The Case of Fatboys: On Passing Members’ Resolutions in Writing

by Jason Yong Kok Yew ~ 5 September 2020

The Case of Fatboys: On Passing Members’ Resolutions in Writing


Contributed by

Jason Yong Kok Yew (Associate)

Tel: 603-6201 5678 / Fax: 603-6203 5678

Email: yky@thomasphilip.com.my

Website: www.thomasphilip.com.my

The High Court of Malaya at Kuala Lumpur in Mohamed Zahid Yon bin Mohamed Fuad v Jason Jonathan Lo [2019] 1 LNS 343 clarified on the applicability of the provisions of the Companies Act, 2016 to companies incorporated under the provisions of the Companies Act, 1965. This case also clarified on the interpretation of Section 291(1) of the Companies Act, 2016, on whether members’ resolutions in writing were valid if signed by a majority in number or a majority in shareholding of a company.

The Facts

In the above case, the Mohamed Zahid (the Plaintiff) was a 40% shareholder whereas Wong (the 2nd Defendant) was a 60% shareholder of the Company, Fatboys Records Sdn Bhd (the 5th Defendant). The contention revolved around the 2nd Defendant signing a members’ resolution to appoint one Jason Lo (the 1st Defendant) as a director of the Company.

Unhappy with the appointment of Jason Lo as a director, Mohamed Zahid filed an Originating Summons and a Notice of Application to declare Jason Lo’s appointment as invalid, and to restrain Jason Lo from representing himself (‘holding himself out’) as a director of the Company.

The Plaintiff’s Contentions

Amongst Mohamed Zahid’s main contentions were that under the Companies Act, 1965 (which has since been replaced by the Companies Act, 2016), members’ resolutions are only valid if signed by all members of the Company.[1] In this case, since only Wong signed the members’ resolution and Mohamed Zahid did not, the members’ resolution (and accordingly, Jason Lo’s appointment as a director of the Company) is invalid.

In order to support this contention, Mohamed Zahid argued that the provisions of the 1965 Act should apply instead of the 2016 Act because the Company was operating with the template Memorandum and Articles of Association (now known as the ‘Constitution’) provided by Table A of the 1965 Act. Further, the Company had never passed any resolutions to adopt the corporate management regime under the 2016 Act.

The Court’s Findings

However, the Kuala Lumpur High Court held that because the members’ resolution to appoint Jason Lo was passed after the Companies Act, 2016 came into force, it is the 2016 Act which should apply instead of the 1965 Act. This is supported by Section 619(3) of the Companies Act, 2016, which states that: “The memorandum of association and articles of association of an existing company in force and operative at the commencement of this Act, and the provisions of Table A under the Fourth Schedule of the Companies Act 1965 if adopted as all or part of the articles of association of a company at the commencement of this Act, shall have effect as if made or adopted under [the Companies Act, 2016], unless otherwise resolved by the company.

As such, the Court held that Jason Lo’s appointment by way of a members’ ordinary resolution[2] could be passed by way of a written resolution[3], as in this case. Accordingly, since the members’ resolution was signed by Wong in his capacity as a 60% shareholder of the Company, the said members’ resolution was passed by a ‘simple majority of more than half of [the Company’s] members’[4], and as such was valid.

Interpretation of Section 291(1) of the Companies Act, 2016

Other than the applicability of the Companies Act, 1965, Mohamed Zahid also argued that “by a simple majority of more than half of such members” in Section 291(1) of the Companies Act, 2016, should be interpreted to mean “by a simple majority of more than half of the total number of shareholders”.

For ease of reference, Section 291(1) of the Companies Act states as such:

  1. An ordinary resolution of the members or a class of members of a company means a resolution passed by a simple majority of more than half of such members-

 

  1. Who are entitled to vote and do vote in person, or where proxies are allowed, by proxy at a meeting of members; or
  2. Who are entitled to vote on a written resolution.”

If Mohamed Zahid’s interpretation of Section 291(1) were correct, this would mean that even if the provisions of the Companies Act, 2016 applied to the Company, the members’ resolution appointing Jason Lo was still invalid because it was only signed by 1 of the Company’s 2 shareholders (i.e. Wong), and not signed by ‘more than half of the 2 shareholders’ (i.e. both of the Company’s shareholders).

In considering this, the Court asked what would happen if a company had 10 shareholders, but a members’ resolution was only signed by 2 shareholders holding 90% of the company. Would the resolution be invalid simply because the resolution was not signed by more than of the number of shareholders of the Company?

The Court thought that such an interpretation would be tantamount to “reading into Section 291(1) what is not there”. As such, the Court disagreed with Mohamed Zahid’s interpretation of Section 291(1) of the Companies Act, 2016 and held that the words “more than half of such members” must be read as meaning “more than half the number of shareholding of the members” and not “more than half in number of the shareholders”.

A Possible Stumbling Block

However, the facts of this case (insofar as derived from the judgment) are silent on whether Wong, in signing the members’ resolution, complied with other relevant provisions of the Companies Act, 2016.

For instance, there is no indication of whether Wong complied with Section 302 of the 2016 Act, which provides the procedure for members’ written resolutions. Section 302 states that Wong should have requisitioned for the Company to circulate his proposed members’ resolution. Upon receiving such requisition notice, the directors are to circulate such members’ resolution to every eligible member.[5] If the directors fail to do so, then the member who requested the members’ resolution (i..e Wong) may proceed to circulate the same[6], and any reasonable expenses incurred in doing so shall be reimbursed by the company.[7]

It is submitted that Section 302 and 303 of the Companies Act, 2016, while providing a clear procedure for due process in approving members’ written resolutions, is bureaucratic and unnecessary in certain circumstances – for instance, where there is only a single shareholder of a company. Does this mean that a single shareholder will have to propose a members’ written resolution to a company’s directors and requisition for the same to be circulated back to the same shareholder who drafted the said resolution in the first place? On a plain reading of the 2016 Act, it would appear so.

Conclusion

Notwithstanding the above, the above case is still helpful in reinforcing Section 619(3) of the Companies Act, 2016, which provides that companies incorporated under the provisions of the 1965 Act are now subject to the provisions of the 2016 Act. Further, the Court successfully resolved the imprecise wording of Section 291(1) of the Companies Act, 2016. A group of shareholders cannot block another group of shareholders with majority shareholding from dictating the company’s affairs (as is the right of majority shareholders, generally), simply because the first group outnumbers the second. To do so would be antithetical to the well-established principles of corporate democracy, and would have made a sham of modern company law.

 

 

 

[1] Section 152A(1) of the Companies Act, 1965

[2] Section 202(1) of the Companies Act, 2016

[3] Section 290(1) of the Companies Act, 2016

[4] Section 291(1) of the Companies Act, 2016

[5] Section 303(1) of the Companies Act, 2016

[6] Section 303(6) of the Companies Act, 2016

[7] Section 303(7) of the Companies Act, 2017