Journal of Corporate Law Studies

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Shareholder primacy, controlling shareholders and

Malaysia’s Companies Act 2016

Aiman Nariman Mohd-Sulaiman & Shanty Rachagan

To cite this article: Aiman Nariman Mohd-Sulaiman & Shanty Rachagan (2017) Shareholder
primacy, controlling shareholders and Malaysia’s Companies Act 2016, Journal of Corporate Law
Studies, 17:1, 203-224, DOI: 10.1080/14735970.2016.1245377

To link to this article: http://dx.doi.org/10.1080/14735970.2016.1245377

Published online: 01 Nov 2016.

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JOURNAL OF CORPORATE LAW STUDIES, 2017
VOL. 17, NO. 1, 203–224
http://dx.doi.org/10.1080/14735970.2016.1245377

Shareholder primacy, controlling shareholders and

Malaysia’s Companies Act 2016
Aiman Nariman Mohd-Sulaimana and Shanty Rachaganb
a
Faculty of Law, International Islamic University Malaysia, Kuala Lumpur, Malaysia; bSchool of
Business, Monash University Malaysia, Selangor, Malaysia

ABSTRACT
The predominant corporate governance model within the Commonwealth
mimics that of the UK where powers of management are reserved for the
board. This director primacy model, however, is being challenged by
proposals to expand shareholders’ decision-making rights including giving
shareholders the power to initiate their own proposals and to instruct the
board. Amidst this debate, Malaysia has passed its new Companies Act 2016
which contains, amongst others, s 195 which empowers shareholders to make
binding recommendations to the board relating to the management of the
company. Empowering shareholders by giving them such powers have been
the subject of intense criticisms. This article examines s 195 and the
shareholders participation eco-system to provide an idea of the law in
practice as well as to address the concerns relating to giving shareholders
such expansive power. This article advances the view that the decision-
making framework under the Companies Act 2016 and the actual functioning
of the power to instruct show that these criticisms may be unfounded and
the potential setbacks of shareholder empowerment can be minimised
through judicious use of legal rules.

1. Introduction
The predominant corporate governance model within the Commonwealth
mimics that of the UK where the power to make business decisions and to
manage the company is reserved for the board. The leading theory is that
modern companies can only function efficiently if shareholders cede
control to a select group to enable business decisions to be made expedi-
tiously and efficiently. This director primacy model, however, is being chal-
lenged by proposals to expand shareholders’ decision-making rights
including the more controversial recommendation that shareholders should
have authority to present proposals on matters affecting the management
of the company and, subject to some conditions, to make recommendations
which are binding on the board.

CONTACT Aiman Nariman Mohd-Sulaiman aimann@iium.edu.my

© 2016 Informa UK Limited, trading as Taylor & Francis Group
204 A. N. MOHD-SULAIMAN AND S. RACHAGAN

Proponents of shareholder empowerment support enhancing share-

holders’ general power as this will be able to effect value-increasing
changes that management does not favour; shareholders will no longer be
stuck with arrangements that they view as inferior but which they are power-
less to change without management initiation.1 With the threat or possibility
of shareholders’ intervention and disapproval, management would be influ-
enced not to pursue changes that might not be supported by shareholders.
This will ensure that shareholders’ interest prevails and will also increase
shareholders’ monitoring of managers which should benefit the entire corpor-
ate governance system.2 Critics, however, argue that conferring on share-
holders the power to instruct the board enables shareholders to encroach
on operational matters with adverse impact on shareholder value.3 There is
also the concern that expanding shareholders’ powers within a concentrated
shareholding structure could propagate oppressive conduct and self dealing
transactions by controlling shareholders.4 Adding to the debate is a mixed
result from empirical studies on whether empowering shareholders adds
value. Earlier studies suggested that investors do not value strong share-
holders’ rights5 but recent empirical evidence shows that shareholder propo-
sals have significant long-term effects on a company’s performance and a
firm’s value.6 Critics are also wary of activist shareholders; empowering share-
holders by giving them instruction rights could result in managers being
forced to inefficiently accommodate activist shareholders, thereby creating
conflicts amongst shareholders.7 However, there is evidence showing that
some proposals raised by activist shareholders received shareholder
support, indicating that their interest may not necessarily be against majority

1
Lucian A Bebchuk, ‘The Case For Increasing Shareholder Power’ (2005) 118 Harv L Rev 833.
2
Lisa Fairfax, ‘Making the Corporation Safe for Shareholder Democracy’ (2008) 69 Ohio State LJ 53; Gordon
Smith, Matthew Wright and Marcus Kai Hintze, ‘Private Ordering With Shareholder Bylaws’ (2011) 80
Fordham L Rev 125.
3
Stephen M Bainbridge, ‘The Case for Limited Shareholder Voting Rights’ (2006) 53 UCLA L Rev 601;
Stephen M Bainbridge, ‘Director Primacy and Shareholder Disempowerment’ (2006) Vol 119(6)
Harvard L Rev 1735.
4
Mara Faccio and Larry HP Lang, ‘The Ultimate Ownership of Western European Corporations’ (2002) 65(3)
Journal of Financial Economics 365; Chandrasekhar Krishnamurthi and Aleksandar Sevic, ‘Legal Environ-
ment, Firm-Level Corporate Governance and Expropriation of Minority Shareholders in Asia’ (2005) 38
(1) Economic Change and Restructuring 85.
5
Johnathan M Karpoff, Paul Malatesta and Ralph Walkling, ‘Corporate Governance and Shareholder Initiat-
ives: Empirical Evidence’ (1996) 42 Journal of Financial Economics 365.
6
Bonnie G Buchanan and others, ‘Shareholder Proposal Rules and Practice: Evidence from a Comparison of
the United States and United Kingdom’ (2012) 49(4) American Business Law Journal 739; Bo Becker and
others, ‘Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable
Challenge’ (2010) Harvard Law & Econ Discussion Paper No 685 <http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=16956> accessed 20 October 2013; Fabrizio Ferri, ‘Low-cost’ Shareholder Activism: A
Review of the Evidence’ in Claire A Hill and Brett H McDonnell (eds), Research Handbook on the Economics
of Corporate Law (Edward Elgar Publishing, 2013) 192–215; Luc Renneboog and Peter G Szilagyi, The Role
of Shareholder Proposals in Corporate Governance’ (2011) 17 Journal of Corporate Finance 167.
7
Bainbridge, ‘Director Primacy’ (n 3); Iman Anabtawi, ‘Some Skepticism About Increasing Shareholder
Power’ (2006) 53 UCLA L Rev 561; Lynn Stout, ‘The Mythical Benefits Of Shareholder Control’ (2007) 93
Va L Rev 789
 JOURNAL OF CORPORATE LAW STUDIES 205

shareholders’ views.8 Furthermore, proponents of shareholders’ empowerment

assert that shareholders are generally rational, ‘aware of their own ignorance’
and normally interfere with management only when necessary.9 Shareholders
are also more likely to follow management unless there are clearly visible signs
of managerial failure – such as repeated unsatisfactory dividend distributions,
continuous share price drops or blatant private rent extraction by directors.10
Amidst this debate, several common law jurisdictions, i.e. the UK and Hong
Kong have amended their law to allow members to make recommendations
to the board on management matters. Malaysia is also overhauling its
company legislation by passing the Companies Act 2016 to replace its Compa-
nies Act 1965. The Companies Act 2016 introduces section 195 which empowers
shareholders to make binding recommendations to the board relating to the
management of the company. The company law reform places Malaysia in a
unique position. It positions Malaysia opposite Singapore11 and Australia12
that still retain the traditional view in favour of director primacy. In the UK13
and Hong Kong,14 the power of the members to instruct the board is conferred

8
Fairfax, ‘Making the Corporation Safe’ (n 2); Smith, Wright and Hintze (n 2); Lisa Fairfax, ‘The Future of
Shareholder Democracy’ (2009) 84 Indiana Law Journal 1259; Yonca Ertimur, Fabrizio Ferri and
Stephen Stubben, ‘Board of Directors’ Responsiveness to Shareholders: Evidence from Shareholder Pro-
posals’ (2010) 1 Journal of Corporate Finance 53.
9
Brett H McDonnell, ‘Setting Optimal Rules for Shareholder Proxy Access’ (2011) 43 Arizona State Law
Journal 67.
10
Alan Dignam and Michael Galanis, ‘Australia Inside-Out: The Corporate Governance System of the Aus-
tralian Listed Market’ (2004) 28 Melbourne University Law Review 623.
11
Singapore published its Report of the Company Legislation and Regulatory Framework Committee in 2002
(available at http://www.agc.gov.sg). In 2007, another review was conducted by the Steering Committee
for the Review of the Companies Act which was completed in 2011. The respective reports stated that
the law reform follows closely the development of the UK law reform. However, to date, Singapore has
not followed the UK Companies Act 2006 in giving shareholders power to make binding recommen-
dations. Singapore’s model constitution for companies limited by shares does not have the equivalence
to the UK model articles of association.
12
Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia [2015] FCA 785,
upheld in Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia [2016]
FCAFC 80, following NRMA Ltd v Parker (1986) 6 NSWLR 517: The court decided that under the Australian
Corporations Act, there is no power given to shareholders to pass non-binding resolutions. The authority
to pass non-binding resolution is only available in relation to the non-binding resolution on a listed com-
pany’s remuneration report. In addition, despite the legal framework giving shareholders power to ask
questions and comment on the management of the company in the general meeting, these are to
enable them to express views on the company’s management and not to pass non-binding resolutions
or make recommendations to the board.
13
Model Articles for Private Companies and Model Articles for Public companies under The Companies
(Model Articles) Regulations 2008
14
Model articles under Hong Kong Companies Ordinance 2014:
Division 1 – Directors’ Powers and Responsibilities
2
Directors’ general authority
(1) Subject to the Ordinance and these articles, the business and affairs of the company are
managed by the directors, who may exercise all the powers of the company.
(2) An alteration of these articles does not invalidate any prior act of the directors that would have
been valid if the alteration had not been made.
(3) The powers given by this article are not limited by any other power given to the directors by
these articles.
(4) A directors’ meeting at which a quorum is present may exercise all powers exercisable by the
directors.
206 A. N. MOHD-SULAIMAN AND S. RACHAGAN

via a clause in the model constitution accompanying the respective company

legislations. However, as it is trite law that the constitution is alterable, this
clause is not a mandatory provision and can be excluded from the constitution.
In such a situation, the well-entrenched view that the board has the powers of
management prevails. In contrast, because of s 195(3) of the Companies Act
2016, the power of the general meeting to make binding recommendations
to the board is embedded in statute and cannot be excluded. The section
states that any recommendation by any members shall not be binding on the
Board, provided that (a) the right to make recommendations is provided for in
the constitution, or (b) passed as a special resolution. The use of the word ‘or’
indicates that subsections (a) and (b) are to be read disjunctively. This position
arguably renders Malaysia more shareholder-centric than the UK.15 In Europe,
similar reform through the European Union’s Shareholder Rights Directive
2007/36/EC adopted in July 2007, introduced amongst others, the participation
rights of shareholders in terms of asking questions and tabling their own propo-
sals but without any similar power to make binding recommendations. Hence,
Malaysia’s position goes beyond the European Union’s reform.
The move towards a shareholder primacy model is understandably being
viewed with some trepidation. This article examines the functioning of the share-
holders’ power to instruct the board in Malaysia under s 195 of the Companies
Act 2016. It advances the view that the criticisms proffered against giving share-
holders’ proposal and instruction rights could be alleviated by a legal and regu-
latory framework which provides adequate counterbalance against frivolous
interference in operational matters and against entrenchment of abusive con-
trolling shareholders. It argues that the decision-making framework under the
Companies Act 2016 shows that the criticisms may be unfounded and the
potential setbacks of shareholder empowerment can be minimised through
judicious use of legal rules. The article concludes by suggesting some further
reforms that will further improve and clarify s 195 of the Companies Act 2016

2. The functioning of the power to instruct under s 195 of the

Companies Act 2016
From a legal perspective, the director primacy model operates to limit share-
holders’ decision-making powers. The prevailing view is that shareholders
3
Members’ reserve power
(1) The members may, by special resolution, direct the directors to take, or refrain from taking,
specified action.
(2) The special resolution does not invalidate anything that the directors have done before the
passing of the resolution.
15
The present model Articles of Association for companies limited by shares in the UK Companies Act 2006
has been viewed as making the UK as the most shareholder-centric jurisdiction: see Luca Enriques, Henry
B Hansmann and Reinier Kraakman, ‘The Basic Governance Structure: The Interests of Shareholders as a
Class’ in Reinier Kraakman, John Armour and Paul Davies (eds), The Anatomy of Corporate Law: A Com-
parative and Functional Approach (2nd edn, OUP 2009) 55–88.
 JOURNAL OF CORPORATE LAW STUDIES 207

cannot interfere or intervene in the directors’ exercise of their power to make

business decisions except where the company legislation or the constitution
of the company would require the power to be exercised by shareholders.
Most company legislations within the Commonwealth would have a model
constitution, moulded along the lines of the Table A of the UK Companies
Act, which reserves the power to manage a company’s affairs to its board
of directors. An example is article 73, Table A which serves as the model con-
stitution under Malaysia’s Companies Act 1965. Leading cases have held that
where the constitution follows the model Table A of the UK Companies Act
1948 shareholders cannot interfere or intervene in the directors’ exercise of
their power to make business decisions.16 Subsequent UK company legis-
lations have retained the clause in Table A that confers power of management
to the board.17 Because of this clause, shareholders have limited power to
table their own proposals on the management of the company and directors
are also not subject to the wishes of the members in exercising the board’s
management powers. Notwithstanding shareholders’ power to convene
meetings, this cannot be initiated for improper purposes, for example for
passing a resolution that the general meeting has no power to pass, i.e. on
matters reserved for the board.18 This also means that shareholders have
no authority to present any resolution on matters affecting the management
of the company even if expressed as a non-binding opinion or request.
However, due to the introduction of section 195 of the Malaysia Companies
Act 2016 which repeals the Companies Act 1965, including Table A, the tra-
ditional view regarding the division of power between the board and the
general meeting is no longer tenable. S 195 provides that:

(1) The chairperson of a meeting of members of a company shall allow a

reasonable opportunity for members at the meeting to question,
discuss, comment, or make recommendation on the management of
the company.
(2) A meeting of members may pass a resolution which makes recommen-
dations to the Board on matters affecting the management of the
company.
16
See John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113; Automatic Self-Cleansing Filter Syndicate Co
Ltd v Cunninghame [1906] 2 Ch 34; Baldev Singh v Mahima Singh [1974] 2 MLJ 206; Quality Concrete Hold-
ings Bhd v Classic Gypsum Manufacturing Sdn Bhd & Ors [2012] 2 MLJ 521, citing these cases. See also
NRMA Ltd v Parker (1986) 6 NSWLR 517; 4 ACLC 609. Contrast with Credit Development Pte Ltd v IMO
Pte Ltd [1993] 2 SLR 370 criticised in Ronald Choo, ‘Division Of Powers Between The General Meeting
And The Board Of Directors In A Company’ (1993) 5 Singapore Academy of Law Journal 360
17
Art 70, Table A, UK Companies Act 1980.
18
See NRMA Ltd v Parker (1986) 6 NSWLR 517; 4 ACLC 609. In this case, the purpose of the meeting was to
instruct the board of directors to conduct the election of directors in a particular way. Under the com-
pany’s constitution, the decision as to the manner in which the elections should be held was one that
belonged to the directors: Australasian Centre for Corporate Responsibility v Commonwealth Bank of Aus-
tralia [2015] FCA 785.
208 A. N. MOHD-SULAIMAN AND S. RACHAGAN

(3) Any recommendation shall not be binding on the Board, unless the rec-
ommendation is in the best interest of the company, provided that –
(a) the right to make recommendations is provided for in the consti-
tution; or
(b) passed as a special resolution.

While proponents of shareholders’ empowerment will rejoice, as noted

earlier several criticisms have been made against the shareholder primacy
model. One of the major concerns about giving shareholders expansive
power to propose and to instruct the board is that this could enable any share-
holder to interfere in any management matters and on day-to-day business
operations.
At first glance, s 195(1) of the Companies Act 2016 seems to support this
view. The use of the word ‘shall’ in the section which provides ‘The chairper-
son of a meeting of members of a company shall allow a reasonable oppor-
tunity for members … ’ and the absence of any shareholding threshold give
rise to views that meetings could then turn out to be protracted affairs as
the chairman is obliged to give any shareholders the opportunity to
comment on management matters. However, a closer perusal of the
decision-making framework indicates that this view may not be a correct
interpretation of the section. Despite the wording of s 195(1) requiring the
chairperson to give any shareholders the opportunity to comment on man-
agement matters, it does not make every shareholders’ resolution binding on
the board. A distinction must be drawn between the power given to share-
holders to raise queries at general meetings i.e. to question, discuss,
comment, from the power to instruct the board to do or refrain from doing
something, i.e. the power to make binding recommendations.
Before the board is obliged to act in accordance with the general meeting’s
instructions, s 195(3) of the Companies Act 2015 lays down several conditions.
For the recommendation to be binding, the general meeting must pass a
special resolution to instruct the board to do or refrain from doing something.
This shows that not each and every shareholders’ resolution is binding on the
board. Section 195(3) of the Companies Act 2015 also provides that the rec-
ommendation shall not be binding on the Board, unless the recommendation
is in the best interest of the company.19 The ‘best interest’ requirement can be
problematic in the sense that if this is left to the director’s subjective evalu-
ation, it is likely that the shareholders’ recommendation will never be effec-
tive. Despite the ‘binding’ nature of the resolution, the board arguably may
still decide not to abide by it if they believe that this is not in the best interest
19
The consideration given to the company’s interest is reiterated in s 311(5)(d) of the Companies Act 2016
which requires that the resolution must not be one that if passed, would not be in the best interest of
the company.
 JOURNAL OF CORPORATE LAW STUDIES 209

of the company, rendering the shareholder empowerment ineffective. It is

also unclear on whom lies the onus to show that the recommendation is in
the best interest of the company. An earlier version of the equivalent statutory
provision in the Companies Bill released for public consultation in July 2013
did not contain this phrase.
However, the concept of best interest of the company is normally con-
sidered as part of director’s duties so that it is for the directors to consider
whether their decision to do or refrain from doing something is in the best
interest of the company.20 The courts have been careful not to take over
the board’s role in making business or commercial decisions and have
tried to avoid deciding based on hindsight.21 Thus, the court will not
assess the commercial viability of the decision or transaction and will
defer to the decision of the board.22 However, the court can look objectively
at surrounding circumstances and the facts of the case and at the trans-
action to decide whether any director in the same position could have
reasonably believed that the decision is in the best interest of the
company. The directors’ honest belief that the decision is in the best inter-
est of the company must be credible. This approach enables the court to
strike a balance between allowing directors to make risky commercial
decisions and making directors accountable for unreasonable business
decisions.23 In the context of shareholders’ binding resolutions, the direc-
tor’s decision whether to abide by the recommendation should be
subject to the same considerations and the same rules should apply. In
this situation it is likely that shareholders would challenge the board’s
refusal to be bound and the matter needs to be resolved by a court of
law. This unfortunately cannot be avoided but is no different from existing
practice when there is conflict between the board and the shareholders

20
Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62, 74; Equiticorp Finance Ltd (in liq) v Bank of New
Zealand (1993) 32 NSWLR 50; 11 ACLC 952; 11 ACSR 642. The Charterbridge principle states that in asses-
sing whether the decision was in the best interests of the company, the court will consider whether ‘an
intelligent and honest man in the position of the director of the company concerned, could in the whole
of the existing circumstances have reasonably believed that the transactions were for the benefit of the
company’. In Re Smith v Fawcett Ltd [1942] Ch 304 the rule was laid down that it is what the board con-
siders – not what the court may consider – to be in the best interest of the company which matters.
21
See A Walters, ‘Directors’ Responsibility to Creditors after Farepak’ (2013) 34(1) Company Lawyer 1.
22
Directors have not been held liable for causing the company to pay a sum of money to secure a joint
venture agreement which was subsequently entered into: Tan Joo Chai & Anor v Eco Water Technologies
(M) Sdn Bhd [2015] 3 MLJ 380.
23
There seems to be some uncertainty about the test to be applied. This is a subjective test based on
Regentcrest v Cohen [2001] BCC 494. It is an objective test based on Kawin Industrial Sdn Bhd (in liquida-
tion) v Tay Tiong Soong [2009] 1 MLJ 723: ’The test whether the directors have acted in breach of their
fiduciary duties is an objective one, in that, in the absence of separate consideration: “Whether an honest
and intelligent man in the position of a director of the company concerned, could, in the whole of the
existing circumstances, have reasonably believed that the transactions were for the benefit of the
company” (see Chan & Koh on Malaysian Company Law, Principles and Practice (2nd Ed) at p 589 referring
to the test laid down by Pennycuick J in Chaterbridge Corp Ltd).’ There is also the view that the test is a
combination of a subjective and an objective test: The Bell Group Ltd v Westpac Banking Corp (No 9)
[2008] 70 ACSR 1; [2008] WASC 239.
210 A. N. MOHD-SULAIMAN AND S. RACHAGAN

where the courts will be the final arbiter. No doubt the easier way to
ensure that directors follow the shareholders’ wishes is for the majority
of the shareholders to remove and replace directors. But there is logic in
following the alternative route of recommendations, whether binding or
not, as this provides a measure of controlling particular conduct rather
than the extreme measure of replacing the directors.
Further, while it is true that there is no minimum shareholding to question,
discuss, comment, or make recommendation on the management of the
company, the recommendation is only binding if a special resolution is
passed by the meeting. A vote is still required to be passed for a recommen-
dation to be binding. As such, there is no guarantee of success merely by a
shareholder being allowed to introduce a proposal for consideration at a
meeting.
In addition, s 195 is not a standalone provision. This section merely pro-
vides the basis for the shareholders to bind the board by way of the
general meeting passing a special resolution. There are other rules which
necessarily apply to enable the general meeting to make recommendations
which are binding on the board. This is where the interface between s 195
and other sections of the Companies Act 2016 needs to be carefully con-
sidered. These other sections operate to minimise shareholders’ unnecessary
interference with management.
One such section is s 309 of the Companies Act 2016 which states:
Unless otherwise provided in the constitution, a resolution shall be validly
passed at a meeting of members if –
(a) notice of the meeting and of the resolution is given; and
(b) the meeting is held and conducted,
in accordance with the provisions of this Subdivision.

The requirements that ‘notice of the meeting and of the resolution’ must
be given ‘in accordance with the provisions of this Subdivision’ for a resolution
to be valid leads to the necessary application of sections 310 and 311 of the
Companies Act 2016. If a shareholder wants to propose a resolution to be
passed at a meeting of members, he must give notice to convene the
meeting himself under s 310(b) of the Companies At 2016. Alternatively, he
may request the company to convene a meeting to consider the shareholders’
proposal under s 311. These section require a minimum shareholding
threshold.24 Therefore, the view that no minimum shareholding is required

Under s 310(b) of the Companies At 2015, ‘at least ten per centum of the issued share capital of a
24

company or a lower per centum as specified in the constitution or if the company has no share
capital, by at least five per centum in the number of the members.’ Under s 311(3), ‘members represent-
ing at least ten per centum of the paid up capital of the company carrying the right of voting at meetings
of members of the company, excluding any paid up capital held as treasury shares or in the case of a
company not having a share capital, members who represent at least five per centum of the total voting
rights of all members having a right of voting at meetings of members.’
 JOURNAL OF CORPORATE LAW STUDIES 211

under s 195 for a general meeting to make recommendations to the board is

incorrect.
Another relevant section is s 311(5) which provides that resolution may
properly be moved at a meeting unless the resolution is one that –

(a) if passed, would be ineffective whether by reason of inconsistency with

any written law or the constitution;
(b) is defamatory of any person;
(c) is frivolous or vexatious; or
(d) if passed, would not be in the best interest of the company

Section 311(5)(a) requires that any proposal must not be inconsistent with
any written law. This requirement debunks the view that shareholders, particu-
larly activist shareholders, can easily instruct the board to carry out trans-
actions to the detriment of the company and/or its creditors for example by
agitating for higher payment of dividend or for the company to return
capital by way of a share buy back.25 The payment of dividends for
example (or reduction of capital) cannot be made unless certain rules particu-
larly relating to solvency are complied with. When these rules are breached,
there is criminal and civil liability on the directors and shareholders who
approve the dividends with awareness or knowledge that the company
may not be able to comply with dividends rules.26 The courts would also be
guided by the directors’ duty to act in the best interest of the company. It
is unlikely that the directors could be ordered to issue debentures instead
of issuing shares or raising capital via private placement instead of a public
offer.27 The courts are also unlikely to allow the power to override the
board’s management decision to be exercised by shareholders if the decision
affects creditors’ interests.28 The shareholders’ power to instruct by passing a
special resolution therefore does not enable the shareholders to order the
board to enter into a course of conduct which contravenes any other
25
See Elisabeth Behrmann and Yuriy Humber, ‘Transocean Reaches $1.1 Billion Dividend Accord With Icahn’,
Bloomberg, 12 November 2013 <http://www.bloomberg.com/news/articles/2013-11-11/transocean-
reaches-accord-with-icahn-on-dividend-plan-and-board> accessed 11 February 2016; Adam Satariano,
‘Carl Icahn Pushes for Bigger Investor Payout From Apple‘, Bloomberg, 14 August 2013 <http://www.
bloomberg.com/news/articles/2013-08-14/carl-icahn-pushes-for-bigger-investor-payout-from-apple>
accessed 11 February, 2016.
26
S 132 and s 133 of the Companies Act 2016; Dato Gan Ah Tee & Anor v Kuan Lee Choon [2012] 10 MLJ 706;
It’s a Wrap (UK) Ltd v Gula [2006] EWCA Civ 544.
27
See CAS (Nominess) Ltd v Nottingham Forrest FC plc. [2002] 1 BCLC 613; McKillen v Misland (Cyprus) Invest-
ments Limited & Ors [2012] EWHC 2343 (Ch); Passport Special Opportunities Master Fund LP v eSun Hold-
ings Ltd [2011] 4 HKC 62; William MF Wong, ‘Reconsideration of Dilution of Shareholding through Private
Placement of Shares at Discount’ (2012) 33(2) Company Lawyer 55; Re Molopo Energy Limited v Keybridge
Capital Limited [2014] NSWSC 1864.
28
See Susan Watson, ‘Can Shareholders of a Company Override a Management Decision Made by the
Board? Attorney-General v Ririnui’ (2015) <http://ssrn.com/abstract=2711032> accessed 10 February
2016.
212 A. N. MOHD-SULAIMAN AND S. RACHAGAN

provisions of the Companies Act 2016. Various corporate transactions require

compliance with specific procedures or requirements with the corollary liab-
ility for non-compliance. In these situations, the power to instruct does not
mean that shareholders’ recommendation even if passed as a special resol-
ution has the effect of waiving compliance with statutory procedures and
requirements.
Section 311(5)(a) of the Companies Act 2016 also states that the proposal
must not be inconsistent with any limitation in the constitution itself. This
implies that the constitution itself may contain clauses that limit matters
which are within the board’s power, i.e. matters that are reserved for board
of directors. It follows that even if the general meeting were to pass a
special resolution under s 195(1), this must not go against any limitation
that the constitution itself provides. This provision reiterates the view that
the potential for frivolous proposal is minimised.
There are also practical considerations that could minimise the misuse of
s 195 of the Companies Act 2016. One important point is the financial impli-
cations of convening a meeting. Normally, the cost of convening a com-
pany’s meetings is borne by the company as meetings are usually initiated
by the directors. If shareholders are not able to obtain the support of the
board to convene a meeting, these shareholders are likely to end up using
their own funds. Therefore, unless there is a real likelihood of success, share-
holders would not exercise their power to propose resolutions and convene
meetings without considering the financial implications particularly if the
cost were to fall on the shareholders themselves. No doubt shareholders
could pass on the cost of the meeting to the company if they requisition
the company to convene the meeting. However, s 311(5) of the Companies
Act 2015 will apply and several conditions as explained earlier must be
fulfilled.29
Furthermore, giving shareholders power to instruct the board does not
mean that every decision made by the board will always be subject to
review by shareholders. In some situations, even where members may
legally be able to instruct directors to do or refrain from doing something,
it may not be practical for members to do so. A reversal of an already
implemented board’s resolution is an example. Arguably, the shareholders’
proposal could even be considered as frivolous or vexatious or not be in
the best interest of the company if the reversal could expose the company
to liability to third parties. The special resolution by general meeting may
not even be able to invalidate the directors’ earlier resolutions but operates
merely to prevent directors from acting upon it.30 On this point, admittedly,

29
A shareholder may also request for a proposal to be voted on by of a written resolution for a private
company but the same considerations discussed under s 311(5) apply: s 302(2) of the Companies Act
2016.
30
Paul Davies, Gower and Davies’ Principles of Modern Company Law (7th edn, Sweet & Maxwell 2009) 303.
 JOURNAL OF CORPORATE LAW STUDIES 213

s 195 of the Companies Act 2016 is silent regarding the effect of the binding
resolution on directors’ previous decision or conduct. This is one lacuna that
needs to be addressed to resolve any uncertainties. Under the present Com-
panies Act 1965, article 73 Table A contains the following clause: ‘no regu-
lation made by the company in general meeting shall invalidate any prior
act of the directors which would have been valid if that regulation had not
been made.’ The model constitution under the Hong Kong Companies Ordi-
nance 2014 contains a similar provision.31 It is suggested for Malaysia that a
similar provision be included in s 193 of the Companies Act to the effect
that the general meeting cannot invalidate prior decisions of the board.
Another often cited reason for the apprehension in giving shareholders’
proposal and instruction rights is the erosion of directors’ accountability.
This could occur if directors use the general meeting to cause the passing
of a resolution to ratify or instruct the board to enter into a course of
conduct which is otherwise considered as not in the interest of the
company.32 However, it is unlikely that the courts will allow the breach to
remain unchallenged particularly if the directors are controlling shareholders.
The common law and Malaysia’s case law are replete with derivative actions
brought by minority shareholders as evidence of this stance. Although the
majority of the shareholders at a general meeting has the power to ratify a
breach, ratification of breach will not be upheld if done by interested share-
holders who are themselves the directors or are the directors’ associates.
The law provides protection against this abuse of power through the oppres-
sion remedy or by invalidating the ratification of directors’ conduct if it
amounts to fraud or an abuse of power particularly if the shareholders are
themselves the directors or are their associates.33 The recently introduced
statutory derivative action in Malaysia also affirms the judicial limits to ratifi-
cation laid down by case law.34 If the directors are trying to get prior approval
to whitewash their potential breach, such manipulation will likely be con-
sidered as a breach of duty.35 Furthermore, where there are controlling share-
holders who are connected to directors, certain rules are in place as discussed
below in Section 3 to minimise voting distortion. Also, some statutory pro-
visions or statutory duties cannot be contracted out which means share-
holders cannot authorise non-compliance with specific procedure of the

31
See above n 14.
32
Companies & Securities Advisory Committee, Shareholder Participation in the Modern Listed Public
Company Final Report (Australia 2000).
33
Abdul Rahim bin Aki v Krubong Industrial Park (Melaka) Sdn Bhd [1995] 3 MLJ 417; Chio Tan Seng & Ors v
Chong Chai Huat & Ors [1997] 4 CLJ Supp 116; Koh Jui Hiong @ Koa Jui Heong & Ors v Ki Tak Sang @ Kee
Tak Sang and another appeal [2014] 3 MLJ 10; see Pearlie Koh, ‘Directors’ Fiduciary Duties: Unthreading
the Joints of Shareholder Ratification’ (2005) 5(2) Journal of Corporate Law Studies 363.
34
s 181D of the Companies Act 1965 which was introduced in 2007. This rule is retained under s 349 of the
Companies Act 2016.
35
s 140, Companies Act 1965 which is retained under ss 288 and 289 of the Companies Act 2016.
214 A. N. MOHD-SULAIMAN AND S. RACHAGAN

Companies Act. Where the wrongdoer-directors are not controlling share-

holders, it is trite law, even under the director primacy model, that the
general meeting may ratify a breach of duty, provided there is no oppression
and absent conflict of interest.36
There is, nonetheless, one aspect of s 195 of the Companies Act 2016 that
could encourage frivolous conduct and may not be in the company’s interest.
This relates to the shareholders’ ability to make non-binding resolutions or
recommendations to the board under s 195(2). There are two scenarios
here. The first relates to a shareholders’ proposal which is intended not to
be passed as a special resolution but merely as a signalling mechanism to
inform board and management of shareholders’ views. The second relates
to proposals intended to be made biding but failed to obtain the necessary
support. In the second scenario, it is possible that the same shareholders
will attempt to pass similar proposals subsequently and possibly repeatedly
either by convening the meeting themselves or by requisitioning the
company to do so. In the latter case, the company would have to use its
resources to convene a meeting requested by shareholders to discuss
matters which will unlikely be implemented. The non-binding nature of the
resolutions makes them inefficient and potentially a waste of corporate
assets since directors are not obliged to act on them or even take notice of
the recommendations.37 Nonetheless, it is likely that repeated attempts to
pass similar proposals which have failed earlier may be considered by the
courts as frivolous and vexatious. Repetitive shareholders’ proposal could
fail the test under s 311(5)(c) of the Companies Act 2016 which provides
that the resolution is not frivolous or vexatious. This means that the
company may be justified in not complying with the request to convene
the meeting to consider such proposals or even challenge the members’
conduct in convening the meeting themselves. There are also indications
from case law that successive resolutions seeking expressions of opinion
could be abusive and could, therefore, be prevented by court if repeatedly
made. In Petroceltic International PLC v Worldview Capital Management SA &
Anor,38 Petroceltic’s decision to issue bonds to raise capital was opposed by
Worldview, which had a 29% shareholding in the company. Worldview
issued a notice to convene an EGM a month after a meting was to be con-
ducted by the company. When Petroceltic’s request to withdraw the notice
was ignored, the company succeeded in obtaining an injunction. The court
applied the traditional view that where powers have been vested in the

36
Bamford v Bamford [1970] Ch D 135.
37
There is some support of a positive impact of shareholders proposals on firm’s long-term performance,
although the wealth creating value of shareholder proposals does not depend on whether it is binding in
nature or not: Bonnie G Buchanan and others, ‘Shareholder Proposal Rules and Practice: Evidence from a
Comparison of the United States and United Kingdom’ (2012) 49(4) American Business Law Journal 739.
38
[2015] IEHC 61.
 JOURNAL OF CORPORATE LAW STUDIES 215

board, the general meeting could not interfere with their exercise. However, it
did note that Worldview had on four previous occasions requisitioned an
EGM.39
For Malaysia, it is suggested that further regulations may be required to
address repetitive attempts to pass proposals which have failed to obtain
the required support. On this point, Malaysia could consider the US’s experi-
ence where there are regulations that minimise such attempts. These are, first,
the rule requiring a higher percentage for presenting a resolution which has
earlier failed to obtain the requisite voting approval and second, a three-year
‘cooling off’ period before the proposal could be presented to the general
meeting again. Malaysia could consider having similar provisions to minimise
frivolous proposals. These could be drafted as mandatory statutory rules, or
rules drafted by the regulatory authorities. This could even be dealt with
internally through the company’s constitution.40
A final point that requires clarification relates to the interface between s
195(3) and s 311(5) of the Companies Act 2016. Let’s assume that the
company adopts a constitution which creates a reserve list of matters that
falls within the board’s power. Does this mean that (1) by virtue of s 195
(3)(b), the special resolution reigns supreme and that the limitation in the
constitution is ineffectual? Or (2) could it be argued that even if there
were a provision in the constitution reserving management powers to the
board, this ‘reserve list’ may be overridden by any subsequent special resol-
ution passed by the general meeting? If the answer to these questions is yes,
such an interpretation would be in conflict with s 311(5)(a) of the Companies
Act 2016 and would also not be in line with s 33 of the Companies Act 2016
which provides that the constitution shall be binding on the company and
the members. Section 195(3) of the Companies Act 2016 could not be
intended to confer on shareholders such unlimited power. A perusal of
the New Zealand Companies Act 1993 may shed some light on the issue.
Section 130 of the New Zealand Companies Act provides that the rec-
ommendation is binding if the constitution so provides and if it does not
intrude on the ‘reserve list’, i.e. Schedule 2. Schedule 2 contains a list of trans-
actions which are reserved for the board. When we consider the New
Zealand approach, what emerges is that other than matters listed under
Schedule 2, the constitution reigns supreme. Malaysia’s Companies Act
2016 does not have a similar list. A practical solution to this is that where
a reserve list exists in the constitution, shareholders would have to amend
the constitution before overriding board decisions on matters reserved for
the board.

Para [4] of the judgment: ‘In the calendar year of 2015 three EGMs have taken place due to the requisi-
39

tion of the defendant company in addition to an AGM.’

40
The sections that may need to be amended are ss 310(b), 311(30(a) and (b) of the Companies Act 2016.
216 A. N. MOHD-SULAIMAN AND S. RACHAGAN

3. Concentrated shareholding: addressing distortion of voting

outcome
There is well documented evidence that in a concentrated shareholding struc-
ture, diversion of funds known as expropriation or tunnelling usually occurs
legally through the use of the voting power at general meeting or control
over voting power through corporate groups and pyramid structures.41
Also, through their control or close association with management, controlling
shareholders are able to propose matters that could undermine the minority
shareholders’ interests. Certain transactions can be used by controlling share-
holders to extract private benefits at the expense of the minority shareholders.
The controlling shareholder can increase his financial entitlement and control
rights through dilutive share issues, insider trading or enter into transactions
that discriminate against minority shareholders.42 There can be a transfer of
resources from the firm to the controlling shareholders or persons associated
with them through outright theft or fraud via self-dealing transactions. This
can also occur through asset sales and contracts such as transfer pricing
advantageous to the controlling shareholder.43 Control transactions, i.e. priva-
tisation and takeovers, may also provide the occasion for self-dealing.44 It is
also possible that in a privatisation, the offer price is low because manage-
ment may not have revalued the company’s assets. Controlling shareholders
may reject value-maximising takeovers (if they are not fully compensated for
the foregone private benefits of control), and accept value-destroying ones
that let them to retain the control premium.
In companies where the controlling shareholder is the state or the govern-
ment, expropriation of minority shareholders could occur through transactions
which are entered into, although not illegal or immoral, which are not commer-
cially beneficial to the company and the minority shareholders due to the pol-
itical goals inconsistent with shareholder wealth maximisation.45 In family
controlled companies, it is common to see direct participation of members of
the family in the management of the company, often (though not always) as
members of the top management team, which gives them considerable

41
Stijn Claessens and Simeon Djankov, ‘Who Controls East Asian Corporations?’ (1999) World Bank Policy
Research Working Paper No 2054 <http://ssrn.com/abstract=597191> accessed 1 June 2012; Simon
Johnson, ‘Tunneling’ (2000) 92 American Economic Review 22; Simon Johnson and Todd Mitton, ‘Crony-
ism and Capital Controls: Evidence from Malaysia’ (2003) 67(2) Journal of Financial Economics 351.
42
Johnson, ‘Tunnelling’ (n 41); Johnson and Mitton, ‘Cronyism and Capital Controls’ (n 41).
43
Vladimir Atanasov, Bernard Black and Conrad S Ciccotello, ‘Law and Tunneling’ (2011–12) 37 J Corp L 1.
44
Tom Kirchmaier and Jeremy Grant, ‘Financial Tunnelling and the Revenge of the Insider System’ (2005)
FMG Discussion Papers No 536, Financial Markets Group <http://ideas.repec.org/p/fmg/fmgdps/dp536.
html> accessed 20 June 2012.
45
Marcel Kahan and Edward B Rock, ‘When the Government Is the Controlling Shareholder’ (2011) 89 Texas
Law Review 1293; William L Megginson and Jeffry M Netter, ‘From State to Market: A Survey of Empirical
Studies on Privatization’ (2001) 39 Journal of Economic Literature 321 (380) but contrast with Stephen
Martin and David Parker, ‘Privatization and Economic Performance Throughout the UK Business Cycle’
(1995) 16 Managerial & Decision Economics 225.
 JOURNAL OF CORPORATE LAW STUDIES 217

power over the companies, typically beyond their cash-flow rights.46 Additional
governance concern is the entrenchment of managers, often members of the
family, who are put in place to ensure succession and control by the family
unit. Attempts to remove them are often not successful as it lacks the support
of the majority shareholders who have familial relationship with the managers.
These governance concerns are relevant to Malaysia. Findings in 1999
showed that 85% of public listed companies in Malaysia are owner
managed where the post of CEO, Chairman or Vice-Chairman has been
filled by a member of the controlling family or an employee drawn from
the ranks of the controlling shareholder.47 A recent study that we conducted
amongst public listed companies indicated that there is a dominance of family
control, followed by significant state control.48 This is consistent with earlier
findings.49 Our analysis shows that the five largest shareholders in the top 50
Malaysian public listed companies own an average of 55.09% of the total
shares.50 Our research shows that the shareholding structure has remained
largely unchanged since 2008. We found that amongst these 50 companies in
2010 and 2009, 47 (94%) and in 2008, 48 (96%) have concentrated shareholding
with their five largest shareholders controlling 50% of the company. Of these 50
companies surveyed in 2010, 38% had one dominant shareholder (more than
40% control). 2010 data showed that 85% of these companies were state-con-
trolled and 15% were family owned companies with approximately 50% of
shares in family hands.51 In 2009 and 2008 respectively, 32% and 36% had one
dominant shareholder with more than 40% control. Of these 50 companies sur-
veyed in 2012, 38% had one dominant shareholder (more than 40% control).

46
Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, ‘Corporate Ownership around the World’
(1999) 54(2) Journal of Finance 471; Suman Chakrabarty, ‘The Influence of National Culture and Insti-
tutional Voids on Family Ownership of Large Firms: A Country Level Empirical Study’ (2009) 15(1)
Journal of International Management 32.
47
R Thillainathan, ‘Corporate Governance and Restructuring in Malaysia: A Review of Markets, Mechanisms,
Agents and The Legal Infrastructure’ (Joint World Bank/OECD Survey of Corporate Governance arrange-
ments in a selected number of Asian countries, 1999).
48
The study covered 50 composite index component companies on Bursa Malaysia. The selection was
based on the market capitalisation of these companies between 2008 and 2012. This research utilises
secondary data, information available in the company’s annual report. The annual reports were
chosen as the Listing Requirements of Bursa Malaysia requires all listed companies to disclose certain
information in their annual reports, including share ownership. See further Shanty Rachagan and
Aiman Nariman Mohd-Sulaiman, ‘Controlling Shareholders: Issues and Challenges for Shareholders’
Empowerment in Directors’ Remuneration in Corporate Malaysia’ (2014) 9 Asian Journal of Comparative
Law 267.
49
Claessens and Djankov (n 41); Thillainathan (n 47).
50
Earlier studies found that total shareholding of the five largest shareholders in companies listed on the
Malaysian stock exchange at December 1998 was 58.84%: Abdul Hadi bin Zulkafli, M Fazilah bt Abdul
Samad and Md Ishak Ismail (2005) ‘Corporate Governance In Malaysia’ Malaysian Institute of Corporate
Governance <http://www.micg.net/research/> accessed 18 April 2007; in 2006, the average concen-
tration of the five largest shareholders in the top 150 Malaysian listed companies was 54.85%: On Kit
Tam and Monica Guo-Sze Tan, ‘Ownership, Governance and Firm Performance in Malaysia’ (2007) 15
(2) Corporate Governance 208.
51
Examples of family-owned PLCs in Malaysia, amongst others, are Genting Bhd, Berjaya Group Bhd, and
YTL Berhad.
218 A. N. MOHD-SULAIMAN AND S. RACHAGAN

Eighty-five per cent of these companies were state-controlled and 15% were
family owned companies in 2012, with approximately 50% of shares in family
hands. In 2011 and 2010 respectively, 32 and 36% had one dominant shareholder
(more than 40% control). Of these companies, 75% and 61% of them were state-
controlled and 25 and 39% were family owned companies respectively.52
Given the prevalence of concentrated shareholding structures, certain rules
and regulations are needed to minimise the possibility that empowering
shareholders may result in distortion of voting outcomes. Malaysia’s legal
and regulatory responses are detailed below

3.1 Supermajority votes and voting restrictions

Mandating supermajority voting is identified as a regulatory technique to
address agency conflict due to the presence of controlling shareholders.53
However, supermajority voting may be insufficient given the large percentage
of voting control that can be exercised by controlling shareholders in Malay-
sia. Further, since voting is based on the number of shareholders present and
voting at a meeting and not based on the entire shareholding, shareholder
apathy will enable controlling shareholders to easily fulfil the supermajority
voting requirement.
An additional regulatory technique that may be useful is voting restrictions.
Voting restrictions rules have been in place in Malaysia as early as 1998 when
the stock exchanges’ rules were amended to provide for an outright prohibi-
tion on interested parties from voting on related party transactions. This ruling
however applied only to public listed companies. In 2007, an amendment was
made to the Companies At 1965 resulting in the rule prohibiting interested
shareholders in public companies from voting on any transactions involving
disposal or acquisition of assets of a substantial value to or from directors
or substantial shareholders or persons connected to them. These transactions
can only be voted on by disinterested shareholders, diminishing the power of
the controlling shareholders to extract private benefits. Amendments were
52
In the context of Malaysia, state control over PLCs exists due to the government policy that supports the
growth of government-linked companies (GLCs). In 1993, the Malaysian government set up Khazanah
Nasional Berhad, which is the investment holding arm of the Government of Malaysia entrusted to
hold and manage the commercial assets of the government and to undertake strategic investments.
Khazanah was incorporated under the Companies Act 1965 on 3 September 1993 as a PLC. The share
capital of Khazanah is owned by the Minister of Finance, a body corporate incorporated pursuant to
the Minister of Finance (Incorporation) Act 1957. Khazanah is the trustee to Malaysia’s commercial
assets and its main objective is to promote economic growth and make strategic investments on
behalf of the GovernmentSome of the key listed companies on the Malaysian Stock Exchange in Khaza-
nah’s investment portfolio include: Telekom Malaysia Berhad, Tenaga Nasional Berhad, CIMB Group, IHH
Healthcare Bhd, Malaysia Airports Holdings Berhad, Time dotCom Berhad, UEM Sunrise Bhd, Parkson
Holdings Bhd, Astro Bhd and Axiata Group Bhd.
53
La Porta, Lopez-de-Silanes and Shleifer (n 46); Priya P Lele and Mathias Siems, ‘Shareholder Protection: A
Leximetric Approach’ (2007) 7 Journal of Corporate Law Studies 17; John Armour, S Deakin, Priya P Lele
and Mathias Siems, ‘How do Legal Rules Evolve? Evidence from a Cross-National Comparison Of Share-
holder, Creditor and Worker Protection’ (2009) 57 American Journal of Comparative Law 579 ; Holger
Spamann, ‘The “Antidirector Rights Index” Revisited’ (2010) 23(2) The Review of Financial Studies 467.
 JOURNAL OF CORPORATE LAW STUDIES 219

also made to the Companies Act 1965 in 2007 to disallow voting by directors
who have an interest in contract or transaction with the company from voting
at the board meeting; this was achieved via s 131A which is applicable to a
public company or a subsidiary of a public company. Prior to 2007, an inter-
ested director is not prohibited from voting on the transaction unless the
articles so provide. With the introduction of section 131A, any provisions in
the articles of association that allow an interested director to vote in
respect of the contract or transaction in which the director is interested is
invalid as being against sec 131A, Companies Act. These sections are retained
under the Companies Act 2016.54
Malaysia already has in place rules that minimise tunnelling in control
transactions. Privatisation or ‘going private’ can be conducted by a selective
capital repayment, a scheme of arrangement or by voluntary withdrawal of
listing from Bursa Malaysia, i.e. the stock exchange. For these privatisation
routes, the proposal requires the approval of at least 75% shareholders and
not more than 10% dissenting. A privatisation under the Malaysian Code on
Takeovers and Mergers requires the approval of 90% of the voting shares of
the company excluding the shares already owned by the offeror or persons
connected to the offeror. For a listed company, disposal of its assets affect-
ing its core business could also lead to delisting or privatisation. Under the
Companies Act 1965, the disposal of assets of a company where the assets
is of a substantial value requires an ordinary resolution under s 132C. Since
such a low shareholding threshold is not in the interest of the minority
shareholders of a public listed company in a concentrated shareholding
structure such as Malaysia, the listing rules of the stock exchange (BMLR)
was amended to require ‘at least 75% shareholders’ support.55 Additional
safeguards include the appointment of an Iidependent advisor. Subsequent
to the amendment, privatisation deals which were not supported by disin-
terested shareholders increased in number, heralding a new type of share-
holder activism.
However, it is noted that the voting restriction is effective only if the trans-
actions are identified as those to which the voting restrictions apply. The loop-
hole is that determination as to whether the transaction is one that voting
restrictions applies is usually made by management. In most cases, disinter-
ested shareholders do not have prior knowledge of these transactions.
However, there is some measure of check and balance via the reliance
placed on audit committee and independent non-executive directors as
well as enforcement for contravention.

54
ss 218 and 222 of the Companies Bill 2015. The common law position was laid down in Regal (Hastings)
Ltd v Gulliver (1967) 2 AC 134.
55
The original proposal was to put privatisation via disposal of assets on similar regulatory requirements by
requiring at least 75% shareholders or approval of at least 50% shareholders and not more than 10%
dissenting.
220 A. N. MOHD-SULAIMAN AND S. RACHAGAN

3.2 Power to issue shares and pre-emption rights clause

The issuance of new shares may be abused by directors who are interested in
entrenching themselves by either making the majority shareholders into the
minority or by issuing shares to their sympathisers. In this type of conflict, the
law provides protection by requiring that shareholders’ approval be obtained
for any new issuance. However, in a concentred shareholding structure, the
controlling shareholders can easily secure approval which will cause the
dilution of minority interest. The approval requirement alone is insufficient
to address the conflict between controlling and minority shareholder. A regu-
latory technique to address the distortion of voting outcome is the pre-
emption right. A pre-emption right prevents the dilution of existing share-
holdings, either in terms of diluting voting rights or diluting economic
value of the shares, by giving the existing shareholders the right to subscribe
for new shares to maintain their shareholding proportionately.56 No doubt, a
pre-emption right does not guarantee that controlling shareholders’ share-
holding will not be increased nor does it ensure that minority shareholders’
shareholding will not change. The pre-emption rights could also be viewed
as further entrenching controlling shareholders. Minority shareholders
themselves may also be motivated by liquidity constraint or the desire to
diversify investment in not exercising their pre-emption rights.57 Nonetheless,
a pre-emption right clause will enable the non-controlling shareholder to
maintain their shareholding proportionately so that their existing voting
and financial interest will not be further diluted without their agreement.
Prior to the Companies Act 2016, a pre-emption right is not mandated
by the Companies Act 1965 but dealt with under the BMLR where a
listed company’s articles of association must contain a pre-emption right
clause. The BMLR however allows for this to be disapplied by the
company passing a simple resolution to that effect. The BMLR also provides
for a general mandate that enables the directors to issue shares without
going to shareholders provided a general mandate is still in force and
that the shares does not exceed 10% of the issued and paid up capital
shares (excluding treasury shares).58 The Companies Act 2016 introduced
s 85 that provides that any new issue of shares which rank equally to exist-
ing shares as to voting or distribution rights shall first be offered to the
holders of existing shares in a manner which would, if the offer were

56
Another type of pre-emption rights clause prevents transfer of shares to an outsider which is typical in
private companies. In Malaysia, a public listed company cannot restrict transfer of its shares because the
BMLR prohibits this; a public unlisted company may do so although this is unlikely: for discussion on how
dilution is carried out: see Mira Ganor, ‘The Power To Issue Stock’ (2011) 46 Wake Forest Law Review 705;
Pierre Blais, ‘Shareholder’s Protection From Share Watering Caused By The Additional Issue Of Shares:
Pre-Emptive Rights’ (1961) 19 Faculty of Law Review 43.
57
Ganor (n 56).
58
Para 6.03, Bursa Securities Listing Requirement. Several jurisdictions have this general mandate although
they differ in terms of the cap normally ranging between 5 and 20% of the issued and paid up capital.
 JOURNAL OF CORPORATE LAW STUDIES 221

accepted, maintain the relative voting and distribution rights of those

shareholders. This right however is subject to a company’s constitution.
Where such a right is given to existing shareholders, directors are
allowed to dispose those shares in such manner as the directors think
most beneficial to the company if the offer is not accepted by the existing
shareholders within the timeframe of the offer.
Nonetheless, the ability of the company to disapply the pre-emption right
by way of an ordinary resolution under the BMLR and under the Companies Act
2016 may not be appropriate for a concentrated shareholding structure like
Malaysia. In a concentrated shareholding structure, it is quite easy for the con-
trolling shareholders to get the sanction of the general meeting for the
general mandate and for waiver.59 Data for Malaysia shows that more than
half of the 50 companies we surveyed had one dominant shareholder with
more than 40% control.60
To address this loophole, the law could prohibit disapplication. It is noted
that an earlier draft of the Companies Bill which was released for public con-
sultation in 2013 contains a statutory provision that mandates pre-emption
rights.61 This version has the effect of giving the pre-emption right statutory
backing and preventing a disapplication of the pre-emption rights clause.
However, prohibiting disapplication of pre-emption rights is unwise. There
are sound reasons where issue of new shares cannot be made on an equal
basis to all existing shareholders. An example is where the consideration is
not paid in cash but by way of transfer of assets. A better approach is to
allow for disapplication but subject to a higher voting percentage. Further,
the Companies Act 2016 requires further enhancement. The Companies Act
2016 is not as comprehensive as the UK Companies Act 2006 which provides
for exceptions to pre-emption right, exclusion of rights of pre-emption and
disapplication of pre-emption rights.62 While listed companies are able to
rely on the BMLR which provides more details regarding pre-emption
rights, non listed pubic companies and private companies are in need of
similar clarity.63

59
See Wong (n 27) 55–64. See Passport Special Opportunities Master Fund, LP v eSun Holdings Ltd. Unre-
ported 8 June 2011 Hong Kong Companies Court.
60
Some institutional shareholders are critical of this rule and have not been supportive of this general
mandate: National Association of Pension Funds, Corporate Governance Policy and Voting Guidelines
(Feb 2009); Aberdeen Corporate Governance Principles; The UK Pre-emption Group statement of Prin-
ciples; see ‘Directors’ Powers To Allot Share Capital And Disapply Shareholders’ Pre-Emption Rights’
<http://www.ivis.co.uk/ShareholdersPreemptionRight.aspx> accessed 16 January 2016.
61
See s 85 (1): ‘Where a company issues shares which rank equally or prior to existing shares as to voting or
distribution rights, those shares shall be offered to the holders of existing shares in a manner which
would, if the offer were accepted, maintain the relative voting and distribution rights of those share-
holders.
(2) An offer under subsection (1) shall remain open for acceptance for a reasonable time.’
62
Ss 564–573, UK Companies Act 2006.
63
See Pre-Emption Group, Disapplying Pre-Emption Rights A Statement Of Principles (2015) <http://www.
pre-emptiongroup.org.uk> accessed 16 January 2016.
222 A. N. MOHD-SULAIMAN AND S. RACHAGAN

3.3 The one share, one vote principle

In general, the case for the one share, one vote rule turns primarily on its
ability to match economic incentives with voting power and to preserve
the market for corporate control as a check on bad management. By contrast,
the case for permitting companies to deviate from a one share, one vote rule
turns on:

(1) The claim that informed parties will choose optimal arrangements on their
own; and
(2) The existence of a reasonably efficient market, in which the proceeds that
company founders realise when they sell their shares will reflect the
voting rights that those shares carry.

A cross country study carried out in 1996 showed that Malaysia was found
to be one of only 11 countries (out of 49 countries surveyed) which impose a
genuine one-share-one-vote rule.64 The one share, one vote rule applies in
relation to public companies and shares which confer multiple votes are pro-
hibited and the multiple voting right is not exercisable in public companies.
The Companies Act 2016 reflects a move towards a less restrictive approach
regarding the one-share, one-vote principle. Section 69(d) of the Companies
Act 2016 states that subject to the constitution of the company, shares in a
company may confer special, limited, or conditional voting rights or under s
69(e) not confer voting rights. The Companies Act 2016 no longer contains
a provision equivalent to s 55 of the Companies Act 1965 that requires all
ordinary shares in a public company to carry one vote per share. The BMLR
however does not allow listing of dual-class shares. This means that only
public listed companies are prohibited from having dual class shares listed
on the stock exchange but they may still have shares with weighted voting
rights if these shares are not listed.
The deviation from one share-one vote (in the form of dual class shares or
shares with weighted voting rights) enables shareholders whose financial
investment in the company is small to gain disproportionate control rights.
The minority shareholders often emerge as controlling shareholder due to
this arrangement. This is where controlling shareholders are often able to
legally engage in tunnelling. Nonetheless, shares with weighted voting
rights are not always an evil tool: it could be a useful means by the state to
exercise control over companies in which the government invest for national
interests and for the public good. However, given the evidence of decisions
that are motivated by personal gains or political goals,65 the deviation from

Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert W Vishny, ‘Legal Determinants of
64

External Finance’ (1997) 52 Journal of Finance 1131.

65
Kahan and Rock (n 45).
 JOURNAL OF CORPORATE LAW STUDIES 223

one-share-one-vote increases monitoring costs and increases the likelihood of

expropriation of minority interests.

4. Conclusion
Opponents of shareholder empowerment argue that giving shareholders the
power to instruct will create interfering shareholders as well as enable
rampant abuse by controlling shareholders. This is not necessarily the case.
The concern regarding unbridled shareholder power is assuaged by the func-
tioning of the right to instruct within the decision-making framework under
the Companies Act 2016. The anxiety surrounding s 195 of the Companies
Act 2016 could be due to critics having overlooked the fact that the newly
introduced section is not a standalone provision. In relation to the concern
that empowering shareholders could result in entrenchment of abusive con-
trolling shareholders, the evolution of shareholder empowerment rules in
Malaysia has been cognisant of the possible distortion of voting outcome
due to controlling shareholders. Malaysia’s response to concerns about
voting distortion is twofold; by mandating super-majority requirements for
significant transactions or control transactions as well as voting restriction
by interested shareholders. This enables Malaysia to respond to concerns
about how best to empower shareholders without entrenching controlling
shareholders or enabling expropriation of minority interests.
It could be argued that despite the changes introduced by the Companies
Act 2016, specifically s 195, the power conferred on shareholders to make
binding proposals is not as expansive as initially thought and therefore that
it would have been easier to retain the status quo. The fact that s 311(5) of
the Companies Act 2016 allows the constitution to limit matters on which
notice of meetings can be given by a shareholder also creates a conundrum
as this could be considered as rendering s 195(3) of the Companies Act 2016
ineffectual. But this does not mean that empowering shareholders will ulti-
mately result in chaos. The shareholder empowerment debate is not about
giving shareholders unbridled power to usurp the decentralised management
that is part of the operational norms of modern corporations. The focus of the
new rule is improving accountability and governance. The challenge is balan-
cing the adverse impact that shareholder empowerment could pose to effi-
ciency, cost and expediency of carrying out business. The law reform is not
intended to encourage disruptive shareholders’ behaviour. The fact that the
Companies Act 2016 expressly empowers shareholders to raise questions at
any company meetings should not be a major cause of concern. In practice,
shareholders have always had the ability to raise queries at any company
meeting. Nonetheless, much of the practice is based on good governance,
not on legal rules. From this perspective, s 196 informs shareholders of
the ability and encourages them to actively participate in decision-making.
224 A. N. MOHD-SULAIMAN AND S. RACHAGAN

Giving shareholders expansive participatory rights could be a means of

achieving and implementing policy decisions regarding the role of corpor-
ations in society and the impact of companies on the community in which
they operate. This approach fits in within the wider policy of promoting share-
holders’ activism and corporate sustainability initiatives initiated by the regu-
lators in Malaysia. No doubt, corporate governance issues and challenges will
not be resolved merely by giving shareholders expansive proposal rights.
However, expanding shareholders existing powers to instruct or propose
does not necessarily create interfering shareholders or enable abusive control-
ling shareholders to reign supreme.
Finally, while the policy for empowering shareholders is appropriate,
there are some further improvements that can be suggested to the Com-
panies Act 2016 to balance efficiency argument with accountability.
These include measures to prevent repetitive proposals, such as a
‘cooling off’ period before the proposal could be resubmitted, as well as
a higher shareholding threshold to resubmit a rejected proposal. To
address the governance concern arising out of concentrated shareholding
structure, additional measures such as a higher percentage to disapply
the pre-emption right clause and retention of the one share-one vote
should also be considered.

Disclosure statement
No potential conflict of interest was reported by the authors.

Funding
This work was supported by the Ministry of Higher Education (MOHE) Malaysia [FRGS
11-046-0195].