Wednesday, December 4, 2019

[449.19] Powers and Rights of Shareholders under Companies Act 2016

Under the Companies Act 2016, share certificates are no longer mandated. The register of members forms the prima facie evidence of the legal title of the member of the shares stated therein. Thus, it can be deduced that a person becomes a member of the company when his name is entered into the company’s register of members. Reference may be made to Ming Yueh Holdings Sdn Bhd v Kong Ming Bank Bhd (1990) where the court held that the correct term to use in reference to any person having any share in a company would appear to be a member.
Even the fact that a person owns shares does not make him a member of the company. It is possible to purchase shares without being registered as the holder of those shares in the company’s register of members. Thus, it follows that even if a person owns shares in a company, he is not yet a member until his name is in the company’s register of members. This is affirmed by the definition of member in Section 2(1) of CA 2016.
A member of the company is entitled to the rights conferred on him by the Companies Act 2016 and the company’s constitution, if any. Section 33(1) of CA 2016 says that the constitution has the effect of a contract between the company and the members and between the members themselves and binds them to the extent as if the documents “had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the constitutions. Once his name is registered in the company’s register of members, he will enjoy the rights conferred by the Companies Act 2016 on members as per Section 101(2) of CA 2016.
1. The right to exercise his right to vote attached to the share
Firstly, in this circumstance, not all ordinary shares and preference shares have voting rights. For instance, Section 90(2) read together with Section 90(3) of CA 2016 reveals that a company may issue ordinary shares which do not entitle holders to vote at the company’s general meetings. As for the holder of preference shares, preference shares is defined under Section 2(1) of CA 2016 to mean “a share by whatever name called, which does not entitle the holder to the right to vote on a resolution or to any right to participate beyond a specified amount in any distribution whether by way of dividend, or on redemption, in a winding up, or otherwise”.
2. The right to receive notice of meetings of the members
Secondly, he is entitled to receive notice of meetings of the members which is in accordance to Section 101(2) (b) and Section 321(1) of CA 2016. Any intentional omission will invalidate the meeting. This is because Section 321(1) of CA 2016 provides that notice of a company meeting must be given to every member of the company. Generally, notice must be given to all persons whose names appear in the company’s register of members, for Section 2(1) of CA 2016 defines a member as a person whose name is entered in the register of members. However, where a member has died or who has become bankrupt, and the company has been notified in writing of the identity of the person entitled to the deceased or bankrupt’s shares, then the notice will be send to the person who is so entitled as per Section 321(2) of CA 2016.
All members of the company who have a right to attend and vote at the meeting shall be given notice of the meeting, failing of which the meeting may be held to be void. And consequently, the proceedings at the meeting are void. However, Section 316(6) of CA 2016 saves the meeting if the omission to give the notice is accidental. In Musselwhite v Musselwhite (1962), some members had executed transfers of their shares in favour of third parties but the shares had yet to be transferred. Though their names remained in the register of members, the company did not give them notice of the meetings under the impression that they were not entitled to receive the notice. The court held that this was an intentional omission and thus, the meeting was held to be void.
This case is to be contrasted with the case of Re West Canadian Collieries Ltd (1962) where the failure to give notice of a meeting to nine members was due to an administrative error. The court held that it was an accidental omission and thus, the omission did not invalidate the meeting. Thus, in other words, Section 316(6) of CA applies to preserve the meeting where the company did not deliberately omit serving the notice on a member.
However, even if Section 316(6) of CA 2016 cannot be applied, the meeting may still be validated by the application of Section 582(1) and (2) where Section 582 does not apply if there is injustice to a member who did not receive the notice and thus, did not attend the meeting. It also cannot be applied to prevent a member from exercising his statutory right to attend and vote at the meeting.
3. The right to question, discuss, comment and make recommendation on the management of the company
This is in accordance to Section 195 of CA 2016 which is not found in Companies Act 1965 and thus, a new right conferred on the members. At the member’s meeting, members shall be given reasonable opportunity to question, discuss, comment or make recommendation on the company’s management. The section reads:
(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 under this section which makes recommendations to the Board on matters affecting the management of the company.
(3) Any recommendations made above shall not be binding on the Board, unless the recommendation is in the best interest of the company, provided that –
a. The rights to make recommendations is provided for in the constitution, or
b. Passed as a special resolution
However, whether it remains merely a recommendation to the Board or whether it is binding on the Board depends on the conditions which are prescribed under Section 195(2) and (3). The members may avail themselves of one of the two approaches, that is, by special resolution or ordinary resolution.
4. The right to receive dividends declared by the company – Section 101(2)(c)
Section 131 of CA 2016 provides that a company may distribute its profit to its members only if the company is solvent. Thus, the company may pay dividends only if the company is solvent and the company has distributable profit. According to Marra Development Ltd v BW Rofe Pty Ltd (1977), the company must have a profit at the time of declaration, not necessarily at the time of payment. Once the dividend is declared, it becomes a debt due by the company to the members on the date payable notwithstanding that the profit has evaporated by then.
Further, dividends should not be paid if the payment will cause the company to be insolvent. As the directors are the ones who authorize the payment of dividends, they must be satisfied that the company will be solvent immediately after the distribution is made. The solvency test is prescribed in Section 132(3) of CA 2016. If the company pays dividend not out of the company’s profits, every director or manager who willfully does so will be liable to the company as per Section 133(2) of CA 2016. Besides, the company may also recover from the shareholder the amount of dividends exceeding profit unless the shareholder has received the dividend in good faith and has no knowledge that the company did not satisfy the solvency test as under Section 133(1) of CA 2016.
A company may also issue ordinary shares with different entitlement to dividends as per Section 71(1) (e) read together with Section 71(2) of CA 2016 where the holder shall have the right to an equal share in dividends authorized by the Board, nevertheless, their entitlements will be stated in the company’s constitution or in accordance with the terms on which the shares were issued. It is similarly so for holders of preference shares with different entitlement to dividends as prescribed in the company’s constitution.
5. The rights to appoint another person as his proxy to attend, participate, speak and vote at the member’s meeting.
A member need not attend the company meeting in person as he may appoint another person to attend the meeting on his behalf. This person may even participate, speak and vote on his behalf at the meeting and this is known as the member’s proxy. Section 334(1) of CA 2016 provides that every member who is entitled to attend the company meeting has the statutory right to appoint a proxy.
Thus. in a notice calling for meeting, a statement on the right of a member to appoint a proxy must be prominently displayed as per Section 335(1) of CA 2016. The right to appoint a proxy is an important statutory right for a member who is unable to attend the meeting. Despite his absence, he may exercise his rights through his proxy to query the directors and to vote on any resolution. Further, the purchaser of shares in the company, who did not manage to get the share transferred to his name before the company meeting, may be appointed by the seller as a proxy to enable him to attend the meeting.
Under the Companies Act 2016, the members can appoint anyone to be his proxy and it does not specify the maximum number of proxies which may be appointed by a member. However, where he appoints more than one proxy, then he must specify the proportions of his holdings to be represented by each proxy.
6. The right to apply to the court to restraint the company
This right applies when the directors cause the company to enter into a substantial value transaction. Even if the company’s constitution has vested the power to enter into such transactions in the directors, Section 223 and Section 228 of CA 2016 provide that member’s approval must be obtained before the company enters or carries into effect any transaction of substantial value. What tantamount to substantial value depends on whether the other contracting party is a director or substantial shareholder or a person connected with him. If he is, then Section 228 of CA 2016 applies. If not, Section 223 of CA 2016 applies.
7. The right to take action against the company or directors under Section 346
The legislature recognizes that some members may be oppressed by the directors or the controlling members. In general, Section 346 of CA 2016 provides for a remedy for available for members and debenture holders in the company in the event the affairs of the company are conducted in a manner which is oppressive, in disregard of his interest as a member, discriminatory, or prejudicial to him. It does not identify the persons against whom action can be taken. Thus, action under Section 346 of CA 2016 can be taken against any person who conducts the affairs of the company or does any act on behalf of the company.
Usually, the defendant will be a director or a member of the company who holds a substantial number of shares in the company and is in a position and have the opportunity to oppress the plaintiff. According to the case of Kondapuran Raghuram v Soo Peng & Ors (2006), the defendants could also be the employees of the company who are authorized to act on behalf of the company and thus, in a position to carry out acts which are oppressive to the plaintiff.
In Re Kong Thai Sawmill (Miri) Sdn Bhd (1978), the Privy Council held that there must be a visible departure from the standard of fair dealings and a violation of the conditions of fair play which a shareholder is entitled to expect before a case of oppression can be made. The wrong committed by the defendant against the plaintiff may be in the form of action, omission or inaction and also, it may even be a single act or omission. For instance, in Jaya Medical Consultants Sdn Bhd v Island & Peninsular Bhd (1994), the court held that it is impossible to lay down all categories which fall within the ambit of Section 181 of CA 1965 (equivalent with Section 346 of CA 2016).
Further, remedies are available to a minority member as per Section 346(2) of CA 2016 where the court may order either direct or prohibit the wrongful act, cancel or vary the transaction or resolution, regulate the conduct of the company’s affairs, order other members or debenture holders or the company itself to purchase the interests of the affected member or wind up the company.
According to Koh Jui Hiong v Ki Tak Sang & Anor (2014), the court may also order damages to be paid to the oppressed member. To further safeguard the position of the oppressed member, Section 346(4) of CA 2016 provides that the court may order alteration to the company’s constitution and to not make further alteration to the constitution which is inconsistent with the court unless the company has obtained the prior approval of the court.
8. The right to take or defend the action in the name of the company
This is a kind of a derivative action available to the members in the circumstance where the company has been wronged. Thus, the member may take or defend the action in the name of the company provided that he has first fulfilled the conditions prescribed in Section 347 and Section 348 of CA 2016. The complainant is defined under Section 345 of CA 2016 as either a member of the company or a person who is entitled to be registered as a member, a former member of the company provided the application relates to the circumstances in which the member ceased to be a member and any director of the company.
In deciding whether to grant leave for the derivative action, the court shall take into account whether the complainant is acting in good faith and it appears prima facie to be in the best interest of the company for the court to grant leave. Section 348(3) of CA 2016 further provides that where the court has granted leave to the complainant, the complainant should initiate the derivative action within 30 days from the grant of leave. To ensure that the complainant is serious in filing, and conducting the derivative action, Section 348(5) of CA 2016 provides that the derivative action once commenced cannot be discontinued, compromised or settled without the court’s leave.
9. The right to take the drastic step and petition to wind up the company
There are two type of winding up, which are voluntary winding up and compulsory winding up. The members may opt to cause a voluntary winding up where the members have passed a resolution to wind up the company. There are two forms of voluntary winding-up which are member’s voluntary winding-up and creditors’ voluntary winding up. It is a member’s voluntary winding-up if the company is solvent and the liquidator is appointed by the members and the members’ meeting.
According to Section 439(1)(a) of CA 2016, the members can pass an ordinary resolution to wind-up the company in the event where first, the company’s constitution has fixed the duration of the company and the period has expired. Second, the company’s constitution has provided that the company is to be dissolved upon the occurrence of a certain event, and such event has occurred. However, these are not the only circumstances when the company can be wound up voluntarily. For other circumstances that are not stated in Section 439(1)(a), Section 439(1)(b) of CA 2016 states that a members’ special resolution is required.
The members’ voluntary winding-up commences when the members resolution is passed as per Section 444(1) of CA 2016. Despite the commencement of winding up of the company, its corporate status and corporate powers continue until the company is dissolved.
Apart from that, in a compulsory winding up, the court orders the company to be wound up upon the petition of any of the persons listed in Section 464(1) of CA 2016. They include the company itself, a creditor and a member. The court has the discretion to order winding up of the company if the petitioner can prove any of the circumstances mentioned in Section 465(1) of CA 2016.
Faculty of Law,
Universiti Teknologi MARA

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