APRIL 15 — The balance between pursuing legitimate business goals by raising capital through the issuance of new shares as against the pre-emptive rights of shareholders can be tricky. The shareholders’ concern of share dilution and voting power needs to be weighed against the pursuit of growth in the overall interest of the Company.
To this end, the Federal Court in Dato’ Azizan Bin Abd Rahman & Ors v. Concrete Parade Sdn Bhd & Ors has determined a few important issues in relation to the construction of sections 85 and 223 of the Companies Act (“CA”).
The Federal Court’s decision is important because of the implications to companies in Malaysia, on the permitted means of raising capital for entrepreneurial purposes.
Question: Must shareholders’ approval be obtained in every instance where newly issued shares are to be allotted and issued for the purposes of raising capital or do exemptions and exceptions subsist by virtue of the constitution of the company? If they do, can they be given effect?
Answer: Section 85(1) of the CA grants a statutory privilege to existing shareholders of a company, allowing them to maintain their proportional ownership in the company by providing them with the opportunity to purchase shares on a pro-rata basis before they are issued to outsiders. This pre-emptive right however, is subject to the constitution of the company. In other words, the constitution of the company will have a determinative effect on whether and how the shareholders’ statutory pre-emptive rights in the second part of section 85(1) may be dealt with. The constitution may provide for an ability to renounce or disapply such pre-emptive rights or may be silent or may fortify such pre-emptive rights. The contents of the constitution prevails over the statutory rights conferred under section 85(1) of the Act.
Comment: It is important that the contents of your company’s constitution be reviewed to ensure that the terms thereof appropriately defends your pre-emptive rights as a shareholder of a company.
Question: What is the precise point in time when directors are to obtain shareholders’ approval for the acquisition or disposal of an undertaking or property of a substantial value?
Answer: The management or directors may choose to obtain such approval at the time of the entry into the proposed acquisition or disposal, by making any agreement between the third party and the company for such acquisition or disposal subject to shareholders’ approval at general meeting, which is to be evidenced by a resolution to that effect. The directors or management can choose to obtain such shareholders’ approval at a later stage in the transaction, but before actual ownership of the asset is either acquired or parted with.
Comment: This means that as long as it is understood between the company and the proposed vendor or purchaser that the acquisition or disposal will not go through unless and until shareholders’ approval is obtained, the entry into such an agreement complies with the requirements of section 223. And this in turn is because, as stated earlier, the final acquisition or disposal cannot be completed, until such shareholders’ approval is obtained. If shareholders’ approval is not obtained the transaction simply cannot proceed and will be aborted as the condition relating to shareholders’ approval was not complied with.
Question: Can Section 582(3) be Utilised to Rectify any unknowing contravention of the CA?
Answer: Section 582 of the CA ought not to be utilised to rectify an illegality.
* This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.
