Case Update: The MARA Decision on Appointment of Directors and Management Review

The High Court decision in Majlis Amanah Rakyat (MARA) v Dato’ Abd Rahim Adb Halim & Ors [2018] 8 CLJ 738; [2018] MLJU 1008 touched on some important points on the appointment of directors. It is also the first decision to briefly deal with the new right of management review under section 195 of the Companies Act 2016 (CA 2016).

Image: www.theedgemarkets.com

This dispute arose from the boardroom and shareholder tussle where MARA had requisitioned for an EGM of the company, Med-Bumikar. Med-Bumikar held a substantial stake in the listed entity, MBM Resources Bhd (MBMR). UMW had tabled an offer to purchase Med-Bumikar’s stake in MBMR. The crown jewel at the heart of the dispute was essentially MBMR’s 20% stake in Perodua. UMW already had approximately 38% interest in Perodua and this would allow UMW to have control over Perodua.

Background Facts

MARA holds 29% in Med-Bumikar. In turn, Med-Bumikar owned 49.5% of the shares in MBMR. MBMR holds 22.58% interest in Perodua.

Before the dispute, Med-Bumikar’s Board was made up of 7 directors, and where only 3 out of the 7 directors were aligned with MARA. The majority, being 4 out of the 7 directors, were aligned with other minority shareholders.

On 7 March 2018, UMW issued an offer letter to Med-Bumikar to purchase its 49.5%  stake in MBMR for a price of RM2.56 per share. The next day, Med-Bumikar’s Board held a Board meeting to consider the UMW offer. The Board resolved to appoint an independent financial advisor to advise on the UMW offer.

A few days later, on 12 March 2018, MARA issued a requisition notice to the Med-Bumikar Board to convene an EGM in order for the shareholders to pass two ordinary resolutions. The first was an ordinary resolution to accept the UMW offer at RM2.56 per share. The second was an ordinary resolution to appoint two additional directors to the Board.

Two weeks later, another Board meeting was held on 26 March 2018. The independent financial advisor advised the Board that the UMW offer was fair but not reasonable. It was resolved by the four majority directors to decline the UMW offer and to reject MARA’s requisition notice.

Soon after, the company secretary of Med-Bumikar circulated a directors’ circular resolution (DCR) for the Board to appoint two additional directors. The DCR was signed and effected by the same four majority directors. This was allowed for under the constitution.

MARA’s nominated director was then subsequently passed the DCR already signed off by the four majority of directors. It was a fait accompli. By appointing two additional directors, this resulted in the maximum number of 9 directors allowed for under Med-Bumikar’s constitution.

Nonetheless, MARA issued its notice of EGM to convene an EGM on 30 April 2018 to press ahead with its two ordinary resolutions. The shareholders present and voting unanimously passed the two resolutions. In addition to the resolution for approval for the company to accept the UMW offer, the shareholders requested the Board to form a Board Task Force Committee comprising at least two members from MARA to negotiate with UMW for a better price.

So now, there were the two directors appointed by the four majority directors through the DCR. On the other hand, after the EGM, the ordinary resolution was passed for MARA’s choice of the two directors to be appointed.

Legal Actions

MARA filed an Originating Summons against Med-Bumikar and the opposing directors. Med-Bumikar in turn sought for a counterclaim.

MARA essentially sought for orders to declare that the appointment of the two directors through the DCR was null and void. In the counterclaim, Med-Bumikar first sought a declaration that the management and control of the business and affairs of the company was within the exclusive control of the Board. Therefore, the Board had the unfettered discretion to reject the UMW offer. The EGM’s ordinary resolution could not interfere with that discretion. Second, Med-Bumikar sought a declaration to confirm the valid appointment of the two directors through the DCR.

Findings

The law is that a director of a company shall at all times exercise his powers in accordance with section 231(1) of the CA 2016, for a proper purpose and in good faith in the best interest of the company. If directors exercised their powers for some ulterior purpose or its exercise were carried out in an improper manner, such an exercise of powers could be set aside.

#1: The Majority Directors were in Breach of their Duties when Rejecting the Requisition Notice

First, the High Court held that the four directors were in breach of their duties when the four directors rejected the requisition notice at the Board meeting on 26 March 2018. The minutes of the Board meeting were crucial in making this finding. It showed how the Chairman of the meeting had wrongly referred to the requirement of special resolution instead of just special notice. The Chairman was minuted as saying that the requisition notice was therefore defective.

#2: Majority Directors’ Appointment of Two Additional Directors was to Frustrate MARA’s Appointment

Second, the four directors rejected the requisition notice and knew it was just a matter of time for MARA to convene the EGM. They then caused the DCR to be passed.  It was obvious that the real or predominant reason for the four directors to appoint the two additional directors was to prevent MARA from appointing their choice of two additional directors at the EGM.

The four directors had not shown why there was such a need to appoint two additional directors at that juncture. They did not show why the appointment could not be tabled at a physical directors’ meeting. The use of the DCR was to circumvent the requirement in the constitution for a MARA representative to constitute quorum at a directors’ meeting.

#3: Board’s Power to Appoint Additional Directors Did Not Exclude General Meeting’s Power to Appoint

Third, the Court dismissed the argument that shareholders were not entitled in law to appoint directors at general meeting. They argued that this power rested exclusively with the Board to decide to appoint additional directors. The Board’s power to appoint additional directors did not exclude the company’s inherent power in a general meeting to appoint directors. Section 202(2) of the CA 2016 was also referred to. The directors did not act in good faith and for proper purpose when appointing the two additional directors.  Hence, the appointment of the two additional directors under the DCR was invalid.

The High Court allowed MARA’s application for the declarations.

#4: Shareholders Cannot Bind the Board to Act

The High Court next considered the counterclaim. Where the EGM purported to bind the Board to act in a particular way in relation to the UMW offer, shareholders cannot do so. Powers of management are vested in the directors and shareholders in general meeting cannot usurp those powers. Hence, the shareholders’ ordinary resolution at the EGM could not bind the Board in relation to the UMW offer. This is consistent with the Federal Court’s decision in the Petra Perdana case.

MARA contended that the ordinary resolution was merely a recommendation to the Board under section 195 of the CA 2016. This allows for the passing of a resolution to make recommendations to the Board on management matters.

The Court noted that since this was not a special resolution, and neither was the right to make recommendations contained in the constitution, the recommendation of the shareholders would not be binding on the Board.

However, the Board must still consider the recommendation and act in the best interest of the company. It was not correct to say (as sought in the counterclaim) that the directors have an unfettered discretion to reject the UMW offer. The directors could only reject the offer if that course of action is in the best interest of the company.

Takeaways

My brief takeaways from this case:

  1. Contemporaneous documents are again crucial. Minutes of Board meetings reveal the state of mind and the discussions that went on. In such shareholder disputes and corporate litigation, it is important that the minutes capture what was being discussed. In this case, the minutes served as the evidence to show a breach of the directors’ duties.
  2. Directors must take their duties seriously. Their acts and decisions must always be for the best interest of the company. Here, the act of rejecting the requisition notice and the act of bulldozing through a DCR to appoint additional directors were all held to be breaches of their directors’ duties.
  3. I foresee that the shareholders’ right of management review may increasingly be utilised. Directors must be aware that ordinary resolutions can make recommendations to the Board to take a certain course of action. If it is an ordinary resolution, the recommendation is not binding. But it is still part of the directors’ duty to consider the recommendation and then decide why the directors will take a certain course of action. The rationale should then be accurately and thoroughly captured in the minutes of the board meeting. This allows for transparency and for directors to defend their decision.

 

Leave a Reply