Case Law Spotlight – Pre-emptive Rights and Shareholders’ Approval: Implications for Corporate Transactions

The Federal Court of Malaysia recently delivered a landmark judgment, resolving key issues related to pre-emptive rights and shareholders’ approval, significantly impacting the corporate governance landscape in Malaysia. This ruling, arising from Concrete Parade Sdn. Bhd. v. Apex Equity Holdings Berhad & Others, overturns the earlier Court of Appeal decision and reaffirms the High Court’s interpretation of Sections 85(1) and 223(1) of the Companies Act 2016 (CA 2016).

Case Background

In this case, Concrete Parade Sdn. Bhd., a shareholder of Apex Equity Holdings Berhad (Apex Equity), initiated legal action for minority oppression under Section 346 of the CA 2016. The contention revolved around two major transactions:

1. Share Buy-back Transactions: Conducted by Apex Equity between 2005 and 2017.
2. Proposed Merger: The merger involved the stockbroking businesses of Mercury Securities Sdn. Bhd. and JF Apex Securities Berhad (a subsidiary of Apex Equity), referred to as the Mercury Transaction. The transaction included a cash consideration of RM48 million and a non-cash consideration of RM92 million, both funded by the issuance of new Apex Equity shares. Concrete Parade had contended that their rights as minority shareholders were being oppressed by virtue of the proposed merger.

Federal Court’s Findings

Section 85(1): Waiver of Pre-Emption Rights

Section 85(1) ensures that new shares are offered to existing shareholders on a pro-rata basis to protect against dilution. The Federal Court’s decision clarified:

1. Pre-Emptive Rights: Pre-emptive rights, while statutory, can be waived if the company’s constitution expressly permits it.
2. Shareholders’ Approval: Shareholders’ approval for transactions like the Mercury Transaction is a valid “direction to the contrary,” effectively waiving pre-emptive rights.
3. Resolutions for Waiver of Pre-Emptive Rights: Detailed resolutions for waiving pre-emptive rights are unnecessary if shareholders are informed and vote in favour of the transaction.

Section 223(1): Timing of Shareholders’ Approval

Section 223(1) mandates shareholder approval for substantial acquisitions or disposals. The Court clarified:

1. Shareholders’ Approval: Shareholders’ approval should be obtained either as a condition precedent in the agreement or before the transaction’s completion.
2. Requiring Approval Twice: There is no requirement to obtain shareholders’ approval for the same transaction twice — before and after the agreement — as this adds unnecessary complexity and delays to corporate transactions.

Share Buy Back Transaction

The Court addressed the legality of share buy-back transactions, concluding that such transactions, when conducted lawfully and with shareholder consent, do not constitute oppression. Section 127 of CA 2016 allows public listed companies to buy back their shares under certain conditions. The contention that these transactions were ultra vires the company’s constitution did not hold, as they did not result in unfair prejudice against Concrete Parade compared to other shareholders.

Oppression Remedy

The Court examined whether Apex Equity’s directors’ actions amounted to oppression or unfair prejudice toward Concrete Parade. It concluded that for the oppression remedy under Section 346 of CA 2016 (i.e. remedy to any member of a company where there is oppression or prejudice to the member) to apply, there must be clear evidence of conduct that specifically harms the minority shareholder more than others. Concrete Parade failed to demonstrate this threshold, especially given the shareholder approval mechanisms in place.

Implication for M&A’s and Fundraisings

This ruling has profound implications for mergers and acquisitions (M&A) and fundraising activities:

1. Efficient Approval Processes: Companies can negotiate and finalize agreements without obtaining shareholder approval immediately, accelerating transaction execution and reducing the risk of missed opportunities. However, shareholder approval must still be properly obtained before completion of the transaction;
2. Clear Pre-emptive Rights Framework: Businesses can structure fundraising activities with confidence, knowing that shareholder approval effectively waives pre-emptive rights, and without the need for separate waiver letters which was common practice prior to this landmark case. By voting in favour of a transaction, shareholders are deemed to relinquish any pre-emptive rights option they may have; and
3. Enhanced Corporate Governance: The decision underscores the need for clear governance frameworks and customized constitutional provisions to actively opt-out from certain default provisions, ensuring directors and shareholders understand their rights and responsibilities, fostering transparency and trust within the company.

The Federal Court’s decision provides a balanced approach to shareholder protections, director responsibilities, and corporate flexibility. By clarifying pre-emptive rights and the timing of shareholder approvals, this ruling supports more efficient and pragmatic approach to corporate transactions. 

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This article was written by George Teng (Associate) from Donovan & Ho’s corporate and commercial practice group.

Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.