See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/228249110

Company Law Reform in Malaysia: The Role and Duties of Directors

Article · August 2009

CITATIONS READS
3 17,677

1 author:

Mohammad Rizal Salim

The University of Nottingham Malaysia Campus
15 PUBLICATIONS   58 CITATIONS   

SEE PROFILE

All content following this page was uploaded by Mohammad Rizal Salim on 22 April 2016.

The user has requested enhancement of the downloaded file.

 Company Law Reform in Malaysia: The Role and Duties of Directors
Mohammad Rizal Salim*

1. Introduction
The Companies (Amendment) Act 2007 has come into force in Malaysia on 15 August
2007. Until the law was presented in Parliament few people knew about it. There was no
public consultation. It was passed by both houses of Parliament without any difficulty. It
was as if this was one those inconsequential legislations which routinely went through the
houses of Parliament.

But the Amendment Act is not inconsequential. It was Malaysia’s first major attempt at
updating the Malaysian Companies Act 1965. One commentator wrote of the Act (at that
time it was still at a bill stage) in a weekly financial newspaper under the caption “A
turning point in company law”.1 The Amendment Act does appear to be that – a turning
point in company law in Malaysia. It has 24 sections and covers wide areas of company
law. It clarifies the role of the board; codifies the common law principles on directors’
duties; introduces a business judgment rule, a statutory derivative action, new provisions
on the role of auditors and a provision allowing the court to grant injunctions; reforms the
law on related party transactions, imposes a duty on directors of public companies to
place a system of internal control, provides protection for whistle-blowers; and updates
the rules on meetings of members.

This paper comments on the amendments relating to the role and duties of directors. The
amendments borrowed from some common law countries; comparisons will therefore be
made to the laws in these jurisdictions, where appropriate.2 References will also be made
to the two consultation papers issued by the Malaysian Corporate Law Reform
Committee (CLRC), A Consultative Document: On Clarifying and Reformulating the

* Ph.D; Nottingham University Business School, The University of Nottingham Malaysia campus;
Advocate & Solicitor, High Court of Malaya (non-practicing).
1
Brian Chia, “Forum: A turning point in company law”, The Edge Malaysia, 16-22 July 2007.
2
In this paper comparisons will be made to the Australian Corporations Law 2001, the New Zealand
Companies Act 1993 and the UK Companies Act 2006.

(2009) International Company and Commercial Law Review 142

Electronic copy available at: http://ssrn.com/abstract=1462650

 2

Directors’ Roles and Duties3 and On Review of Provisions Regulating Substantial

Property Transactions, Disclosure Obligations and Loans to Directors.4

2. The amendments and comparative provisions

2.1 The functions and powers of the board
A new section 131B was inserted into the Companies Act which provides for the role of
the board. It states in sub-section (1) that “[t]he business and affairs of a company must
be managed by, or under the direction of, the board of directors.” This is however
qualified by sub-section (2) which states that the board shall have all necessary powers
for managing and to supervise the management, but “subject to any modification,
exception or limitation contained in this Act or in the memorandum or articles of
association of the company”. This statement of the functions and powers of the board is
an update of the current position which left the matter in the company’s articles of
association.5 However, although sub-s. (1) uses the word “must”, the powers of the
directors may be qualified by the company’s constitution, as provided in sub-s. (2).
Therefore, in theory at least, the company must be managed by the board, but the articles
can validly take away all or a substantial portion of the powers.

The CLRC has also recommended for a provision to the same effect be incorporated in
the Malaysian Companies Act 1965.6 It recognizes the current legislative approach which
gives flexibility for companies to structure the roles and functions of their board
according to the needs of the company; and this will not be changed by the legislative
restatement. However the CLRC took the view that such a provision has an educational
value.7 It may be noted that Australia and New Zealand have similar legislative
provisions although there is no corresponding provision in the UK Companies Act 2006.8

3
CLRC, A Consultative Document: On Clarifying and Reformulating the Directors’ Roles and Duties,
2006.
4
CLRC, On Review of Provisions Regulating Substantial Property Transactions, Disclosure Obligations
and Loans to Directors, 2007.
5
Article 73 of Table A of the Companies Act 1965 provides that “[t]he business of the company shall be
managed by the directors”, similar to the Article 70 of the UK Companies Act 1985.
6
CLRC, above note 3, pp. 40-43.
7
Ibid, p.41, para.2.2.
8
Australian Corporations Act 2001, s. 198A and New Zealand Companies Act 1993, s. 128.

(2009) International Company and Commercial Law Review 142

Electronic copy available at: http://ssrn.com/abstract=1462650

 3

2.2 Delegation and reliance

A new s. 132(1F) provides that the directors “may delegate any power of the board of
directors to any committee [of directors], director, officer, employee, expert or any
person”. The power to delegate is, however, subject to the company’s constitution or any
resolution of the board. The provision goes on to state that “where the directors have
delegated any power, the directors are responsible for the exercise of such power by the
delegatee as if such power had been exercised by the directors themselves”.

Section 132(1G) however exonerates directors from responsibility where (a) they
believed on reasonable grounds that the delegate would exercise the power in conformity
with the duties imposed on the directors and the company’s constitution, and (b) they
believed on reasonable grounds, on good faith and after making a proper enquiry, the
delegatee was reliable and competent to perform the duties delegated to them. This
provision resembles the Australian Corporations Law 2001 and New Zealand Companies
Act 1993.9 Again, the CLRC has recommended for a provision to the same effect to be
incorporated in the Malaysian Companies Act 1965.10

New ss. 132(1C) and (1D) allows a director to rely on information, advice, opinions,
reports or statement made by others. The reliance is deemed to have been made on
reasonable grounds if (a) it was made in good faith and (b) the directors have made
independent assessment of the information and advice given, having regard to the
director’s knowledge of the company and the complexity of the company’s structure and
operation. This corresponds with the Australian Corporations Law 2001 and the New
Zealand Companies Act 1993,11 although there is no corresponding provision in the UK

9
Australian Corporations Act 2001, ss. 198D and 190, and New Zealand Companies Act 1993, s. 130. The
Malaysian provision is closer to the Australian provisions compared to the New Zealand’s. There is no
corresponding provision in the UK Companies Act 2006.
10
The reason for this was that directors in large companies may leave the day-to-day operations may be left
to others; therefore the law should recognize the practice of delegation: CLRC, above note 3, p.50,
para.3.11.
11
Australian Corporations Act 2001, s. 189, and New Zealand Companies Act 1993, s. 138.

(2009) International Company and Commercial Law Review 142

 4

Companies Act 2006. Again, the CLRC did recommend a similar provision for the
Companies Act 1965.12

2.3 Directors’ duties

(i) Duty to act for proper purposes and in good faith
The new amendment repeals the current statutory provision on directors’ duties that
requires a director to act honestly and use reasonable diligence in the discharge of his
duties in s. 132(1) of the Companies Act 1965. This is replaced by a new s. 132(1) which
requires a director to act for proper purposes and in good faith.

Although the new provision retains the statutory requirement that directors must act in
good faith in the interests of the company, it does not specify for whose benefit the
company should be managed, and whether directors can properly take into account the
interests of employees, creditors and other stakeholders.13

The Malaysian High Level Finance Committee on Corporate Governance took the long
term shareholder value approach (now is more elegantly stated as the “enlightened
shareholder value”) that companies should be managed “with the ultimate objective to
enhance long term shareholder value, whilst taking into account the interests of other
stakeholders”.14 This was shared by the CLRC.15 This was no doubt influenced by the
Hampel Committee who said:16

12
CLRC, above note 3, pp. 49-52. The CLRC did not articulate any specific reason for this
recommendation.
13
In this respect, neither did the CLRC. For comparison, see UK Companies Act 2006 which provides in s.
172 that a director “must act in the way he considers, in good faith, would be most likely to promote the
success of the company for the benefit of its members as a whole”, but may have regard to the long term
consequences and the interests of the various stakeholders specifically mentioned in the section. There are
no equivalent provisions in Australia or New Zealand.
14
The definition of corporate governance used by the Malaysian High Level Finance Committee on
Corporate Governance, Report on Corporate Governance, 1999, p. 10.
15
CLRC, Strategic Framework for the Corporate Law Reform Programme of Companies Commission of
Malaysia, 2003, p. 21, para. 7.
16
Committee on Corporate Governance, Final Report, 1998, paras 1.16 and 1.17 at pp. 11 and 12. The
underlined emphasis is original.

(2009) International Company and Commercial Law Review 142

 5

The single overriding objective shared by all listed companies, whatever their size
or type of business, is the preservation and the greatest practicable enhancement
over time of their shareholders’ investment. … the directors as a board are
responsible for relations with stakeholders, but they are accountable to the
shareholders.

The Hampel Committee was no doubt influenced by the contractarian paradigm which
stressed on the productive activity of the firm,17 although it was also consistent with
Berle and Means whose thesis was premised upon the presumption that shareholders are
the beneficiaries to whom directors duties of loyalty lies.18 One commentator drew this
parallel between Alchian and Demsetz and Berle and Means (as well as Galbraith),
convincingly arguing that despite their “obvious methodological and theoretical
differences”, they all stressed the specificity of the productive activity, the source of
profit as an organizational quasi-rent.19

In Malaysia, it should also be mentioned that the common law position of directors’
duties to creditors is underdeveloped and inadequate; the same extends to creditors
statutory provisions under the Companies Act 1965.20 Additionally, Malaysia’s corporate
restructuring law gives much room for corporate abuses which may be used to deny
creditors their rightful claims as “creditors are kept from enforcing security for unduly
long periods by the use of temporary restraining orders, which do not rest on sound

17
For the contractarian theory, see Armen A. Alchian and Harold Demsetz, “Production, Information
Costs, and Economic Organization” (1972) 62 The American Economic Review 777.
18
Adolf Berle and Gardiner Means, The Modern Corporation and Private Property Harcourt, Brace &
World Inc., New York, 1932, 1991 ed., Transaction Publishers, New Brunswick and London. See also the
debate on shareholder primacy and stakeholder theories between Berle and Merrick Dodd in Adolf Berle
“Corporate Powers as Powers in Trust” (1931) 44 Harv. L. Rev. 1049; Merrick E. Dodd “For Whom Are
Corporate Managers Trustees?” (1932) 45 Harv. L. Rev. 1145; Adolf Berle, Adolf (1932) “For Whom
Corporate Managers Are Trustees: A Note” (1932) 45 Harv. L. Rev. 1365.
19
Antoine Rebérioux, “Shareholder Primacy and Managerial Accountability” CLPE Research Paper
1/2007.
20
See Hasani Mohd Ali, “Directors’ Duties to Prevent Insolvent Trading: The Malaysian Fraudulent
Trading Provisions Revisited” [2006] 1 MLJ I; Helen Anderson and Janine Pascoe, “A Duty of Imperfect
Obligation: A Comparison of Directors’ Duties to Creditors in Australia, Malaysia and Hong Kong” [2002]
2 MLJ cxxix.

(2009) International Company and Commercial Law Review 142

 6

conceptual ground or precedent”.21 Employees’ rights are severely limited by high levels
of state intervention and control over industrial relations, in which a competitive
economy which could be achieved through the lowering of production costs, increasing
productivity and sustaining competition were given a much higher priority.22 The public
stakeholding is weakened by a relatively poor enforcement of planning and
environmental regulation, as well as the relatively poor public awareness and resistance
due to the tight control over the media and the citizen’s rights to association and speech.23
Thus, it is very unlikely that by adopting a provision along the lines of s. 172 of the UK
Companies Act would transform the core nature of directors’ general duties, especially if
such duties are not accompanied by a mechanism in which they may be enforced.24
However, such a provision may be useful to set out the theoretical or philosophical theme
underlying directors’ duties,25 as well as having an educational effect.

(ii) Duty of care, skill and diligence

A new s. 132(1A) was inserted which imposes a duty on directors to use reasonable care,
skill and diligence. This is made subject to a new business judgment rule in s. 132(1B),
reliance on information provided by others in s. 132(1C), and reliance on the actions of
delegatee in s. 132 (1F). This corresponds loosely with the Australian Corporations Act
2001 and the New Zealand Companies Act 1993.26

21
Rabindra Nathan, Guide to Restructuring in Asia 2001, White Page, London, p.76. Amendments were
made to the provision in 1998 to strengthen creditors’ protection under the corporate arrangement and
reconstruction provision in s. 176 of the Malaysian Companies Act 1965. However, according to Nathan,
the procedure is “still cumbersome and subject to delays”.
22
See Rabiu Sani Shatsari and Kamal Halili Hassan, “The Right to Collective Bargaining in Malaysia in
the Context of ILO Standards” (2006) Asian Journal of Comparative Law 1; V. Anantharaman, Malaysian
Industrial Relations: Law and Practice, UPM Press, Serdang, Malaysia (1997) pp. 76-77.
23
Gary Rodan, “Do Markets Need Transparency? The Pivotal Cases of Singapore and Malaysia” (2002) 7
New Political Economy 23; Gary Rodan, Transparency and Authoritarian Rule in Southeast Asia:
Singapore and Malaysia, RoutledgeCurzon, London, 2004.
24
For a critique of the UK provision (then a Bill), see Daniel Attenborough, “The Company Law Reform
Bill: An Analysis of Directors’ Duties and the Objective of the Company” (2006) 27 Company Lawyer 162.
25
This relates to the debate on the models of corporate governance - should companies be managed for the
benefit of shareholders (the shareholder primacy model) or for the interests of stakeholders (the stakeholder
model)?
26
Australian Corporations Act 2001, ss. 180, 181 and 189; New Zealand Companies Act 1993, ss. 131, 137
and 138. The UK Companies Act 2006 provides for the duty to act for proper purpose in s. 171, duty to act
in good faith in s. 172 and exercise reasonable care, skill and diligence in s. 174. In addition, s. 173 requires
director to exercise independent judgment.

(2009) International Company and Commercial Law Review 142

 7

The standard of care required of a director in s. 132(1A) applies both the objective and
subjective tests. However, this time the provision corresponds more closely to the UK
Companies Act 2006 rather than the Australian or New Zealand provisions.27 The CLRC
has in fact suggested following the UK’s proposed reform.28 It is likely that the drafters
of the Amendment Act were influenced by CLRC’s recommendation on this.

(iii) Duty to avoid conflicts of interest

The Companies Act requires directors interested in a contract with the company to
disclose their interests pursuant to s. 131, regulates substantial property transaction in ss.
132E, 132F, 132G and loans to directors and connected persons in ss. 133 and 133A
respectively. These provisions were the statutory extension to the directors’ duty under
common law to avoid conflicts of interest, with modifications necessary to expand the
scope of the duty as well as to provide better clarity. Thus, the prohibition in the
provisions applies not only to directors, but also to persons connected with directors and
in the case of s. 132G, to shareholders.

As relates to the disclosure by the director having an interest in contracts in s. 131,29 a

new s. 131A was inserted by the Amendment Act which requires interested directors of
public companies to abstain in the discussion relating to the contract and from voting.
The prohibition however applies mainly to public companies.30 This codifies the common
practice that bars a director from voting in a contract in which he has an interest. Article
81 of Table A provides:

27
UK Companies Act 2006, s. 174; Australian Corporations Act 2001, s. 180(1); New Zealand Companies
Act 1993, s. 137.
28
CLRC, above note 3, pp. 44-48. The UK’s proposal was made by the UK Company Law Review
Steering Committee, Modern Company Law for a Competitive Economy, Final Report, 2001.
29
For provisions equivalent to s. 131, see UK Companies Act 2006, ss. 177 and 182; Australian
Corporations Act, s. 191; New Zealand Companies Act 1993, s. 140.
30
There is no equivalent UK provision. Interested directors can therefore participate in the decision-making
process, but subject to the provisions in the company’s articles. The Australian Corporations Law 2001, s.
195, prohibits interested directors in a public company from attending the directors meeting and voting. For
private companies, it is a replaceable rule that the directors may vote. The New Zealand Companies Act
1993, s. 144, allows interested directors to vote.

(2009) International Company and Commercial Law Review 142

 8

81 A director shall not vote in respect of any contract or proposed contract

with the company in which he is interested, or any matter arising thereout,
and if he does so vote his vote shall not be counted.

Bursa Malaysia’s Listing Requirements requires all listed companies to provide in its
articles a provision similar to article 81 Table A: Bursa Malaysia, Listing Requirements,
para. 7.27.

Section 132C

The Amendment Act has also amended the substantial property transaction provisions in
ss. 132E and 132F.31 The provision now prohibits a company from entering into an
arrangement or transaction with the director of the company (or the holding company) or
a person connected with the director for the purchase of or disposal to such person, a
“non-cash asset of the requisite value” unless prior approval of shareholders in general
meeting was obtained. The new provision updates the law in that:
(a) It extends the prohibition to substantial shareholders of the company (or the
holding company).32
(b) It requires the director, substantial shareholder or related parties to abstain
from voting on the resolution; and
(c) It updates the definition of the term “non-cash assets of the requisite value”.

The amendments were in general consistent with CLRC’s recommendation in relation to

the extension of the prohibition to substantial shareholders and persons connected with
the substantial shareholders and the definition of “non-cash assets”.33 However, the
requirement that the related party abstain from voting extends also to private companies,

31
For equivalent provisions, see the UK Companies Act 2006, ss. 190-196; Australian Corporations Act
2001, Part 2E.1 (note that the Australian provision applies only to public company or an entity controlled
by it). New Zealand has no comparative provision.
32
Substantial shareholder is not defined in the section. Section 69D defines substantial shareholder as a
shareholder having not less than two percent of the voting shares.
33
CLRC, above note 4, p. 60, para. 6.8.

(2009) International Company and Commercial Law Review 142

 9

although the CLRC’s recommended that the restriction applies only to public
companies.34

It may be noted that for listed companies, any acquisition or disposal of assets, the
company must make announcements to either (i) the Bursa Malaysia, or (ii) both Bursa
Malaysia and the shareholders, or (iii) to Bursa Malaysia as well as obtaining
shareholders’ approval, depending on the value of the transaction.35 For related party
transactions, the interested director must abstain from board deliberation and meeting,
and the interested director, shareholder, or persons connected are prohibited from voting
at the general meeting.36 Additionally, in cases where shareholders approval is required, a
“main advisor”, will be responsible to ensure the fairness of the transaction and that it is
not detrimental to the minority shareholders, as well as a requirement that an independent
advisor will advise the minority shareholders whether they should vote in favour of the
transaction.37

Section 132G is now deleted. This is consistent with CLRC’s recommendation.38 This
section prohibited any transaction in which the shareholder or director of the acquiring
company or persons related to the shareholder or director has a substantial shareholding
in the target company. The section has no provision for the approval of the general
meeting. There were many complaints that the provision unnecessarily prevented even
genuine business transactions, as well as creating interpretation difficulties.39 This
provision will not be missed.

Nominee directors
The Amendment Act codifies the duties of nominee directors. A new s. 132(1E) now
provides that a director appointed to represent the interests of a shareholder, employer or

34
Ibid, p. 55, para. 5.12.
35
Bursa Malaysia, Listing Requirement, paras 10.04-10.06.
36
Bursa Malaysia, Listing Requirement, para 10.08.
37
Ibid. The main advisor is usually a merchant bank appointed by the listed issuer, and it is responsible
mainly to the minority shareholders to ensure that the transaction is carried out on fair and reasonable
terms.
38
Ibid, p. 38, para. 2.14.
39
See Report on Corporate Governance, above note 14, pp.158-159.

(2009) International Company and Commercial Law Review 142

 10

debenture holder “shall act in the best interest of the company” and in the event of
conflict “shall not subordinate his duty to act in the best interest of the company to his
duty to his nominator”. This is a statutory restatement of the traditional common law
position that nominee directors, as other directors, must act in the best interest of the
company,40 but may also act in the interests of the nominator provided that it does not
give rise to a conflict of interest.41 This new provision is consistent with the
recommendation made by the CLRC.42

The statutory requirement prohibiting directors from acting in their nominators’ interest
appeared to be the only provision in which the Amendment Act took an approach
opposite to that taken in all three jurisdictions under comparison. The UK Companies Act
2006 requires directors to avoid conflicts of interest, but, subject to the company’s
constitution, directors can authorise otherwise.43 Additionally, in the case of a public
company, the company’s constitution must specifically allow for such authorization to be
given.44 As an additional safeguard to protect the interest of the company, the interested
directors will not be counted for the purpose of quorum requirement and are excluded
from voting.45 These override the common law rule or equitable principle requiring the
consent of members of the company, unless the company’s constitution requires such
consent to be given.46

The Australian Corporations Act 2001 is silent on the issue of the duties of nominee
directors except in the situation of a wholly-owned subsidiary. It allows the directors of a
wholly-owned subsidiary to act in the interests of the holding company, if this is
authorized by the company’s constitution, and the subsidiary was not insolvent at the
time the director acts and does not become insolvent because of the act.47

40
Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324.
41
Levin v Clark [1962] NSWR 686; Re Broadcasting Station 2GB Pty Ltd [1964-65] NSWR 1648; Berlei-
Hestia (NZ) Ltd v Fernthough [1980] 2 NZLR 150.
42
CLRC, above note 3, p. 75, para. 4.37.
43
UK Companies Act 2006, s. 175(1), (4) and (5).
44
UK Companies Act 2006, s. 175(5)(b).
45
UK Companies Act 2006, s. 175(6).
46
UK Companies Act 2006, s. 180(1).
47
Australian Corporations Act 2001, s. 187.

(2009) International Company and Commercial Law Review 142

 11

The New Zealand Companies Act 1993 has a similar provision to the Australian.48
Additionally, directors of a subsidiary which is not a wholly-owned subsidiary are
allowed to act in the interests of the holding company, subject to an additional
requirement that this has been agreed by the subsidiary’s minority shareholders.49 Also,
where the company was incorporated to carry out a joint venture between the
shareholders, the directors of such company may act in the best interests of the nominator
provided that they were expressly permitted to do so in the company’s constitution.50

3. The mandatory / enabling nature of corporate law

Is corporate law mandatory or enabling?51 In essence, mandatory law cannot be varied
but enabling law can. It has been said that the US corporate law is mostly enabling;52
while Australia is the opposite.53 It could be said that Malaysia’s corporate law, like
Australia, has a mandatory core. The Amendment Act further reinforces this by codifying
directors’ duties and strengthening the provisions for substantial property transactions.
The new amendment introduces a statutory restatement of the common law position that
prohibits nominee directors to act in the interests of his nominator where there is a
conflict of interest.54 The CLRC had earlier recommended a mandatory rule for nominee
directors. They reasoned that such a rule will help directors understand the nature and
extent of their duty, and is consistent with the prohibition under securities law which
prohibits the disclosure of corporate information by a nominee director to the appointor.55

48
New Zealand Companies Act, s. 131(2).
49
New Zealand Companies Act, s. 131(3).
50
New Zealand Companies Act, s. 131(4).
51
See M A Eisenberg, “The Mandatory Structure of Corporation Law” (1989) 89 Columbia Law Review
1461.
52
Roberta Romano, The Genius of American Corporate Law, AEI Press, Washington, 1993.
53
Ian Ramsay, “Models of Corporate Regulation: The Mandatory/Enabling Debate” in Corporate
Personality In The 20th Century, C Rickett, R Grantham, (eds.), pp. 215-270, Hart Publishing, Oxford,
1998. For the categories of mandatory corporate rule, see J N Gordon, “The Mandatory Structure of
Corporate Law” (1989) 89 Columbia Law Review 1549. Black argued that some mandatory rules are
actually trivial: Bernard Black, “Is Corporate Law Trivial? A Political and Economic Analysis” (1990) 84
Northwestern University Law Review 542; M J Whincop, “Trivial Pursuit: A Theoretical Perspective on
Simplification Initiatives” (1997) 7 Australian Journal of Corporate Law 250.
54
Section 132(1E)
55
CLRC, above note 3, p. 74, para 4.35.

(2009) International Company and Commercial Law Review 142

 12

It could well be argued that a mandatory rule that nominee directors may not act in the
interests of their nominator, regardless of the wishes of shareholders, carried the
mandatory content a bit too far. In situations where parties are fully informed such as
joint venture companies, perhaps they could be entrusted to regulate their relationship. In
this context, the relevant bodies may do well to explore what factors should be
considered to determine what rules should be mandatory or enabling and the appropriate
balance between these rules.56

4. The shareholding structure of listed companies

The amendments have not addressed the core corporate governance problem in Malaysia
– the controlling shareholders. The concentrated nature of shareholding means
controlling shareholders often have a negative influence over corporate governance and
also diminished the role of hostile takeovers as a disciplining effect on managers. The
low threshold of public shareholding spread required of listed companies57 and a
relatively poor enforcement regime is a fertile ground for concentrated shareholding to
flourish.58 The efficacy of independent director provisions is doubtful because of the
natural tendency of business owners to distrust outsiders.59 The use of pyramiding,
interlocking directorates and interlocking shareholding60 resulted in control rights which
are far greater than the corresponding cash-flow rights. Government-linked companies,
which dominated the top ten of the largest listed companies by market capitalization, give
rise to specific governance problems, not least because of the dominant role by the
government which controls the appointments to the top posts in the board and their
extensive veto rights. But perhaps this fell beyond the remit given to the law reform body

56
See the discussion by Ramsay, above note 53.
57
Bursa Malaysia’s Listing Requirements requires only 25 per cent of the total number of shares to be in
the hands of the public (paragraph 3.05).
58
R La Porta, F Lopez-de-Silanes, A Shleifer and R Vishny, “Legal Determinants of External Finance”
(1997) 52 Journal of Finance 1131; R La Porta, F Lopez-de-Silanes, A Shleifer and R Vishny “Law and
Finance” (1998) 106 Journal of Political Economy 1113;
59
See Lilian Miles, “Waking Up After the 1997 Financial Crisis: Corporate Governance in Malaysia”
(2005) 20 Journal of International Banking Law and Regulation 21.
60
See Lim Mah Hui Ownership and Control of the One Hundred Largest Corporations in Malaysia,
Oxford University Press: Kuala Lumpur, 1981.

(2009) International Company and Commercial Law Review 142

 13

responsible for the amendments. It should be noted that these issues are not currently
being examined by the CLRC as well.61

5. The amendment process

A major portion of the amendments is meant to strengthen the law on corporate
governance in Malaysia. Not long after the Asian financial crisis swept Malaysia together
with some other Asian economies in 1997, the Malaysian High Level Finance Committee
on Corporate Governance was set up. It produced the Report on Corporate Governance
in 1999.62 The Report contained a draft Code on Corporate Governance and some
proposals to reform the Companies Act 1965. The Amendment Act is a follow-up to the
Report.63

It would be interesting to note that the Companies Commission has in 2003 established
the CLRC pursuant to the powers given to them by the Companies Commission of
Malaysia Act 2001. The CLRC was given the mandate to undertake the process to
undertake a review of the Companies Act 1965. The CLRC follows the UK approach by
publishing consultative documents, the first of which is entitled Strategic Framework for
the Corporate Law Reform Programme of Companies Commission of Malaysia.64 In the
Strategic Framework, the Committee explained their underlying approach:65

Most of the amendments made to the Companies Act 1965 were thus on a piece-
meal basis and lacked a systematic and coherent review of current corporate law
and practice. It is thus timely for Malaysia to carry out a systematic and coherent
corporate law reform program. A corporate law reform program will enable
Malaysian businesses to be competitive and to be better equipped in dealing with
future challenges in the business environment. It would also enable modernisation

61
The CLRC was however aware of the importance of the regulation of corporate groups: CLRC, above
note 15, p. 26 para. 7.
62
Report on Corporate Governance, above note 14.
63
Companies Commission of Malaysia, “Amendments to Companies Act Marks New Era in Corporate
Governance in Malaysia”, Press Release, 2 July 2007.
64
CLRC, Strategic Framework for the Corporate Law Reform Programme of Companies Commission of
Malaysia, 2003.
65
Ibid, p. 14.

(2009) International Company and Commercial Law Review 142

 14

and rationalisation of company law and to move away from the ‘piece-meal’
approach of company law reform. In addition, much of the underlying philosophy
and fundamentals of company law as originated from UK and Australia which
were once the basis for the Companies Act 1965 are being or have been reviewed
in their respective jurisdictions.

The CLRC has to-date published several Consultative Documents covering many, if not
all, areas covered in the Amendment Act. It would appear that the CLRC and the body
responsible for the Amendment Act work independently of each other although many
(but not all) of the amendments in relation to directors’ roles and duties covered in the
Amendment Act appeared to take on board the proposals made by the CLRC.

Finally, it should also be said that information on the new amendments and their
implications is not easy to obtain. The explanatory note which accompanied the Act is
too brief to be of any practical guidance and the web-pages of the relevant authorities do
not provide any information. The only source of information appears to come from the
Companies Commission which organized a series of half-day seminars on the updates on
the amendments at various venues throughout Malaysia.

6. Conclusion
On the whole, it could be said that the updating of the Companies Act was a move in the
right direction. It has streamlined the duties of directors by codifying the common law
duties of directors, updated the rules on substantial property transactions, and where
possible attempted to streamline the provisions of the Companies Act with those of the
Bursa Malaysia’s Listing Requirements. They were also, on the whole, consistent with
CLRC’s recommendations. However, not all of CLRC’s recommendations were
implemented.66 This is unfortunate, as the CLRC has reviewed the law in a more
comprehensive fashion, as reflected in the recommendations they had made. An example
is the definition of directors. The CLRC recommended widening this definition to state “a
person in accordance with whose directions or instructions the majority of the board of

66
CLRC, above notes 3 and 4.

(2009) International Company and Commercial Law Review 142

 15

directors of a corporation is accustomed to act”.67 This makes it, at least in theory, easier
to prove a person as a shadow director. This is a massive problem in Malaysia, as the
shareholding structure of even the largest public company in Malaysia is concentrated.
This has resulted in the board being subservient to the controlling shareholders.68
Additionally, in relation to substantial property transactions, the amendments did not go
as far as those recommended by CLRC.69

In conclusion, the amendments appear to be a patchwork of rules borrowed from various

sources and appeared to suffer from very little or no theoretical analysis. In contrast with
the CLRC which took the effort to be open and consultative, the reform process lacked
transparency. There are also many ambiguities and anomalies which arise from the
amendments, which poses questions whether the changes brought about by the
Amendment Act were well thought of.70 The lack of discussion or debate on the
Amendment Act at both the drafting stage and at the Parliamentary level poses further
questions on the efficacy of the lawmaking process in Malaysia.

67
CLRC, above note 3, p. 19, para. 19. The words in italics were the recommended insertion.
68
For shareholding structure of Malaysian companies, see Lim Mah Hui, above note 60; Stijn Claessens,
Simeon Djankov, and Larry Lang, “The Separation of Ownership and Control in East Asian Corporations”
(2000) 58 Journal of Financial Economics 81.
69
CLRC, above note 4.
70
See Wan Kai Chee and Ooi Pei Ling, “A Review of the Amended Section 132E of the Companies Act”
Zaid Ibrahim Law & Practice Update, December 2007. Sujata Balan and S.T. Lingam have pointed out
other interpretation difficulties resulting from the amendments in their paper, “The Effects of the
Companies (Amendment) Act 2007 on Directors’ Duties”, unpublished research paper, 2008. These
“anomalies” has prompted setting up of a Bar Council’s sub-committee in 2008 to undertake a “through
review of the amendments”: Malaysian Bar Council, “Invitation for Feedback on the Recent Amendments
to the Companies Act 1965”, Circular No: 247/2008.

(2009) International Company and Commercial Law Review 142

View publication stats