Duties and liabilities of directors

1.0

Introduction

At the point of inception, the minimum number of director in company should have is two. The directors will collectively be known as board of directors. At least one of them resides in Malaysia. Directors are normally appointed by shareholders with the objective to govern the company and to create value to shareholders. However, the power to run the company is actually stipulated in the Articles and Association of the company.

2.0

Fiduciary duties of directors

Directors have fiduciary duty to the company in undertaking decision in running the company. It is a requirement that directors have to act in the best interest of the company, to exercise power on proper use, retain discretionary powers, avoids conflict of interest and to exercise care, due diligence and skills. It is best that director is to make disclosure or any issue that

3.0

Duty to avoid Conflict of interest

One of the major duties is to avoid conflict of interest. The imposition come strictly in recognition of huma frailty. Director must not allow sitatui

therefore, directors are required to disclose any material information that will influence decision making. Directors, is in any way directly or indirectly interested in a contract or proposed contract with the company to declare at a

Duties and liabilities of directors

meeting of directors of the company the nature of his interest, or the fact and nature, character and extent of the conflict.

A director, however, are not barred from entering contract with company provided that a declaration is made. This issue is address in Section 131 of the Companies Act 1965, which specifically spells out that it is the duty of every director who is in any way directly or indirectly interested in a contract or proposed contract with the company to declare at a meeting of directors of the company the nature of and fact of his interest, character and extent of the conflict. The declaration must be made as soon as practicable after he has knowledge of the relevant fact. The disclosure can be resolved by taking advantage of Section 131(4) i.e. by giving a general notice to the Board of Directors. The Company Secretary must record the declaration in the minutes of the Board meeting. If the Articles of Association of that particular company provide stricter rule, compliance with Section 131 will not be sufficient. provisions of the Articles of Association must be complied with. Case of Non-declaration of interest The

Under the same provision, the director, however, are requested not to participate or deliberate the matters. This is as stipulated in Section 131A
Interested director not to participate or vote. Subject to section 131, a director of a company who is in any way, whether directly or indirectly, interested in a contract entered into or proposed to be entered into by the company, unless the interest is one that need not be disclosed under section 131, shall be counted only to make the quorum at the board meeting but shall not participate in any discussion while the contract or proposed contract is being

Duties and liabilities of directors considered at the board meeting and shall not vote on the contract or proposed contract.

A failure to declare will carry a heavy penalty of imprisonment up to 5 years or to pay fine of RM500,000 or both. 4.0 Material acquisition in which a director is substantial shareholder and the

acquisition is material

4.1

Section 132C of the Companies Act, 1965, in essence, provides that

shareholders approval at general meeting must be secured for any acquisition or disposal of a companys undertaking or property of a substantial value/portion. 2.2 Therefore, shareholders approval in general meeting for any acquisition or disposal of a companys undertaking or property of substantial value/portion is required. 2.3 The threshold of what constitutes substantial value or portion for listed companies is set out under Section 132C(1A) of the Companies Act, 1965. Section 132C(1A) provides as follows: (1A) For the purpose of subsection (1), in the case of a company where all or any of its shares are listed for quotation on the official list of a Stock Exchange as defined in the Securities Industry Act 1983, the term substantial value or substantial portion shall mean the same value prescribed by the provisions in the listing requirements of the Exchange

(a) which relates to acquisitions or disposals by a company or its subsidiaries to which such provision applies; and (b) which would require the approval of shareholders at a general meeting in accordance with the provisions of such listing requirements. 2 2.4 Therefore, the materiality threshold for any acquisition or disposal of undertaking or property of a substantial value or portion by a listed company adopts the threshold under the Main Market Listing Requirements of Bursa

Duties and liabilities of directors

Malaysia Securities Berhad. Chapter 10 of the Main Market Listing Requirements sets out the requirement that must be complied with in respect of transactions entered into by a listed issuer or its subsidiaries. Details is as below:i) If the percentage ratio is less than 5% and the consideration is satisfied in cash or unquoted securities, no announcement is needed

ii)

If the percentage ratio is more than 5% and above RM250,000, the company must announce the transaction to the Exchange as soon as possible after terms of the transaction have been agreed. The listed issuer must include the information set out in Appendix 10A in the announcement. , The listed issuer must also furnish the Exchange, in a separate letter, the percentage ratios applicable to such transaction,

iii)

If the percentage ratio is more than 25% and above RM250,000, the above is applicable with additional following information is required

a.

issue a circular which includes the information set out in Appendix 10B to its shareholders; and

b.

seek shareholder approval of the transaction in a general meeting.

c.

The listed issuer must submit the draft circular to the Exchange together with a checklist showing compliance with Appendix 10B.

2.6

For the purpose of percentage ratios calculation, the calculation are as per detail in the Chapter 10, paragraph 10.02 (g) (i) to (viii).

2.7

For non-listed company, a substantial value/portion falls under the ambit of Section 132(1B) (a),(b) and (c) of Companies Act, 1965, that provides as follows: (1B) In the case of any company other than a company to which subsection (1A) is applicable, an undertaking or property shall be considered to be of a substantial value and a portion of the companys undertaking or property shall be considered to be a

Duties and liabilities of directors

substantial value and a portion of the companys undertaking or property shall be considered to be a substantial portion if :-

a)

Its value exceeds twenty-five per centum of the total assets of the company;

b)

The net profits (after deducting all charges except taxation and excluding extraordinary items) attributed to it amounts to more than twenty-five per centum of the total net profit of the company; or

c)

Its value exceeds twenty-five per centum of the issued share capital of the company,

Whichever is the highest.

2.0 difference between threshold of material between listed and non-listed company 3.1 The difference in the threshold level of material transaction by listed and non-listed company is as illustrated below: -

Listed ABC Berhad Total assets (mil) Net profit (mil) Paid-up capital (mil) Net tangible asset (mil) 50 25 100 150 50 25 100 150

Non- Listed XYZ Berhad

Both companies are acquiring a company with the following statistics and assuming that the acquisition will be financed partly by cash and partly by loan. The acquisition price is 0.8x of the NTA of the company. Table 1; target acquire company

Duties and liabilities of directors

RM mil Total assets (mil) Net profit (mil) Paid-up capital (mil) Net tangible asset (mil) 25 5 30 50

Table 2 ; The threshold limit for listed and unlisted company Listed Total assets (mil) Net profit (mil) Paid-up capital (mil) Net tangible asset (mil) Highest or relevant threshold Action need to be undertaken The percentage ratio to NTA which is 26.7% need to fulfil regulation under chapter 10 of the listing requirement as detail above The 25% of the paid-up capital which is RM 25 million can only purchase the assets after obtaining approval from shareholders at a general meeting as stipulated in Companies Act 1965. 40/150 = 26.7% Non- Listed 25% x 50 = 12.5 25% x 25 = 6.25 25% x 100 = 25.0