The World Bank has recognised Malaysia for having improved its corporate governance standards. However, their report also stated that Malaysia’s Companies Act is outdated.
In its recent report on the Observance of Standards and Codes, the bank said the Act is “showing its age”, despite having been amended significantly in 2006 and 2007.
Specifically, the bank noted, the Act – which is based on the UK’s Companies Act of 1948 – lacks clarity on key shareholder rights, strong foundations for creditor rights, insolvency and liquidation.
That is their big picture. The report went on to drill down to the details. To begin with, the report states that the Act does not explicitly recognise the right of shareholders to receive dividends in proportion to their shareholdings. The Act also does not bind companies to any deadline to issue dividends to shareholders. Also, there is no law to ensure that companies treat shareholders of a particular class equally; there isn’t even an acknowledgement that the shares carry such rights. The report did note, however, that the common law implies equitable treatment in such a relationship.
The bank then noted there were gaps in the Act about disclosing ownership and control of a company. While those who own 5% or more of a company have to disclose their holdings, the Act does not require disclosure of indirect holdings, such as shares held via another company, custodian or sub-custodian. Neither does the Act require a company to disclose existing shareholder agreements, even though these can materially affect who actually controls a company.
The report also deals with a related issue, that shareholders, should have the right to request additional information on shareholdings and control of a company.
The bank noted further in the report that the Act does not protect minority shareholders against capital injections into companies, since Malaysian companies routinely get such injections just by obtaining a general mandate from shareholders that enable them to issue up to 10% of a company’s current issued share capital, at a maximum discount of 10% of the average price traded during the pre-determined price fixing period. We do know that in contrast, Singapore and Hong Kong have laws that strengthen the shareholders enough to whittle away such general mandates (although the permitted thresholds are higher in both these places).
As for shareholders in general, the report was concerned that the Act does not specifically provide them a right to ask questions of companies. Instead, it requires shareholders who want to query a company either to band together in a group of at least 100 before they can petition the company, or have a minimum of 5% of voting rights before they can table amendments to the meeting’s agenda, or to nominate directors. To allow shareholders the time to do so; the Act states a minimum lead time for sending out meeting notices for annual general meetings to just 14 days, unless the meeting includes a special resolution.
Having identified all these gaps in the Act, the report recommends the following amendments to the Act to “fundamentally reform” company laws in Malaysia to protect shareholders and make legal rights clearer to all. The following are the most basic issues that an amended Act must address:
·Shares of the same class must have the same rights, including a right to receive dividends;
·Shareholders should be treated equitably, and so directors should act in the interests of all shareholders;
·Shareholders must have the right to ask questions at annual general meetings. For this, thresholds allowing shareholders to amend the agenda for meetings should be lowered and a standard notice period of 21 days for all such meetings should be introduced;
·Proxies representing more than one shareholder should be permitted to exercise proxies for each shareholder. Also, postal voting by shareholders should be permitted;
·Shareholders should receive stronger legal protection in share issues, including higher thresholds to dis-apply pre-emptive rights, while major transactions, mergers and related party transactions should all require a super majority of votes; and
·Shareholders should be given the right to scrutinise and approve, or disallow, directors’ remuneration.
We do agree that it is imperative to reform the Act and we also like that the bank is emphasising the importance of keeping the momentum of reform, in response to these fast-changing times, to protect smaller shareholders and ultimately maintains investor confidence.
Malaysian authorities concerned have delved into the reforms of the Companies Act and “the proposed Companies Bill also reflects the recommendations made by regulatory authorities, professional bodies, the World Bank’s 2012 Malaysia Report of the Observance of Standards and Codes (ROSC) on Accounting and Audit Oversight, the World bank’s Ease of Doing Business Report as well as, the recommendations based on the report issued by the OECD’s Peer Review Group (PRG) of the Global Forum on Transparency and Exchange of information for Tax purposes on Malaysia.”
There is an immediate need to take all necessary steps towards making the existing Act up-to-date, relevant and with enough bite to deter bad corporate practices. Given that Malaysia is a prime player in the Asean Economic Community (AEC) 2015, Malaysia needs to reform the Act thoroughly if it is to compete and benefit from the AEC, and to truly become a high-income nation by 2020.
© CORSTON-SMITH ASSET MANAGEMENT SDN BHD 2014