This case concerns the timing of shareholder approval required prior to the entry and/or implementation of a substantial acquisition by a company. It also deals with an examination of pre-emptive rights of shareholders for any new shares issued by the company.

 

In this minority oppression action, Concrete Parade Sdn. Bhd. (“Concrete Parade”) challenged the validity of a proposed merger exercise between Apex Equity Holdings Berhad’s (“Apex”) wholly-owned subsidiary (“JF Apex”) and a private entity, Mercury Securities Sdn. Bhd. (“Mercury”).

 

In essence, the proposed merger was carried out via 3 sets of agreements, a Head of Agreement executed by Apex and Mercury (“HOA”), a Business Merger Agreement executed by Apex, JF Apex and Mercury (“BMA”), and 7 Subscription Agreements between Apex and 7 other identified outsiders (“the Placees”) in respect of a private placement exercise (to partly finance the merger)

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Concrete Parade contended the HOA, BMA and Subscription Agreements in effect formed a single composite transaction. Concrete Parade further argued that the execution of the HOA was in breach of s.223(1)(b) of Companies Act 2016, which requires that the “entry” of a substantial undertaking be subject to shareholders’ approval, and the “carrying into effect” of the undertaking must first obtain shareholders’ approval. Notwithstanding that, the HOA did not contain a condition precedent for shareholders’ approval and the BMA was executed before shareholders’ approval was obtained. 

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Further, Concrete Parade also contended that the execution of the Subscription Agreements was in contravention of shareholders’ statutory pre-emptive rights under s.85 of the Companies Act 2016 and Article 11 of Apex’s Memorandum of Articles, which (read together) provide that “subject to any direction to the contrary”, all new shares shall be offered to the shareholders in proportion to their existing shareholdings. By not offering existing shareholders their statutory pre-emptive rights (but instead executing the Subscription Agreements), Apex and its directors had committed a breach of s.85 of the Companies Act 2016.

 

The High Court dismissed the suit. The Court of Appeal reversed the High Court’s decision.

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 In allowing the subsequent appeal, the Federal Court delivered a landmark decision on the interpretation of sections 85 and 223, Companies Act 2016 (“CA 2016”). In essence, the Federal Court held:

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1.       The pre-emptive rights under section 85 (for any shares issued by the Company to first be offered to existing shareholders) is not absolute but is instead subordinate to the constitution of the company. Shareholders are entitled to waive the pre-emptive rights in full (instead of just manner and proportion) at a general meeting;

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2.       In the circumstances, so long as the shareholder is aware that by voting in favour of the resolution, his shares would be diluted – that is sufficient for the disapplication of the pre-emptive rights under section 85;

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3.       On the timing of shareholder approval under section 223, the restrictions on the “entering into” and “the carrying into effect” of the transaction are to be read disjunctively. In other words, so long as the transaction contemplates that it would not go through without shareholder approval, it is sufficient to meet the requirements of section 223.

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Alvin Tang acted for Concrete Parade.

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