This article explores the legal standards of disclosure in shareholders’ circulars, with key takeaways from the Mercury Securities case and the rights shareholders possess to challenge misleading resolutions.
Introduction
As a holder of ordinary shares in a company, you may be asked to vote on company resolutions, often related to the company’s affairs and the transactions the company plans to undertake.
In the case of public listed companies, Bursa Malaysia’s Listing Requirements require that companies issue a circular to shareholders before any shareholder votes on a corporate proposal. This shareholders’ circular ought to provide key information to shareholders to help them make informed decisions.
This poses a number of questions:-
- What is the required standard of disclosure in these circulars?
- Who is responsible for providing full and frank disclosure to shareholders?
- What happens if the disclosure standards are breached?
- Who can challenge these circulars for lack of disclosure?
These questions were addressed in the case of Mercury Securities Sdn Bhd & Anor v Concrete Parade Sdn Bhd & Anor [2020] 11 MLJ 388 (“Mercury Securities case”).
The Mercury Securities Case
The Mercury Securities case concerned a proposed merger between Mercury Securities Sdn Bhd (“Mercury Securities”) and JF Apex Securities Berhad (“JF Apex”). A key condition for the merger was shareholder approval from JF Apex’s holding company, Apex Equity Holdings Berhad (“Apex Equity”). Such shareholder approval was obtained during Apex Equity’s extraordinary general meeting (“EGM”) on 19.6.2019.
However, minority shareholders of Apex Equity intervened in proceedings commenced by Mercury Securities and JF Apex to obtain a vesting order from the court. In opposing the vesting order application, the minority shareholders challenged Apex Equity’s shareholder approval obtained during the EGM on the basis that the shareholder’ circular did not provide sufficient disclosure to the shareholders.
Directors’ Duty to Disclose
In the Mercury Securities case, the learned Judge clarified that there is a duty imposed on company directors to make full and honest disclosure to shareholders before shareholders vote on any resolution. In other words, directors of a company have a duty not to mislead. This obligation to disclose is part of a director’s fiduciary duties and is also an implied duty under S. 223 of the Companies Act, 2016. Effectively, this means that directors can be held liable for breach of duty if the relevant disclosure standards in a shareholders’ circular are not met.
Standard of Disclosure
The learned Judge in the Mercury Securities case set out that full and honest disclosure must be provided in a shareholders’ circular. This means that the shareholders’ circular must be complete in all material aspects and must not contain misleading information in material matters.
It was also elaborated that information in a shareholders’ circular must be presented in a manner that enables a shareholder, as an ordinary person in commerce and not as a lawyer, to make an informed decision on the corporate proposal upon scanning or quickly reading the circular.
Whilst Bursa Malaysia’s Listing Requirements set the standard of disclosure for a shareholders’ circular, the learned Judge held that mere mechanistic compliance does not by itself mean that the shareholders’ circular has provided full and honest disclosure.
The absence of intention to mislead or to provide incomplete disclosure will not prevent the shareholders’ circular from being struck down. If any, the absence of intention will only affect the personal liability of the directors.
Who can Challenge the Resolution?
It was established in the Mercury Securities case that any shareholder can commence an action to set aside a resolution obtained in breach of the duty to make full and fair disclosure. Such an action does not need to be commenced on behalf of all shareholders.
Furthermore, the shareholder commencing the action need not show that he/she would have voted differently if sufficient disclosure was made in the circular. All that he/she must show is that the circular itself was misleading and/or did not provide adequate disclosure.
Consequences of Insufficient or Misleading Disclosure
It was explained that a resolution obtained in breach of the duty to provide full and fair disclosure will render the said resolution ineffective but does not necessarily invalidate the proposed transaction. In this respect, it will still be open for the company shareholders to subsequently approve the transaction in another general meeting provided that sufficient disclosure is made. However, if the proposed transaction could not be subsequently carried out on the ground that the resolution is ineffective, the counterparties to the proposed transaction may have a right to sue the company for breach of contract.
Conclusion
Shareholders have a right to be adequately informed before they vote on any company resolution. Directors must also be aware of their disclosure obligations to shareholders in order to avoid liability and to ensure that corporate governance is carried out with transparency.
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NOTE: © Izral Partnership. The contents herein is intended to be for general information and reference only, and it does not, and is not intended to, constitute or substitute for legal advice. As the facts and circumstances of the various matters will differ from case to case, specific legal advice for each of such matters will invariably be required.