Business

Saturday March 28, 2009

The right to issue shares

By RUSILA ABDUL RAZAK


WHILST directors need the freedom to raise funds in whatever manner they deem to be in the best interest of the company, especially in turbulent times, such freedom should not be unfettered. After all, the giver of the mandate should have a say in the manner the mandate is exercised.

It is entrenched in any legal system that recognises company law, that the right to issue shares is vested in the shareholders.

Section 132D sub-section (1) of our Companies Act, 1965 clearly states that “the directors shall not, without the prior approval of the company in general meeting, exercise any power of the company to issue shares”.

This is so even if the Articles of Association of the company allow directors to issue shares – a rare instance in which the Act clearly overrides the provisions of the company’s Articles of Association.

Sub-section (2) provides that the power once given can be for a particular exercise or can be general.

But most, if not all companies prefer to ask for the general power. Hence, the general mandate.

The limit of this general mandate which is currently 10% of the nominal value of the issued and paid-up capital of the company is not found in the Act, but is determined by the Regulators – the Securities Commission and the Bursa.

The Regulators also determine other rules and regulations as well as procedures relating to issuance of shares.

This is to be expected as it is easier for Regulators to change their rules and regulations to react to changing circumstances than it is for the Act to be amended each time a change becomes necessary.

Nevertheless, Regulators must never lose sight of the fact that the original right to issue shares belongs to the shareholders. Shareholders must, therefore, be given their due regard.

Shareholders, especially minority shareholders, are concerned that issuance of shares or placements which are within the prescribed limits and are not caught by specific listing requirements, literally go unnoticed.

Their terms and conditions are not only not known prior to the issuance, but are also not made known after the event. Yet, the impact on the shareholders is real.

Granted that placements under S.132D are by nature small, but cumulatively they can result in a substantial dilution of shareholdings.

A consequence of such a dilution can be the loss of representation on the board or even the loss of the right to convene an EGM under section 144 of the Act.

To extract any information in the Annual Accounts to find out whether directors have exercised the power of the general mandate can be daunting.

Even then, the precise terms of the exercise can never be discovered. This is not good corporate governance practice.

At least in Hong Kong where issuance of shares are made under a general mandate, an announcement disclosing details of the terms of the subscription will be made to the Stock Exchange of Hong Kong, albeit after the event. Such announcements are absent in both Malaysia and Singapore.

It is proposed for the common good, that when shareholders receive an AGM or EGM notice which contains a resolution for S.132D, that they do the following:-

(1) Attend the meeting;

(2) Ask directors these questions:-

(a) Who are the subscribers, give some information about their activities and ownership;

(b) What is the reason for the new issues;

(c) How will the proceeds be utilised;

(d) What would the shareholding structure of the company look like after the new issues are taken up;

(e) Were there any new issues done during the past 12 months;

(f) If there were, repeat questions (a) to (d) relating to the past issues;

(3) Register your request with the directors that you would appreciate if in future all the information requested for are provided together with the Notice calling for the meeting;

(4) Do not vote for the resolution if the answers are not satisfactory;

(5) Vote for the resolution if the answers give are reasonable and acceptable and then thank the directors for their openness.

This is a simple process, but if adopted, will be far reaching in ensuring directors’ transparency. It will also enable actual data to be collated and compiled and thereby, establish a track record of the company and the directors.

It will help to eliminate negative perceptions which by nature are unsubstantiated.

Lately, it is observed that requests for shareholders approval under S.132D by companies have somewhat reduced. For example, Kuala Lumpur Kepong Bhd, Batu Kawan Bhd, S P Setia Bhd and Fraser & Neave Holdings Bhd have stopped requesting for a S.132D approval for the last five years.

It is interesting to note that in the case of KLK Bhd and S P Setia Berhad, EPF has a shareholding that exceeds 10%.

Perhaps the absence of S.132D resolution in both these companies can be directly attributed to EPF exercising its influence to ensure that they comply with EPF’s voting policy which is to vote against the resolution if no disclosure of the reasons for the request for the resolution is made at the general meeting.

It is not that directors should not have the freedom to act or judge on their own right in the interest of the company; it is just that they should exercise this discretion given to them transparently at the general meeting with the shareholders.

“The better part of valour is discretion …” – Falstaff, Henry IV, Part One.

·Datin Rusila Abdul Razak is senior associate consultant of Minority Shareholder Watchdog Group

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