June 2024
By Karen Cheah Yee Lynn, and Leong Wei Chung
Section 85 and Section 223 of the Companies Act 2016
A. The case of Dato’ Azizan bin Abd Rahman & Ors v Concrete Parade Sdn Bhd & Ors and other appeals [2024] 3 MLJ 223 – Summary of Facts
Back in 2019, Concrete Parade Sdn Bhd (“Concrete Parade”) initiated legal proceedings against several parties including Apex Equity Holdings Berhad (“Apex Equity”) concerning a proposed merger involving Apex Equity’s subsidiary and Mercury Securities Sdn Bhd, along with a proposed private placement to finance the merger (“Proposed Merger”).
Concrete Parade alleged, amongst others, that:
- the proposed private placement violated Concrete Parade and other shareholders’ pre-emptive rights under Section 85(1) of the Companies Act 2016 (“CA 2016”).
- the agreements related to the Proposed Merger breached Section 223(1) of the CA 2016 because the requisite shareholder approvals were not obtained prior to the transaction.
The legal dispute revolved around determining whether the Proposed Merger infringed upon existing shareholders’ pre-emptive rights under the CA 2016, and whether shareholders’ consent was mandatory prior to entering into significant agreements like the Heads of Agreement (“HOA“) and the Business Merger Agreement (“BMA“) concerning the Proposed Merger.
B. Interpretation of Section 85 of the CA 2016 and the Federal Court’s Decision on the Proposed Private Placement
Concrete Parade and other minority shareholders raised concerns about the non-compliance with their pre-emptive rights as outlined in Section 85 of the CA 2016. They contended that the BMA was executed without prior shareholder’s approval, thereby violating Section 223 of the CA 2016.
The Federal Court ruled that the shareholders’ pre-emptive rights, as stipulated by Section 85(1) of the CA 2016, could be waived based on the free contractual will of the shareholders as expressed in the company’s Constitution or its equivalent under the Companies Act 1965 regime. Therefore, if shareholders choose to assert their pre-emptive rights, they may vote against the resolution for the Proposed Merger including the private placement. Apex Equity’s Constitution expressly permits the waiver of pre-emptive rights via “directions to the contrary at a general meeting,” which must involve a shareholders’ resolution.
It was further ruled that Apex Equity was not obligated to explicitly remind shareholders of their pre-emptive rights or state in circulars or resolutions that voting in favour of the resolution would waive these rights since such requirements are not imposed by Section 85(1) of the CA 2016 or Apex Equity’s Constitution. Thus, shareholders who voted in favour of the Proposed Merger at the general meeting, particularly on the private placement, were well aware of or should have been aware that their shareholding would be diluted.
C. Interpretation of Section 223 of the CA 2016 and the Federal Court’s Decision on the Proposed Merger
The Federal Court with its decision has definitively ruled that the two components of Section 223(1) should be interpreted disjunctively, necessitating compliance with either one, but not both. This makes commercial sense as the HOA serves as a preliminary record of understanding between parties which will be further detailed in a subsequent formal agreement if the transaction materializes. It is clear that parties had addressed their minds on the application of Section 223(1)(i) in the HOA, and therefore this provision was deemed to have been complied with because the HOA expressly required shareholders’ approval as a condition precedent – meaning the Proposed Merger could not proceed without the approval of Apex Equity’s shareholders.
The Federal Court recognised the commercial expediency of such transactions and stated that an interpretation of Section 223(1) necessitating directors to obtain shareholders’ approvals twice for the same corporate transaction: first, before executing the merger agreement, and second, before the actual transfer of assets envisioned by the agreement would be an unreasonable interpretation of Section 223(1) and contrary to commercial sense. Requiring shareholders’ approval at different stages of the same transaction could impede corporate transactions and lead to termination. The Federal Court further clarified that shareholders’ approval was only required before the actual transfer of assets, dismissing the need for multiple rounds of approval and thereby simplifying procedural requirements and promoting business efficiency.
D. Decision of the Court
The Federal Court, led by Chief Justice Tun Tengku Maimun Tuan Mat alongside Justices Tan Sri Nallini Pathmanathan and Datuk Rhodzariah Bujang, thoroughly reviewed the case and unanimously overturned the Court of Appeal’s decision, confirming the legality of the Apex Equity’s merger with Mercury Securities on the Proposed Merger.
This material is for general information only and is not intended to provide legal advice. If you have any queries regarding the above, please feel free to contact us at insights@chooi.com.my.