OVERVIEW OF DATO’ AZIZAN BIN ABD RAHMAN & ORS V CONCRETE PARADE

A. INTRODUCTION:

The Respondent, Concrete Parade Sdn Bhd (“Concrete Parade”) filed an oppression claim against Apex Equity Holdings Berhad (“Apex”) and its directors, challenging a proposed merger, a private placement of shares, and share buy-back transactions under various provisions of the Companies Act 2016 (“CA 2016”). The High Court dismissed the claim, findingcompliancewithstatutoryrequirements.TheCourtofAppealreversedthis,questioning the interpretation of pre-emptive rights and shareholder resolutions. The Federal Court ultimately overturned the Court of Appeal’s decision, reaffirming that the statutory provisions were properly adhered to, and that the transactions did not constitute oppression, providing crucial guidance on the application of CA 2016.

B. ISSUES WHICH AROSE:

Pre-Emptive Rights to New Shares 

Concrete Parade, along with other minority shareholders, argued that the directors of Apex had breached section 85(1) CA 2016, affecting their statutory pre-emptive rights. This breach allegedly occurred when the directors proposed a private placement of new shares, potentially diluting Concrete Parade’s shareholding, without obtaining explicit shareholder’s approval.

Disposals or Acquisitions of Substantial Assets

Concrete Parade also argued that the agreements (i.e. Heads of Agreement and Business Merger Agreement) executed by the parties for the proposed acquisition of Mercury Securities Sdn Bhd and merger with JF Apex Securities Bhd violate the statutory requirements under section 223 of the CA 2016, as the directors failed to obtain prior shareholder approval for the transactions.

Share Buy-back Transactions

Another argument raised was whether the share buy-back transactions carried out by Apex between 2005 and 2017, without proper authorization within Apex’s articles of association, amounts to an illegality. Specifically, the questions were: Did the contravention of section 67A(1) of the Companies Act 1965 (“CA 1965”) and section 127(1) of CA 2016 render the share buy-back transactions void and unenforceable? If the transactions were illegal, did this illegality result in oppression against the minority shareholder, Concrete Parade, under section 346 of the CA 2016? Can section 582(3) of the CA 2016 be used to rectify such an illegality?

Oppression

It was argued whether the oppression action is properly brought by Concrete Parade under the oppression provision. Specifically, Apex questioned if a cause of action under oppression would be the correct means to remedy Concrete Parade’s grievances. Can the Court find that the affairs of a public-listed company have been conducted oppressively by the directors as a result of the denial of shareholder’s statutory right to vote on corporate exercises requiring shareholders’ approval, despite having obtained the approval of the majority shareholder?

C. COURT’S ANALYSIS:

Pre-Emptive Rights to New Shares 

Pre-emptive rights prescribed by section 85(1) CA 2016 can be waived or disapplied if a company’s constitution expressly provides for it, as is the case with Apex’s constitution, which allows for pre-emptive rights to be waived by way of ‘directions to the contrary at a general meeting’. Such directions to the contrary must necessarily include a shareholders’ resolution passed at a general meeting.

Reaffirming the High Court’s position, it was deemed unnecessary for Apex to explicitly remind shareholders of their pre-emptive rights or set out in circulars that voting in favour of the resolution would result in their pre-emptive rights being waived. Additionally, the Federal Court held that the Court of Appeal had erred in relying on the Indian High Court decision in Shanti Prasad as this decision was reversed on appeal by the Indian Division Bench and Supreme Court.

Disposals or Acquisitions of Substantial Assets

The Federal Court was in the opinion that the two limbs in section 223(1) CA 2016 should be read disjunctively, therefore requiring compliance with either one of the limbs, as opposed to compliance with both. The Heads of Agreement merely acts as a letter of intent or a record of understanding between parties that may be detailed out in a subsequent formal agreement, should the transaction materialise. The fact of the matter is the proposed merger could not be carried out without the approval of Apex’s shareholders.

The Court of Appeal’s interpretation of section 223 CA 2016 requires the shareholders’ approval to be obtained twice for the same corporate transaction: once before executing the merger agreement and once more before the actual acquisition or disposal of assets. The Federal Court deemed this interpretation to be unreasonable and is contrary to commercial sense, as it could hinder and potentially abort corporate transactions by requiring approvals at multiple stages.

Share Buy-back Transactions

The Federal Court addressed compliance and authorization issues, determining that the share buy-back transactions straddled both section 67A of the CA 1965 and section 127 of CA 2016. The contraventions were primarily related to sections 67A and 127 of both of the Acts, which permit a public listed company to purchase its own shares if authorized by its constitution, rather than sections 67 and 123 of both of the Acts, which prohibit financial assistance for the purchase of a company’s own shares. There was a lack of compliance with section 67A(1) of the CA 1965 because Apex’s articles of association did not authorize the company to purchase its own shares.

Regarding the determination of illegality, the Federal Court found that the purpose of section 67A of the CA 1965 was to enable companies to purchase their own shares if it was done in good faith and in the company’s interest. The share buy-back transactions were undertaken in good faith and in the interest of the company, evidenced by the directors presenting the buy-back proposal to shareholders annually. The Federal Court found it difficult to conclude that the contravention of section 67A(1) of the CA 1965 alone rendered the transactions illegal. The transactions did not violate the material provisions of section 67A(2) or section 127(2) of both of the Acts.

Further, in the oppression claim by Concrete Parade, the Federal Court found that the share buy-back transactions did not result in oppression against Concrete Parade as all shareholders were equally affected by these transactions, and Concrete Parade had failed to show how they particularly have suffered unfair prejudice as compared to the other shareholders. Concrete Parade had approved the transactions from year 2013 or 2014 onwards and did not act to oppose the validation proceedings. The complaints now lacked credibility and evidence of prejudicial conduct by the majority.

Regarding the validation order and nullity of the share buy-back transaction which had been validated by the High Court, the Federal Court held that the Court of Appeal had erred in declaring the High Court’s validation order as void based on an assumed illegality. Instead, the Federal Court found no clear illegality that would render the transactions null and void and therefore did not find it necessary to determine whether section 582(3) of CA 2016 could be used to rectify an illegality, as it was not conclusively established that an illegality existed.

Oppression

The Federal Court found that Concrete Parade had failed to establish a contravention of sections 85, 223(1)(b)(i) and (ii) of the CA 2016. There was also no conclusive establishment of illegality in relation to section 67A of CA 1965 or section 127 of CA 2016 concerning the share buy-back transactions.

The Federal Court determined that Concrete Parade’s grievance could not amount to oppression since the majority of shareholders approved the merger, and the majority rule was in favor of the merger. The Federal Court emphasized that the failure to join the majority shareholders, who were alleged to have oppressed Concrete Parade, was fatal to the oppression action. The grievances should have been brought as an action against the officers or directors for contravening specific provisions of the Act and not as an oppression action. The Federal Court also noted that the oppression action appeared to be an abuse of the statutory oppression remedy, aimed at hindering or halting the proposed merger. Concrete Parade had failed to demonstrate how it was unfairly prejudiced as a minority shareholder, given that all shareholders were affected similarly, and the majority’s approval did not constitute grounds for oppression.

D. CONCLUSION

The evolution of Malaysian Company law, for example, section 132C of the CA 1965 which was replaced by section 223 of the CA 2016, reflects a delicate balance between empowering management and protecting shareholders’ interests. Initially, the stringent requirements for shareholder approval were aimed at preventing unilateral decisions by the board of directors that could significantly impact the company. However, these constraints also hindered the flexibility needed for effective business negotiations and entrepreneurial initiatives, and such changes were necessary to align with modern corporate governance principles, which recognize the need for management to conduct ordinary business without undue interference while ensuring that shareholders retain control over significant transactions of the company.

Ultimately, the Malaysian legislative framework strives to strike a balance that fosters both efficient corporate governance and robust shareholder protection, facilitating smoother corporate transactions and promoting a more dynamic business environment.

For personalised legal and compliance support, please reach out to our Dispute Resolution Partner, Mr. Brandon Cheah (brandon@nzchambers.com), Associate, Ms. Aireen Natasha Ab Wahad (aireen@nzchambers.com), and Advisory & Compliance Associate, Ms. Maryam Amilah Zaini (maryam@nzchambers.com).We are here to help you achieve compliance and manage these regulatory updates effectively.

Authors:

  1. Brandon Cheah
  2. Aireen Natasha
  3. Maryam Amilah Zaini

Published Date:
31 July 2024