13.2.

3 Corporate Law Reform Committee

In December 2008, the Corporate Law Reform Committee (CLRC) completed the first
comprehensive review of the Act since its inception in 1965. The CLRC recommended
comprehensive changes to the statutory provisions affecting directors’ duties, including:

 stipulating an objective standard of care, skill and diligence, which allows for proper
delegation of duties and provides for a ‘business judgement rule’;
 providing a statutory requirement that directors act for a proper purpose and in the best
interest of the company;
 codification of directors’ conflict of interest rules;
 the overhaul of outmoded provisions on regulation and disclosure of related party
transactions; and
 vetoes on self-interested director voting and replacing the requirement for directors to
act ‘honesty’ with a directive that they act in the best interests of the company and for
proper purposes.

The statutory requirements supplement does not replace or override the common law duties.
The discussion below outlines the core fiduciary duties and how they have been supplemented
by provisions of the Act.

13.3 DUTY TO ACT IN GOOD FAITH AND IN THE BEST INTERESTS OF

Directors must exercise their discretion in good faith, in what they consider and not what the
court may consider to be in the interests of the company, and not for any collateral purposes:
Re Smith and Fawcett Ltd [1942] 1 All ER 542. This is expressed as a duty to act bona fide for
the benefit of the company as a whole. Majority shareholders are also obliged to act bona fide
for the benefit of the company as a whole. While the same expression is used for both directors
and shareholders, higher standards are required from directors because they are regarded as
fiduciaries. Shareholders are not fiduciaries and may act in their own self-interest.

The Act also imposes a similar duty on directors. Under s 132(1), a director of a
company shall at all times exercise his or her powers for a proper purpose and in good faith in
the best interests of the company.
 The fiduciary duty to act in good faith in the interests of the company is a subjective
duty. There is no breach where the directors act in what they honestly believe to be in the
interests of the company. The courts are generally reluctant to override the business judgement
of directors. In some cases directors may breach their fiduciary duties where they fail to give
proper consideration to the company’s interests or where they act in a way that no reasonable
person could consider is bona fide in the interests of the company. Directors are presumed to
have acted bona fide for the benefit of their company and those persons alleging a breach of
duty bear the onus of proving that they have not acted bona fide: Intrico Pte Ltd v Multi-Pak
Singapore Ltd [1995] 1 SLR 313.

13.3.1 Best interests of the company

[Link] Present and future shareholders

A difficult question arises as to what is meant by the phrases ‘the company as a whole’ and
‘the interests of the company’. A company is regarded as a legal entity separate and distinct
from its shareholders. Despite this, the courts take the view that the duty to act bona fide for
the benefit of the company as a distinct commercial entity. Acting for the benefit of the
company means that the directors must act in the interests of the shareholders as a collective
group: Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286.

As long as the company is solvent, the interests of the company are the interests of its
shareholders. However, the shareholders’ interests are paramount. The distinction between the
interests of the company as a commercial entity and the interests of shareholders is best
illustrated in a takeover context. If the duty of directors were only to the commercial entity they
would not be entitled to engage in defensive measures designed to increase the price offered
for the company’s shares. The commercial entity is not concern with who controls it nor has it
any interest in the market price of its shares. The courts have not adopted this approach.
Directors are entitled to defend their company against a takeover if they are of the opinion that
the offeror has made an inadequate bid. This action is in the interests of the shareholders since
it gives them the opportunity to sell their shares for the highest possible price.

[Link] Individual shareholders

Whilst directors must act bona fide in the interests of the shareholders, this does not mean that
they owe duties to particular shareholders.
 Percival v Wright

[1902] 2 Ch 421

A director of a company was approached by a shareholder wishing to sell his shares. The
director agreed to buy them but did not disclose that there was an impending takeover bid at a
substantially higher price. The shareholder later sought to rescind the contract for the sale of
his shares on the basis that the director breached the fiduciary duty to him by failing to disclose
the information concerning the impending takeover even though it did not eventuate. The
English court rejected the shareholder’s claim. It was held that directors only owe fiduciary
duties to the company as a whole and not to individual shareholders.

Sometimes, however, where there are special circumstances, the directors may owe fiduciary
duties to individual shareholders. Such special circumstances arose in New Zealand case of
Coleman v Myers [1977] 2 NZLR 297. The managing director of a family company arranged
for the company to be taken over at an undervalue by a new company controlled by him. It was
held that the managing director breached fiduciary duties owed to the minority shareholders of
the family company. He failed to disclose material information concerning his potential profits
and mislead the shareholders regarding the true value of the company’s assets. Woodhose J
noted that the factors which would give rise to a fiduciary duty to individual shareholders,
include, dependence upon information and advice, the existence of a relationship of confidence,
the significance of some particular transaction for the parties and, of course, the extent of any
positive action taken by or on behalf of the director or directors to promote it.

Brunninghausen v Glavanics

(1996) NSWCA 199

Glavanics and Brunninghausen were the two directors of a company. Glavanics, the minority
shareholder, despite being a director, was not involved in the company’s management and has
no access to its financial records. After a falling out, Brunninghausen, the majority shareholder
and managing director, entered into negotiations to buy Glavanics’s shares. However, unknown
to Glavanics, another person approached Brunninghausen offering to buy all the shares in the
company. Eventually Glavanics agreed to sell his shares to Brunninghausen, who subsequently
sold all the shares to the third party for a higher price. When Glavanics became aware of this
he sued Brunninghausen for breach of fiduciary duty and claimed equitable compensation. The
court, applying the factors noted in Coleman v Myers, decided that that the general rule that a
director does not owe a fiduciary duty to act in the interests of particular shareholders did not
apply where there are only two shareholders and the director is one of them.

Malaysian authority now also supports the principle that special circumstances may justify a
departure from the principle in Percival v Wright. The following case, however, distinguished
Coleman v Myers and Glavanics v Brunninghausen on the facts.

Lum Sow Kuen v Chuah Choong Heong

(unreported, 25 April 1998; Suit No D-5-22-1390 of 1993), [1998] MLJU 39

This case involved a similar situation to that in Percival v Wright. The plaintiff transferred her
shares to a director of a company prior to a takeover. The other directors subsequently sold
their shares at a much higher price than obtained by the plaintiff in her private sale. She brought
an action against the directors, relying on the principles established in Coleman v Myers and
Brunninghausen v Glavanics claiming the directors owed a fiduciary duty to inform all
shareholders of any matters involving a possible takeover. The court dismissed her claim,
concluding that her allegations of wrongdoing should have been brought against the company
and not its directors. Ratman J held that the facts in Coleman and Glavanics were very different
from the facts in this case. The finding of a fiduciary duty to individual. This principle was
illustrated in the following Australian case.

Equiticorp Finance Ltd v BNZ

(1993) 11 ACLC 952

Funds were transferred from two companies in a group to satisfy the debt of a related company.
The New South Wales Court of Appeal held that the dominant director of the group was
justified in considering that the welfare of the group was intimately tied up with the welfare of
the individual companies. The interests of the two companies were considered because
provision was made for compensating them for the loss of the funds. The transactions were
justified because the holding company of the group had guaranteed the debt, which was repaid.
The alternative was a possible disaster for the whole group including the two companies.

Balancing the interests of the individual company against the interests of the group, as occurred
in Equiticorp Finance Ltd remains a controversial issue, particularly in relation to the interests
of creditors. The duty of directors to creditors has been increasingly recognised and is discussed
below.
13.3.4 Employees

It was traditionally held that directors should not consider the interests of employees ahead of
the interests of the company as a whole. In Parke v Daily News Ltd [1962] Ch 927, a company,
which controlled two newspapers, sold one of them. The directors intended to distribute surplus
proceeds from the sale amongst its employees by way of compensation for dismissal. A
shareholder brought an action to prevent these payments. It was held that the proposed
payments were not reasonably incidental to the carrying of the company’s business. They were
gratuitous payments to the detriment of shareholders and the company as a whole.

In most cases, a payment to employees will be in the interests of the company where their
employment continues because its industrial relations may be improved. This did not arise in
Parke v Daily News Ltd because the company was in fact selling that part of its business
operations.

The Companies Act 1985 (UK) now requires directors to have regard to the interests of
employees in general.

The Act does not have such a general provision. However, under paragraph 7 of the Third
Schedule companies are empowered to establish and support various facilities calculated to
benefit employees and past employees and their dependents and to provide for pensions and
allowances. The Third Schedule powers are available to companies by virtue of s 19(1)(c).

13.3.5 Creditors

As discussed above, directors are subject to a fiduciary duty to exercise their powers in good
faith and in the best interests of the company. When the company is solvent, the best interests
of the company correspond with the best interests of its shareholder as a collective group.
Different considerations apply if the company is insolvent or in financial difficulties. In such
circumstances, the interests of the company are those of its creditors. Directors have a duty to
exercise their powers in a way that does not prejudice the company’s ability to pay its creditors.
This duty is discussed below.

13.3.6 Directors’ duties and corporate social responsibility

In recent times, leading listed companies in Malaysia are becoming increasingly aware of their
wider responsibilities. The traditional view is that directors’ duty to act in the interests of the
shareholders and in insolvency situations with the company’s creditors. There has been an
increasing concern that this view is too narrow and that companies also have wider social
responsibilities. Consequently, directors may be required to consider the interests of other
important stakeholders apart from the shareholders when making business decisions. Other
stakeholders who have a legitimate interest in a company’s activities include:

 the company’s employees;

 the company’s customers and suppliers;

 the environment;

 regulators and other government agencies; and

 the broader community

CSR Malaysia is a news portal covering Corporate Social Responsibility in Malaysia and the
Asian region. Sustainability, environmental, social and governance matters are reported on its
website at [Link]

The CLRC recommended against the codification of obligations of corporate social