Resignation and Removal of Directors LEE SWEE SENG
Resignation and Removal of Directors LEE SWEE SENG LLB, LLM, MBA Advocate & Solicitor Notary Public,Trademark, Patent Agent Certified Mediator [email protected] www.leesweeseng.com Appointment of Directors Who can be appointed as a director? The person appointed must: Consent to the appointment (s123 Companies Act 1965) be an individual and not a company (s 122(2) Companies Act 1965) At least 18 years old (s 122(2) Companies Act 1965) Not disqualified from being a director Appointment of Directors Section 122(3) provides that the first directors of a company shall be named in the Memorandum and Articles of Association (M&A). The first directors are deemed to have been appointed on the incorporation of the company. The first directors will hold office until the first Annual General meeting (AGM) where they will retire. Malaysian Company Secretarial Practice, Prentice Hall 2006 by Zubaidah Zainal Abidin at page 85 Appointment of Directors Any subsequent appointment is governed by the M&A and they are usually appointed by the directors themselves for filling of casual vacancy or as an additional director. The Articles of the company usually provides that directors appointed to fill casual vacancies or as additional directors shall hold office until the next AGM where they shall be eligible for re-election. Malaysian Company Secretarial Practice, Prentice Hall 2006 by Zubaidah Zainal Abidin at page 85 Casual Vacancy a) b) c) d) e) f) g) May arise as a result of : Death; Insanity; Resignation; Disqualification due to absence from board meetings; Bankruptcy Failure to obtain qualification shares Becomes prohibited from being a director by reason of an order made under the Act. Malaysian Company Secretarial Practice, Prentice Hall 2006 by Zubaidah Zainal Abidin at page 85 Statutory Declaration before Appointment as a Director Form 48A Before a person is appointed as a director, he must lodge with the ROC a statutory declaration using Form 48A that : He consents to act as a director; He is not an undischarged bankrupt; He has not been convicted of any offence whether within or outside Malaysia; He has not been imprisoned for any offence within the period of 5 years immediately preceding the date of the declaration. Statutory Declaration before Appointment as a Director An updated Form 49 must be lodged with the ROC for any appointment of directors. The Register of Directors, Managers and Secretaries must be updated. Resignation of Directors Resignation of Directors Table A art 72(e) The office of director shall become vacant if the director – resigns his office by notice in writing to the company; Resignation of Directors S141(6)(b) states that the company must notify the ROC of the director’s resignation. If the company refuses to give notice to the ROC so that the director’s name remain on records of the company, this will not affect the validity of the resignation. The failure to comply with the procedural requirement to notify ROC on the director’s resignation will not force a person to remain as director without his consent. Malaysian Company Secretarial Practice, Prentice Hall 2006 by Zubaidah Zainal Abidin at page 90 Resignation of Directors Latchford Premier Cinema Ltd v Ennion [1931] 2 Ch 409 The facts:A company's articles of association provided that the office of a director should ipso facto be vacated if by notice in writing to the company he resigned his office. Two of the directors orally tendered their resignations at the annual general meeting of the company and their resignations were accepted by the meeting. Resignation of Directors Latchford Premier Cinema Ltd v Ennion [1931] 2 Ch 409 Held:Where the company accepts the notice, oral notice will suffice even where written notice is required. Notice is presumably effective not on posting but only on receipt by the company. Resignation of Directors Latchford Premier Cinema Ltd v Ennion [1931] 2 Ch 409 Held:A director’s position is analogous to an employee as far as resignation is concerned. An employee is entitled to resign any time, provided that he pays damages if he breaches his contract by not giving sufficient notice. The company cannot on principle refuse to let him go. Resignation of Directors Jimat bin Awang v Lai Wee Ngen [1995] 3 SLR 293 The facts:The petitioners were directors and shareholders of the company. They argued that their resignation as directors was invalid as there were no resolutions accepting their resignation; Resignation of Directors Jimat bin Awang v Lai Wee Ngen [1995] 3 SLR 293 Held:The validity of any resignation did not depend on whether it was accepted by resolution unless this was provided for in the contract or in the articles of association of the company. Resignation of Directors Glossop v Glossop [1907] 2 Ch 370 Neville J “I have no doubt that a director is entitled to relinquish his office anytime he pleases by proper notice to the company, and that his resignation depends upon his notice and is not dependant upon any acceptance by the company, because I do not think that they are in a position to refuse acceptance.” Signed but Undated Resignation Letter Khoo Choon Yam v Gan Miew Chee [2000] 6 MLJ 20 The facts:The Plaintiff was a director of the company. A resolution was passed by for the appointment of additional directors of the company. This resolution was not sent to the plaintiff. Signed but Undated Resignation Letter Khoo Choon Yam v Gan Miew Chee [2000] 6 MLJ 20 The facts (contd):The Defendants contended that the Plaintiff had resigned from the company, and the resignation was effected through an undated letter of resignation given by the Plaintiff upon his appointment as a director. The Plaintiff contended that he never signed such resignation letter and his signature was forged. Signed but Undated Resignation Letter Khoo Choon Yam v Gan Miew Chee [2000] 6 MLJ 20 Held:Whether or not the Plaintiff signed the undated letter of resignation could not be decided on conflicting affidavit evidence. However, even if the plaintiff had signed such a letter, it was void and of no effect. Signed but Undated Resignation Letter Khoo Choon Yam v Gan Miew Chee [2000] 6 MLJ 20 Held (contd):A resignation letter under compulsion is no resignation in law. When a person is required to sign an undated resignation letter as a condition for appointment as a director, what other inference can be drawn except that it was signed under compulsion or duress Signed but Undated Resignation Letter Khoo Choon Yam v Gan Miew Chee [2000] 6 MLJ 20 Held (contd):There is a procedure by which the board and the company may get rid of their directors. All that needs to be done is to follow the procedure. Resignation of Directors Notwithstanding anything in the Articles, a director may not resign if his resignation will leave the company with less than 2 directors, or with no directors. Therefore, the last 2 directors of a company may not resign. However, a person who is disqualified from being a director by the provisions of the Act or the Articles, may resign notwithstanding that he is one of the last 2 directors, since continuing in office would be an offence. Malaysian Company Secretarial Practice, Prentice Hall 2006 by Zubaidah Zainal Abidin at page 90 Retirement of Directors Retirement by Rotation The Articles of the company will usually contain provisions relating to retirement by rotation. The purpose is to give the shareholders an opportunity to review the directors’ performance and to replace them, if necessary. Malaysian Company Secretarial Practice, Prentice Hall 2006 by Zubaidah Zainal Abidin at page 90 Retirement by Rotation At the first AGM. all directors shall retire from office. At the subsequent AGM, one third of the directors for the time being shall retire from office. The directors who have been longest in office since their last election shall retire. Malaysian Company Secretarial Practice, Prentice Hall 2006 by Zubaidah Zainal Abidin at page 90 Retirement by Rotation A director appointed to fill casual vacancy or as additional director in between two AGMs is required to retire at the forthcoming AGM. When considering the number to retire by rotation, directors appointed between two AGMs and managing director is not to be taken into account in determining the directors to retire by rotation. Malaysian Company Secretarial Practice, Prentice Hall 2006 by Zubaidah Zainal Abidin at page 91 Retirement by Rotation The Articles usually provide that the retiring director shall be eligible for reelection. However, a company may elect some other person in place of the retiring director at the meeting. Malaysian Company Secretarial Practice, Prentice Hall 2006 by Zubaidah Zainal Abidin at page 91 Retirement by Rotation Failing this, the retiring director will be deemed to have been re-elected, unless: a) another person is elected b) a resolution not to fill the vacancy is passed c) a resolution for the re-election of that director is lost. Malaysian Company Secretarial Practice, Prentice Hall 2006 by Zubaidah Zainal Abidin at page 91 See Teow Chuan & Anor v YAM Tunku Nadzaruddin Ibni Tuanku Jaafar & Ors [2007] 2 MLJ 212 The facts:The Board of Directors made a resolution that all executive directors must retire on attaining 55 years of age. The Plaintiffs brought an action challenging the introduction of a new term into their existing contract that they should retire. See Teow Chuan & Anor v YAM Tunku Nadzaruddin Ibni Tuanku Jaafar & Ors [2007] 2 MLJ 212 Held:The power to pass the resolution as to retirement of directors was a fiduciary power entrusted by the memorandum and articles of the Company. That power was used for a collateral or improper purpose, namely to remove the Plaintiffs and was invalid. See Teow Chuan & Anor v YAM Tunku Nadzaruddin Ibni Tuanku Jaafar & Ors [2007] 2 MLJ 212 Held:In common law, an attempt by a party to a contract to unilaterally introduce a new term into it is regarded as a breach of contract. This amounts to an ‘intimation of an intention to abandon and altogether to refuse performance of the contract’ Removal of Directors How can a director be removed? It may be that a dispute in the company leads to either some of the directors or members wanting to remove a director from office. A director may have a service contract with the company If the company terminates the director’s appointment in breach of the contract, the director may be entitled to damages. The rights that a director may have under a contract will depend upon the provisions contained in the contract. Commercial Applications of Company Law in Malaysia, 2002 CCH Asia Pte Ltd, pg 227 Removal of Directors of Public Companies Removal of Directors of Public Companies Removal by other directors It is not possible for directors of a public company to remove another director. This is prohibited by section 128(8) Removal of Directors of Public Companies Removal by members Resolutions coupled with special notice (S153 Companies Act) Section 128 of the Companies Act gives the members of a public company the power of control over the directors. The members of a public company can remove a director by giving special notice to the company to remove him, (usually a simple majority) notwithstanding any provision in the Articles Malaysian Company Secretarial Practice, Prentice Hall 2006 by Zubaidah Zainal Abidin at page 87 Removal of Directors of Public Companies Removal by members • Resolutions coupled with special notice (S153 Companies Act) S128(1) Companies Act 1965 A public company may remove a director by ordinary resolution before the expiration of his term of office. Removal of Directors of Public Companies Removal by members Resolutions coupled with special notice (S153 Companies Act) S128(1) Companies Act 1965 If the director who is being removed was appointed to represent the interests of a specific class of shareholders or debenture holders, the resolution to remove him will not be effective until a successor has been appointed. Removal of Directors of Public Companies Resolutions coupled with special notice (S153 Companies Act) S128(1) Companies Act 1965 Transposed to s. 128(1) of our Act the proper meaning of "A public company may by ordinary resolution remove a director ..." means that a simple majority of the shareholders of the company may vote to remove a director and no agreement made by the directors or the company can fetter that right. Removal of Directors of Public Companies The Courts will not interfere with the statutory right of shareholders to remove directors: Soliappan v Lim Yoke Fan [1968] 2 MLJ 21; Dato' H.M. Shah & Ors. v. Dato' Abdullah b. Ahmad [1991] 1 MLJ 91 - a Supreme Court decision which applied s. 128(1) and upheld the shareholders' right to terminate the appointment of the executive chairman and managing director of the company in the 9 month of a three-year contract with the company appointing him to those positions: Tuan Ishak Ismail v Leong Hup Holdings & Or Appeals [1996] 1 CLJ 393 Removal of Directors of Public Companies Removal by members Resolutions coupled with special notice (S153 Companies Act) S128(2) Companies Act 1965 Special notice of the resolution to remove a director is required – that is not less than 28 days notice to the company of the intended resolution. Removal of Directors of Public Companies Removal by members Resolutions coupled with special notice (S153 Companies Act) S153 Companies Act 1965 defines special notice as the notice of intention of its member(s) to move the resolution proposed, served to the company not less than 28 days before the meeting at which the resolution is to be moved. Removal of Directors of Public Companies Removal by members Resolutions coupled with special notice (S153 Companies Act) • The 28 days grace period is to allow the directors who are to be removed time to prepare for their defences. • On receipt of the special notice of resolution, the company must then give notice of the resolution to its members at least 14 days before the meeting. Malaysian Company Secretarial Practice, Prentice Hall 2006 by Zubaidah Zainal Abidin at page 124 Removal of Directors of Public Companies Removal by members Resolutions coupled with special notice (S153 Companies Act) If the twenty-eight days grace period was not complied with, the resolution shall not be effective. Malaysian Company Secretarial Practice, Prentice Hall 2006 by Zubaidah Zainal Abidin at page 124 Removal of Directors of Public Companies Removal by members Rights of director to be heard - S128(2) The director who is being removed has an opportunity to defend himself. He is entitled to be heard on the resolution at the meeting and to make written representations to the company and request the company to send copies of the representations to every member if the company notified in the meeting. Guide to Company Law in Malaysia & Singapore, 2nd Ed, CCH Asia Ltd, pg 67 Removal of Directors of Public Companies Removal by members Rights of director to be heard - S128(3) If copies of the representations are not sent out because they were received too late, the director may ask for the representations to be read out at the meeting without affecting his right to be heard orally. Guide to Company Law in Malaysia & Singapore, 2nd Ed, CCH Asia Ltd, pg 67 Removal of Directors of Public Companies Removal by members Rights of director to be heard - S128(4) However, the director’s right to be heard is not absolute. That director cannot use his right to attract publicity for defamatory matter. If a director does that, the company or any affected person may apply to court to stop him from sending or reading out the representations at the meeting. Removal of Directors of Public Companies Removal by members Rights of director to be heard In practice, it will usually be easier to proceed under the articles of association of the company rather than under the statutory procedure. Company articles usually provide that the company may by resolution remove a director before his term expires. Guide to Company Law in Malaysia & Singapore, 2nd Ed, CCH Asia Ltd, pg 67 Removal of Directors of Public Companies Where a company adopts Table A as its articles or association Removal of Directors of Public Companies If a company adopts Table A as its articles or association, then the director may, notwithstanding the provisions of the Companies Act, be removed from office before the expiry of his term via an ordinary resolution without special notice. Guide to Company Law in Malaysia & Singapore, 2nd Ed, CCH Asia Limited, pg 67 Removal of Directors of Public Companies Table A art 69 provides that:- Subject to section 128, the company may by ordinary resolution remove any director before the expiration of his period of office. Removal of Directors of Public Companies Proceedings under the articles will also deprive the director the statutory right to make representations. That right only arises when special notice is given under the Act’s procedure. Guide to Company Law in Malaysia & Singapore, 2nd Ed, CCH Asia Limited, pg 68 Removal of Directors of Public Companies Meeting convened under Section 144 or Section 145 Companies Act 1965 Requisition by shareholders (s 144, CA) If a company is unwilling to call a meeting pursuant to S128 and S 153 Companies Act 1965, the proposer of the resolution will fail in his bid to oust the director unless he has 10% of the voting rights in the company, or can muster support from members with equivalent voting power. This will enable him to have a meeting convened under S144 or S145 Companies Act 1965 Guide to Company Law in Malaysia & Singapore, 2nd Ed, CCH Asia Ltd, pg 67 Requisition by shareholders (s 144, CA) Requisition shall state the objects of the meeting and shall be signed by the requisitionists and deposited at the registered office of the company. The requisition need not be under corporation’s seal; Roxy Electric Industries (Malaysia) Bhd v Syarikat Nominee Bumiputra Sdn Bhd [1989] 3 MLJ 231. Requisition by shareholders (s 144, CA) Upon receipt of requisition the director must convene an extraordinary general meeting not later than two months. If the directors do not convene a meeting within 21 days, the requisitionists may do so themselves (s 144(3)) within 3 months. Requisition by shareholders (s 144, CA) Any reasonable expenses incurred by the requisitionists in calling the meeting are to be paid by the company, which may reimburse itself out of any sums due to the defaulting directors by way of fees or other remuneration: sub-s (4). Requisition by shareholders (s 144, CA) If it is impracticable to call a meeting in accordance with the Act or the articles, the court may order a meeting to be called upon application of any director or of any member who would be entitled to vote at the meeting or of the personal representative of any such member, and may make such orders as are necessary to provide for its conduct: (s 150) Eg of a notice under s 144 NOTICE OF EXTRAORDINARY GENERAL MEETING NOTICE IS HEREBY GIVEN THAT an Extraordinary General Meeting of the Company will be held pursuant to Section 144 of the Companies Act, 1965 at [location] on [date] at [time] for the purpose of considering and if thought fit to pass the following ordinary resolutions:- Call for meetings s 145 Meetings called by shareholders as provided by the articles where it may provide that the directors have power to convene extraordinary general meetings. The section gives members holding of at least 10% of the voting rights in the company, the power to convene a meeting themselves. Call for meetings s 145 Differs from s 144 in that the directors are not involved in this section. At least 14 days’ notice must be given of meetings other than a meeting to pass a special resolution. Eg of a notice under s 145 “We, HLB Nominees (Tempatan ) Sdn Bhd (Company No.47697-U) and Mr. Cheong Heng Choy (NRIC No.571002-10-5287), holders of not less than one-tenth of the paid-up share capital of SJA Berhad ("Company") intend to convene an extraordinary general meeting of SJA Berhad ("Meeting") pursuant to Section 145 of the Companies Act 1965 on 2 July 2003. Eg of a notice under s 145 The objects of the Meeting are as follows:To Appoint with Immediate Effect by way of Ordinary Resolution the Following Persons as Directors of the Company:- INDIAN CORRIDOR SDN BHD & ANOR V. GOLDEN PLUS HOLDINGS BHD [2008] 5 CLJ 774 INDIAN CORRIDOR SDN BHD & ANOR V. GOLDEN PLUS HOLDINGS BHD [2008] 5 CLJ 774 The facts:The two appellants are shareholders of the respondent (a public listed company) holding 19.745%. On 27.12.2007, acting under s145 Companies Act 1965, they issued a requisitionists' notice to the respondent company. The purpose of the meeting was to remove the directors of the respondent and to appoint others in their place. INDIAN CORRIDOR SDN BHD & ANOR V. GOLDEN PLUS HOLDINGS BHD [2008] 5 CLJ 774 The facts (contd):The meeting was to be held on 26 January 2008 in Penang. However, on 16 January 2008, the respondent company took out an originating summons seeking declaratory relief which impugned the validity of the requisition. INDIAN CORRIDOR SDN BHD & ANOR V. GOLDEN PLUS HOLDINGS BHD [2008] 5 CLJ 774 The facts (contd): An application to restrain the meeting was also made within the summons but was not pursued as both sides agreed to have the summons disposed off on its merits. INDIAN CORRIDOR SDN BHD & ANOR V. GOLDEN PLUS HOLDINGS BHD [2008] 5 CLJ 774 The facts (contd):Article 55 of the respondent’s articles of association reads as follows:‘The Directors may, whenever they think fit, convene an Extraordinary General Meeting and Extraordinary General Meetings shall also be convened by such requisitionist, as provided by section 144 of the Act. If at any time there are not within Malaysia sufficient Directors capable of acting to form a quorum at a meeting of Directors, any Director or any two Members may convene an Extraordinary General Meeting in the same manner as nearly as possible as that in which Meetings may be convened by the Directors. INDIAN CORRIDOR SDN BHD & ANOR V. GOLDEN PLUS HOLDINGS BHD [2008] 5 CLJ 774 Court of Appeal: In the present instance, the High Court held that the appellants had by reason of art 55 of the respondent’s articles of association contracted out of s. 145 of the Act and were therefore not entitled to rely on that section to requisition a meeting. INDIAN CORRIDOR SDN BHD & ANOR V. GOLDEN PLUS HOLDINGS BHD [2008] 5 CLJ 774 Court of Appeal: “If the High Court is right, the appellants are forever barred from requisitioning a meeting under s. 145 of the Act if they want to remove one or more of the directors. We must say at once that if so drastic a result was intended by the legislature it would be found in the Act But we must confess our inability to find such a limitation upon the right conferred by s 145. Therefore, the appellants were not barred from requisitioning a meeting under s. 145 of the Act” INDIAN CORRIDOR SDN BHD & ANOR V. GOLDEN PLUS HOLDINGS BHD [2008] 5 CLJ 774 Court of Appeal: ss 128(2) and 153 are to be read as follows. If a public company by resolution in general meeting wants to remove one or more of its directors, then special notice of that resolution must be given to the company. And special notice means notice of not less than 28 days. INDIAN CORRIDOR SDN BHD & ANOR V. GOLDEN PLUS HOLDINGS BHD [2008] 5 CLJ 774 Court of Appeal: On having been given special notice, the burden is on the company, that is to say the board of directors having conduct of the management of the company’s business and affairs to give notice of the meeting to the shareholders. If the company acting through its board of directors fails to do so, surely it cannot rely on its own omission to frustrate the requisitioning members from exercising the very valuable right conferred upon them by s. 145 of the Act. INDIAN CORRIDOR SDN BHD & ANOR V. GOLDEN PLUS HOLDINGS BHD [2008] 5 CLJ 774 Court of Appeal:The setting out of the grounds for proposing the removal is not a requirement of s128 The notice requirement in s128 meets the element of fairness as it makes the director concerned aware of the fact that there is a proposal to remove him. INDIAN CORRIDOR SDN BHD & ANOR V. GOLDEN PLUS HOLDINGS BHD [2008] 5 CLJ 774 Court of Appeal: Nowhere in s128 does the Act require requisitionists to furnish explanatory statements along with a resolution moving for the removal of a director INDIAN CORRIDOR SDN BHD & ANOR V. GOLDEN PLUS HOLDINGS BHD [2008] 5 CLJ 774 Special Notice pursuant to Sections 153 & 128(2) of the Companies Act 1965 ‘We, Indian corridor Sdn Bhd. (Co No. 784936A) and Pembangunan Qualicare Sdn. Bhd. (Co No.442213-M), being two (2) members of Golden Plus Holdings Berhad (“the Company”) holding not less than one-tenth of the paid-up and issued shares capital of the Company, hereby give notice of our intention to propose the following resolutions… INDIAN CORRIDOR SDN BHD & ANOR V. GOLDEN PLUS HOLDINGS BHD [2008] 5 CLJ 774 …which require special notice pursuant to Sections 153 and 128(2) of the Companies Act 1965 as Ordinary Resolutions at an Extraordinary General Meeting of the Company to be convened pursuant to Section 145 of the Companies Act 1965 to be held at Sri Pinang Ballroom, Level 4, Dorsett Penang Hotel, 3 Jalan Larut, 10050 Penang, Malaysia on Saturday, 26 January, 2008 at 9.00 am and any adjournment thereof:-’ KOW KEK LEONG V. KL TEAM DEVELOPMENT SDN BHD & ORS [1998] 5 CLJ 328 KOW KEK LEONG V. KL TEAM DEVELOPMENT SDN BHD & ORS [1998] 5 CLJ 328 The facts:The petitioner was unhappy with the way the other directors had prepared and managed the company’s accounts and had queried over the same in the general meetings of the company KOW KEK LEONG V. KL TEAM DEVELOPMENT SDN BHD & ORS [1998] 5 CLJ 328 The facts (contd):An extraordinary general meeting of the company was held and a resolution was passed removing the petitioner from the directorship of the company. KOW KEK LEONG V. KL TEAM DEVELOPMENT SDN BHD & ORS [1998] 5 CLJ 328 The facts (contd):Having removed the petitioner, the remaining directors thereafter convened a director’s meeting and increased the payment of the director’s fee to themselves. KOW KEK LEONG V. KL TEAM DEVELOPMENT SDN BHD & ORS [1998] 5 CLJ 328 The facts (contd):The petitioner petitioned to wind up the company and applied for declarations that the resolution passed did not comply with s 128 of the Act, and was null and void KOW KEK LEONG V. KL TEAM DEVELOPMENT SDN BHD & ORS [1998] 5 CLJ 328 Held:S128(2) overrides the articles of association of the company in respect of the notice period for the removal of a director of the company. The notice given to the petitioner did not comply with s 153 and it was bad. Where a meeting is held pursuant to a bad notice, the meeting is void, and resolutions passed thereat is null and void Filling of vacancy - S128(5) Removal of Directors of Public Companies Filling of vacancy - S128(5) A vacancy created by the removal of a director if not filled at the meeting at which he is removed, may be filled as a casual vacancy. Removal of Directors of Public Companies S128(6) Companies Act 1965 A person appointed director in place of a person removed shall be treated, as if he had become a director on the day on which the person in whose place he is appointed was last appointed a director. Removal of Directors of Public Companies S128(7) Companies Act 1965 Nothing in subsections (1) to (6) shall be taken as depriving a person removed there under of compensation or damages payable to him in respect of the termination Removal of Directors of Public Companies Southern Foundries (1926) Ltd v Shirlaw [1940] 2 ALL ER 445 (House of Lords) The facts:Shirlaw was appointed as managing director of Southern Foundries by contract. Three years after the appointment, the entire share capital of Southern Foundries was acquired by Federated Foundries Ltd. Removal of Directors of Public Companies Southern Foundries (1926) Ltd v Shirlaw [1940] 2 ALL ER 445 (House of Lords) The facts:New articles were then adopted by Southern, including one that gave Federated the power to remove Shirlaw at any time. Removal of Directors of Public Companies Southern Foundries (1926) Ltd v Shirlaw [1940] 2 ALL ER 445 (House of Lords) The facts:Federated then removed Shirlaw as director under the new articles. Shirlaw sued for damages for breach of contract. Removal of Directors of Public Companies Southern Foundries (1926) Ltd v Shirlaw [1940] 2 ALL ER 445 (House of Lords) Held:Notwithstanding that the removal was in accordance with the articles, it remained a breach of contract. The company could not be restrained from amending its articles, but to act on the amended articles might nevertheless amount to a breach of contract. Removal of Directors of Public Companies The measure of damages is the salary he would have received during the period of notice. He cannot, however insist on remaining as a director. Nor would the court specifically enforce a contract so as to require the company to retain a director. Company Law by Walter Woon, Sweet & Maxwell Asia, Second Edition, pg 244 Age Limit for Directors S129(1) provides that:Notwithstanding anything in the memorandum or articles of the company, no person over the age of seventy years shall be appointed or act as a director of a public company or of a subsidiary of a public company. Age Limit for Directors S129(2) provides that:the office of a director of a public company or of a subsidiary of a public company shall become vacant at the conclusion of the annual general meeting commencing next after he attains the age of seventy. Removal of Directors of Private Companies Removal of Directors of Private Companies Removal by other directors It is possible for the constitution of a private company to have a provision that allows directors to remove another director. Commercial Applications of Company law in Malaysia, 2002 CCH Asia Pte Ltd, pg 227 Removal of Directors of Private Companies Removal by Members The provisions of section 128 do not apply to a private company. The removal of directors of private companies are governed by the company’s articles of association. If there is no provision in the Articles pertaining to removal, the directors can be removed by not being re-elected when he is due to retire by rotation at the annual general meeting. Malaysian Company Secretarial Practice, Prentice Hall 2006 by Zubaidah Zainal Abidin at page 88 Removal of Directors of Private Companies The articles may permit the majority of members to remove a director. However, it is possible for the articles to limit this in some ways. For example, the articles might specify that a director cannot be removed by a majority of members for at least a year after taking office. Commercial Applications of Company Law in Malaysia, 2002 CCH Asia Pte Ltd, pg 228 Removal of Directors of Private Companies In the case of a public company section 128 would mean that even though this restriction is contained in the company’s articles, the majority of members could still remove the director at any time. However, in the case of a private company, the restriction would have to be observed. Commercial Applications of Company Law in Malaysia, 2002 CCH Asia Pte Ltd, pg 228 Removal of Directors of Private Companies In addition to the above, the articles of a private company may provide for any other manner of removal. It may be possible for the company to request in writing that the director vacate his office. Commercial Applications of Company Law in Malaysia, 2002 CCH Asia Pte Ltd, pg 228 Removal of Directors of Private Companies The director cannot be removed if it will cause the number of directors to fall below two as this will go against the requirement that each company must have at least two directors. (see S.122 CA 1965) Removal of Directors of Private Companies Sometimes, a director is required to hold a specified amount of shares as a condition to being elected as director of the company. The share qualification must be acquired within a specified time, failing which the director is automatically removed from office. This requirement is mandatory and applies to a company even if it will cause the number of directors to fall below two: see S.122(7) and S.124(3) of the Companies Act. Removal of Directors of Private Companies A private company may adopt article 69 of Table A of the Companies Act 1965 and if so its shareholders will have the power to remove a director prematurely from office. Footnote at p.25 of A Consultative Document – On Clarifying and Reformulating the Directors' Role and Duties by CLRC for CCM. Removal of Directors of Private Companies Para 1.23 of A Consultative Document – On Clarifying and Reformulating the Directors' Role and Duties By CLRC for CCM However, it was noted by the CLRC that one issue which requires clarification is whether the removal of a director which is done in accordance with the company's Articles of Association would still require a special notice to be served on the company. In Soliappan v Lim Yoke Fan & Others [1968] 2 MLJ 21, the court decided that section 128 is an independent source for the power of removal that can be relied on in the absence of provisions in the Articles empowering the removal of a director. However, subsequent to this case, section 128(2) was amended where the words 'under this section' were removed, leading to arguments that whilst directors of a public company may be removed by a simple resolution passed at a general meeting irrespective of anything stated in the Articles, a special notice must still be given to the company in respect of the resolution to remove a director even if the removal is accordance with procedures specified in the Articles and even in the case of a director of a private company. The CLRC is of the view that special notice to the company is only required when the director of a public company is to be removed at a shareholders' general meeting. This is because the special notice is to be served by shareholders who want to propose for the removal of the director and as such, the special notice is to provide a reasonable opportunity to the directors of public companies to make their representations to the shareholders at the general meeting in relation to their removal. If the director is not removed at a shareholders' general meeting, a special notice will be irrelevant as no meeting will be called to consider the removal. The CLRC recommends that: (a)where the right of the shareholders at a general meeting to remove a director (as reflected in section 128 of the Companies Act 1965) is concerned, this right should be made applicable to public companies only and should not be extended to private companies; and (b) where a director of a public company is to be removed, special notice is required when the director is to be removed in accordance with section 128 of the Companies Act 1965. Removal of Directors Where directors do not serve under a contract of service: They may be removed in accordance with the articles without the necessity of paying them damages The power of removal is usually vested in the general meeting. (Table A art 69) Company Law by Walter Woon, Sweet & Maxwell Asia, Second Edition, pg 244 Removal of Directors Where directors do not serve under a contract of service:In the case of a public company, even if the articles provide that the board shall have power to remove a director, such an article is ineffective. s128(8) In the case of a private company, a power granted to the board to remove directors is a fiduciary power which must be exercised in the interests of the company. Company Law by Walter Woon, Sweet & Maxwell Asia, Second Edition, pg 244 Removal of Directors ‘Entrenchment’ of Directors In the case of a private company: Possible to ‘entrench’ directors by including suitably drafted articles. For eg i. by providing that a director may not be removed without a special resolution; ii. that a particular director will hold office for life. Company Law by Walter Woon, Sweet & Maxwell. Second Edition pg 245 Removal of Directors ‘Entrenchment’ of Directors In the case of a public company: Not possible to ‘entrench’ directors. S128(1)provides that a public company may always remove a director by ordinary resolution, notwithstanding anything contained in the company’s memorandum or articles or in any agreement that may exist with the director. Removal of Directors ‘Entrenchment’ of Directors In the case of a public company: S128(2) special notice must be given of such resolution. S128(3) The director who is to be removed is entitled to make representations in writing to the company, which is bound to circulate them. How does a Company amend its Articles of Association? How does a company amend its Articles of Association? Section 31 Companies Act 1985 states that the amendment or repeal of any provision in the articles requires a special resolution of members. A company may also include in its articles of association a further requirement that must be satisfied before the special resolution takes effect. Commercial Applications of Company Law in Malaysia, 2002 CCH Asia Pte Ltd, pg 124 How does a company amend its Articles of Association? For eg, in a small company, the members may agree that amendments to the articles require the written consent of all of the members. If such a requirement were included, any purported amendment to the articles by special resolution would not take effect unless that additional requirement was satisfied. Commercial Applications of Company Law in Malaysia, 2002 CCH Asia Pte Ltd, pg 124 How does a company amend its Articles of Association? Section 31(2) Companies Act 1965 Where a company has passed a resolution to amend or repeal its articles, that resolution will take effect on the day it is passed or on a later date specified in the resolution. Commercial Applications of Company Law in Malaysia, 2002 CCH Asia Pte Ltd, pg 124 How does a company amend its Articles of Association? Section 31(2) Companies Act 1965 Alteration of the articles must be made by special resolution. The alteration of the company’s articles is also subject to some limitation on the members’ voting power. The members must vote in the best interests of the company as a whole. Commercial Applications of Company Law in Malaysia, 2002 CCH Asia Pte Ltd, pg 124 How does a company amend its Articles of Association? This stipulation prevents the majority shareholders from exercising their vote to alter the articles to the prejudice of a minority. It is for the members to decide what is best for the company. The court will not interfere unless the decision is not one that a reasonable man could have made. Guide to Company law in Malaysia & Singapore, 2nd Edition, CCH Asia Limited, pg 50 Conclusion Directors hold office at the behest of the shareholders and at the end of the day, unless there is a valid compensation agreement for removal before expiry of a director’s term of office, the director so removed may have little recourse in law. Courts are reluctant to interfere generally with shareholders’ decision in removing directors if proper procedure has been followed. The End Thank you Assisted by Patricia Boo LLB (Hons) London, CLP
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