PUTRAJAYA (March 26): A merger between JF Apex Securities Bhd — a unit of locally listed Apex Equity Holdings Bhd — and Mercury Securities Sdn Bhd was lawful and had not oppressed the rights of minority shareholders, the Federal Court ruled on Tuesday, denying a challenge by Concrete Parade Sdn Bhd, a minority shareholder of Apex Equity.
A three-member apex court bench, led by Chief Justice Tun Tengku Maimun Tuan Mat, overturned the Court of Appeal (COA) decision, and upheld the High Court decision.
The unanimous decision was read by Federal Court judge Tan Sri Nallini Pathmanathan in a judgement that legal circles said had significant bearing on company law and mergers. The third member of the bench was Datuk Rhodzhariah Bujang.
Nallini essentially said that the COA had erred in its decision in ruling in favour of Concrete Parade at the appellate level. The apex court allowed the appeals by four different sets of parties and ordered Concrete Parade to pay costs of RM150,000 each to the four sets of parties in the appeal. It also ordered for the costs ordered by the COA to be refunded to the appellants.
Seven questions of law were posed to the apex court bench for consideration in the matter where Concrete Parade was seeking a declaration that the heads of agreement between Apex Equity and Mercury Securities on Sept 21, 2018, and the business merger agreement between JF Apex and Mercury Securities on Dec 18, 2018, were illegal, unlawful and void due to oppression of minority shareholder rights.
One of the questions posed was whether the use of the oppression provision was indeed the proper means of remedying Concrete Parade’s grievances, to which Nallini answered in the negative.
She said that all shareholders of Apex Equity were equally affected by these transactions, and therefore questioned how Concrete Parade alone could be singularly and unfairly prejudiced as compared to the majority of the shareholders of Apex Equity.
“We (the bench) are satisfied that oppression has not been made out and that the Court of Appeal erred in so concluding in respect of the share buy-back transactions. The decision of the High Court is correct and is preferred,” Nallini said.
Concrete Parade claimed that there was oppression against it by reason of the share buy-back transaction, which it claimed were ultra vires (beyond the powers) of the Apex Equity constitution (or Articles of Association).
Nallini said the fact of the share buy-back transactions being ultra vires of Apex Equity’s constitution does not necessarily equate to illegality.
“Second and more importantly, Concrete Parade has failed to establish how the fact of the share buy-back transactions being ultra vires the constitution unfairly prejudices it as a minority shareholder. What is the damage that it (Concrete Parade) had suffered?” she said.
Apex court says unfair prejudice not established
Nallini also said the COA made a mistake in concluding that the merger would “unfairly prejudice” Concrete Parade as a shareholder as the value of its investments in Apex Equity would diminish.
“It failed to comprehend that the shareholders at the general meeting had voted in favour of the merger. If the majority approved the merger, how then was Concrete Parade unfairly prejudiced? All shareholders would have suffered the same fate.
“More importantly, it is majority rule that prevails. The fundamental principle of governance in companies is the majority rule. As stated by the High Court, while Section 346 of the Companies Act 2016 (CA) represents a statutory intrusion into that rule, it is fundamental that unfairly prejudicial conduct must be established.
“Section 346 or the cry of oppression cannot be utilised in an attempt to circumvent a situation where majority rule prevails bona fide, as is the case here,” the Federal Court judge added.
Section 346 of the CA concerns remedy in cases of oppression.
Shareholders’ approval is sacrosanct, but directors have full powers of management
The Federal Court judge said Section 223(1)(b)(i) addresses the situation at the onset of entering into an arrangement for the acquisition or the disposal of an asset where it offers or details an additional option available to the directors, whereby at the point of entry into any such agreement, the directors may make such agreement, which is subject to shareholders’ approval.
She added that the intent and purpose of the Act do not alter or change in any manner whatsoever, as it is the shareholders’ knowledge and approval that is sacrosanct and that is protected in both those statutory provisions.
However, Nallini said the COA was wrong in ruling there was a breach of Section 223(1)(ii) of the CA, where the directors need to ensure that when the company enters into any arrangement or agreement for acquisition or disposal of property, such agreement or arrangement must be put to the shareholders at the general meeting who pass a resolution approving the entry.
The COA decision, she said, meant that directors need to seek shareholders’ approval twice: Firstly, before the business merger agreement (BMA) is signed, and again back to the shareholders for the actual transfer of the shares and consideration is exchanged, including the private placement.
She said directors are accorded full powers of management of the company and to keep reverting to the shareholders on a continuous basis adversely affects the company’s performance in terms of growth and expansion.
“The costs involved in procuring shareholders’ approval are considerable. Of greater concern is the time expended in procuring such consent. Business efficacy is key in promoting economic activities. Many transactions will be aborted and opportunities lost when the CA is construed to impose greater regulation than it actually does, or needs to.
“The requiring of two sets of shareholders’ approval makes neither legal nor commercial sense, given the purpose and intent of the Companies Act. As the primary purpose is to make shareholders aware of the proposed transaction and to get their approval for the overall aspects of the same, including matters like the private placement in the instant case for the purposes of obtaining quick financing, it is sufficient that shareholders’ approval was obtained once,” Nallini said.
Shareholders’ approval, she added, should moreover be obtained at the point when most details have been ironed out, so that the shareholders have a fair comprehension of the entirety of the proposed transaction.
“The COA further erred when it held that shareholders’ approval was required for entry into the heads of agreement (HOA) and the BMA. The COA committed an error of law and fact when it failed to recognise that it was open to the company to obtain shareholders’ approval at any time prior to the actual transfer of ownership of the shares of Mercury Securities,” the judge said.