Court of Appeal’s ruling on sections 85 and 223 of the Companies Act 2016
23 May 2022
The Court of Appeal in Concrete Parade Sdn Bhd v Apex Equity Holdings Bhd & Ors
 9 CLJ 849 issued significant rulings on the interpretation of sections 85 and 223 of the Companies Act 2016 (‘CA 2016’).
The appellant filed an oppression suit against the respondents under section 346 of the CA 2016. The facts that gave rise to this suit include the following:
- the appellant at all material times held 10 million shares amounting to approximately 4.68% of the total shares of the 1st respondent, Apex Equity Holdings Berhad (‘Apex Equity’), a public listed company;
- Apex Equity entered into a Heads of Agreement (‘HOA’), a Business Merger Agreement (‘BMA’) and Subscription Agreements (‘SAs’) that were inter-conditional upon one another;
- the HOA, inter alia, provided for the merger and transfer of the business of the 16th respondent, Mercury Securities Sdn Bhd (‘Mercury’) to the 2nd respondent, JF Apex Sdn Bhd (‘JF Apex’), a wholly-owned subsidiary of the 1st respondent, via the BMA and the SAs;
- the consideration of RM140 million for the transfer of the Mercury’s business to JF Apex was to be partly satisfied by the allotment and issue to Mercury of 100 million new shares in Apex Equity valued at RM92 million, amounting to about 31% of the enlarged share capital of Apex Equity;
- the balance of RM48 million of the consideration was to be paid in cash, of which RM18.8 million was to be funded by the proceeds from the allotment and issue to the 9th to 15th respondents (‘placees’) of 20 million new shares in Apex Equity (‘placement shares’) amounting to approximately 6.2% of the enlarged share capital of Apex Equity;
- although the HOA, BMA and SAs were subject to the approval of the shareholders in general meeting of Apex Equity, the HOA was executed on 21 September 2018 and the BMA and the SAs on 18 December 2018 without the said approvals being obtained;
- after the appellant filed its oppression suit on 20 February 2019 seeking, inter alia, to nullify all agreements executed in respect of the proposed merger exercise, Apex Equity convened an extraordinary general meeting to be held on 19 June 2019 (‘the EGM’) at which approval of its shareholders was sought for the proposed merger exercise pursuant to the BMA (‘merger resolution’) and the proposed private placement pursuant to the SAs (‘placement resolution’); a circular was issued by Apex Equity to its shareholders in connection with the EGM; and
- the merger resolution and the placement resolution were approved at the EGM by a vote of 54.8% to 45.2%.
The appellant contended, among other grounds, in its oppression suit that the proposed merger exercise contravened sections 85 and 223 of the CA 2016.
Decision of the High Court
The High Court dismissed the appellant's oppression suit (see Concrete Parade Sdn Bhd v Apex Equity Holdings Bhd & Ors
 6 CLJ 684.)
Breach of section 85 of the CA 2016
The learned High Court Judge held that there had not been any contravention of the rights of pre-emption under section 85 of the CA 2016 by reason that the proposed placement had been approved by the shareholders of Apex Equity at the EGM. The Court took the view that it was not necessary for the shareholders’ circular to expressly specify that approving the proposed acquisition of Mercury’s business would amount to a waiver of the shareholders’ right of pre-emption as any reasonable shareholder would have understood that a private placement must necessarily have the effect of diluting that shareholder’s interest in Apex Equity. In other words, the failure to use a specific form of words denoting the waiver of a pre-emption right could not amount to an act of oppression, so long as the effects of the transaction being proposed were made reasonably clear to the shareholders of Apex Equity.
Breach of section 223 of the CA 2016
The High Court held that on a proper construction of section 223(1) of the CA 2016, it suffices if either (a) a substantial transaction had been approved by the company in a general meeting prior to the entry of the transaction; or
(b) the documentation recording the substantial transaction specifies shareholders’ approval as a condition precedent. As the BMA specified shareholders’ approval as a condition precedent to the completion of the proposed acquisition of Mercury’s business, the High Court ruled that there had been no contravention of section 223(1).
The High Court also held that on the true construction of section 223(1), an agreement or transaction is only subject to shareholders’ approval if it has the effect of creating enforceable obligations on a company to either acquire an asset of substantial value or to dispose of a substantial portion of its assets. In the present case, even though the HOA was expressed to be legally binding, it did not have the effect of committing the parties to the sale and purchase of the business, and was thus not subject to the requirement for shareholders’ approval under section 223(1).
Furthermore, even if the HOA was in contravention of section 223(1), it had been superseded by the BMA which had been made subject to shareholders’ approval, and hence was in compliance with section 223(1). The HOA thus no longer had any force or effect, and accordingly the question of whether the HOA was void was academic.
Lastly, and in any event, the learned Judge was not satisfied that the appellant had demonstrated any prejudice to its rights as a shareholder in order to avail itself of the remedies under section 346 of the CA 2016.
The appellant appealed against the decision of the High Court, inter alia
, on grounds that the learned Judge had misdirected himself in failing to hold that the merger agreements were in breach of the CA 2016, in that:
Decision of the Court of Appeal
- the SAs were in breach of section 85 of the CA 2016 which provides the appellant with a statutory pre-emptive right to be offered any new shares in Apex Equity; and
- the HOA and the BMA were in breach of section 223 of the CA 2016 which requires prior shareholders’ approval before the carrying into effect of the proposed merger exercise.
The appellant’s appeal was allowed by the Court of Appeal. Some of the grounds for the Court’s decision are summarised below.
Denial of statutory and contractual pre-emptive rights
The Court of Appeal first referred to section 85(1) of the CA 2016 and Article 11 of the articles of association of Apex Equity (‘Article 11’) which read as follows:
“Subject to the constitution, where a company issues shares which rank equally to existing shares as to voting or distribution rights, those shares shall first be offered to the holders of existing shares in a manner which would, if the offer were accepted, maintain the relative voting and distribution rights of those shareholders;
“Subject to any direction to the contrary that may be given by the Company in general meeting, all new shares or other convertible securities shall be offered to such persons as at the date of the offer are entitled to receive notices from the Company of general meetings in proportion, as nearly as the circumstances admit, to the amount of the existing shares to which they are entitled …
Based on a reading of the above provisions, the Court of Appeal was of the view that the appellant had a statutory and contractual pre-emptive right to be offered new shares in Apex Equity and could not be denied of this right unless there is “direction to the contrary”
given during a general meeting prior to such shares being offered to outsiders.
The Court of Appeal then considered the respondents’ contention that there was no breach of section 85 of the CA 2016 for the following reasons:
“Direction to the contrary”
- the placement resolution passed at the EGM subsequent to the execution of the SAs constituted a direction to the contrary; and
- section 75 of the CA 2016 grants powers of allotment in respect of the placement shares.
The Court of Appeal disagreed with the learned Judge’s view that the resolution passed by the company in general meeting approving the business merger (which included the proposed placement as part of it) amounted to a “direction to the contrary that may be given by the company in general meeting
” within the meaning of Article 11.
Their Lordships agreed with the appellant’s contention that the placement resolution passed at the EGM could not in law constitute a “direction to the contrary
” because the words “subject to any direction to the contrary
” under section 85 of the CA 2016 does not entitle a full waiver of the shareholders’ pre-emptive rights. The Court of Appeal referred to Shanti Prasad Jain v Kalinga Tubes Ltd and others
 49 AIR 202, 208 where the Indian High Court held that the equivalent Indian section of section 81 of the Companies Act 1956 “in the allotment of new shares does not contemplate total exclusion of the existing shareholders from participating; the clause “subject to any directions to the contrary” can only refer to the manner and proportion in which the shares have to be offered to the existing shareholders
.” On this premise, their Lordships held that “no resolution passed at a general meeting can completely displace the appellant’s pre-emptive rights in the new shares as was sought to be done via the subscription agreements
In any event, the Court of Appeal further held that the placement resolution did not constitute a “direction to the contrary
” for the following reasons:
- a “direction to the contrary” must be obtained before any shares are offered to outsiders; it was an undisputed fact in this case that the placement resolution was passed after the execution of the SAs where the offer of the placement shares was made to the placees. Thus, the placement resolution could not retrospectively allow the issuance of new shares to outsiders in breach of section 85 of the CA 2016;
- for a “direction to the contrary” to be operative, the proposed resolution must set out all the requisite information regarding the shareholders’ pre-emptive rights under section 85(1) of the CA 2016, i.e. (a) the existing shareholders have a statutory pre-emptive right to be offered any new shares which rank equally to existing shares issued by Apex Equity read together with Article 11; (b) by voting in favour of the resolution for the issuance of the placement shares, the shareholders of Apex Equity would be waiving their statutory pre-emptive right; and (c) the placement resolution could not be relied on to suggest a waiver of express statutory rights because a waiver by election is only valid if the party electing had knowledge of his legal rights and with that knowledge consciously chose not to exercise the same (Peyman v Lanjani  Ch 457, 487 (CA); Leathley v John Fowler & Co Ltd  KB 579.
The Court of Appeal concluded that the breach of section 85 in relation to the placement shares was oppressive as it had resulted in (a) the unjustified dilution of the appellant’s shareholding in Apex Equity because of the new shares being issued to outsiders despite the statutory safeguard in section 85; and (b) the loss of opportunity to enhance the appellant’s shareholding in Apex Equity by subscribing for part of the placement shares.
Section 75 of the CA 2016
The respondents argued that there was no breach of section 85 as section 75 of the CA 2016 grants directors the power to allot the placement shares. The material parts of section 75 read as follows:
“(1) Unless the prior approval by way of resolution by the company has been obtained, the directors of a company shall not exercise any power:
(a) to allot shares in the company;
(d) to allot shares under an agreement or option or offer.
The Court of Appeal rejected the respondents’ arguments on three grounds. First, that section 85 of the CA 2016 is not subjected to section 75 of the CA 2016 as the former is only subjected to the constitution, which makes no reference to the latter. Second, the express wording of section 75 states that the directors “shall not exercise any power to allot shares in the company”
unless the prior approval by way of resolution by the company has been obtained. Third, the directors of Apex Equity have always accepted that prior approval is required because in previous annual general meetings, shareholders’ approval was always sought to empower the directors to allot and issue new shares up to an amount not exceeding 10% of Apex Equity’s issued share capital (e.g. resolution 11 of AGM minutes of 28 May 2018). The Court of Appeal concluded that the invalid offer and issuance of the placement shares under the SAs constituted oppressive conduct within the meaning of section 346 of the CA 2016.
Contravention of section 223 of the CA 2016
Section 223 of the CA 2016, inter alia
, prohibits the directors of a company from entering or carrying into effect any arrangement or transaction for the acquisition of an undertaking or property of substantial value or the disposal of a substantial portion of the company’s undertaking or property unless (a) the entering into the arrangement or transaction is made subject to the approval of the company by way of a resolution (‘proviso (i)’); or
(b) the carrying into effect of the arrangement or transaction has been approved by the company by way of a resolution (‘proviso (ii)’).
After considering the arguments of the parties and the provisions in the HOA and the BMA, the Court of Appeal took the view that in the factual matrix of the case, the obligations under section 223 of the CA 2016 mean that:
- the HOA (being the starting point and/or the entering into of the merger exercise) has to be made subject to and/or contain a condition precedent for the approval of the shareholders of Apex Equity; and
- the implementation and/or the carrying into effect of the HOA (being the execution of the BMA) required the prior approval of the shareholders of Apex Equity.
In light of the above, their Lordships took the view that the following rulings by learned High Court Judge cannot be sustained:
Whether HOA created binding and enforceable obligation
- for the purpose of satisfying proviso (i), it is sufficient that the entering into of the arrangement or transaction is “made subject to the approval of the company by way of resolution”; in other words the requirement for shareholders’ approval must be specified as a condition precedent to any arrangement or transaction of substantial value; and
- provisos (i) and (ii) of s. 223(1)(b), CA 2016 are separated by the word “or” which connotes that s. 223(1) is satisfied if either one of the conditions in the proviso is fulfilled, in other words the requirements in the provisos should be read disjunctively in that it suffices if either of the provisos are satisfied.
The Court of Appeal disagreed with the High Court’s findings that the although the HOA was legally binding and imposed an obligation on the parties to utilise their efforts to finalise and execute the BMA, it “did not have the effect of committing the parties to the sale and purchase of the business … this did not mean that the (HOA) created enforceable obligations for the sale and purchase of Mercury’s business … Thus in relation to the sale and purchase of the business, the (HOA) merely constituted an agreement to agree, and would not be enforceable as contractual rights or obligations
According to the Court of Appeal, there was no merit in the respondents’ contention that there was no finality in the HOA because there were additional terms, including the totality of the business assets/liabilities of Mercury, which still needed to be worked out during the exclusivity period. Their Lordships referred to the Daiman Development Sdn Bhd v Mathew Lui Chin Teck & Another Appeal
 1 MLJ 56 where the Privy Council observed that once it has been determined that a promise to purchase is not subject to contract, even a simple “booking proforma” for the purchase of a property (which identifies the parties and specifics of the property to be bought and its price) can be enforced even when a further agreement with additional terms has yet to be executed.
On the facts of the appeal, the Court of Appeal observed that all the salient terms of the BMA had been agreed as per clause 2 of the HOA, including the purchase consideration of RM140 million, the business to be acquired and the duration and term of the HOA. In the opinion of the Court of Appeal,
it was the express intention of the parties that there was to be a legally binding and enforceable agreement and the respondents’ argument on the additional terms, if any, which may be negotiated during the exclusivity period, was merely an expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through, and it is not a condition or term of the bargain whereby there is no enforceable contract if the condition is unfulfilled.
Whether the passing of the merger resolution cures the contravention of section 223
The Court of Appeal found merit in the appellant’s contention that the passing of the merger resolution did not cure the breaches of section 223 of the CA 2016 for the following reasons:
Denial of statutory right to vote
- the HOA which was completed on 18 December 2018 (by the execution of the BMA) did not contain a condition precedent for shareholders’ approval; the merger resolution cannot ex post facto allow for the inclusion of such condition precedent after the completion of the HOA; and
- the BMA required shareholders’ approval before it was executed on 18 December 2018; therefore a shareholders’ approval obtained six months later on 19 June 2019 cannot cure the transgression which had already occurred.
The Court of Appeal disagreed with the respondents’ contention that even assuming that section 223(1) requires prior shareholders’ approval to be obtained before the entering of the BMA, Apex Equity would have arrived at exactly the same position had it sought the shareholders’ approval prior to the entering into the HOA or BMA and thus there could not conceivably be any prejudice to the appellant.
Contrary to the position taken by the respondents and agreed to by the learned High Court Judge, the Court of Appeal said denial of the appellant’s fundamental statutory right to vote provided in section 223 constitutes an oppression on the minority irrespective of whether such vote would have changed the outcome of the merger resolution (Lim Hean Pin v Thean Seng Co Sdn Bhd & Ors
 2 MLJ 10 at p. 34 B per Edgar Joseph Jr. J.)
Their Lordships added that the oppressive conduct of the denial of the appellant’s right to vote assumed greater significance when the proposed merger exercise, although framed as acquisition of Mercury, is instead designed to facilitate a covert reverse take-over of Apex Equity and its subsidiaries, including JF Apex. The ultimate result of the proposed merger exercise is that Mercury would be the single largest shareholder in Apex Equity holding about 31% of the company’s enlarged share capital, which together with the placement shares (constituting about 6.2% of Apex Equity’s enlarged share capital) issued to placees identified by Mercury for the proposed merger exercise means that Mercury would control of about 37.2% of Apex Equity’s enlarged share capital and have complete control over the Apex Equity group of companies through Mercury’s managing director, and have the sole discretion to appoint the entire board of directors of the company’s subsidiaries, including JF Apex.
The Court of Appeal’s decision raises several issues of concern in relation to sections 85 and 223 of the CA 2016.
The adoption by the Court of Appeal of the rationale in the Indian High Court’s decision in Shanti Prasad Jain,
i.e. that the section 85 does not contemplate the total exclusion of existing shareholders
from participating in a proposed issue of shares, raises two issues. First, whether section 85 permits a company to obtain a full waiver from its shareholders of their pre-emption rights in respect of new shares to be issued. Second, if the first issue is answered in the affirmative, whether such waiver may be obtained by way of a shareholders’ resolution or must be obtained from each and every entitled shareholder.
If a company’s constitution has a provision similar to Article 11, the company should comply with the Court of Appeal’s strict view as to the requisites of a valid ‘direction to the contrary
’ as compared to the more practical approach adopted by the High Court.
In light of the factual matrix of this case, the Court of Appeal took the view that proviso (i) and proviso (ii) of section 223(1) are to be read conjunctively notwithstanding the use of the phrase ‘or’ between the two provisos. Their Lordships took the view that the execution of the BMA (rather than the consummation of the transactions therein provided) carried into effect the proposed merger set out in the HOA. Parties involved in transactions that involve inter-related agreements should carefully consider whether each agreement requires shareholders’ approval and the time at which the approval for each agreement is to be sought.
The Court of Appeal took the view that the HOA was completed on its date of execution and as it did not contain a condition precedent for shareholders’ approval, the merger resolution could not subsequently allow for the inclusion of such condition precedent. Similarly, the Court of Appeal also held that the BMA required shareholders’ approval before it was executed
, thus the merger resolution passed six months after its execution could not cure the breach of section 223. Two concerns arise from these rulings. First, in relation to the HOA, the Court appears to have linked completion to the execution of the document rather than the transactions contemplated under the HOA, which were in fact not completed until several months later. Second, the Court of Appeal appears to have taken the view that the BMA required shareholders’ agreement before it was executed. The Court does not appear to have considered that the BMA included a condition precedent for shareholders’ approval, which appears to be permitted under proviso (ii) to section 223(1).
The respondents have sought leave to appeal to the Federal Court against the Court of Appeal’s decision. It is hoped that leave will be granted and that the leave questions will address the issues that arise from the Court of Appeal’s decision.
Case commentary by Kok Chee Kheong (Partner) and Tham Zhi Jun (Associate) of the Corporate Practice of Skrine.
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