Shareholder(s) have the power to nominate a director to represent them in the board of director of a company as a move to ensure that their interests in the company are protected. These directors are referred to as ‘nominee directors’.
The question then arises:
“Who should nominee directors prioritize their duty to – the company or the shareholders?”
Section 217 Companies Act 2016 (the preceding provision being section 132(1E) Companies Act 1965) expressly states that nominee directors have a duty to act in the best interests of the company. In the event where the nominee director is found to be in conflict of their duty to act in the best interests of the company and their duty towards their nominator, the nominee director must prioritize their duty to act in the best interests of the company and not towards their nominator.
"So then, when and/or how would the nominee director can be found to be acting in the ‘best interest’ of the company?"
The leading case of Tengku Dato’ Ibrahim Petra Tengku Indra Petra v Petra Perdana Bhd & Another Appeal [2018] 2 MLJ 177 held that one must observe through an objective and subjective point of view when determining whether the director is acting in the best interests of the company.
The Objective & Subjective Point of Views:
Through the objective glass, the director’s actions will be assessed based on what a reasonable director has thought to be prudent and had conducted the affairs of the company rationally and in a bona fide manner.
The subjective point of view on the other hand, will assess the director based on the director’s state of mind and whether the director has considered that their actions were conducted in the best interests of the company.
In view of the principles established in the case of Tengku, it can be summarized that one must look at the factual circumstances of each case both objectively and subjectively and that it is impossible to define a “one circumstance which fits all scenario” in establishing whether the nominee director has been acting in the best interests of the company.
Example of Situations of Conflict:
Confidential Information
A nominee director may at times be placed in a hard place in where their nominators may request them to disclose certain confidential information of the company. Should the nominee director wish to do this, it is pertinent that they acquire the consent of the shareholders at a general meeting first as failure to do so may result in them being held in offence for their breach of duties owed to the company as reflected in section 218(1)(b) Companies Act 2016.
Disclosure of Interests
There may be times when the nominee director finds themself to be directly or directly interested in certain contracts, propose contracts, properties, and offices with the company. In this event, the nominee director is required to disclose their interests to the company via a meeting of the board of directors as soon as practicable where they have knowledge of their interest (section 221 Companies Act 2016). In this situation, the nominee director may not be allowed to participate or vote in the meeting concerning the contracts, proposed contracts, properties, and offices even if their nominators have no interests either directly or indirectly to the same.
As a nominee director, I was not at all involved in the management of the company in which I was nominated in, can I still be found to be in breach of my duties as director to the company then?
Where a nominee director is found to be in breach of their duties, it has been clearly established in Dato’’ Seri Timor Shah Rafiq v Nautilustug & Towage Sdn Bhd [2018] 8 MLJ 394 that the nominee director is unable to rely on the defence that they were not involved in the management of the company. This is because, it is fundamental to note that the current law in Malaysia admits no distinction between the statutory and fiduciary duties owed by the different categories of directors.
Offence Upon Committing a Breach
Should a nominee director be found to be in breach of their duties to act in the best interest of the company they shall:
On conviction be liable to imprisonment for a term not exceeding 5 years; or
A fine not exceeding RM3,000,000.00; or
Both of the above.
CONCLUSION
In summary, nominee directors are primarily still duty-bound to act in the best interests of the company and not their nominators. Failure for them to conduct accordingly may result in nominee directors being held liable for their breach towards the company.
Authored by Yap Sher Min
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