This article first appeared in The Edge Malaysia Weekly on April 7, 2025 - April 13, 2025

THE Court of Appeal’s recent decision regarding a company director’s retirement and re-election has been the talk of the legal and corporate circuit.

This decision is an important one, as there has been no precedent set by the courts on this point of law, save for the case of Tan Sri Wan Sidek Wan Abdul Rahman v Rahman Hydraulic Tin Bhd. However, the two cases are different in their respective circumstances.

Unlike in the Wan Sidek case, which involved the retirement of a director appointed to fill a casual vacancy until the next annual general meeting (AGM), this recent case involves a director who was appointed through an AGM.

The most recent ruling, given by a three-man bench led by judge Datuk P Ravinthran, together with Datuk Mohd Nazlan Mohd Ghazali and Datuk Dr Choo Kah Sing, clarified the legal position on a director’s retirement in the absence of an AGM.

The bench unanimously ruled that company directors who are eligible for re-election cannot be automatically retired without holding an AGM, even if the directorship time frame had lapsed.

In the case of Datuk Seri Andrew Kam Tai Yeow v Grandfoods Sdn Bhd, Granny’s Kitchen Sdn Bhd, Lead Enterprises Sdn Bhd, Raub Mining & Development Company Sdn Bhd and Raub Oil Mill Sdn Bhd, each of the respondent companies had sought an extraordinary general meeting (EGM) in 2017 to remove Andrew as their director.

Andrew had then filed an injunction restraining Raub Mining and Raub Oil Mill from holding their respective general meetings. The respondents then told him that he was no longer a director with effect from the date of the AGM even though the AGM did not take place.

In 2019, Andrew was informed that he had lost his place on the board of all five companies as he had retired as a director, even though no general meeting had been held.

Andrew’s siblings and father had previously sought declarations from the High Court in the names of the companies that Andrew was deemed to have retired due to the absence of AGMs.

The High Court had ruled against Kam by stating: “… a director due for retirement at the AGM of a certain year will retire automatically, despite no AGM being held in that year, because a director on his appointment does not ordinarily step into an office perpetually. This means that unless terminated by an earlier act, a director’s office is limited by the terms of the articles of association of the company concerned. Therefore, the office of a director can be automatically vacated through retirement by rotation, or can be deemed retired even in the absence of an AGM, in line with the articles of association.”

However, in his written decision, Nazlan said that retirements by rotation and re-election to the board of a company are strictly governed by the express terms of the company’s articles of association and by convening an AGM.

“The retirement of directors, particularly by way of rotation, is inextricably intertwined with their eligibility for re-election,” said Mohd Nazlan in a 45-page judgment, which overturned the said High Court decision.

The rotation system is a mechanism where a company’s board of directors periodically changes its composition to introduce fresh perspectives and expertise. Under the Companies Act 2016, at each AGM, around one-third of the longest-serving directors must retire. If directors started on the same day, they decide among themselves or draw lots to determine who retires in that round.

Ruling confined to this unique case, say experts

However, some legal experts argue that this case is confined to its unique facts, and that the Court of Appeal had relied on the respective company’s articles of association to come to its decision.

Ranjan N Chandran, a consultant with the law firm Hakem Arabi & Associates, said the decision of the appellate court may have to be confined to its peculiar facts, as the Articles of Association of that company state that retirement of the directors happens at the general meeting and the court relied on the articles.

“It is for this reason that the court ruled that the articles of association did not expressly or implicitly provide for automatic vacation of the director’s office by way of retirement,” he added.

Ranjan said the Companies Act has two exceptions to the sanction of the AGM to effect the retirement of a director: (1) where the company’s constitution specifically provides otherwise; or (2) where the terms of appointment of the directors set out the terms of the retirement.

He said when this case goes up to the Federal Court on appeal, there will be some finality to the matter.

“With the leave of the Federal Court, there will be the finality of the differing positions taken by the High Court and Court of Appeal,” he added.

In the judgment, the bench noted that neither the Companies Act 2016 nor the companies’ Articles of Association had said the non-convening of an AGM to be grounds for automatic retirement.

Nazlan surmised that as a re-election can only happen if an AGM is convened, allowing automatic retirement just because the timing to hold an AGM had lapsed alone would rob the director of the right to seek re-election and the shareholders’ right to vote for or against it.

“In that sense, the retirement and re-election are intertwined and are but a single process at the general meeting. This is where the directors concerned retire at the end of the meeting, but whose re-election, if voted for at the meeting, takes effect upon the conclusion of the same meeting.

“This is an important aspect of shareholder democracy in modern company law, which did not appear to feature in any substantive fashion in the submissions of counsel for parties before us,” Nazlan said.

The bench further ruled that the director who is due to retire should have the right to offer himself up for re-election at the AGM where he is set to retire. The bench said that the companies in “one fell swoop” had denied the possible re-election of Andrew by not holding an AGM, and instead appointed a new director in place of Andrew who they had deemed to have retired.

“The appellant as a director retiring by rotation was thus denied the opportunity to offer himself for re-election at an AGM, which although injuncted in respect of the first and second respondents herein, indisputably could have been convened for the three other respondent companies,” Nazlan said.

Bypassing AGM would allow for bypassing of shareholder democracy

Irene Kam, partner of law firm Messrs. Azri, Lee Swee Seng & Co, who also serves as an independent non-executive director of Parkwood Bhd, had said that this decision has reiterated the importance of adherence to the company’s articles of association, where the articles retain the requirement for an AGM.

“Any attempt to bypass the company’s own articles provisions are to be shut down, because it is essential that every act done is compliant with the company’s constitution,” she said.

She said that although retirement by rotation is an automatic process, the re-election of an eligible director requires a positive act, which can only happen at the general meeting, thus the bypassing of an AGM can open a can of worms.

“If directors are allowed to bypass the holding of an AGM (where the articles provide for them), they can prevent re-election of a director who is due to retire but is eligible for re-election — that opens up the possibility of abuse of power by controlling directors, and also bypasses shareholder democracy by depriving the shareholders the right to vote for a director who may want to offer himself up for re-election,” she said, alluding to Nazlan’s judgment.

Aaron Wong, senior partner of Messrs. Azri, Lee Swee Seng & Co, who also serves as an independent non-executive director of Opensys Bhd, shared Kam’s sentiment, saying that the non-holding of an AGM also prevents the shareholders from voting on directors who are eligible to offer themselves for re-election.

“The Court of Appeal is against any approach that would have a negative impact on shareholder democracy and activism,” he said.

Lavinia Kumaraendran, who is a principal partner at Messrs Lavania & Balan Chambers, applauded the judgment of the Court of Appeal bench. She said strict adherence to the Articles of Association is “absolute and pivotal”, which is the same position taken in Australia as well as the UK.

She also agreed with Kam that the AGM had to be a prerequisite for retirement by rotation as it gave shareholders the right to review and vote on the board’s performance and make decisions on the board’s composition.

“The AGM is the primary venue for shareholders to exercise their power to appoint or remove directors, because at the end of the day, the board is accountable to the shareholders,” she said, adding that without an AGM, there was no mechanism for directors to be retired by rotation and the board’s composition would remain unchanged.

Lavinia said the decision was consistent with Section 205 of the Companies Act, which provides for retirement of directors. However, to standardise the retirement of directors and when it is supposed to kick in, she said these usually are inserted into a company’s Articles of Association.

She added that when a director retires at an AGM, his re-election is also intertwined, as stipulated in the Companies Act, agreeing with Nazlan that retirement and re-election cannot be seen as separate from each other.

“When a director retires, which takes place at the end of a general meeting, then that retirement is accompanied by his eligibility for re-election. All this must happen at the AGM,” she said.

She added that this case puts into perspective the fact that the board of directors cannot usurp and use their powers on the board to refuse to call an AGM as a backdoor attempt to automatically retire or remove an outgoing director.

“This judgment prevents that from happening and ensures that an AGM is a prerequisite,” she said.

Lavinia added that this removes any power of the board to remove any director and appoint another director without an AGM.

She also emphasised the need for Articles of Association to be very clearly worded without ambiguity, adding that they need to state that a director is not automatically retired should there not be an AGM.

“I think it needs to be stated clearly because in this situation there is no provision for automatic retirement — it cannot be read that there is an automatic retirement.”

Lavinia added that in standard Articles of Association, there is no stipulated time frame for a director’s retirement. It is always pegged on to the conclusion of a general meeting of shareholders, so one cannot say that a director is “deemed to be retired” — or as Nazlan very clearly stated, that the retirement of a director is pegged to an AGM.

Source
https://theedgemalaysia.com/node/750501