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INTRODUCTION
Section 37 of the Malaysia Companies Act 2016 (‘s.37 CA 2016’) is a new inclusion to the Companies Act 2016 (‘CA 2016’). It conferred the Court a discretion to alter or amend the constitution of a company upon an application by a director or a shareholder where it is not practicable to do so using the procedures set out in the Companies Act or the constitution itself. To date, s. 37 CA 2016 had only been considered and decided in the case of Chew Meu Jong v Lysaght (Malaysia) Sdn Bhd [WA-24NCC-178-05/2017] (‘Chew Meu Jong’) which is the first case in Malaysia and the world where such order has been granted.
BRIEF FACTS
In Chew Meu Jong, the shareholding of Lysaght (Malaysia) Sdn Bhd (‘the Company’) is divided into 3 classes, namely Class A, B and C where different rights are attached to the different classes of shares. Pursuant to the constitution the Company (‘the Constitution’), each class of shareholders are entitled to appoint directors and the presence of the shareholders and/or directors of each class is required to form a quorum for the Company’s general and/or board meetings.
Previously, United Engineers Limited (‘UEL’) and Chew Bros (M) Sdn Bhd (‘Chew Bros’) were the only 2 Class A Shareholders of the Company. Sometime in 2017, UEL sold all its shares to Chew Bros in accordance with the pre-emption right under the Constitution (‘Share Sales’). Following the Share Sales, some Class B and Class C shareholders and their representative directors raised issues on the interpretation of the Constitution in respect of quorum requirements. They insisted that the presence of UEL and its representative director is mandatory before a quorum is achieved despite the Share Sales as there are still references of them in the Constitution. As a result, the Class B director refused to attend directors’ meeting thereby making the meeting inquorate as Class B director is also a quorum requirement. To solve this deadlock, the Plaintiff, as a director of the Company was forced to make a s.37 application to alter the Constitution – to remove reference to UEL (‘s.37 Application’). Certain Class B and Class C shareholders and/or their representative directors (‘Interveners’) then intervened and opposed the s.37 Application.
CONTENTIONS BY PARTIES
Before the High Court, the Plaintiff submitted that it is not practicable for the Company to amend the Constitution via the usual procedure set out in the CA 2016 or in the Company’s constitution itself. The Plaintiff made reference to certain authorities in New Zealand and the dictionary meaning of the word ‘not practicable’. On the other hand, the 1st to the 4th Interveners contended otherwise.
THE LAW RELATING TO s.37 APPLICATION
There are no other similar provisions to s.37 CA 2016 in other countries including the United Kingdom, Australia, Singapore and Canada except for section 34 of the Companies Act 1993 in New Zealand (‘s.34 CA 1993 (NZ)’). The operative phrase in both sections is ‘not practicable’. As the phrase “not practicable” is not defined in CA 2016, the High Court referred to various case laws, textbook, and dictionary.
As the New Zealand company law regime is the only available reference to the s.37 Application, the Court referred to the only two New Zealand caselaw which had interpreted s.34 CA 1993 (NZ) – Karen Davy and John Dewar Marsh v Grace Natalie Scarrott & Ors [2016] NZHC 1791 (‘Karen Davy’) and Shell (Petroleum Mining) Co Ltd v Todd Petroleum Mining Co Ltd (2006) 3 NZCCLR 538 (‘Shell’). Although the application was not allowed in both cases, the meaning of ‘not practicable’ was discussed in those cases.
In Karen Davy, Venning J accepted the meaning of “not practicable” to be the same as “impracticable” as defined in the dictionary as “That cannot be carried out, affected, accomplished or done, practically impossible.” His Lordship further opined that “The impracticability is directed at the process or procedure. It is only if it is not practicable to use the normal process to change the constitution that the Court’s intervention is necessary or justified.”
The High Court adopted the same principle in Karen Davy and held that the test for a s.37 Application is that the alteration or amendment of the constitution by the Court under s.37 CA 2016 can be allowed if it is not practicable to use the normal process to change the constitution. The High Court also made reference to Morison’s Company and Securities Law on the circumstances that can be considered as ‘not practicable’ in the context of company law.
NOT PRACTICABLE TO AMEND BY USING NORMAL PROCEDURE
The High Court held that the facts of Chew Meu Jong warrant that it is not practicable for the Constitution to be amended by using the normal procedure because it is impossible for the Company to obtain a quorum for the shareholder’s meeting to amend the Constitution.
The Court highlighted that the relevant article of the Constitution states that no business shall be transacted at any general meeting unless a quorum of members is present and the quorum shall be “two ordinary ‘A’ shareholders and one ordinary ‘B’ shareholder present in person or by proxy or representative”. After the completion of the Share Sale, there is only 1 ordinary ‘A’ shareholder remaining in the Company – Chew Bros. As such, the Company could never be able to satisfy the requisite quorum for a shareholders’ meeting which requires 2 Class ‘A’ shareholders instead of 1 Class A shareholder because UEL is no longer a shareholder of the Company.
At the same time, the Company is unable to hold a directors’ meeting due to the position taken by the Class B and Class C directors who are also the Interveners. Prior to the s.37 Application, the Class B and Class C directors had insisted that there can be no quorum for Board meetings unless a director nominated by UEL is also present – despite UEL no longer has any representative director on the board since their shares had been transferred to Chew Bros. The Class B director had in fact refused to attend any further board meetings called to ensure that any meetings called will be inquorate – presence of a Class B director being necessary for the quorum. As a result, the Board is unable to call for a meeting. The High Court held that this is also another example of ‘not practicable’.
At the Court of Appeal, the Interveners also raised the argument that the Constitution can be amended through an application under s.314 CA 2016 which is an application to Court for a court convened meeting to be used in conjunction with s.36 CA 2016. It was argued by the Plaintiff that s.314 CA 2016 cannot be considered as a ‘normal process’ to change the constitution. Further s.314 CA 2016 is more relevant for a situation where a shareholder still exists but refused to attend a shareholders’ meeting in an attempt to prevent certain resolutions from being passed. Case laws have held that to break the deadlock, the Court is empowered to grant the s.317 Application. Cases such as Chong Mei Ling & Ors v APPT Bhd & Ors [2018] 1 LNS 2051 and Chuah Sean Kin & Ors v Persatuan Kenel Anjing Malaysia & Anor [2009] 8 MLJ 453 was referred to. However, this can be distinguished in the Chew Meu Jong case as UEL is no longer a shareholder of the company.
NO PREJUDICE TO THE OTHER SHAREHOLDERS
The learned High Court Judge had rightly observed that the s.37 Application would not cause prejudice to the other shareholders as it is a simple clarification of the Constitution and would not alter the rights of the parties. The number of directors and total shareholdings of each class of shares – remain unchanged after the proposed amendment of the Constitution.
APPELLATE COURTS UNANIMOUSLY DISMISSED THE INTERVENERS’ APPEALS
Dissatisfied, the Interveners appealed to the Court of Appeal (COA) and the appeal was unanimously dismissed on 28.5.2021. The Notice of Motion to seek leave from the Federal Court (FC) to appeal against the decision of the Court of Appeal was unanimously dismissed by the FC on 2.12.2021 as it did not meet the threshold the of s.96(a) of the Courts of Judicature Act.
At the time of writing this article, the written grounds of the COA and/or FC have yet to be released.
CONCLUSION
This is certainly a welcomed precedent, as it showcases that s.37 CA 2016 may be invoked in genuine and exceptional cases where the proposed amendment to the constitution is not practicable to be made by using the normal procedures set out in the Act or the constitution itself.
* The Plaintiff in this case was successfully represented by Chooi & Company + Cheang & Ariff (CCA)’s litigation partner, Ms Cindy Goh Joo Seong and associates Mr. Loh Heng Yeong and Ms. Samantha Siow San San.
Authored by:
Cindy Goh Joo Seong
Loh Heng Yeong
Samantha Siow San San