This article first appeared in The Edge Malaysia Weekly on November 27, 2023 - December 3, 2023

AN independent director of Malaysian Genomics Resource Centre Bhd (MGRC) is suing his fellow directors and key management personnel for allegedly breaching their fiduciary duty in the company’s undertaking of at least four transactions, and in turn is accused of launching the lawsuit in bad faith and because of a “personal grudge”.

In August 2022, MGRC’s wholly-owned subsidiary MGRC Healthcare Sdn Bhd signed a one-year collaboration agreement with Rinani Renal Bhd, a privately held company.

Under this deal, MGRC Healthcare is to appoint Rinani Renal as a consultant in obtaining the exclusive rights to operate a haemodialysis treatment centre for the Malaysian International Islamic Chamber of Commerce in Gombak, Selangor. Also as part of the agreement, MGRC Healthcare made an advance payment of RM5 million to Dynamic Prestige Consultancy Sdn Bhd as a stakeholder, according to court documents.  (The RM5 million constitutes 13.5% of the net assets of MGRC as at June 30, 2022.)

In a lawsuit filed in Shah Alam High Court on Oct 27 and obtained by The Edge, the applicant Aswath Ramakrishnan — an independent non-executive director of MGRC — claimed that when MGRC’s external auditor HLB Ler Lum Chew PLT asked the management why an independent lawyer had not been appointed as a stakeholder, given the significance of the advance payment, the management said it was confident about Rinani Renal and Dynamic Prestige.

The management also said there was no related party relationship between Rinani Renal and Dynamic Prestige. Based on its due diligence, however, Dynamic Prestige appears to be the ultimate shareholder and decision-maker of Rinani Renal, prompting management to conclude that both are essentially “of the same party”. Rinani Renal is a wholly-owned subsidiary of Rinani Care Sdn Bhd, which in turn is a wholly-owned subsidiary of Dynamic Prestige. According to a stock exchange filing, Dynamic Prestige is fully owned by its director Huzaini Husin.

In another development, MGRC Healthcare entered into a collaboration — this time with Dynamic Prestige — on a potential partnership to jointly set up 50 dialysis centres with a 42-seat capacity each in November 2022. The six-month agreement saw MGRC Healthcare make an advance payment of RM4 million.

When HLB asked the management whether the two collaboration agreements are similar, given that they are to operate dialysis centres with Dynamic Prestige as a common party, the reply was that the agreements were not linked.

According to court documents, HLB was told that the reason for entering into the second agreement with Dynamic Prestige was the opportunity presented to the management by the consultant to potentially acquire an existing dialysis business.

In both cases, MGRC management decided that it was not necessary to present a board paper — to consider the benefits and risks associated with the agreements — to the company’s board of directors (BoD), as the collaborations were deemed to be at an early stage.

In its response to the auditor, the management also said there was no need for prior approval from the BoD before entering into the agreements and payments of the advance, as the management deemed they were within the ordinary course of business.

There was also no requirement to make an announcement to Bursa Malaysia, as the agreements were not “concrete” yet, the management said, adding that the two projects are still underway and that the management is in constant communication with Rinani Renal and Dynamic Prestige.

Now, these transactions, along with two others, are being questioned in court by Aswath — who joined the board in May. He alleges that some board members and key management personnel of the ACE Market-listed genomics and biopharmaceutical company violated their fiduciary duty in relation to at least four transactions involving the company and its subsidiaries with external parties, namely Rinani Renal, Dynamic Prestige and Rinani Genotec Sdn Bhd (now known as Genotec Sdn Bhd).

MGRC executive chairman Noor Azri Noor Azerai, independent non-executive directors Mohd Shakir Shahim, Syed Zulkifli Syed Ismail, Chih Yi May, Mohamad Ruzaini Hamzah, Muhammad Badri Hussin, financial controller Ang Jia Yee and company secretary Ng Lai Yee are the eight respondents named in the suit. Aswath also applied for leave of the court to commence derivative proceedings in the name of MGRC against the respondents.

In the lawsuit, Aswath is seeking the appointment of an independent auditor to conduct an investigation into MGRC’s administration and operational matters, and full cooperation from all the parties including agents, directors, officers, employees and other relevant representatives in the course of the investigation.

According to the lawsuit, HLB’s audit summary report for the financial year ended June 30, 2023 (FY2023), allegedly revealed a series of red flag related-party transactions that should have led to more scrutiny of the company’s operations.

On Aug 28 this year, a meeting was held with the respondent directors, members of the audit, nomination and remuneration committees with HLB for the auditor to present its audit findings for FY2023. During the meeting, HLB flagged areas of concern to at least four transactions conducted between July and December 2022, amounting to RM15.47 million, which include a lack of reporting and control of significant transactions entered into by the management, the suit alleges.

Based on the issues raised by HLB, the respondent directors had decided that “no further steps are to be taken to proceed with the impugned transactions until further notice”, the suit notes.

The lawsuit also alleges that the respondent directors voted to change the financial year-end of MGRC instead of resolving the audit issues highlighted by HLB. An Oct 25 stock exchange filing shows that the board has decided to change the company’s financial year-end from June 30 to Dec 31, as it requires more time to assess the information in the financial statements for FY2023.

Another concern brought up by HLB involves the offer to subscribe for shares in Rinani Genotec, a biomedical technology firm, in December 2022. MGRC paid a RM3.5 million deposit to Rinani Genotec, even though a formal subscription agreement between the parties had yet to be executed.

According to court documents, MGRC’s management had made a presentation to the BoD that Rinani Genotec has a service agreement with Kuala Lumpur City Football Club (KL City FC) to provide cell therapy treatments for its players. Management had also carried out a fund flow analysis to support its acceptance of the offer to subscribe for shares in Rinani Genotec.

Asked about the assessment of the related-party relationship with companies associated with “Rinani” and, in this case, Rinani Genotec, the management responded that other than the similarities of the name Rinani, there was no other relationship. The ultimate beneficial owner of Rinani Genotec is Najid Afendi Muda.

Questions were also asked about the appointment of Dynamic Prestige by MGRC’s 51%-owned subsidiary Aquahealth Sdn Bhd as a project management consultant for a dialysis centre in a contract worth RM3.5 million in June 2022. An amount of RM2.97 million was paid to Dynamic Prestige upon acceptance of the letter of engagement the following month.

In the lawsuit, Aswath said that, arising from the issues and findings raised by HLB and/or from the audit summary report, he had instructed the audit committee to appoint auditor Messrs Ecovis Malaysia PLT and law firm Messrs Cheang & Ariff to give their professional opinions in relation to the audit summary report.

The audit opinion by Ecovis was submitted to the BoD in October this year. In its response to additional questions by Ecovis, however, the management of MGRC made a somewhat surprising disclosure when it said it had received two letters from Dynamic Prestige in September, stating that “we mutually agreed to further extension of both (collaboration) agreements [on] condition that Dynamic Prestige will submit status updates every month”.

“The extension of these transactions, which had passed their expiry period, was made without first obtaining the approval of all members of the board and outside the authority of the management. This clearly violates the decision of the respondent directors that was reached on Aug 28, 2023,” the suit alleges.

Ecovis’ findings also showed that the consideration given for MGRC’s proposed collaboration with Rinani Renal amounting to RM5 million constitutes 13.5% of the net assets of MGRC as at June 30, 2022, and that with Dynamic Prestige totalling RM4 million constitutes 10.8%.

The amount of RM3.5 million transferred to Rinani Genotec for the proposed subscription of shares in Rinani Genotec is also equivalent to 9.4% of the net assets of MGRC,  while the total fees for the proposed engagement agreeable by Aquahealth and Dynamic Prestige of RM3.5 million constitutes 9.45%.

All four transactions triggered Paragraph 10.06 of the Listing Requirements, which requires transactions with a percentage ratio of at least 5% to be announced to Bursa Malaysia, Ecovis noted in the court documents.

Following Ecovis’ findings, Bursa filings show that MGRC made a slew of announcements on all four transactions early this month.

At the same time, Cheang & Ariff had on Oct 22 submitted its legal opinion to the board in respect of certain transactions entered into by MGRC and its subsidiaries that were highlighted by HLB. Cheang & Ariff concluded that because no approval was obtained from the BoD by MGRC Healthcare at the point of entering into the related agreements, its two collaborations with Rinani Renal and Dynamic Prestige are deemed invalid, as MGRC chairman Noor Azri had no authority to enter into such agreements, according to court documents. 

Also, Cheang & Ariff in its report alleges that the executive director of MGRC and MGRC Healthcare is liable for fiduciary breaches, as he had failed to obtain board approval before the execution of these transactions.

It also claims that the respondent directors and key management personnel of MGRC, MGRC Healthcare and Aquahealth had failed to exercise their duty of supervision of control and thus had breached their fiduciary duties.

In summary, the findings of Ecovis and Cheang & Ariff revealed that the transactions are invalid and consistent because they were entered into without authorisation. In other words, the money had already been paid out by MGRC even though these transactions and/or agreements were invalid, the lawsuit says.

On Nov 16, in his reply to Aswath’s lawsuit, MGRC chairman Noor Azri alleges that the former was acting in bad faith and against the company’s best interest, as the respondent directors had taken the necessary steps to review all the affected transactions in ascertaining the next best move to be taken.

Noor Azri also believes Aswath’s actions in filing the suit are due to a “personal grudge” against him over another lawsuit filed by Bintai Gemilang Petroleum Engineering Sdn Bhd against Magnalogic Sdn Bhd, after he had suggested that Messrs Ahmad Deniel, Ruben & Co (ADR) be discharged and replaced with Messrs Saiful, Roger & Co to represent Magnalogic in the case.

“I state that the applicant (Aswath) acted in bad faith because I and/or (Ang) Jia Yee (who is a director of Magnalogic) have exposed the ‘serious misconduct’ of ADR in general and the applicant and/or Sandraruben Neelamagham (Ruben) in particular,” Noor Azri claimed in his affidavit in reply, noting that Aswath is a senior partner at ADR, along with Ruben, who is the managing partner.

Meanwhile, Noor Azri said the respondent directors have agreed and are in the process of looking for a solution to the said four transactions. “I also believe the respondent directors should be given a chance and granted time to complete the four transactions, which is the best course of action for MGRC,” he added.

During a case management hearing last Thursday, the court set the hearing date for Aswath’s lawsuit against the eight respondents on Jan 3, 2024.

Founded in 2004, MGRC is a pioneer in genome sequencing, bioinformatics analysis and genetic screening services. The company was listed on Bursa in 2010. MGRC’s then largest shareholder was Syntamatix Sdn Bhd, with a 64.31% stake. Syntamatix was sovereign wealth fund Khazanah Nasional Bhd’s indirect unit. Through Syntamatix and its other subsidiaries Neuramatix Sdn Bhd and Encipta Ltd, Khazanah previously controlled 70.34% in MGRC as at Oct 22, 2010.

At the time, MGRC’s founder and former managing director Robert George Hercus @ Abdul Karim Hercus and his wife, Munirah Abdul Hamid, who was the company’s former executive director, also held an indirect stake of 69.45% in MGRC through Synamatix and Neuramatix (5.12%).

In May 2020, Synamatix ceased to be a substantial shareholder in MGRC.

According to stock exchange filings, MGRC’s current largest shareholders include Rinani Group Bhd, with 11.21% equity interest; Pixelvest Sdn Bhd, with a 7.54% stake; and Bintai Kinden Corp Bhd, with a 5.235% stake.

Shares in MGRC have fallen  39.2% since the start of this year to close at 46.5 sen last Friday, giving it a market capitalisation of RM63.8 million. 

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