Author name: Daphne Sit

In general, the directors of a company have the power and authority to make decisions pertaining to the business of the company. However, it is essential to note that certain transactions require approval from the company’s shareholders, as stipulated by the Companies Act 2016 (“Act”). An instance of this is when the company engages in substantial property transactions with its directors, substantial shareholders, or persons connected with them. This requirement is defined in Section 228 of the Act. Rationale for Section 228 Section 228 is designed to prevent potential abuses, such as self-dealing and asset-stripping, by directors and controlling shareholders. This often occurs through transactions involving acquisition of assets for the company or sale of the company’s assets at non-market rates or on less favourable terms than the company would have received from a bona fide third party. Such actions can be detrimental to the interests of shareholders, given that they are unfairly structured to shift wealth from the company to the interested individuals involved. To address these risks, Section 228 introduces specific procedures that must be observed and complied with by a company when a transaction falls within its scope. Essentially, this section requires shareholders’ approval to be obtained for transactions involving related parties as defined by its provisions. Transactions entered into by a company in contravention of Section 228 shall be void. Identifying Transactions Falling under Section 228 To fall under the umbrella of Section 228, there are 3 elements that must be present: Element 1: Type of arrangements or transactions The type of arrangements or transactions falling under Section 228 contains in two limbs – Section 228(1)(a) and (b). Such arrangements or transactions can take any of the following forms between the company and a related party: “Non-cash asset” means any property or interest in property other than cash. Furthermore, it is clear from Section 228(1)(a) and (b) that the acquisition or disposal of shares or non-cash assets shall be made with the company (Kam Thai Eng Linda & Anor v Tan Sri Dato’ Kam Woon Wah & Ors [2020] 1 LNS 2124). Element 2: Categories of Related Parties                                  Section 228 applies where transactions made by the company are with any of the following related parties: (a) a director (as defined in Section 210 of the Act) of the company or its holding company; or (b) a substantial shareholder (as defined in Section 136 of the Act); or (c) a person connected with the director or substantial shareholder. A “person connected with a director” is defined in Section 197 and includes: This same definition also applies to persons connected with a substantial shareholder. Element 3: Requisite Value Section 228 only applies where the transactions meet the requisite value threshold stated under this section. For public listed companies and their subsidiaries, requisite value shall mean the value as defined in the listing requirements of the stock exchange where shareholders’ approval at a general meeting is required. On the other hand, for private or unlisted public companies, it depends on the value of non-cash assets involved in the transaction. The table below summarises when the prior approval of shareholders is required to be obtained to comply with Section 228: Threshold Value Shareholders’ Prior Approval  Less than RM50,000   No More than RM50,000 and less than 10% of the company’s net assets No More than RM50,000 and more than 10% of the company’s net assets Yes More than RM250,000   Yes The value of the company’s net assets is determined based on the accounts prepared in accordance with Section 245 of the Act for the last financial year preceding the transaction. In cases where no accounts have been prepared prior to the transaction, the value is determined based on the company’s called-up share capital. Exempted Transactions There are exceptions to Section 228. Section 229 identifies various transactions that do not qualify as related party transactions. These exceptions include: For transactions falling within these exceptions, the approval of shareholders is not a prerequisite. When all 3 elements mentioned above are satisfied, the approval of the company’s shareholders in a general meeting must be obtained before the said arrangement or transaction can be carried into effect and valid in law, unless the transaction comes under one of the exceptions provided under Section 229 (Omega Securities Sdn Bhd v. Yeo Lee Hoe [2003] 1 CLJ 276). How is prior approval obtained? If a transaction or arrangement falls within the ambit of Section 228, it must be approved through a resolution passed by the shareholders at a general meeting. The resolution required is an ordinary resolution, and Section 228(1)(A) or (B) specifies that the approval must occur at a general meeting. This means that a member’s resolution in writing is not an option for the purpose of compliance with Section 228. As for the reading of Section 228(1)(A) and (B), the High Court in Kam Thai Eng Linda held that Section 228 only requires shareholders’ prior approval before an arrangement or transaction is ‘carried into effect’, rather than before the transaction is “entered into,” which can be made subject to the shareholders’ approval. The implication is that shareholders are required to provide their approval before the transaction is executed or implemented. However, it is possible for initial negotiations or discussions about the transaction to occur or for the parties to enter into the arrangement before seeking shareholders’ approval, as long as approval is obtained for the company to formally proceed with the transaction and become legally bound by the terms of the arrangement. If the transaction or arrangement benefits a director or substantial shareholder of the company’s holding company, or a person connected with such a director or substantial shareholder, it also necessitates prior approval through a resolution of the holding company (Section 228(2)(b)). In cases where the company involved in the acquisition or disposal is an unlisted subsidiary of a publicly listed company, approval for the same transaction or arrangement is required from the shareholders of the unlisted subsidiary at a