Question 1 - kjhui kojj PDF

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Question 1 A director of a company has the duty under the law to act with reasonable care, skill and diligence. The Business Judgment Rule provides for the requirements a director will be deemed to have fulfilled this duty. This rule is a credit that ‘directors in whom are vested the right and duty of deciding where the company’s interest lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts.’ In Malaysia, the Business Judgment Rule has been given statutory recognition. It was provided under s. 214 of the Companies Act 2016. Section 214 reads as follows: A director who makes a business judgment is deemed to meet the requirements of the duty under subsection 213(2) and the equivalent duties under the common law and in equity if the director (a) makes the business judgment for a proper purpose and in good faith;(b) does not have a material personal interest in the subject matter of the business judgment; (c) is informed about the subject matter of the business judgment to the extent the director reasonably believes to be appropriate under the circumstances; and (d) reasonably believes that the business judgment is in the best interest of the company. Petra Perdana Bhd v Tengku Dato’ Ibrahim Petra Tengku Indra Petra & ors [2015] 8CLJ 85, this is a significant decision explaining the scope of directors’ duties. It gives guidance on when a director acts in the best interest of the company and the discretion afforded to a director when the director makes a business judgment. The Plaintiff, Petra Perdana Berhad (Petra Perdana), was a public-listed investment holding company. In turn, Petra Perdana owned approximately 64% of the shares of the public-listed entity, Petra Energy Berhad (PEB). The three Defendants were previously directors of Petra Perdana. The first Defendant was the Executive Chairman and CEO, while the second and third Defendants were non-executive directors. The starting point of the dispute was a particular shareholders’ resolution of Petra Perdana. The shareholders had passed an ordinary resolution imposing certain restrictions on the directors for Petra Perdana to sell the PEB shares. Some of the restrictions were that any sale was for cash and with a maximum 10% discount. This general mandate imposed by the shareholders were renewed annually by the shareholders in general meetings. Petra Perdana experienced cashflow problems. The Petra Perdana directors decided to sell a significant number of the PEB shares that the company owned. This was in order to quickly raise funds to alleviate the cashflow problems. The sale was carried out through two divestments of the PEB shares. The sale of these shares did not require any statutory approval of the shareholders as it was not a substantial portion of the company’s assets. However, this sale did not comply with the restrictions set out in the shareholders’ mandate. Eventually, there was a shareholder dispute at Petra Perdana. This led to the Defendants being removed as directors of the company. With new management in place, Petra Perdana filed a suit against the nowremoved directors. At the end of the High Court trial, the Court dismissed Petra Perdana’s suit. The Court essentially found that the directors had not breached their duty to act in the best interest of the company. In Federal Court, there were certain key issues decided. Firstly, shareholders’ resolution cannot override the management powers of the board. The Federal Court restored the conventional position that shareholders in general meeting cannot control the powers of management conferred by the articles of association on a board of directors. Shareholders can only do so by altering the articles to take away the powers of the board. Alternatively, if the

opportunity arises, the shareholders can refuse to re-elect the directors whose actions they disapprove. This legal position is further reinforced by section 131B of the Companies Act 1965 (now section 211 of the Companies Act 2016). Section 131B was inserted to emphasise that the “business and affairs of a company must be managed by, or under the direction of, the board of directors.”. Secondly, the test for directors acting in the “best interest of the company”. The second key issue was on the test for breach of duty of a director to act in the best interest of the company. The Federal Court held that the test is a combination of both a subjective and objective test. The first element being the subjective test is to assess the state of mind of the director. Whether the director, and not the court, considered the exercise of discretion is in the best interest of the company. Nonetheless, the second element is the objective test. The court will assess whether an intelligent and honest man in the position of the director could have reasonably believed that the transactions were for the benefit of the company. Thirdly, directors exercising their business judgment. The third key issue related to the statutory business judgment rule. This was contained in section 132(1B) of the Companies Act 1965 (and now section 214 of the Companies Act 2016). The business judgment rule provides additional protection for a director. This rule will presume that a director acted with due care and skill if certain pre-conditions are fulfilled. It was held that the court would not second guess the merits of a commercial or business judgment made by directors. The court would not interfere with business decisions as long as the directors acted bona fide. However, after Malaysian Companies Act of 2016 were introduced, which recently replaced the Malaysian Companies Act of 1965, creates significant concerns for organizations that operate in the country. This is mainly due to a company’s limited ability under the new law to indemnify directors and officers of local companies and the potentially narrowed ability to purchase directors and officers (D&O) insurance. The new law also has stricter standards and higher responsibilities for directors, including heavier fines and longer terms of imprisonment for violations. It is slightly opens up the potential for indemnification, when compared to the 1965 law. But it also curtails the use of D&O insurance for non-indemnifiable claims. The new law has reiterates that any corporate indemnification shall be void(s.288 of the Act). The law provides exceptions for civil liability for corporate officers, with the prior approval of boards of directors. Adds another opportunity for reimbursement where the proceedings are discontinued or not pursued. States that exceptions to the rule of not indemnifying corporate directors rule do not apply to breaches of the director’s duty of loyalty and good faith and/or the failure to meet the standards of the business judgment rule. Under s.289 of the Act stated that companies cannot use insurance for claims against directors or officers for acts or omissions in their capacity as such unless indemnity is permitted through the exception in the act. Keeping in mind that the law imposes restrictions on corporate indemnification, this could mean that where companies cannot indemnify their directors or officers, they also cannot purchase insurance for these claims. If Director insurance is in place in a manner not in compliance with these provisions, a director or officer who is accused of wrongdoing is personally responsible to the company for the cost of the insurance unless the executive satisfies the court that he/she is not liable for the alleged wrongful conduct....