PROFILING NOMINEE DIRECTORS IN MALAYSIA
Dr. Yang Chik Adam
Faculty of Law, Universiti Teknologi Mara, Shah Alam [email protected]
ABSTRACT: This paper illustrates the profile of nominee directors in Malaysia’s corporate landscape. A nominee director is usually appointed to the board of directors of a company to represent the interests of a specific group or class of persons such as a class of shareholders, a major creditor to the company or an employee group. Section 132(1E) Companies Act 1965 states the responsibility of a nominee director.
Under s.132(1E) CA 1965, among others, a nominee director must not subordinate his duty to act in the best interest of the company to his duty to his nominator. Taking into consideration the concentration in Malaysian corporate economy and the joint venture company or incorporated joint venture is a common form of corporate entity in Malaysia, nominee directors independence is put to test. In relation to this profile, the position of nominee directors in various corporate settings will be discussed in terms of their actual and perceived independence from the board of directors that they are in. This paper concludes with an examination of the need for independence when acting as director of a company. It also illustrates that in discharging the duties as director of a company nominee directors must tread the fiduciary duties carefully.
KEYWORDS: company law, corporate governance, nominee directors, independence.
1. Introduction
Boards of directors lie at the centre of corporate organizations. The board leads and controls the company. Thus, an effective board is fundamental to achieve its objective and success of the company. Section 41 of the Companies Act (CA) 1965 states that any person occupying the position of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the directors of a corporation are accustomed to act and an alternate or substitute director. Hence, these directors are identified by the types of directors, namely executive director or non-executive director. By virtue of s.132(1E)2 CA 1965 provides the responsibility of a nominee director which reads that a director who was appointed by virtue of his position as an employee of a company or who was appointed by or as a representative of a shareholder, employer or debenture holder shall act in the best interest of the company and in the event of any conflict between his duty to act in the best interest of the company and his duty to his nominator he shall not subordinate his duty to act in the best interest of the company to his duty to his nominator.
1 Section 4 Companies Act 1965
2 Section 132(1E) Companies Act 1965
Research3 has found that Malaysia is in the mould of the concentrated ownership.
Concentrated shareholding structure characterized by the widespread presence of the family group and the State.4 As such, in certain situations the independence of the nomine directors in discharging their duties to the company and also to the nominators will be a challenge.
1. Who are nominee directors?
Macquarie Concise Dictionary of Modern Law5 defines the term nominee director as a company director appointed by a person or group to represent the interests of that person or group. The term nominee director has also been referred to as class director6 inter alia, a director elected or appointed to a corporate board to represent a special-interest group, e.g.
the preferred stockholders. As stated above by virtue of s 132(1E) CA 1965 stipulates the responsibility of a nominee director. This means that there can be a director who has been appointed by virtue of being an employee of a company or as a representative of a shareholder, employer or debenture holder. It states categorically that nominee director “shall act in the best interest of the company and in the event of any conflict between his duty to act in the best interests of the company and his duty to his nominator he shall not subordinate his duty to act in the best interest of the company to his duty to his nominator. The landmark case on nominee director is Levin v Clark, Jacobs J noted that:
It is not uncommon for a director to be appointed to a board of directors in order to represent an interest outside the company: a mortgagee or other trader or a particular shareholder. It may be in the interests of the company that there be upon its board of directors one who will represent these other interests and who will be acting solely in the interests of such a third party and who may in that way be properly regarded as acting in the interests of the company as a whole.7
2. TYPES OF NOMINEE DIRECTORS
Nominee directors can be categorized based on the way we view firstly their involvement in the company to which board they are nominated, or second, the level to which they are perceived as “representing” the nominator’s interest.
In the first instance, we categorise them based on their positions on the board of the company to which they are nominated. In this sense, the nominee director is either an executive or non- executive director.
Acting as the executive nominee director, he or she runs the business of the investee company.
This may occur when the nominator takes over the investee company as it is often that officers of the nominator are seconded to take over the management of the investee company. In this sense, Auyeung8 is of the view that the legal principles in place for nominee directors largely
3 S.Claessens,S .Djankow & LHP.Lang.(1999). The World Bank Group. Finance, Private Sector & Infrastructure Network, Who Controls East Asian Corporations and the Implications for Legal Reform, Note No.196
4 S. Rachagan & ANM Sulaiman. (2013) Controlling Shareholders: Issues and Challenges for Shareholders’
Empowerment in Directors’ Remuneration in Corporate Malaysia, Asian Journal of Comparative Law, p.7
5 The CCH Macquarie Concise Dictionary of Modern Law, 1988 CCH Australia Limited, p.89
6 Black’s Law Dictionary, 8th ed., Thomson West, 2004, p.493
7 [1962] NSWR 686 p.700
8 S.Auyeung, (2004), One-Day Symposium on Accountability, Governance and Performance in Transition, Australia, p. 46, unpublished.
mirror those governing directors. Anandarajah9 described the type of nominee director who does not participate in the day-to-day running of the company as one who is regarded as non- executive, but not independent. It is possible to have a nominee director take on an executive position as well; but this is rare. Similarly, Koh10 opined that a nominee director is best understood to describe a non-executive director who is appointed at the behest of a particular shareholder or class of shareholders. For example, in a conglomerate, the holding company may have nominees in the various subsidiaries or associate companies.
He does not participate in the management of the day-to-day running of the investee company. As a non-executive nominee in the investee company as in this situation, he can minimise conflicts of interests between the nominator and the investee company.
In the second instance, the nominee director is viewed from the perspective of how he is to represent the nominator. One commentator11 stated that nominees are seen by the other directors as representing their nominator and will be expected by the nominator or to report on the nominator’s investment in the company.
3. Nominee directors may be found in the following business structures:
i) Nominee directors in Listed Public Companies, Listed Subsidiary and Associated Companies
The nominator will often be a significant shareholder of the listed public companies or the listed companies are subsidiaries. The right of appointment may arise from mere agreement of the board in recognition of that shareholding or it may be contractually based. In exceptional circumstances, it may be provided for in the articles of association of the company. The nominee director will usually be a representative nominee director although any additional nominee director may well be an independent nominee director to satisfy sensitivities. In the words of one commentator12 as a matter of commercial reality, directors are appointed to the board to represent a particular shareholder. For listed companies, this often occurs where the listed company is either a subsidiary or has a significant shareholder who seeks representatives on the company’s board and directors are appointed to the board to represent a particular shareholder.
ii) Wholly Owned Subsidiaries and partly owned subsidiaries
The boards of such companies will mostly comprise of representative directors but not in its entirety. Non-executive independent nominee directors are often appointed to wholly own subsidiary boards to provide an external perspective to the business of the company. In these companies, there will usually be representative nominee directors, independent nominee directors, directors who are senior managers of the company and independent directors representing the minorities.
9 K.Anandarah. (2004), Basic Essentials of Corporate Governance, LexisNexis Singapore, p.44
10P. Koh. 2005, Reform realism and the boardroom, ICSA International, p.653
11 M.Lishman, 2010, Nominee Directors: The need for board protocols, 28 Company and Securities Law Journal, p.130
12 M.Lishman, (2010), Nominee Directors: The need for board protocols, 28 Companies and Securities Law Journal, p.130
iii) Government-Linked Companies (GLCs)
The nominee directors of GLCs are often appointed to the board of directors of a company as the representative director of the government. The articles of association of the company may accord the right to the government to appoint its representative. This is to protect public investment in the entity or to ensure adherence to some public policy which the entity is capable of affecting.
iv) Venture Capital Investments
In the venture capital process, the venture capitalists will often “wear two hats” – one as a director, the other as a shareholder, and will owe fiduciary duties in both these capacities. The venture capitalist may have the interests of the venture capital fund represented through the appointment of a director. In a small company, it is not unusual for the majority shareholder to have the power to appoint directors.13 However, in the venture capital setting, it is considered the norm. The terms of appointment for a director may be set out in the shareholders’
agreement14 or may be conferred by the constitution, which may make provisions for outsiders to appoint directors.15 The appointment of a nominee director raises an inherent possibility of conflict with the recognized fiduciary and statutory duty of directors to act in good faith in the interests of the company as a whole.16 Conflict arises because the nominee director will owe simultaneous duties to the portfolio firm and the venture capitalist.
4. The Strict duty of nominee director
Nominee directors like any other companies directors are bound by the fiduciary duties under CA 1965. This strict interpretation of the fiduciary duty of nominee director was applied in the case of Industrial Concrete Products Bhd v Concrete Engineering Products Bhd.17 This case confirms the common law position of nominee directors. Nominee directors like any other directors must act in the best interests and shall not subordinate his duty to act in the best interest of the company to his duty to his nominator. The facts of this case involved the maneuverings in the boardroom, corporate takeovers and commercial wrestles between competing individuals, business rivals and market adventurers. Choo Chin Tye (Choo) was nominted by Low Thean Hock (Repco Low) as his nominee in Concrete Engineering Products Bhd (CEPCO) as well as a mandatory signatory to the company’s banking instruments. Without the knowledge of the other directors, Choo negotiated to transfer the production and management of CEPCO’s core assets to Industrial Concrete Products Bhd (ICP). ICP was in the same line of business as CEPCO, Choo proposed to ICP to acquire CEPCO’s core business. Choo indicated to ICP that the group he represents was the majority shareholders of CEPCO. They have a corporate plan for a reverse takeover of
13 Santos Ltd v Pettingell (19790N4) ACLR 110
14 Ford HAJ, Austin RP and Ramsay IM, Ford’s Principles of Corporation Law (12th ed, 2005) p.6.330
15 Woodlands Ltd v Logan [1948] NZLR 230
16 Australian Corporations Act 2001 (Cth), s 181
17 [2001] 2 MLJ 332; see also the case of Euco International Sdn Bhd v PF Chen [1984] 2 MLJ 61,
CEPCO by the State Economic Development Corporation of Sabah who would inject into CEPCO a clinker plant. By this process, the core business of CEPCO would no longer fit into the corporate program and should be sold.
The court held that:
“by the lack of precise and detailed framework of the corporate plan and the non disclosure of detailed effort to introduce this reverse takeover exercise, I am suspicious whether this plan was just a set up invented by Choo’s principal, with Choo having full knowledge and participating in it, to stimulate market interest in CEPCO’s share during to give sufficient leverage to manipulate for enormous financial gains. This can be seen by the substantial rise in the price of CEPCO’s share during this period, the fizzling out of this reverse takeover proposal and the disposal of Repco Low’s and associate’s controlling interest immediately before such plans could see the light of day. I believe that once they reaped their benefit they just left the scene leaving others to pick up the carcasses.
But while in control of CEPCO, Choo proceeded to run the entire company as if he owned it with total disregard for the board and all other shareholders, except for the group he represented. This is certainly in conflict with his duty to the company and that of the interests of his principal. I find that Choo had not acted bona fide in the interest of CEPCO and neither did he promote and advance CEPCO’s interest nor considered the relevant facts before committing the acts as alleged. His entire action throughout this period as a director was solely towards the benefit and interest of the group that nominated him to the board. Such interest not only conflicted with those of CEPCO, but was also disastrous to CEPCO. Its assets were nearly stripped and its core business was on the verge of being annexed by its main competitor. For this, Choo is guilty of CEPCO’s accusation of being in breach of his fiduciary duty”.18
5. Conclusion
The nominee director of a company would have to tread carefully with prudent in discharging his fiduciary duty as the nominee directorship can be clouded by misapprehension and misconstruction. In the Malaysian corporate structure it is not uncommon for family-based enterprises and government corporatized bodies to have a legitimate interest in maintaining nominee directors to oversee their interest. This expectation is legitimate and has commercial justification.
18 Ibid
