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Ratification – get out of jail card?

07 July 2018 / The Star

IT is AGM season. As always, we are never disappointed with some of the creative practices and answers that come from the boards of directors. Read more at https://www.thestar.com.my/business/business-news/2018/07/07/ratification-get-out-of-jail-card/#kBGmx6HDOEkH0gEZ.99

The issue of ratification seems to be one of the items that directors are slipping into the agenda. Some shareholders are not quite sure what exactly a ratification is.

However, this is one resolution that all shareholders need to be aware of and read word for word.

Let us start by going through exactly what a ratification is.

Generally speaking, ratification is a way out to regularise an unauthorised action. You may say, do you mean that directors can do things without proper authorisation?

In simple terms, ratification gives them a convenient way to regularise actions and decisions that had not been earlier authorised by the shareholders. The Companies Act has no specific provisions to allow “ratification” even though this is the method used to regularise oversight, ignorance or the very well-known “let us bulldoze this through” mentality.

Directors know that they need to get shareholders’ approval for the decisions made that are without an appropriate mandate given by shareholders. For instance, in public-listed companies (PLCs), both fees and benefits are subject to shareholders’ approval and must be secured before payment.

However, we have seen many companies practising the policy of paying first, and then going to the AGM for approval. Unfortunately in some listed companies, their constitution specifies that only the fees are subject to prior approval, while other benefits are paid at the board’s whims and fancies.

However, with Section 230 in the Company’s Act currently being enforced, this loophole is closed. So, this practice of payment of fees and benefits before seeking approval at the AGM should be something of the past, as a good company secretary will guide the board so that the PLC has to obtain prior approval from shareholders before they pay the benefits (typically meeting allowances) and fees, which should only be paid after the financial year-end has passed.

We are also seeing a move by PLCs who want to pay benefits during the year instead of waiting until the end of the financial year. These PLCs have also moved to get shareholders’ prior approval, which is an improvement. However, other benefits may still be “hidden” and paid without shareholders’ knowledge .

Just to give you a flavour of the “hidden payments”; for instance, we have seen directors receiving monthly auto allowances of RM20,000 (on top of that the same person receives another auto allowance as he is also a director of a subsidiary company). We have also seen directors receive other allowances, such as a “security allowance”.

These are just normal public-listed government-linked companies (GLCs), where directors do not require a “security allowance”. Again, these benefits are not clearly itemised for shareholders to scrutinise.

In the case of the payment of directors’ fees, the new Companies Act spells out that in the event where shareholders’ approval is not secured, the payment turns into a debt owed by the director to the company.

You may think that this is not possible, but some companies have proven that it is. In a recent AGM, a public-listed GLC did not seek shareholders’ approval for the directors’ benefits in the previous year, as required under Section 230 of the Companies Act, and only sought shareholders’ approval this year.

The argument that the directors gave to shareholders for not seeking approval is that the provision in the Companies Act did not specify that approval is required before paying.

So this heroic board continued paying directors’ fees and sought for approval the following year. The floor at the AGM pointed out that this is considered a ratification and not an approval given the change in the Companies Act.

So for this AGM, the GLC tabled the motion for approval of the directors’ benefits from the period of Jan 1, 2017 until the next AGM.

The board received a rude shock when this resolution was not carried, and the directors had to return the meeting allowances that they had received to date.

All this happened because there was a change of government in this state.

Under the previous government, those directors paid themselves a 10% increase in directors’ fees without the required approval from shareholders. Predictably, there were both politicians and political appointees on the board. On the plus side, we have now been told that these political appointees are stepping down.

The other form of ratification gaining ground is the ratification on related party transactions that have already been signed; if subsequently the board or shareholders are happy with it and ratify it, then there is no issue.

However, if the ratification fails, then the people who had undertaken to execute the contract will be in breach of their powers and will be subject to disciplinary action.

Case in point is the “elephant in the room” fiasco where the board disclaims all knowledge and the CEO as well as so-called adviser in charge went ahead to execute actions without the board’s approval. So if the board did not ratify the actions, then the people who went ahead are considered to have acted beyond their powers.

With all the media attention on this scandal, we find it highly unlikely that the board will now turn around and ratify all the decisions of the previous CEO. However, we are overwhelmed by the blatant disregard for rules, with so many side deals or back-dating of documents to suit their purpose.

With a new government in place, we hope that the spirit of reform will bring closer scrutiny to these underhanded practices. Shareholders should be able to exercise their right to question and reject questionable motions, such as the use of ratification as a “get out of jail card”.




© CORSTON-SMITH ASSET MANAGEMENT SDN BHD 2014