11.

Batavia Bhd (Batavia) is a public company that operates management business. It was established in Batavias issued capital is owned by

an investment

2002 by Mr Frank Green.

the following shareholders: 45 ordinary shares held by FG investment Bhd (FG) 45 ordinary shares held by Venture Capital Bhd (Venture) 10 ordinary shares held by various executives of Batavia.

Mr Frank Green is the sole director of and shareholder in FG. Batavia has five directors. They are Mr Green (managing (nominee of venture) and three independent director), Mr Brown

non-executive directors (one of whom is the chairman). Batavia has not adopted a constitution. Answer the following question: 1. Batavia would like to enter an investment contract with Fg. What are the rules and legal position that has to be complied by the company? Advise Batavia on how they should proceed with the proposal. Based on this case, Mr Green as a sole director must avoid conflicts of interest between personal interest and was the a interest of the company and the appearance of a conflict.

The conflicts appear in this case because Mr Green FG

director for Batavia and also a shareholder and sole director in investment Bhd that would like to enter an investment thus a conflict of interest may arise when Mr interests or relationships that Company assets, for contract with FG,

Green takes actions or has

make it difficult to perform his duties objectively and effectively, or when an individual uses his position, or improper benefit.

Article 81 of Table A of the Fourth Schedule provides that the article of a company may prohibit a director from voting on any contract or proposed contract with the company in which he is interested. In addition, article 72(h) states that the office of a director shall become vacant if he fails to declare the nature of his interest as required by the Act. It shall be noted that failure to disclose by a director is an offence under section 131(8) of the Companies Act. This duty can be seen in the case of Aberdeen Railway Co. v Blaikie Bros . It concerns the fiduciary duty of loyalty, and in particular, the duty to not engage in self dealing. It laid down a basic rule that if a director had an interest in a corporate transaction, the transaction is voidable at the company's will, and it is the duty of directors to avoid any possibility of a conflict of interest. This case preceded the Companies Act 2006 section 177 (UK Law), that requires that if directors are interested in a proposed transaction, they should merely declare that interest to the board, and section 239 (UK Law) which stipulates that in approving any transaction the interested director may not vote.

Disclosure of interests in contracts, property, offices, etc.

Every director of a company whether directly or indirectly, duties or interests might be created in conflict shall declare at a meeting of the directors of the company the fact, nature, character and extent of the conflict. As a matter of prudence, a director should always disclose and seek approval from the

shareholders in the event of any potential breach of section 132(2).

Direct interest through legal ownership, while Indirect interest through deemed ownership defines under 4(3), (5) and (6) : o he owns a security through another person or body corporate, or o he has got a right to purchase that security by contract, or

o he has an option over the security, or o He has control over the voting right attached to the security.

Under Section 317(1) CMSA provides that unless exempted by the Commission in writing, a person who is a chief executive or director of a listed corporation who has an interest in the securities of such listed corporation or any of its associated corporation shall notify the listed corporation in writing : (a) of the subsistence of his interests at that time; and (b) The extent of his interests in the listed corporation or associated corporation of the listed corporation at that time.

In Malaysia, section 132(2)(e) provides that a director shall not engage in business which is in competition with the company except with the consent or ratification of a general meeting. This means that a director may involve in a competing business activity with the consent of the general meeting. In addition, any involvement in competing company must be declared at a

meeting of the directors by virtue of section 131(5) of the Companies Act.

This prohibition subsists due to the fiduciary relationship existed between the directors and the company. As such, a director who breached his fiduciary duty by entering into a contract with his company still remains accountable to the company for any profit that he gained from the contract even if the contract is not chooses to affirm the avoided either because the company

contract or because of any other circumstances. However, this rule of not to contract with the company, or the non-conflict rule, can be modified by the company in accordance with statutory requirements. Section 131 provides that a director is not prevented from entering into a contract with his company in which he has an interest if the requirements of section 131 are complied with. Section 131 requires every director of a company to disclose to a meeting of the directors any interest which they may have in a contract or proposed contract with the company.

Effect of Contravention
Penal provisions If Mr Green is a failure to disclose an interest in a contract or proposed contract, the company has a right to declare the contract or proposed contract voidable except if the

contract entered is in favour of a bona fide purchaser for value and without actual notice of the non-compliance of section 131(7A). Imprisonment for seven years or one hundred and fifty thousand ringgit, or both.

Declaring the Interest to Proceed with The Proposal

The Mr Green's declaration of interest must be made at a meeting of directors. The statutory provision does not require the parties at the meeting to make a decision on the transaction or contract at hand. A director who is interested in a contract or a proposed contract is prohibited from taking part in the discussion or voting of the said contract or proposed contract at the board meeting. However, the directors attendance is counted for the purpose of meeting the quorum of the board meeting. The parameter of the directors interest is regulated by section 131. It should be noted that the interest of a member of the director's family is treated as an interest of the director. Therefore, if the transaction or contract at hand involves a member of a director's family, the director would be regarded as having an interest in such a transaction or contract. To satisfy the requirements of that section, the director must give a general notice to the company stating the following:

that the director is an officer or member of a specified corporation or a member of a specified firm;

that the director is to be regarded as interested in any contract which may arise after the date of the notice; and

The nature and extent of his interest in the specified corporation or firm.

The notice must be given at a meeting of the directors or the director must take reasonable steps to ensure that the notice and its contents are brought up and read at the next meeting of the directors, once it is given. If the director's interest is not different in nature or greater in extent than the nature so specified in that notice, the general notice by the director to the board would be a sufficient declaration of his interest. The company secretary is required to inform the board members on the requirements of subsection 131(7A). In addition, the company secretary is also required to record the declaration, if made by the director, in the minutes of the board meeting. Companies are still protected against asset shuffling by unscrupulous directors or shareholders through the amendments of sections 132C and 132E. These sections provide safeguards with regard to any transactions or arrangements to be entered.