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SHAREHOLDERS' RIGHTS AND RESPONSIBILITIES IN GENERAL MEETINGS CONTENTS Introduction What is a Company? Division Of Corporate Powers Between Board And Shareholders The Role Of Investors In Promoting Corporate Governance

Shareholders' Rights Types Of Shareholders' Meetings What Constitutes a Valid Meeting? Rights And Responsibilities Of Shareholders In Relation To General Meetings

Shareholders' Rights To Vote At General Meetings Shareholders' Right To Inspect Register Of Directors' Shareholdings At AGM

ACKNOWLEDGEMENT SIDC wishes to thank Mr. Eric Kang Shew Meng of PFA Corporate Services Sdn. Bhd. for his permission in extracting most of the information in this booklet from his paper, "Shareholders' Rights and Responsibilities in General Meetings." He presented the paper on 29 April 2000 at the SIDC Saturday Seminar on "What Investors Should Know - Part 1" held at the Securities Commission, Kuala Lumpur.

INTRODUCTION When you buy shares (whether one lot or more), you become a shareholder of the company. What then are your rights and responsibilities? How do you relate to the management and board of directors (board) of the company? If you are unhappy with the way the company is being run, when and where can you voice your grievances or concerns? As owners of companies, shareholders should play an active role in exercising their rights. They can bring the company directors to task if they believe that the business is not being run in the best interest of the company. By participating actively, shareholders can encourage openness, integrity and above all, accountability of the board and in so doing, enhance the practice of good corporate governance. Another important role of shareholders is in deciding related-party transactions since the Kuala Lumpur Stock Exchange (KLSE) Listing Rules require that controlling shareholders abstain from voting in such transactions. It is the shareholders other than the controlling shareholders that will vote on such businesses. Shareholders must view Annual General Meetings (AGMs) seriously because they provide the opportunity for them to meet and question the board on a wide range of issues affecting the company. Shareholders, when attending an AGM can actively participate by: inquiring any matter pertaining to the company, which has been included in the annual reports raising issues relating to procedural and legal requirements of general meetings raising issues relating to the strategic and financial management of the company, the future direction of the company, its goals and objectives and its diversification and expansionary policy, if relevant engaging in frank discussions with the directors on the company's performance exerting pressure on the directors to be more transparent and accountable. At the meeting, shareholders should enquire whether notice of the meeting was given to the auditor and whether or not, the auditor or his authorised agent is present at the meeting. Shareholders can also inspect the Register of Directors' Shareholdings at the AGMs. Shareholders can exercise their rights to propose any resolution for consideration and discussion. They can also requisition any statement for circulation that they would like other members to be aware of when considering any proposed resolution. But care must be taken to ensure that no shareholder or group of shareholders dominate a meeting and prevent it from carrying out its business. As you can see, shareholders can contribute towards the corporate governance of the company if they exercise their rights appropriately. This booklet seeks to explain how the power of controlling the company is divided between the board of directors and the shareholders. It will explain your rights as a shareholder and the role you play in enhancing the corporate governance of the company.

But first, let us explain how the law views a company and how it divides the powers between the board and the shareholders. We will also give brief explanations of the memorandum and articles of association as reference is constantly made to them throughout the booklet. The roles of directors and company secretaries are also briefly touched on. WHAT IS A COMPANY? A company is incorporated under the law and serves to unify the common interests of a group of people. It is described as an artificial person with separate legal personality possessing rights and obligations distinct from those of its members and officers. As provided in the Companies Act 1965 (CA), a company has its own legal capacity to enjoy rights, assume obligations, has perpetual succession, can own property, is liable for its own debts, can sue or be sued in its own name and perform duties independently of the members. However, being an artificial person with separate legal personality it can only operate through some form of human agencies. The two main organs of human agencies through which a company can operate are the shareholders acting together in a general meeting and the board of directors. These two organs can exercise all powers of the company under its memorandum and articles of association, and those conferred upon it by statute. The sources from which corporate powers are derived are:

a) b) c)

The common law The memorandum and articles of association The Companies Act, 1965

A Company's Constitution A company's constitution is contained in two fundamental documents, the memorandum of association (memorandum) and articles of association (articles). Once a company's memorandum and articles are registered, they are binding on the company and every member. A member can obtain from the company, a copy of its memorandum and articles upon request and it is given free or usually at the payment of a nominal fee. Memorandum of Association The memorandum of association (memorandum) commonly identifies the objects (the business which it is formed to carry on or the purpose which the company is formed to achieve) of the company and its powers. These powers and objects are usually expressed in wide terms to avoid the need to alter the memorandum by special resolution of members, each time the company changes direction. In summary, the memorandum regulates the external affairs of the company.

Articles of Association The articles of association (articles) are the company's internal regulations and cover such matters as the allotment of shares, transfer of shares, appointment of directors, termination of a director's term of office, directors' powers and duties, conduct of meetings, declaration of dividends and the use of the company's seal. They must be printed, divided into numbered paragraphs and signed by every subscriber to the memorandum. In summary, the articles regulate the internal affairs of a company. The Role of Directors Every company must have at least two directors who are of full age and capacity and who live in Malaysia. A person aged more than 70 cannot be appointed or act as a director of a public company or a subsidiary of a public company, unless he is appointed by the shareholders at a general meeting by a resolution passed by a three-fourth majority. If the articles require that a director must hold a specified number of shares, he must satisfy this requirement within two months of his appointment. Among the duties expected of directors as stipulated in the CA are to: keep accounts ensure that a balance sheet and profit and loss statement be made out for each financial year ensure that a directors' report be written for each financial year lay before the company at its annual general meeting, a profit and loss account, balance sheet and directors' report for the financial year act honestly and take reasonable care and diligence in exercising his powers Directors as fiduciaries are subject to the following duties: Must act bona fide in the interest of the company and must not exercise their powers for any collateral purpose. Must not place himself in a position which there is a conflict between his duty to the company and his personal interests (usually taken to mean financial interests) or duties of others. Must not make any secret profit out of the position as director. As such, directors are to avoid: Situations which might conflict with duties as director Trading in the company's securities while making use of confidential pricesensitive information Entering into a transaction with the company unless approval of the company by resolution is obtained.

The Company Secretary The CA requires that a company must have at least one secretary of full age and capacity who lives in Malaysia. A secretary is appointed by the directors and must be present at the registered office of the company when it is open to the public. In order to act as a company secretary, a person must be a member of a professional body or of a body prescribed by the Minister of Domestic Trade and Consumer Affairs, or be licensed by the Registrar of Companies. A shareholder requiring information about the company can contact the company secretary, usually preferably in writing. The company secretary will provide information that he is empowered to release the shareholder or if not, to advise him accordingly. DIVISION OF CORPORATE POWERS BETWEEN BOARD AND SHAREHOLDERS Historically, the decision-making power of a company lies in the assembly of the shareholders during the general meeting. However, this is only possible if the company is small with few shareholders that are often also the directors. But with big companies, it is impractical and sometimes impossible for so many shareholders to operate and manage the various functions of a company. It is therefore necessary to have a definite body of individuals run the activities and affairs of the company other than the shareholders themselves. Thus, for practical and legal reasons, the corporate powers of companies are divided between the board of directors (minimum of two directors) and the shareholders in general meetings, and that ideally, the major portion of the management powers be vested in the board. This results in a division of power and separation of ownership and control, and with one organ autonomous of the other. The law then imposes extensive duties which include "trustee-like" fiduciary duties and the common law duty to exercise care, skill and diligence to ensure certain minimum standards of behaviour from directors; and enforces compliance with the laws on the board. This separation of ownership and control is to prevent directors shrouding their transactions in secrecy. Broadly, there are four means by which powers are divided between the board and the shareholders in the general meetings. They are:

a) b) c) d)

The common law The memorandum and articles of association The Companies Act 1965 (CA) For listed companies, the Listing Rules of relevant exchanges

The articles determine who shall have the powers of management. The CA reserves some functions to either the general meeting or the board of directors (board), e.g. the power to alter the memorandum and articles is specially reserved to the general meeting while the duty to prepare annual accounts is reserved to the board. For public-listed companies, the Listing Rules of the relevant exchange also seek to reserve certain powers exclusively in the hands of the shareholders or to require shareholder approval.

Most companies adopt article 73 (of Table A in the Fourth Schedule of CA ) on the powers and duties of directors, which states that "directors and no one else are responsible for the management of the company except in the matter specifically allotted to the company in the general meeting." The shareholders therefore, cannot control the directors directly but instead operates indirectly by acting together in the general meeting. And the general meetings can only interfere with the board's exercise of management power by altering the articles of association by special resolution or if the opportunity arises, by refusing to re-elect the directors. However, since very few shareholders turn up at general meetings, the board is consequentially the most powerful organ in the company's management structure. It is therefore important that the board uphold high standards of corporate governance in managing the company. THE ROLE OF INVESTORS IN PROMOTING CORPORATE GOVERNANCE The Malaysian High Level Finance Committee Report on Corporate Governance defines corporate governance as follows: "Corporate Governance is the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long-term shareholder value, whilst taking into account the interests of other stakeholders." The Wall Street Journal (23 June 1999) defined corporate governance as follows: "Corporate Governance, in principle, refers to the joint responsibility imposed on the Board of Directors and management to protect shareholder rights and enhance shareholder value. In practice, the Board is the real representative of shareholders and acts as a check against management. The Board must ensure, among other things, that the company is accountable to shareholders, that it gives equitable treatment to all its "owners", small as well as large, and that it acts transparently." Although shareholders as owners of the business are a principal party to corporate governance, the Finance Committee holds the view that good corporate governance rests firmly with the board, and auditors and shareholders necessarily only play a secondary role. The Finance Committee is of the view that shareholders cannot play a leading role in corporate governance because: firstly, they are subject to financial constraints secondly, they are free to buy and sell their shares; and thirdly, they are not experienced business managers. Nevertheless, the Finance Committee also holds the view that annual general meetings (AGMs) represent a crucial mechanism in shareholder communication and recommends that a best practices guide be prepared for the specific purpose of improving the quality of AGMs. It is emphasised again that shareholders can play a strategic role in enhancing corporate governance if they realise the opportunities provided by AGMs to exercise their rights for corporate democracy and public scrutiny of directors. It does not require the exercise of specialised or technical knowledge or business experience by the shareholders but merely the

exercise of their rights in the AGMs. AGMs give shareholders direct access to the board, no matter the size of their shareholding. SHAREHOLDERS' RIGHTS The law provides the shareholders with several basic rights. Listed below are the key rights relating to general meetings. Shareholders have the right to: requisition for and convene general meetings attend, appoint a proxy and speak at general meetings vote at general meetings information such as, the Registers of Substantial Shareholders, the Register of Debentures, the Instruments and Register of Charges, the Register of Directors' Shareholdings, the Register of Directors, Managers and Secretaries, the Minute Book of General Meetings, the Registrar and Index of Members. A copy of audited financial statements must be circulated to shareholders at least 14 days prior to the meeting enforce these rights. TYPES OF SHAREHOLDERS' MEETINGS As a shareholder can only exercise his or her rights effectively when acting as a group in a meeting, it is important that a shareholder understands the different types of meetings. Shareholders' meetings are termed as "General Meetings" in the CA. It is the meeting where all shareholders are entitled to attend and vote. There are basically three types of shareholders' meetings, namely, Annual General Meeting (AGM), Extraordinary General Meeting (EGM) and Class Meeting. Annual General Meeting (AGM) The AGM is the only shareholders' meeting, which must be held by all companies. All companies must hold its first AGM within 18 months of its incorporation. Thereafter, it must be held once every calendar year, in not more than 15 months after the last preceding AGM or not more than 6 months after the end of its financial year. The AGM enables shareholders to obtain information and to question the directors regarding the affairs of the company. It also allows shareholders to meet and pass resolutions without having to face the difficulties associated with calling an EGM that is not supported by the directors. The main purpose of holding an AGM is to transact "ordinary" business as defined by the articles. Article 46 of Table A in the Fourth Schedule of the CA lists the business transactions as follows:

a) b) c) d)

The consideration of the accounts, balance sheet and the reports of the directors and auditors; Declaring a dividend (if any) recommended by the directors; Election of directors in place of those retiring; and Appointment and fixing of the remuneration of auditors.

However, any competent business called "special business" may also be transacted. Extraordinary General Meeting (EGM) EGMs are general meetings of companies other than the AGM. They are convened to transact "special" business, which are too urgent to wait until the next AGM. Class Meetings Class meetings are meetings of the holders of a class of shares of the company, which issues different classes of shares. Principally, class meetings are held in connection with situations concerning variation of rights attached to the class of shares. Class meetings shall be convened and held in the manner, as far as possible, in accordance to that of general meetings. The respective company's articles and the conditions attached to the issue of the class of shares may contain provisions that set out further regulations relating to a class meeting. In such a situation, the class meetings shall be held in compliance with the articles or the conditions attached to the shares. WHAT CONSTITUTES A VALID MEETING? A valid meeting is a meeting: Which has been properly convened With the requisite persons present to form a quorum In which there is a chairman From which no persons who are entitled to attend are excluded Properly Convened Only persons with proper authority can convene a meeting. Without such persons with proper authority, the meeting is considered to be improperly convened, and the notice issued for such a meeting is therefore invalid and any resolution passed will be null and void. Who then are the authorised persons?

a) b) c) d) e)

The board of directors Any director may convene an EGM and the secretary shall on such requisition convene the EGM (if so provided by the articles) Two or more members (shareholders) holding not less than 10 per cent of the issued share capital of the company may call a meeting Members holding not less than 10 per cent of the paid-up voting share capital of the company The court where it is for any reason impracticable to call the meeting in any manner as provided by the articles.

Notice of Meeting The notice convening a meeting is the form or method of communication used by the convenor to summon all persons who are entitled to attend the meeting. The giving of notice is a fundamental requisite for the validity of meetings because the persons who are entitled to attend and vote at the meeting must be informed that a meeting would be held. In fact, intentionally denying a person from receiving notice of a meeting may be viewed as an oppressive or unfair conduct. Contents of a Notice of Meeting The normal contents of a notice of meeting are:

a) b) c) d) e) f) g) h)

The name and company number of the company The type of meeting The date, day and time of the meeting The place of the meeting The business of the meeting indicating the nature of any "special" business to be transacted i.e. the agenda The date of the notice The signature and name of the convenor (in practice, it would usually be the person authorised by the convernor, i.e. that of the secretary); and Notes to the notice regarding appointment of proxy, the time and place for deposit of the proxy form.

The notice calling a meeting is required to state the rights of the members to appoint proxies to attend and vote on their behalf and that the proxy need not also be a member. This statement must be placed prominently (or reasonably) in the notice. Non-compliance with this requirement would render the officer in default and liable to a fine. Method of Service The articles usually contain the provisions to the form or method of giving notice. However, if the articles are silent on this, then any reasonable form or method of giving the notice may be adopted. The provisions of the articles regarding the form or method and contents of notice must be closely observed and complied with in order for the meeting to be valid. No meeting shall be held if the notice of meeting is invalid. Length of Notice To call for a meeting of a company or of a class of members, other than a meeting for the passing of a special resolution, notice in writing must be given in not less than 14 days or such longer period as is provided in the articles. In the case of a meeting called for passing of a special resolution, a notice of 21 days is required.

The 14 or 21 days notice excludes the day of serving the notice and the day of the meeting. Place of Meeting Any general and class meeting, including adjourned meetings must be held in the same state as the registered office. The Agenda The notice sets out the business to be discussed. If the special business to be transacted requires a special resolution or one that needs special notice, the proposed resolution must be set out word for word in full. For ordinary resolutions, only the general nature of the business needs to be set out, although preferably it should be given in full. By setting out the resolutions in full, shareholders can decide whether or not they should attend the meeting. The Finance Committee recommends that the notice calling for a meeting should provide sufficient information to enable shareholders make the decision of whether or not they should attend the meeting. KLSE Listing Requirements require an accompanying explanatory circular giving explanation for any special business to be sent out together with the notice convening the meeting. Quorum of Meeting A quorum for a meeting is the minimum number of persons (who are entitled to attend the meeting) who must be present to validly transact the business of the meeting. The articles usually specify the requisite number of members to constitute a quorum. Article 47 of Table A in the Fourth Schedule of CA provides that two members present in person or by proxy (or as representative of a corporate member) shall be a quorum for general meetings. If the articles do not make any provision regarding quorum of meeting and Table A is excluded (which is unlikely) from the company's articles, the CA provides that two members of the company personally present shall be a quorum. Chairman Every meeting needs a person to act as chairman to control and superintend the conduct of the meeting; and who the chairman should be is usually stated in the articles. Article 49 of Table A provides that the chairman of the board shall be the chairman at every general meeting of the company. If no chairman is present within 15 minutes after the appointed time for the holding of the meeting, of if he is unwilling to act, the members present shall elect one of the members to be the chairman of the meeting. If the articles do not provide for the appointment of chairman of a general meeting, then any member present at the meeting can be elected to be the chairman.

The function and duties of the chairman are:

a) b)

Preservation of order Conduct of meeting - to ensure that proceedings are properly and duly conducted e.g. ensure that the notice convening the meeting is in order, and that the requisite quorum is present. Sense of meeting - to ensure that the sense of meeting is ascertained such as, putting the relevant questions to vote and causing a poll to be taken when duly demanded, declaring the results of a poll and if authorised, using the casting vote when necessary. Deciding point of order and incidental questions arising which require decisions during the meeting Allowing minority shareholders to present their argument and at the expiration of a reasonable time for discussion, if he thinks fit, putting the motion to the meeting.


d) e)

The chairman is expected to act impartially and uninfluenced by party politics. His decision in all the questions must be unbiased and impartial. Thus the role of the chairman must be supportive of the exercise of rights of shareholders and not to suppress them. Persons Entitled to Attend Meeting Every member is entitled to attend any general meeting of a company. In addition, the auditor of the company or his authorised agent is also entitled to attend any general meeting of the company and to be heard on any matter that concerns his capacity as the auditor. RIGHTS AND RESPONSIBILITIES OF SHAREHOLDERS IN RELATION TO GENERAL MEETINGS Shareholders' Rights to Requisite for and Convene General Meetings Two or more members holding not less than 10 per cent of the issued share capital may call for a meeting. The shareholders must convene the general meeting in a manner as close as possible to the conduct of general meetings in accordance with the articles of the company. The shareholders can send out the notice of the meeting but must do all acts and bear all costs involved in convening the meeting. The meeting must be conducted in the same manner as one convened by the company. Members holding not less than 10 per cent of the paid-up share may requisition for the convening of an EGM. The directors must proceed to convene an EGM as soon as possible, within 21 days from the date of receipt of the requisition. The meeting shall be held no later than two months after the date of receipt of the requisition. If the directors fail to convene the EGM as requisitioned by the members within 21 days after the date of the requisition was received, any of the requisitionists representing more than one-half of the total voting rights of all the requisitionists may proceed to convene the EGM. The EGM so convened must be held within three months from the date of deposit of the requisition.

Shareholders' Rights to Attend, Appoint Proxy and to Speak at General Meetings Every member has a right to attend any general meeting of the company and to speak and vote on any resolution before the meeting notwithstanding any provision in the memorandum and articles. However, a member whose calls are in arrears, may be barred from attending a meeting if the articles so provide. The articles may also provide that the right of holders of preference shares to attend and vote at a general meeting is suspended based on specified conditions. A member may attend any general meeting of the company or class meeting (if he is entitled to attend) personally or by proxy. A proxy means a lawfully constituted agent. Every member of a company entitled to attend and vote at a meeting of a company is entitled to appoint another person or persons (whether a member or not) as his proxy to attend and vote on his behalf. The proxy shall have the same right as the member to speak at the meeting. However, unless the articles provide otherwise:

a) b)

A proxy shall not be entitled to vote except on a poll i.e. the proxy cannot vote on show of hands. A proxy shall be a member, or if he is not a member of the company, he shall be an advocate, an approved company auditor or a person approved by the Registrar of companies; and A member shall not appoint more than two proxies to attend and vote at the same meeting; and if two proxies are appointed, the appointment shall be invalid unless he specifies the proportions of his holdings to be represented by each proxy.


SHAREHOLDERS' RIGHTS TO VOTE AT GENERAL MEETINGS Every shareholder has a right to vote at any general meeting of the company. The CA further provides that each equity share issued by a public company or a subsidiary of a public company shall confer the right to one vote at a poll at any general meeting. The business of general meetings is decided by voting. The two common ways of voting at general meetings are by show of hands and by poll. Voting by Show of Hands Voting by show of hands is a common law method. Each person at the meeting has one vote. Article 51 Table A provides that at any general meeting a resolution put to vote shall be decided by a show of hands in the first instance unless a poll is demanded. Unless the company's articles provide otherwise, a proxy cannot vote on show of hands. Article 54 of Table A clearly states that every member or his proxy present shall have one vote each on a show of hands.

Voting by Poll Voting by poll is voting by written ballot. Votes are given proportionately to the number of shares held. The manner on how a poll should be demanded is usually provided in the articles e.g. Article 51 of Table A provides that a poll may be demanded before or on the declaration of the result of show of hands by:

a) b) c) d)

The chairman At least 3 members present in person or by proxy Any member or members present in person or by proxy holding or representing not less than 10 per cent of the total voting rights of all the members present at the meeting or Any member or members holding shares (in the company conferring a right to vote at the meeting) of aggregate sum which has been paid up equal to or not less than 10 per cent of the total sum paid up on all the shares conferring that right.

The demand for a poll may be withdrawn if the articles provide so. However, if the articles do not contain such a provision, then the poll once demanded properly and accepted by the chairman cannot be withdrawn. Casting vote In is provided in the articles of some companies that the chairman of the meeting is entitled to exercise a second or casting vote. A casting vote is a second vote given to the chairman to resolve the situation where there is an equality of votes (whether on show of hands or on a poll). SHAREHOLDERS' RIGHT TO INSPECT REGISTER OF DIRECTORS' SHAREHOLDINGS AT AGM Shareholders have the right to access the Register of Directors' Shareholdings and Interests, which are made available for inspection at each AGM. The Register must be produced at the commencement of each AGM of the company and kept open and accessible during the meeting to all persons attending the meeting.



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