Capital market practitioners involved in corporate transactions await an important ruling from the Federal Court. This involves an appeal by Apex Equity Holdings Bhd (Apex) on the merger with Mercury Securities Sdn Bhd (Mercury) and which minority shareholders challenged as being in contravention of provisions of the Companies Act 2016 (CA 2016).

This opinion piece does not touch on the merits or otherwise of allegations of minority oppression nor on the validation by the court of the exercise of share buy-back by Apex.

History of the case

Apex sought to merge their business with Mercury in 2018. As was normal then, the parties entered into heads of agreement (HOA) on Sept 21, 2018 which led to the execution of a Business Merger Agreement (BMA) and also Subscription Agreement (SA) on Dec 18, 2018.

Concrete Parade Sdn Bhd and other minority shareholders complained of non–compliance with their pre-emptive rights (section 85 of CA 2016) and also that the entering into the HOA was not made subject to shareholders’ approval, in contravention of Section 223 of CA 2016).

The High Court handed down its decision on Aug 7, 2019 and on Sept 11, 2019 grounds were given, inter alia that it is legally sufficient in a transaction that is composite in nature, ie, involving a combination of agreements (the HOA, BMA and the SA) that shareholders’ resolution is obtained before the completion of the agreements. Therefore there has been compliance with Section 223 of CA 2016. The High Court also held that the pre-emptive rights as stated under Section 85 of the CA 2016 had been complied with. The Articles of Association of Apex which have a clause that provides that, ”Subject to any direction to the contrary that may be given by the Company in general meeting ...” . The High Court held that this provision (Art 11 in Apex’s constitution) has the legal consequence that a resolution passed for a share placement suffices to satisfy Section 85.    

On Aug 18, 2021, the Court of Appeal (COA) accepted Concrete Parade’s & Ors’ appeal and overruled the High Court. This has the result that even at the stage of negotiations, all preliminary agreement(s) have to be made subject to the shareholders’ approval. On pre-emptive rights under Section 85 the COA also held that a resolution simpliciter without specific reference to Section 85 is inadequate.

On the issue of pre-emptive rights, which is statutorily provided for under Section 85 of the CA,  there were legal arguments in this case that the passage of a general meeting resolution simpliciter without specific reference to a “waiver” by shareholders is insufficient and this was upheld by COA.

An Appeal was made by Apex to the Federal Court and the appeal hearings concluded on the Aug 2, 2023.

Background of the law on approval of shareholders at general meeting

Section 132C of the Malaysian Companies Act 1965, the precursor to Section 223 of CA 2016, had an important legislative background.

The two major organs of a company are the board of directors and the shareholders at a general meeting. Section 132C sought to circumscribe the authority and power of management as exercisable by the Board. Following the important UK Company Law Committee 1962 (the Jenkins Committee), modern company law sought to balance the need to accept that whilst the management may conduct ordinary business without the shareholders’ interference, the acquisition of or disposal of material assets and/or business would require consent of shareholders.

However, Section 132C  of CA 1965 has the term “to execute” which carries an unequivocal sense that no business arrangements and agreements may be executed. This raised a constraint upon negotiations and entrepreneurial decisions on management.

In 2007, Parliament deleted the word “execute”, signalling a legislative intention that parties are not so constrained that they cannot “execute” any heads of agreement, memorandum of understanding or letters of intent.

However, Section 132C (and now Section 223 of the 2016 Act) nonetheless retained the wording of “entering into the arrangement or transaction” which gave rise to the contention by Concrete Parade that even the entering into heads of agreement has to be made subject to shareholders’ approval. The COA so held that as the law.

The Apex Court’s Ruling will be significant  

When the Federal Court gives its judgement the law will be clarified with the ruling from our Apex Court as to whether the High Court decision or the COA’s is correct. Capital market professionals await such definitive guidance. The Federal Court indicated that the decision will be forthcoming with written grounds when the hearing of Appeal concluded on August 2, 2023.       

Philip Koh Tong Ngee is an adjunct professor at Universiti Malaya and the School of Business, Monash Malaysia University.