd). Every director must :

• Obtain a basic understanding of their company’s business

• Keep informed about and monitor the company’s activities and regularly attend board meetings

• Monitor the company’s financial position

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Duty of care (cont)

• Higher standards are expected of some directors :– Those with special skill– Executive directors in relation to the time

spent on company matters, compared to non-executive directors

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Duty of care (cont)

• Delegation and reliance– Delegation

• Re City Equitable Fire Insurance• Directors may delegate any of their powers to any

person, unless the articles restricts delegation• If delegate is negligent, director will be liable

unless directors have monitored or supervised and use reasonable care to appoint a competent person

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Other duties

• Duty to act in good faith in the best interests of the company

• Duty to act for a proper purpose

• Duty to retain discretion

• Consequences of breach of duty

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Duty to act in good faith in the best interests of the company

• Section 132(1) – also a common law duty

• What is meant by good faith?

– Director must act honestly

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Duty to act in the best interests of the company

(cont)• What are the company’s interests?

Possibilities are :

– Members

– Company as a commercial entity separate

from its members

– Creditors

– Other companies within a group of

companies

– Employees, customers, suppliers and the

community

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Duty to act in the best interests of the company

(cont)• What are the company’s interests? (cont)

– Members

. Interests of company are generally those of its

members

. But interests of members may conflict and directors

must balance interests

– Company as a commercial entity separate

from its members

. Conflicting court decisions

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Duty to act in the best interests of the company (cont)

• What are the company’s interests? (cont)

– Creditors

. Common law principle – when a company is insolvent or nearly insolvent, its interests are

those of its creditors, not its members

. Kinsela v Russell Kinsela Pty Ltd

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Duty to act in the best interests of the company (cont)

• What are the company’s interests? (cont)

– Corporate groups

A Ltd

B Ltd C Ltd

50%+ (or “control”)50%+ (or “control”)

• Can the directors of B cause B to enter a transaction that benefits A or C, but does not directly benefit B ?

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Duty to act in the best interests of the company

(cont)• What are the company’s interests?

(cont)

– Corporate groups (cont)

. Walker v Wimborne

- High Court : directors must put their

company’s interests before the group’s

interests

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Duty to act in the best interests of the company

(cont)– Corporate groups (cont)

. Test

– Whether a person in the position of the director

could have reasonably believed the decision would

benefit the company: Charterbridge

. Equiticorp Finance v BNZ

– Directors can approve a transaction that benefits the

group (or another group company) if their company

will benefit indirectly

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Duty to act in best interests of the company (cont)

– Employees, customers, suppliers and the

community . Do not receive priority over interests of members

. Parke v Daily News Ltd

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Duty to act for a proper purpose

• Section 132(1) – also a general law duty

• Even if directors actions are in company’s best interests, may still be a breach of duty if power not exercised for a proper purpose

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Duty to act for a proper purpose (cont)

• Two questions :– Question of law : what are the proper

purposes for which the power in question may be exercised?

– Question of fact : for what purpose was the power actually exercised?

• If more than one purpose, use “but for” test – Whitehouse v Carlton Hotel

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Duty to act for a proper purpose (cont)

• eg The power to issue shares– Normally a power of the board of directors– Proper purposes include :

• to raise capital• for an employee share scheme• as consideration for purchase of an asset

– Improper purposes include :• to entrench the existing board of directors• to fight off a hostile take-over bidder• to make a majority member a minority member

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Duty to act for a proper purpose (cont)

• Powers other than issuing shares– Kwality Textiles (M’sia) Sdn Bhd. v Arunachalam &

Ors – Lim Koei Ing v Pan Asia Shipyard & Engineering Co.

Pte Ltd

– Permanent Building Society (in liq) v Wheeler

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Duty to retain discretion

• Directors cannot undertake or agree that they will not exercise powers given to them in the company's articles of association or under the Companies Act 1965

• This would be against the duty to act in the best interests of the company.

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Consequences of breach of duty

• Section 132(1)

– Fine or imprisonment or both

• Common law duties

– Company has civil remedies such as

compensation, damages for breach of duty

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Company secretary

• See p 40, 33, 144

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Auditors

• An auditor must be registered under the Companies Act – sec 8

• Special rules apply to appoint or remove auditors, which are designed to protect their independence from management : sec 9

• Auditors owe duties to the company, and may owe a duty of care to others : sec 174(1)

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Company Law – Lecture 16

• Share capital

• Membership

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Shares

• What are shares? (sec 4(1))

• Classes of shares– generally– preference shares

• Conversion of shares into stocks – Table A (Art 36 - 39)

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What are shares?

• Claims against a company to which particular rights attach, in particular:– distribution rights (interim and final)– control rights (eg information, voting)

• A “chose in action” – a form of personal property – sec 98

• Not an interest in the company’s assets (compare with a trust)

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What are shares? (cont)

• Borland’s Trustee v Steel Bros & Co Ltd (nature of shares)

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Classes of shares

• Shares can be created with different rights attaching : sec 18(1)(c)

• Power to issue shares in the hands of the directors, but the issue of shares in a new class may require shareholder approval if:– amendment to the constitution is required– the issue varies existing class rights– Table A, Art 2

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Classes of shares (cont)

• Typically classes of shares have differing:– entitlement to dividends– priority in relation to payment of dividends– voting rights– priority in repayment of capital on a winding up– right to share in surplus assets on a winding up

• Contrast “preference shares” and “ordinary shares”

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Preference shares

• Usually carry:– fixed dividend– priority for repayment of capital– limited voting rights– no right to share in surplus

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Membership

• A person can become a member by subscribing for new shares, or acquiring already issued shares from another person

• A person ceases to be a member by transferring their shares, or having them cancelled

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Shareholder rights

• Voting rights

• Distribution rights

• Information rights

• Class rights

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Variation of class rights (cont)

• Certain actions taken to vary class rights

• Section 65(1): rights of dissenting members where the variation, cancellation or modification does not have unanimous consent. Members holding at least 10% of the class can apply to the Court for change to be set aside & the change is effective with confirmation by the Court.

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When is sec 65 applicable?

• Section 65(1) requires that :– The company has different classes of shares– The articles (eg. Art 4) or memorandum

provides for a method to vary the class rights– The proposal is a variation

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What is variation?

• Change /alteration of the rights: sec 65(1)• Deletion /abrogation of the rights: sec

65(1)• See Greenhalgh v Arderne Cinemas• Issue of new preference shares ranking

equally or pari passu with existing preference shares: sec 65(6)

• Alteration of the ‘modification of rights’ clause: sec 65(7)

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Method of variation under sec 65

• Company must call separate class meeting only of shareholders whose rights are being affected by the variation proposal

• At least 75% of these shareholders must approve

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What if sec 65 not applicable?

• Variation procedure depends on where the rights are stated

• If the rights are given in the articles of association: sec 31

• If rights given in memorandum: sec 21(1B)

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Introduction to members’ remedies

• Members’ remedies may be available where officers have breached their duties

• But sometimes members can also obtain a remedy even though there has been no breach of officers’ duty

• Members have statutory and common law remedies

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Introduction to members’ remedies (cont)

• Why do minority members need remedies?– Directors and majority shareholders can use

their power to harm minority shareholders– Not always possible for a shareholder to sell

their shares• This explains why the oppression remedy is most

commonly sought by shareholders in private companies rather than public companies

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Members’ statutory remedies

• Oppression remedy

• Court-ordered winding up

• Statutory injunction

• Statutory right to inspect company books

• Other protection :– Variation of class rights (Lecture 7)– Transactions affecting share capital

(Lecture 17)

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Oppression remedy – sec 181

• Court can give a member a remedy where :– the conduct of the company’s affairs or,– the directors’ powers are being exercised, – in an oppressive manner, or– in disregard of members interests including himself

(181(1)(a))OR

– an actual or proposed act or omission by or on behalf of the company, or

– a resolution, or a proposed resolution, of members or a class of members is either

– unfairly prejudicial to, or– unfairly discriminatory against members (181(1)(b))

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Oppression remedy (cont)

• What types of companies can the remedy apply to ?– In theory, any company– But in practice, most oppression actions are

brought by members of private companies• which have only a few participants, and• in which members are also involved in

management

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Oppression remedy (cont)

• What are the tests ?– Was directors’ decision one that no board of

directors acting reasonably would have made?– Not necessary for directors / majority

shareholders to have acted dishonestly or intended to harm the minority – it is a question of impact – is the conduct oppressive in effect ?

– “Reasonable expectations”

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Oppression remedy (cont)

• Examples of oppressive conduct– Diversion of business opportunities– Improper exclusion from management

• Does member have a “reasonable expectation”?

– Unfairly restricting dividends– Oppressive conduct of board meetings– Share issue for improper purpose– Breaches of directors’ duties

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Oppression remedy (cont)

• What orders can the court make ?– Any order “it thinks appropriate”– e.g.

• winding up• regulating the company’s affairs• purchase of oppressed member’s shares• appointment of a receiver• restraining someone from doing something, or

requiring someone to do something

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Statutory injunction

• Court order to stop someone breaching the Companies Act

• Specific provisions : sec 132C , sec 132E or sec 28.

• Who can apply ?– Any member of the company

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Statutory right to inspect books

• Section 157 – Member can apply to court for authorisation to inspect company books– Court can authorise either the member or their

representative– Member must be acting in good faith and for a

proper purpose

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Foss v Harbottle

• Also known as the “proper plaintiff” rule

• The person who can enforce a wrong against the company is the company itself and not any individual shareholder

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Exceptions

• Where members’ personal rights are infringed

• Where the proposal requires special resolution but passed by simple resolution

• Ultra vires transaction: objects clause

• Where there is fraud on the minority

• Where the justice of the case so requires

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Fraud on the minority

• There must be “wrongdoer control”– Control may be because of majority

shareholding

• The wrongdoer obtained benefit/ advantage at the company’s expense

• The wrongdoer prevents the company from suing or enforcing the company’s rights

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Company Law – Lecture 8

• Member meetings– types of meeting– calling meetings– conducting meetings– voting

• Decision-making without a meeting

• Procedural irregularities

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Annual and extraordinary general meetings

• All companies must hold an annual general meeting: sec 143

• All public companies must hold its statutory meeting: sec 142(1)

• Other meetings are called “extraordinary general meetings”

• Rules governing meetings are set out in the Companies Act and the articles of association

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Calling a meeting

• Usually, meetings are called by the board. Art 44 authorises a single director or board collectively to call meetings.

• The Court may order a meeting on application of a director or member if it is impractical to call otherwise: sec 150

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Calling a meeting (cont)

• Directors must call a meeting when requested to do so by members holding not less than 10% of paid up capital: sec 144. If the directors fail to call the meeting within 21 days, the members can do so and the company must pay their reasonable expenses

• Two or more members with at least 10% of issued share capital or 5% in number of members may call a meeting, at their expense: sec 145

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Agenda

• Only matters that have been included in the notice of meeting can be considered at the meeting – other than matters stated in Art 46 of Table A

• Usually, where the directors are calling a meeting, they will determine the agenda

• Members can request the inclusion of resolutions for consideration by the meeting: sec 151

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Member resolutions

• Section 151 allows members with at least 5% of the votes, or numbering at least 100, to give notice to the company of a resolution they propose to move at the next general meeting held more than two months after the notice is received

• Copies of the resolution and a members’ statement are distributed, usually with the notice of meeting

Page 119: Nota Terkini Company Law

Notice of meeting

• General rule – 14 days. Consent to short notice is possible: sec 145(3)

• For passing special resolution: sec 152 (21 days)

• Notice must be given to members, directors and auditor

• Contents of notice: sec 152 and Art 46.

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Notice of meeting (cont)

• Notice must contain sufficient information to enable members to decide whether or not to attend the meeting and how to vote

• Must not be misleading, and must “fully and fairly inform and instruct the shareholder about the matter on which he or she will have to vote”: Devereaux Holdings

• Need to balance information presented: Fraser v NRMA

Page 121: Nota Terkini Company Law

Conduct of meetings

• Quorum

• Use of technology

• Proxies and corporate representatives

• Conduct (role of the chair)

Page 122: Nota Terkini Company Law

Voting

• Members’ entitlement to vote– Section 148(1)– Section 148(2): preference shareholders

• Voting by proxies

• Voting (show of hands and poll)

• Demanding voting by poll

• Ordinary and special resolutions

Page 123: Nota Terkini Company Law

Disqualification from voting

• Companies Act, articles of association and KLSE Listing Requirements prevent interested parties from voting their shares in certain circumstances, including:– related party transactions– Interested director in relation to sec 131

Page 124: Nota Terkini Company Law

Decision-making without a meeting

• Private companies may use “shareholders written resolution”, in which all members entitled to vote must sign a document agreeing to the resolution: sec 152A

• Formality may be waived by all members under ratification

• Section 145(3)

Page 125: Nota Terkini Company Law

Procedural irregularities

• Section 355 – decision may be valid despite irregularity – but there must be no “substantial injustice”

Page 126: Nota Terkini Company Law

DEBENTURES

• What are debentures? – sec 4(1) and sec 38(11)

• A loan or advance to a company may be secured or unsecured

Page 127: Nota Terkini Company Law

Debentures

• Definition – sec 4(1) and sec 38(11) of the Companies Act, sec 4 of the SCA

• Companies may choose to raise finance through issuing debentures to the investing public

• More common for finance companies

• Debentures are “securities” and may be quoted on the KLSE

Page 128: Nota Terkini Company Law

Sources of law governing debt finance

• Contract – the loan agreement

• Property – securities

• Company law – priorities, registration of charges, winding up, creditor protection

Page 129: Nota Terkini Company Law

Secured debt

• Repayment of the debt is secured by a charge over some or all of the company’s assets

• Security gives the lender the right to apply the charged property to satisfy the debt in the event of a default

Page 130: Nota Terkini Company Law

Fixed and floating charges

• Definition of “charge” – sec 4

• Fixed charge – security over a specific asset (eg land). Company cannot dispose of the asset without the consent of the lender

Page 131: Nota Terkini Company Law

Fixed and floating charges (cont)

• Floating charge – “floats” over the assets, allowing the company to dispose of them in the normal course of business and replace them with others of the same class until crystallisation

• Yorkshire Woolcomber Association

Page 132: Nota Terkini Company Law

Floating charges

• Company’s power to give a floating charge is contained in Art 13, Third Sch of the Companies Act

• Useful device enabling companies to give security over trading stock and book debts

• Free to deal with charged assets in the normal course of business, until “crystallisation”

Page 133: Nota Terkini Company Law

Crystallisation

• Charge crystallises automatically on the company ceasing to carry on business or on winding up

• Charge document may provide for crystallisation on the happening of specified events (“events of default”) eg– breaching debt/equity covenants– selling a major asset

Page 134: Nota Terkini Company Law

Crystallisation (cont)

• On crystallisation, the charge effectively becomes a fixed charge over the assets at that time and any later acquired assets

Page 135: Nota Terkini Company Law

Registration of charges

• Section 108 of the Companies Act requires registration of certain charges

• Most charges created by companies must be registered with the ROC: sec 108(1)

• Duty of companies to register charges : sec 109

• Includes all charges as specified in sec 108(3)

Page 136: Nota Terkini Company Law

The registration process

• Company must lodge a notice containing prescribed information within 30 days of creation of the charge : sec 108(1)

• Provisional registration permitted, to allow for stamping

• What is “stamping”?

• Notice of variation and notice of satisfaction and withdrawal

Page 137: Nota Terkini Company Law

Priority

• A company may create two or more charges

• “Priority” refers to the order in which the charges are satisfied

• Order of registration determines priority for registrable charges

• Note that priority can be altered by agreement between the chargees

Page 138: Nota Terkini Company Law

Priority (cont)

• Generally give priority to the first registered charge, unless the chargee had actual or constructive notice of an earlier unregistered charge : common law principles

• Does not affect priority as between registered and unregistrable charges

Page 139: Nota Terkini Company Law

Unenforceable charges

• The Companies Act makes some charges unenforceable

• Charges that should be registered, but are not, cannot be enforced against a liquidator or creditors

• Certain other charges created within six months of winding up in insolvency : sec 294

• Effect of floating charge

Page 140: Nota Terkini Company Law

Winding up

• Involves a “liquidator” selling off company’s assets and distributing the proceeds among creditors (and members if any surplus remains)

• Also known as liquidation

• Provisional liquidator

Page 141: Nota Terkini Company Law

• A process where the company is brought to an end, and the assets and property of the company are redistributed.

• DEREGISTRATION-CO MUST HAVE NO DEBT (REASONS-NO BUSINESS, NOT ACTIVE)

• VOLUNTARY WINDING UP-A RESOLUTION PASSED IN AGM-(REASONS-NO BUSINESS, NOT ABLE TO PAY ITS DEBT, DIRECTORS ONLY CONCERNED WITH PERSONAL GAINS AS OPPOSED TO THE MEMBERS). A LIQUIDATOR IS APPOINTED TO ASSESS/COLLECT/SELL/CARRY OUT INVESTIGATION AND PAY CREDITORS DEBT.

Page 142: Nota Terkini Company Law

• CREDITORS’ WINDING UP-IF IN THE VOLUNTARY WINDING UP CREDITORS FEEL THAT COMPANY IS INSOLVENT, CREDITORS CAN CALL CREDITORS’ MEETING AND WINDING UP NOW BECOMES CREDITOR WINDING UP.

• COURT-ORDERED WINDING UP-BEGINS WITH COURT ORDER ON THE APPLICATION OF ONE OR MORE PARTIES. PETITIONER MUST ESTABLISH THE COMPANY IS INSOLVENT-EG FAILURE TO MEET STATUTORY DEMAND (DEBT MORE THAN RM 500-THE FORM IS SERVED ON THE COMPANY BUT THE COMPANY FAILED TO PAY IN 3 WEEKS TIME)-SEC 218. A LIQUIDATOR IS APPOINTED OR IF NOT THE OFFICIAL RECEIVER BECOMES LIQUIDATOR. CAN BE APPLIED BY COMPANY, CREDTORS ETC.

Page 143: Nota Terkini Company Law

Types of winding up

• Voluntary winding up (sec 254)– Members’ voluntary winding up : sec 4(1) and

sec 258 - 263– Creditors’ voluntary winding up : sec 260 -

263 (Part X, Division 3)

• Compulsory winding up (Part X, Division 2 – sec 217)– In insolvency– On another ground

Page 144: Nota Terkini Company Law

Voluntary winding up

• Members’ voluntary winding up– Only possible for solvent companies– Commences when members pass a special

resolution– declaration of insolvency

• Creditors’ voluntary winding up– Similar to members’ voluntary winding up,

except that the company is insolvent

Page 145: Nota Terkini Company Law

Compulsory winding up in insolvency

• Begins with a court order

• Company must be “insolvent”– Unable to pay debts as and when they

become due and payable: sec 218(2)(b)– Most common way to prove insolvency is via

the “statutory demand” procedure

• Who can apply to court? (sec 217(1)(a)-(g))– Several people, but most often it is a “creditor”

Page 146: Nota Terkini Company Law

Compulsory winding up on grounds other than insolvency

• Grounds are set out in sec 218 – eg:– Company has not commenced business

within one year from incorporation– Just and equitable – see Lecture 16

• Who can apply to court? – sec 217(1)(a)-(g)– Several people including creditors and

members

Page 147: Nota Terkini Company Law

Effect of a winding up

• Secured creditors’ rights unaffected

• Other creditors cannot take action

• Company cannot carry on business except for the purposes of the winding up

• Company management by the liquidator, not the directors

Page 148: Nota Terkini Company Law

Liquidator’s functions

• Collect assets

• Realise assets

• Work out what debts are payable by company, and what is owed to the company

• Distribute proceeds of realised assets among creditors

• If any surplus, distribute among members

Page 149: Nota Terkini Company Law

Liquidator’s duties

• Specific duties under the Companies Act – sec 227, sec 233, sec 235 and sec 281

• Fiduciary duties

• Duties as an “officer” – sec 4

Page 150: Nota Terkini Company Law

Funds available for distribution

• Assets owned by company at time of winding up, excluding any charged assets

• Assets that come into company’s ownership after winding up starts, eg:– Compensation recovered under insolvent

trading provision – sec 304– Funds recovered by liquidator under “voidable

transactions” provisions– Funds recovered from holders of void charges

Page 151: Nota Terkini Company Law

Voidable transactions

• Certain transactions entered into in period leading up to winding up

• Liquidator can apply to court to have a voidable transaction “undone” – so that funds available for distribution are increased

Page 152: Nota Terkini Company Law

Void charges

• Certain floating charges created shortly before winding up – sec 294

• Unregistered charges – sec 108(1)

Page 153: Nota Terkini Company Law

How are funds distributed?

• The general order is:– Secured creditors, then– Expenses of winding up, then– Unpaid wages, unpaid superannuation

contributions, and other employee entitlements, then

– Unsecured creditors, then– Members (assuming there is a surplus)

Page 154: Nota Terkini Company Law

Deregistration

• Deregistration brings company’s existence to an end – sec 308

• Three types:– Deregistration following winding up : sec 240– Voluntary deregistration : sec 272– Deregistration initiated by ROC : sec 308

• Effect of deregistration• Reinstatement