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.

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In this case, Concrete Parade Sdn. Bhd. (“Concrete Parade”) instituted a statutory minority oppression against Apex Equity Holdings Berhad (“Apex”) and 15 others, challenging, inter alia, the validity of a proposed merger exercise between Apex’s wholly-owned subsidiary (“JF Apex”) and a private entity, Mercury Securities Sdn. Bhd. (“Mercury”), and how the proposed merger had unfairly oppressed the right and interest of Concrete Parade, as a minority shareholder in Apex. 

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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. The private placement was intended to partly finance the merger and interestingly, it was made inter-conditional with the BMA. Upon the completion of the merger, Mercury Securities would become the single largest shareholder in Apex, having majority control in Apex and its group of companies.

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Towards this end, Concrete Parade contended the HOA, BMA and Subscription Agreements in effect formed a single composite transaction. Albeit being framed as a merger exercise, the undertaking itself is in effect a covert-take over by Mercury. Concrete Parade 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. In the circumstances, Concrete Parade had been denied of its statutory right to vote, and this had in turn unfairly prejudiced its interest because the value of its investments in Apex would have diminished substantially. 

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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.

 

Incidentally, 4 months after Concrete Parade commenced its action, Apex convened 2 extraordinary general meetings to deliberate and pass resolutions approving the proposed merger as well as the private placement. Resolutions were passed by a narrow margin. 

 

In this regard, Apex argued that the resolutions had the following effects. Firstly, the passing of the resolutions signified the shareholders acceptance of the proposed merger. Assuming there was a breach of s.223(1)(b) of the Companies Act 2016, the resolutions would have cured any contravention on the part of Apex and its directors. Secondly, the resolutions passed constituted a direction to the contrary. In other words, by voting in favour of the resolutions, the shareholders had effectively waived their pre-emptive rights. 

 

The High Court accepted Apex’s arguments and accordingly dismissed Concrete Parade’s claim. 

 

On appeal, the Court of Appeal agreed with Concrete Parade that the HOA, BMA and Subscription Agreements are legally binding, and they essentially formed one composite transaction, with HOA being the “entry” and BMA being the “carrying into effect” within the meaning of s.223(1)(b) of the Companies Act 2016. Hence, the fact that the HOA did not a condition precedent for shareholders’ approval and the BMA was executed without the prior approval of the shareholders rendered them in breach of s.223(1)(b) of the Companies Act 2016. Further, rhe resolutions passed subsequently cannot however ex-post factocure any transgression which had already occurred. 

 

In addition, the Court of Appeal also suggested that the qualifying words “subject to any direction to the contrary” cannot completely displace the shareholder’s pre-emptive rights under s.85, as it only relates to the manner and proportion in which the shares have to be offered to the existing shareholders. In any event, the resolutions passed cannot constitute “a direction to the contrary” or a waiver of the shareholders’ pre-emptive rights because the resolutions did not expressly seek waiver of the same. In response to Apex’s argument that Apex’s directors were entitled to issue and allot new shares pursuant to s.75 of the Companies Act 2016, the Court of Appeal found that the directors’ power under s.75 of the of the Companies Act 2016 cannot bypass or circumvent the restrictions imposed by s.85 of the Companies Act 2016.

 

In light of the above, Court of Appeal allowed Concrete Parade’s appeal and reversed the High Court’s decision. This Court of Appeal’s decision is the very first precedent in Malaysia that discussed the application of s.85 and s.223 of the Companies Act 2016, since the 2016 Act came into force in 2017. These restrictions as clarified by the Court of Appeal has augmented directors’ duty in dealing with pre-emptive rights and seeking shareholders’ approval in a substantial undertaking.

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Alvin Tang acted for Concrete Parade, the plaintiff company.