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Bar Council

50 Years of Merdeka 14 Malaysian Law Conference Kuala Lumpur Convention Centre 29 31 October 2007
th

Corporate Law
Corporate Governance and the Companies Act

by

Michael H.K. Lim,

Shearn Delamore & Co.

Introduction When I first agreed to give this paper in late April, the new Companies (Amendment) Act, 2007 was not there. Nor was there the Revised Malaysian Code on Corporate Governance (2007) or the Statement on Corporate Social Responsibility. When all these new instruments came into effect, I panicked. I had to read them all, do some research and make some sense out of them. Otherwise, this paper would just be history. Consequently, this paper will explore some of my views on the revised Corporate Governance Code and the latest amendments to the Companies Act, 1965. There will also be a discussion of the main items of the US Sarbanes-Oxley Act, 2002 (SOX) to show that some of the main provisions of SOX were already present in the Malaysian Company Law. The beginning The beginning of corporate governance debate is quite recent. Textbook commentaries seem to attribute its origin to the collapses and scandals arising from the collapse of the Robert Maxwell Group of Companies, the Asil Nadirs Group of the Polly Peck Companies and the collapse of Bank of Credit and Commerce International (BCCI), all happening in the early 1990s. Then came the Enron Collapse, the World Com Collapse. It is to be noted that notwithstanding the publications of various corporate governance reports, we still had the Parmalat collapse, the Eurotunnel costs overrun problems and nearer to home, the Barings Bank debacle in Singapore. Arising out of the aforesaid collapses, a deluge of corporate governance reports were published in the United Kingdom. Hence, we had firstly The Cadbury Report (1992), then the Greenbury Report (1995), the Hampel Report (1998) also known as the 1998 Combined Code, The Turnbull Report (1999), the Directors Remuneration Report (2002), the Higgs Report (2003), the Smith Report, the 2003 Combined Code and now finally the UK Companies Act, 2006. As if the aforesaid reports are not enough to whet our academic appetite, many countries and organisations followed the UK in coming up with their own corporate governance reports, starting first with the Organisation for Economic Co-operation and Development (OECD) set of Principles and Guidelines. This was first published in 1999 and subsequently revised in 2004. Then the European Union also entered the fray with a Communication entitled Action Plan on Modernising Company Law and Enhancing Corporate Governance in the European Union dated May 2003. In South Africa, the King Report was published in 1994 followed by a second King Report in March, 2002. In Australia, there were three Bosh Reports: the original in 1991 and two revisions published in 1993 and 1995. The Bosh was followed by the Hilmer Report in 1993. This report focused particularly on directors duty of care and diligence. The Australian position can be said to be now summarised in the listed Australia Stock Exchange Corporate Governance Councils Principles of Good Corporate Governance & Best Practice Recommendations. (2nd Edition, August 2007). And not to be outdone, the following countries have also produced their own reports on Corporate Governance, Austria (November 2002, Updated April 2005), Belgium (December 2004), Brazil (March 2004), Canada (December 2003), China (January 2001), Denmark (August 2005), Finland (December 2003), France (October 2003), Germany (February 2002, Amended May 2003), Greece (July 2001), Hong Kong (November 2004), Italy (July 2002) and Japan (April 2004) (Kim & Nofsinger, Corporate Governance (2007) pg. 142). It should also be mentioned that the Commonwealth Association for Corporate Governance also published a paper in 1999. Last but not least, Malaysia published its own Corporate Governance Report and Code in 1999 which is now revised as at 1st October 2007. There is, therefore, no shortage of reading materials on corporate governance. But on reading these reports, it becomes transparent that they say more or less the same thing, In my view, all

of them take their cue on and build on the Cadbury Report. Each country then tries to finnese the Cadbury Report to suit what they feel is their own peculiar circumstance. But the basics remain. Hence, all discussion centers on the board of directors, its composition, its role and in very general terms outlining what the board of a company should or should not do. Are all these Corporate Governances Principles a success? My view is that they do not guarantee at all that a company will be properly or honestly run. Malaysias Corporate Governance principles has been described as one of the best in the world. In particular, the requirement for directors compulsory training has been lauded by some quarters as being pioneering. However, notwithstanding such high principles and rules, we have witnessed the accounting irregularities in Transmile Group Bhd. (Transmile) and Megan Media Holdings Bhd. (Megan Media). Hence, we really cannot expect high principles and rules per se to be a panacea for corporate ills. The theory of stakeholding The Report on Corporate Governance Malaysia (1999) defines Corporate Governance as: Corporate Governance is the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long term shareholder value, whilst taking into account the interests of other stakeholders. Similarly, in the OECD Principles of Corporate Governance, there is this statement: The Corporate Governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporationsand stakeholders in creating wealth, jobs and the sustainability of financially sound enterprises. In the past, it has been accepted as a matter of trite law that the directors of a company owe no duty to third parties. Their only duty is to act in the best interest of the company. This is the agency principle where the directors are mere agents of the company and, therefore, must act in the best interest of the company. However, lately, there is expectation that the board of a company must act not only in the best interests of the company but must take also into consideration other stakeholders interests. In this regard, the other stakeholders have been said to be the employees of the company, the trade creditors and debtors of the company, the bankers of the company and such other persons as may have dealings with the company. At its height, it is said that Enron had 30,000 employees worldwide. The collapse of Enron meant the loss of employment for thousands of workers and also the loss of their pension funds. In addition, the collapse of Enron also brought down with it the accounting firm of Arthur Andersen which has a worldwide workforce of 85,000. Banks, suppliers and customers of Enron were also badly affected by the Enron collapse. As such, a strong case can be made to say that the board of a company must conduct their duties, not only to promote interest of the shareholders but also the welfare of the companys employees, creditors, customers and bankers and even the community at large. Indeed, in the United Kingdom a similar trend of thought is also to be found. Hence, S. 172 of the UK Companies Act, 2006 reads as follows: S. 172 Duty to promote the success of the company

(1)

A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to: (a) (b) (c) (d) (e) (f) the likely consequences of any decision in the long term; the interests of the companys employees; the need to foster the companys business relationships with suppliers, customers and others; the impact of the companys operations on the community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company.

(2)

Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, sub-section (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to to achieving those purposes. The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company. (emphasis added)

(3)

In addition, it is now topical to talk about corporate social responsibility. The thrust of this trend is to make companies into good corporate citizens. Hence, the Securities Commission Chairman states in a speech on the 23rd August 2007 at the UNDP/ICR Conference.: (1) Since our last conference, I am glad to say that much has been achieved. A quick stock take highlights the establishment of the Institute of Corporate Responsibility Malaysia, the development of Bursa Malaysias CSR framework, the increasing recognition of the ACCAS Malaysian Environmental and Social Reporting Awards (ACCAs MESRA), and the launch of the Silver Book by Khazanah. Last and certainly not least is the requirement in the 2007 Budget for companies tendering for Government contracts to report on their CSR initiatives, and for listed companies to have a section in their annual report on their CSR activities by the end of 2007. As a result, Malaysia has established a clear leadership position on CSR in the region. Over the last few years, we have seen a discernible and growing trend for investment preferences to be increasingly geared towards ethical or socially responsible investment in line with personal moral, ethical and religious values. In Australia for example, managed socially responsible investment portfolios grew by 56% during the 2006 financial year from $7.67 billion to

2)

$11.98 billion. In Europe, there are 388 green, social and ethical funds as at 30th June 2006 compared to 280 funds in 2001. (3) As we can see, CSR is not just about philanthropy. It is not just about the quantum of donations each company makes a year or the number of conservation projects it finances but more importantly, it is about how the organisation integrates responsible and ethical practices in all aspects of its operations, including ensuring that its business practices do no harm to the environment and the organisation contributes towards the development of capacity within a community to facilitate long term sustainability.

Traditionally and classically, it has in the past been carved in stone that directors owe no duty to outsiders other than to the Company and its shareholders as a whole. There are also many cases whether payments for charity have been struck down as being ultra vires the Company. It is necessary, therefore, to consider whether the position in law has changed in Malaysia. The new amendment to the Companies Act, 1965 on directors duties is important. This new amendment attempts to codify directors duties as follows: S. 132(1) A director of a company shall at all times exercise his powers for a proper purpose and in good faith in the best interest of the company;

It will be clear from the above Section that the traditional and classical duty of directors have remained intact. As such, it is submitted that if the board were to decide on a matter that is not directly beneficial to the company, the board may be in breach of S. 132(1) of the Act. Of course, it can still be argued that a board is still acting in the best interest of a company when it takes into consideration the interest of employees, suppliers, customers and creditors. Or when it considers the impact of its business on the environment and the community. The difficulty here is to narrow down a formula whereby such good deeds can be measured in tangible terms. If a board cannot prove that by paying more salaries, the profits of the company have improved, can the board be said to have acted negligently? Similarly, if a company were in deep financial trouble but still refuses to retrench its workers on the basis that it is its corporate social responsibility to maintain employment in the community, can the board be accused of acting negligently? Is not the duty of the board to make money for the company and its shareholders. A more difficult question is the question of donation to a political party. Can a board argue that by making a political donation, the company will be in a position to secure say, Government contracts and concessions? Hence, the political donation though not providing tangible results in the profits, will in the long term benefit the Company. The Sarbanes-Oxley Act, 2002 (SOX) This Section examines the main provisions of SOX and whether Malaysia has similar provisions. SOX was said to have been hastily enacted following the Enron and Worldcom scandal. Although it may have been hastily enacted, it is a fairly long Act and contains many details. Credit must be given for so much work put into the drafting in such a short period of time. Since the collapse of Enron and Worldcom was mainly due to accounting manipulation and irregularities, the thrust of SOX was to focus mainly on accounting matters.

The first major change was the so-called CEO/CFO Certifications. Section 302 of SOX requires companies with a listing in the US to provide to the Securities Exchange Commission (SEC) their annual and quarterly reports a certificate signed by the principal executive officer and principal financial officer of the company certifying the accuracy of the reports and of the companys internal control system. The penalty for issuing a false certificate is a fine of up to US1 million or imprisonment up to 10 years. For a false certificate wilfully given, the penalty is increased to USD5 million fine or imprisonment of up to 20 years. In addition, when a company needs to restate its accounts, the bonuses and perks paid to the director will have to be refunded or forfeited.. There is a separate Section 404 which allows the SEC to prescribe rules requiring each annual report to state who is responsible for establishing and maintaining an adequate internal control structure and a statement containing an assessment of the effectiveness of the internal controls and procedures. Then, there is a S. 402 prohibiting personal loans to executives save for home improvement and manufactured home loans relating to a house. In Malaysia, we have had such a provision in S. 133 of our Companies Act since 1965. S. 401(j) seems to specifically address the major Enron problem. It is worth quoting in full: S. 401(j) OFF-BALANCE SHEET TRANSACTIONS: Not later than 180 days after the date of enactment of the SarbanesOxley Act of 2002, the Commission shall issue final rules providing that each annual and quarterly financial report required to be filed with the Commission shall disclose all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the issuer with unconsolidated entities or other persons, that may have a material current or future effect on financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. In Malaysia. we have a provision similar to the CEO/CFO certification. Our S. 169(15) is worth quoting in full as follows: S. 169(15) The directors of a company shall cause to be attached toevery balance sheet and profit and loss account laid before the company in general meeting (including any consolidated balance sheet and consolidated profit and loss account of a holding company) a statement made in accordance with a resolution of the directors and signed by at least two directors stating whether, in the opinion of the directors: (a) the profit and loss account, and where applicable the consolidated profit and loss account, is or are drawn up so as to give a true and fair view of the results of the business of the company and, if applicable, of all the companies the accounts of which are dealt with in the consolidated profit and loss account for the period covered by the account or accounts; (b) the balance sheet, and where applicable the consolidated balance sheet, is or are drawn up so as to give a true and fair

view of the state of affairs of the company and, if applicable,of all the companies the affairs of which are dealt with in the consolidated balance sheet as at the end of that period; and (c ) the accounts, and where applicable the consolidated accounts, have been out in accordance with the applicable approved accounting standards Furthermore, Sub-section (16) of the same Section reads as follows: S. 169(16) Every balance sheet and profit and loss account of a company laid before the company in general meeting (including any consolidated balance sheet and consolidated profit and loss account annexed to the balance sheet and profit and loss account of a holding company) shall be accompanied by a statutory declaration by a director or where that director is not primarily responsible for the financial management of the company by the person so responsible setting forth his opinion as to the correctness or otherwise of the balance sheet and profit and loss account and, where applicable, the consolidated balance sheet and consolidated profit and loss account.

It will be seen, therefore, that in that sense, we can be said to be way ahead of SOX as far as certifying the accuracy or fairness of accounts are correct. The difference lay perhaps in the penalty for inaccurate report, fine and return of bonuses and other perks. With respect to internal control, until the passage of the recent amendment to our Companies Act, there was only a statement in the Bursa Malaysia Listing Requiirements relating to this. Paragraph 15.27(b) of the Listing Requirements read as follows: (b) a statement about the state of internal control of the listed issuer as a group.

The SOX Act was more direct. It required the statement to assess the effectiveness of internal controls and procedures. To compound matters, the new S. 167A of the new amendments to the Companies Act is too ambivalent. It states as follows: S. 167A. Except as otherwise provided for in the listing requirement of a Stock Exchange in relation to companies whose shares arelisted for quotation on the Stock Exchange, the directors of a public company or a subsidiary of a public company shall have in place a system of internal control that will provide a reasonable assurance that: (a) (b) assets of the company are safeguarded against loss from unauthorized use or disposition; and all transactions are properly authorized and that they are recorded as necessary to enable the preparation of true and fair profit and loss accounts and balance sheets and to give a proper account of the assets.

Penalty: Imprisonment of six months or ten thousand ringgit or both.

Here, it will be seen that the directors should have in place a system of internal control that will provide a reasonable assurance that ... There seems to be no requirement for the directors here to certify the accuracy or adequacy of the internal control structure. In this respect, it is to be queried whether this new section is any different from the old tried and tested S. 167 which reads as follows: S. 167(1) Every company and the directors and managers thereof shall cause to be kept such accounting and other records as will sufficiently explain the transactions and financial position of the company and enable true and fair profit and loss accounts and balance sheets and any documents required to be attached thereto to be prepared from time to time, and shall cause those records to be kept in in such manner as to enable them to be conveniently and properly audited. Every company and the directors and managers thereof shall cause appropriate entries to be made in the accounting and other records within sixty days of the completion of the transactions to which they relate. If default is made in complying with this section, the company and every officer of the company who is in default shall be guilty of an offence against this Act.

(1A)

(2)

Penalty: Imprisonment for six months or five thousand ringgit or both. The last major change made by SOX in setting up the Public Accounting Oversight Board (S. 101). This board is intended to oversee the audit of public companies and protect the interest of investors. The board shall, inter alia, register public accounting firms. At the present moment, the registration of public accountants is controlled by the Malaysian Institute of Accountants set up under the Accountants Act 1967. This Institute also determines and promulgates all the accounting standards that accountants must follow. Recently, the Government has also announced the setting up of a Public Company Accounting Board. One assumes this would be to follow the SOX model. It is interesting to note that the SOX Board shall have five members and only two members shall be certified public accountants. The other three members shall be prominent individual of integrity and reputation who have a demonstrated commitment to the interests of directors and the public, and an understanding of the responsibilities for and nature of the financial disclosures required of issues under the securities law and the obligations of accountants with respect of the preparation and issuance of audit reports with respect to subsidiaries. The Revised Code on Corporate Governance On the 1st October 2007, the Securities Commission revised The Malaysian Code on Corporate Governance which was first issued in March 2000. One can assume that the revision has come about because of the Transmile and Megan Media debacle. The new changes are as follows: (1) Paragraph AA of the Best Practices has been amended to read: .. The nominating committee should

recommend to the board, candidates for all directorships to be filled by the shareholders or the board. In making its recommendations, the nominating committee should consider the candidates skills, knowledge, expertise and experience; professionalism; integrity; and in the case of candidates for the position of independent nonexecutive directors, the nominating committee should also evaluate the candidates ability to discharge such responsibilities/functions as expected from independent non-executive directors;

The explanatory note to this amendment states that it provides greater clarity on the aspects which a nominating committee should consider when recommending candidates for directorships. In Malaysia, there are basically two types of corporate ownership to my mind. The first type would be the owner-controlled companies and the second type would be the institutionscontrolled companies. By the first type of companies, I would give examples like the IOI, Genting, Berjaya or the Binariang group of companies. These are companies that are controlled or run by individual or family shareholders who are often also executive directors of the companies, save and except perhaps for the Binariang group of companies. However, for all these companies, it is public knowledge as to who the controllers of these companies are. As for the second type of companies, examples would be Synergy Drive Berhad, Telekom Malaysia Berhad and Malaysia Airlines Berhad. These Companies are owned by institutions such as Permodalan Nasional Berhad or Khazanah Nasional Berhad. Unlike companies in the US or UK, Malaysia has very few big companies that are not controlled by a single or group of shareholders. In both types of companies, my view is that appointments to the board of these companies are in reality based on the old school tie network. In other words, the nomination of candidates to these companies almost always come from the controlling shareholders. And this method of appointment to the board is not necessarily evil. In fact, it is only natural that a controlling shareholder would want to put his own friendly parties to the board or in the case of the institution-controlled companies, some retired civil servants or army generals or technocrats known to the Finance Ministry. Why would anyone want to put a stranger onto his board? Therefore, to the extent explained above the nominating committees discretion may be quite limited in this respect. A while ago, it was suggested by some quarters that a pool or college of directors should be set up from which public companies can access to tap for directors. Such a pool will have many problems in terms of qualification and selection. Board minutes This revised best practice (para. XIV) requires the board to record its deliberations, in terms of the issues discussed, and the conclusions in discharging its duties and responsibilities. It is suspected that this new requirement must have arisen out of the recent investigations made by the SC. They must have discovered that they could not get much leads from reading the board or audit committee minutes. Traditionally, there are two acceptable ways of recording minutes of meeting. The easy way is only to record what was actually resolved at a meeting leaving out the discussions and deliberations of the meeting leading to the resolution. The other way is to record as far as

possible what was actually said at the meeting. Hence, it is not uncommon nowadays to see a digital tape recorder being placed on the table at board meetings. There is always a debate as to how much is to be recorded in the minutes of a meeting. If too much is recorded, nobody reads them. If too little is recorded, it is not useful or helpful. My own feeling is when a resolution is passed, the whole board is jointly responsible for it. As such, to avoid confusion and debate, only the resolution passed should be recorded. However, a director who disagrees with a resolution should have a right to require his dissent to be recorded in the minutes. Audit committees The next major revamp relates to the audit committee. All members of the audit committee should now be non-executive directors. All members of the audit committee should be financially literate and at least one should be a member of an accounting association or body. Furthermore, the audit committee should do the following, in relation to the internal audit function: review the adequacy of the scope, functions and resources of the internal audit function, and that it has the necessary authority to carry out its work; review the internal audit programme and results of the internal audit process and, where necessary, ensure that appropriate actions are taken on the recommendations of the internal audit function; review any appraisal or assessment of the performance of members of the internal audit function; approve any appointment or termination of senior staff members of the internal audit function; and take cognisance of resignations of internal audit staff members and provide resigning staff members an opportunity to submit his reasons for resigning.

Finally, the audit committee should have frequent meetings with the external auditors without the presence of the executive board members. In addition, the chairman of the audit committee should engage on a continuous basis with senior management, such as the chairman, the chief executive officer, the finance director, the head of internal audit and the external auditors in order to be kept informed of matters affecting the Company. The revised rules relating to the audit committee must have come about arising out of the Transmile and Megan Media investigations. It is easy to blame everything on the audit committee. But in reality the role of an audit committee has yet to be fully developed. How much work is an audit committee supposed to do? The New York Stock Exchange imposed the requirement of an audit committee as far back as 1977. Yet inspite of it, we have the now famous Enron and Worldcom collapse. Indeed, in the Enron case, it is my submission that the audit committee was helpless in respect of the offbalance sheet transactions in respect of the LJMS and the Raptor transactions. These sophisticated instruments and structured products were originated by respectable investment bankers and blessed by the external auditors and lawyers in respect of their accounting treatment. There were some very senior qualified independent accountants on the audit committee including it seems a professor of accounting.. But the instruments were so new and so complicated that few could understand their full impact. My submission is that until and

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unless we set out in detail what we expect the audit committee to do, we should not blame them for any failure in the company. Firstly, the requirement now is for each audit committee member to be financially literate. Of course, a member of the audit committee must be financially literate as the main job of the audit committee is to look at accounts and financial statements. The question is how much training must a director have before he becomes financially literate. Would attending a course in Finance for Non-financial Manager (being a 2 weeks course) be sufficient? Or must he get a diploma in accountancy? We should also not forget that among the audit committee, at least one should be a member of an accounting association or body. In other words, the audit committee must have a qualified accountant. The theory is that this person is the real financially literate person. Normally, this person would also be the chairman of the audit committee. The bad news is that in view of this requirement and the new onerous burden imposed on professionals under the new Companies Act, we may end up with qualified accountants being reluctant to sit on audit committees or even the board of companies. The new Section 132(1A) of the Companies Act, 1965 states as follows: S. 132(1A) A director of a company shall exercise reasonable care, skill and diligence with: (a) the knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities; and any additional knowledge, skill and experience which the director in fact has.

(b)

Traditionally, the common law has taken the position that one does not expect a director to be extra clever. He should perform his duty as would normally be expected of a man on the Clapham Omnibus as it were. But under the new paragraph (b), if a director were a lawyer (practising or retired, one assumes), that lawyer would be required to exercise his knowledge of law on a matter before the board which has to do with law. Similarly, if a person were a qualified accountant, he is expected to demonstrate his skills as an accountant. In this respect, that accountant would be put under great pressure at audit committee meetings. Which brings us to the next point. How much details must the audit committee go into. At the moment, most audit committees meet four times a year to review and approve the quarterly results and listen to the internal audit report on the company. Each meeting usually lasts two or three hours, about half a day. Are audit committees required to meet more frequently or for longer hours? The Board of Enron normally held five regular meetings during the year, with additional special meetings as needed. Board meetings usually last two days, with the first devoted to committee meetings and a board dinner and the second day devoted to a meeting of the full board. Committee meetings generally lasted between one and two hours and were arranged to allow Board members, who typically sat on three committees, to attend all assigned committee meetings. Full board meetings generally lasted between one and two hours. Special board meetings, as well as meetings of the executive committee, were typically conducted by telephone conference. (Senate Sub-Committee Report on Enron July 8, 2002 pg. 9) Without denigrating the role of the audit committees and how much they can do, it is submitted that the hard law must work in tandem with developments. As such, it is

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haartening to note that the recent amendments to the Companies Act, 1965 is showing some teeth. Hence, the new S. 167A requiring directors of public companies to have in place a system of internal control that will provide a reasonable assurance.. is to be applauded, although it is still unclear to me why our existing S. 167 do not have embedded therein a system of internal control. However, it is to be noted that S. 167A do not go as far as SOX which requires the CEO to evaluate the effectiveness of the companys internal controls. In addition, the new Sub-section (8A) of 174 is also quite enlightening. It requires an auditor in the course of performance of his duties to the report to the Registrar a serious offence involving fraud or dishonesty. Furthermore, S. 368B encourage whistle-blowing and affords some protection to whistleblowers. Whilst we are on the topic of law reform, it is also perhaps relevant to mention and learn from S.389B of the UK Companies (Audit, Investigations and Community Enterprise) Act, 2004. This Section makes it an offence for a person [to] knowingly or recklessly makes to an auditor of a company a statement (oral or written) that .. is misleading, false or deceptive in a material particular.. In fact, there are many other sections in the same Act that are worth considering for adoption. Some difficulties of the new amendments to the Companies Act, 1965 I have already referred to some of the difficulties which seem to arise out of the new amendments. Perhaps the most telling one is the new Section 132E. This section is intended to be the substitute of the infamous S. 132G. Now, director/substantial shareholders/connected persons can transact with a company is allowed but the transaction must be approved by the company in a general meeting at which the interested director/substantial shareholder/connected person cannot vote. In principle, the law as contained in the new Section 132E is correct. However, it also catches innocent family companies transactions. We have thousands of companies in Malaysia which are small and family owned. The only shareholders of these companies are usually the husband and wife of a family and some of their adult children. In these companies, it is not uncommon for inheritance purposes for the father of a household to transfer his assets or business into his family company. It is to be queried firstly whether such a transfer which do not involve members of the public require shareholders approval as it is to be presumed that the father is not likely cheat himself or his family. Secondly, even if a shareholders meeting is required, no one can vote at the meeting as all the parties are connected persons. As such, it is submitted that it is not the intention of the new Section 132E to catch transactions that do not involve members of the public and that an amendment should be quickly implemented so as not to impede business efficacy. It is interesting to note that in the equivalent of the UK Companies Act 2006, S. 190, the director of connected person is not disbarred from voting. This would address the family companies problem stated aforesaid but would not protect companies which have public shareholders and who are usually small shareholders compared to directors or connected persons shareholding. The next difficulty which has already been mentioned earlier is the additional knowledge, skill and experience which the director in fact has (S. 132(1A)(b)). There will be a debate as to which particular director has any additional knowledge, skill and experience compared to his other board members. He may be an accountant, lawyer, engineer or quantity surveyor. But is he required to state definitively a point of law, an accountancy entry or an engineering formula.What if the director is a retired lawyer, accountant, engineer? He may not have

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practised his area of expertise for many years. Is he then required to exercise additional care and skill? Surely, the board of a company is entitled to seek and pay for professional opinions from investment bankers, auditors, lawyers, valuers or any other specialist. These practising professionals would be more competent than say a retired professional. In fact, the new S. 132(1C)(b) recognises this. So, why is there a necessity for Sub-section(1A)(b). At first blush, Section 132(2)(a) seems too wide. It says: S.132(2) A director or officer of a company shall not, without the consent or ratification of a general meeting: (a) use the property of the company .. to gain directly or indirectly, a benefit for himself or any other person, or cause detriment to the company.

On the surface, this would seem to illegalise the use of a company car jet or yacht by a director. It is not normal practice for a company to get shareholders approval to buy a car, jet, helicopter or company yacht The last difficulty I have is with respect to the new Section 174(2A) of the Act which required the auditor to report fraud or dishonesty. In large companies, fraud or dishonesty do occur. But when they do, the management will usually lodge police reports. The auditors cannot be expected and should not be expected to lodge reports which has already been lodged by the management. Therefore, I would like to see the word officer in S. 174(8A) to mean directors only rather than every officer of a company. We do not need to inundate the Registrar with so many reports. Thefts and larceny should be the domain of the police.

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