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Registrar of Companies (ROC), Malaysia
Australian Securities Commission
Companies House, UK
 
 
REMOVAL OF DIRECTOR
 

REMOVAL OF DIRECTOR: HOW TO ENTRENCH YOUR POSITION

It is crucial, that the above power exists as it provides a form of checks and balances on directors. Thus this power to remove the director does not only act as a means of deterring the abuse of power by directors but also serves the purpose of sanction in that where the director has abused his power, one of the consequences that he may suffer is that he will be removed from office.

The Act as well as the articles provide for removal of directors.In so far as the articles are concerned, the following articles in Table A make provision for one word removal of directors:

Article 69.

"Subject to S128, the company may by ordinary resolution remove any director from office before the expiration of his period of office, ......."

The inclusion of such an article is not mandatory by law. Thus in private companies where ownership and control are not separated, it is usual for such an article to be excluded. Furthermore it is possible that instead of giving the power to the company to remove directory by way of ordinary resolution, it may be the case that the articles may provide "that the office of the director be vacated if a director was requested in writing to do so by his co-directors" as seen in the Privy Council case of Lee v Chou Wen Hsien (1985) BCLC 45. However in Australia there is a statutory provision that provides for the prohibition of such an article in the articles of association of a public company. In Malaysia there is a provision prohibiting the use of such a clause; see S128[8]. It also appears that if Article 65 is used, its application is also subject to S128 [which will be discussed later] but it suffice to say for this moment that despite the fact that S128 provides power to remove directors from office, removal of directors under this power is subjected to certain limitations which are necessary to prevent the abuse of this section.

A directors tenure of office may also be terminated by some supervening disqualification provided for by the articles of association. To this extent; refer to article 72 of Table A which provides that the office of director shall become vacant if the director:

A. ceases to be a director by virtue of the Act;

B. becomes bankrupt or makes any arrangement or composition with his creditor generally;

C. becomes prohibited from being a director by reason of any order made under the Act;

D. becomes of unsound mind or a person whose property or estate is liable to be dealt with in any way under the law relating to mental disorder;

E. resigns his office by notice in writing to the company;

F. for more than 6 months is absent without permission of the directors from meeting the directors held during that period;

G. without the consent of the company in general meeting holds any office of profit under the company except that of the managing director or manager;

H. is directly or indirectly interested in any contract or proposed contract with the company and fails to declare the nature of his interest in the manner required by the Act.

The inclusion of the above articles are not required by law. Thus they can be omitted by the company.

However, public companies that seek listing to the K.L.S.E., by virtue of the Kuala Lumpur Stock Exchange Listing Requirement, require that if listing is sought then, the articles of that company must have the following provision in their articles in that:

"The office of a director shall become vacant should he become of unsound mind or bankrupt during his term of office".

The inclusion of the above articles, will allow the company to terminate the services of the director automatically.

In so far as the Companies Act is concern; two provisions may be used to remove directors, which are as follows:

A. S128

B. S181

S128

Provides that "Notwithstanding anything in its memorandum or articles or in any agreement between the company and the director, a public company may by ordinary resolution remove the director before the expiration of his period of office. However special notice of the resolution must be given and the director removed is entitled to be heard at the meeting where it is proposed to remove him. He may also require the company to circulate to members his representations in writing, unless this right is being abused to secure needless publicity of defamatory material".

COMMENTARY ON THE APPLICATION OF S128

According to Prof W. Woon, it is possible for a director to entrench his position in the company by simply excluding the inclusion Article 69 of Table A, and instead the articles may provide instead for the following:

1. That a director may not be removed without a special resolution.

2. That on a resolution to remove a director, the directors shares shall carry more votes; as applied in the case of Bushell V Faith (1970) AC 1099. [which will be discussed latter].

3. Or that a particular director shall hold office for life, as seen in the case Khoo Ching Poh v Cosmic Insurance Corp Ltd No2 Suit no 203 of 1974 [unreported] (High Court).

However the entrenchment of the directors’ office is today no longer possible in so far as public companies are concerned. This is because of the effect of the following rules:

A. S128, as mentioned above.

B. Rule 309 of the K.L.S.E. listing requirement.

Despite the fact that S128, allows the company to remove directors, this does not mean that its usage is not limited. The limitations on the application of S128 may be caused either by it’s internal control or because of external factors.

In so far as internal control is concern, the following may hinder the application of S128

1. It is provided by the section itself, that "where a director so removed was appointed to represent the interests of any particular class of shareholders or debenture holders the resolution to remove him shall not take effect until his successor has been appointed".

2. The act also states that notwithstanding anything to the contrary in the memorandum or articles, special notice shall be required of any resolution to remove a director which means the company comply with section 153 of the Companies Act.

3. The director that is sought to be removed has a statutory right to be heard on the resolution at the meeting.

4. The section also provides that the director who is to be removed may require the company to send a copy of his written representation to every member of the company, however it must be noted that the company may not do so, if it receives the written representations too late or where the court is satisfied that the representations are abusive to the section or defamatory.

What is the position if the articles of the company provides for a shorter period of notice, than that required by S153, which imposes the requirement of 28 days notice of the resolution?

It appears that given the decision of the local case of Soliappan v Lim Yoke Fan [1968] 2 M.L.J. 21 [Federal Court, Malaysia], the shorter notice shall suffice as, section 128[7], provides that nothing in this section will prevent the company from removing the director under any power which exists apart from this section.

Thus if directors wish to have the benefit of S128, it is best to see that the Articles of the company has a provision to the effect of Article 69 of Table A, which provides that

"Subject to S128, the company may by ordinary resolution remove any director........"

The word "subject......" ensures that special notice will be observed.

Apart from the internal checks as provided by section 128, the other internal mechanism that was relied on by the director is the use of Weighted Votes, as seen in the case Bushell v Faith [1990] AC 1099.

FACTS

The Company’s 300 shares were held equally between the plaintiff the defendant and their sister. The plaintiff and the defendant were the company’s only director’s. The company’s articles weighted the voting rights attached to the shares from one per share to three per-share where the issue before the general meeting of the company was the removal of the director holding those shares. The plaintiff and her sister purported to remove the defendant from his office.

ISSUE

As a consequence, it was impossible for the shareholders to pass the ordinary resolution as allowed under the then S148 of the English Companies act 1948 (our equivalent section being S128).

The House of Lords held on a majority of 4-1 in favor of the defendant.

Why was this so?

According to Lord Upjohn:

"Parliament has never sought to fetter the right of the company to issue a share with rights or restrictions as it may think fit"

The consequence of the above decision caused many academics to criticize the decision, it made a mockery the then English S148 (the equivalent of our S128).

To quote one academician P.V. Baker;

"Either there are sound reasons of public policy why a bare majority of shareholders in the general meeting should have ultimate control over the board or there are not. If there is [Bushell v Faith] shows that [S.148 E.C.A./OUR S 128] needs strengthening. If there are not then the section ought to be repeated".

Malaysia chose to strengthen the application of S128, by including S55 in the Companies Act.

S155; provides in relation to the following companies:

1. a public company having a share capital;

2. a subsidiary of such a public company;

Notwithstanding any provisions in this act or in the memorandum and articles, each "equity share" issued by the above mentioned companies shall confer the right at a poll at any general meeting of the company to one vote and to one vote only for each ringgit or part of a ringgit that has been paid up on that share.

Equity share is in accordance to S4 of the companies act any share that is not a preference share.

However there is a way to beat this which could be used by directors to entrench their position, in so far as public companies are concerned.

According to C. CHANDRASEGAR; in his book entitled as CORPORATE TAKE-OVERS IN UNITED KINGDOM, SINGAPORE AND HONG KONG" on page 222. A directors may entrench their position, by using a variation of the technique put forth by the case of Bushell v Faith (to issue shares "B class share" at a discounted value from ordinary shares but carrying the same voting rights as ordinary shares. This mode of defence was resorted to by the Keswicks family to tighten their grip in the Jardine - Matheson Group when it was feared that their family company might became a target company for hostile takeover bids.

Apart from the above C. Chandrasegar also helped identify other forms of protection that may be used by directors to entrench their position.

A. Interlocking or Circular Shareholding

In the recent article published by "Malaysian Business" on August 16-31 1992", we were informed of the R.O.C.’s intention to put forth the proposal to prohibit cross-holdings. This was to be one of the "proposed amendments" in the recent amendments to the Companies Act. However we were told that, public opinion on this matter was divided.

WHAT IS CROSS-HOLDINGS?

Cross-holdings is a situation where two or more companies have cross-holdings in each other. At the basic level, cross-holdings would involve two companies who holds mutual shareholdings in each other. A case in point would be that of the Ganda/Samanda group. Ganda Holdings Bhd holds 28% of shares in Samanda while Samanda holds 19% of shares in Ganda.

However as reported by the "Jenkins Committee" in para 152; there are various forms of cross-holdings which range from basic schemes as that seen in the Ganda/Samanda case to more complex forms, such as where 3 companies (with a common board of directors or with boards which agree to act in concert) each have a holding of 26% of the ordinary voting shares of each other companies......" the board of directors of each of the company, with the assistance of the boards of the other companies command a majority and therefore cannot be removed by the remaining share holders.

Thus one of the consequence of cross-holdings is that it can prevent the removal of directors by minority share holders, in that they will not have enough support to carry an ordinary resolution as required by S128 or Article 69 of Table A.

For further reference to complexities of cross-holdings, please refer to the abovementioned published by Malaysian business.

B. PLACING SHARES IN FRIENDLY HANDS

The above mechanisms would usually be supported by a shareholders agreement. According to Prof. Farrar, shareholders agreement may take one of the 3 main forms:

1. An agreement between the company and the members;

2. An agreement between all the shareholders;

3. An agreement between some of the shareholders;

Most of the time, the agreement resorted to will be type 3. The purpose of such an agreement is to regulate the manner in which voting rights will be exercised contractually. As long as the agreement is not illegal, the rights provided by the contract will be enforced. Thus should the contract be breached, the remedies that the affected party may take can either be in the form of damages or even equitable remedies such as specific performance as well as the granting of an injunction. Apart form shareholders agreements; it is possible to control "voting rights" by way or voting trust, here the shares are usually given to a trustee, the trustee on the other had may be given a free hand or a very limited discretion in the manner he may exercise his votes. Unlike shareholders agreements; a voting trust is a more formal device as it confers title of shares to the trustee. Voting rights may also be regulated by use of proxy.

Thus it can be concluded that where there are the following:

1. Cross holding of shares;

2. Voting agreements;

3. Voting trust;

4. Proxy;

it is possible that the directors may be able to defeat the moving of the required resolution that is necessary to remove a director.

If the director that is sought to be removed is a member whether in a private or a public company, it is possible that the director as a "member" may use the following to defeat the removal:

1. S181 of the Companies Act;

2. S218 [1] [i];

S181

Provides for remedies in cases of oppression. According to Prof. W. Woon. If it can be shown by the shareholder/member that any one of the following conditions exist:

A. The affairs of the company are being conducted in a manner oppressive to one or more members of the company;

B. The powers of the directors are being exercised in a manner oppressive to one or more of the members of the company;

C. The affairs of the company are being conducted in disregard of the interest of one or more of the members of the company;

D. The powers of the directors are being exercised in disregard of the interests of one or more of the members of the company;

E. Some act of the company has been done or is threatened which unfairly discriminates against one or more of the members of the company;

F. Some resolution of the members [or any class of them] has been passed or is proposed which unfairly discriminates against one or more of the members of the company;

G. Some act of the company has been done or is threatened which is otherwise prejudicial to one or more of the members of the company.

H. Some resolution of the members [or any class of them] has been passed or is proposed which is otherwise prejudicial to one or more members of the company;

Then the court may be virtue of the above section grant any one of the following orders:

1. Direct or prohibit any act or cancel or vary any transaction or resolution;

2. Provide for the purchase of the shares or debentures of the company held by the aggrieved member by other members or debenture holders or by the company itself;

3. In the case of a purchase of shares by the company provide for the reduction accordingly of the company’s capital;

4. Provide that the company be wound up.

However note that the court may make "such order as it thinks fit and without prejudice to the generality of the above"

Thus with the above, a director who is also a shareholder may apply to the court by petition for an order that the company’s move to remove him is oppressive, discriminative or prejudicial against him as a member, but it must be noted it is not easy to prove the above; as can be deducted from the decision of Re Kong Thai Sawmill [Miri] Sdn. Bhd. [1978] 2 ,MLJ 227.

It must also be noted that a director who is also a shareholder if removed may also seek the aid of the courts by virtue of S128 [1] [i]. However this is sought more as last alternative as this section is used to wind-up the company.

S218 [1] [i]

Provides for the "involuntary winding up of the company" on the grounds that it is just and equitable to do so.

In fact in the United Kingdom we have one reported case, where a director who was removed from the board, sought to use this form of remedy.

EBRAHIMI V WESTBOURNE GALLERIES LTD (1973) AC 492.

FACTS

In 1958 Ebrahimi and N having originally traded as a partnership selling carpets, decided to form a company to take over the business. They became the only directors and the only shareholders; each holding 500 shares. Shortly afterwards N’s son A joined the business and E and N transferred 100 share each to A. A also became a director. Soon after the relationship between E and N became bad, and as a result E was removed from the board by N and A, as they were entitled to do so by way ordinary resolution the English equivalent of under our S128, and was excluded from the day to day management of the company. As all the profits were distributed by way of directors remuneration and not by way of dividend, E was thus denied of is return on his investment.

ISSUE

The court had to decide whether E petition to wind up the company involuntary on the grounds that it was just and equitable should be allowed?

HOUSE OF LORDS HELD

For the applicant.

Note:

Despite the fact, that N and A acted according to the articles of the company and the Companies Act in removing E, their Lordships nevertheless held that the "just and equitable" jurisdiction is not limited to proven cases of mala fides and the legal correctness of N and A’s conduct. In exercising the above jurisdiction the court would take into account "expectations", here E had the legitimate expectation that there would be continued participation on his part in the management of the company.

Finally it must be noted that, the removal of a director may also be hindered by the existence of the contract of employment, in that his removal as director may cause the company to be in breach of contract as seen in the case of Southern Foundries v Shirlaw, unless the company can show that the director himself had breached the contract as seen in the case of Khoo Ching Poh v Cosmic Insurance Corporation Ltd. Here the High Court of Singapore took the opportunity to state the fact that, "in a contract of employment between the director and the company there is the implied term that the director will continue in office as long as he performs his duties satisfactorily".

 

Copyright 1998 Md. Rodzi Harun. All rights reserved.
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