by Shim De Zhen (15 September 2021)
This is a case study of Concrete Parade Sdn Bhd v Apex Equity Holdings Berhad & 15 Ors (Civil Appeal No: W-02(IM)(NCC)-1551-08/2019) in which I had the opportunity to represent one of the respondents.
The case is important for its impact on how share issuance exercises are planned and conducted, particularly for public listed companies.
The case broadly concerned 2 aspects, certain share buy-back transactions and a proposed merger exercise.
This study concerns the proposed merger exercise.
On the facts, the proposed merger exercise was between a public listed company, Apex Equity Holdings Berhad (involved in investment holding and trading of marketable securities), its wholly owned subsidiary, JF Apex Securities Berhad, and another company, Mercury Securities Sdn Bhd (a private limited company engaged in stockbroking and corporate advisory services).
The merger would have seen the business of Mercury Securities transferred to JF Apex. The shareholders of Mercury Securities would have received consideration worth RM 140 million, paid as follows:
- RM 92 million via the issuance of 100 million new ordinary shares at an issue price of RM 0.92 per share in Apex Equity to Mercury Securities
- Balance RM 48 million in cash, of which RM 18.8 million would be generated by a proposed private placement of 20 million new ordinary shares in Apex Equity.
The cash portion involved 3 documents:
- Heads of Agreement (HOA) – meant to be a legally binding draft leading up to a more comprehensive Business Merger Agreement
- Business Merger Agreement (BMA)
- Subscription Agreements for the private placements.
All agreements are conditional agreements subject to the approval of Apex Equity’s shareholders. This means that while the shareholders’ approval had yet to be obtained when the agreements were executed, it was clear that they could only be enforced after approvals were obtained.
The Plaintiff, Concrete Parade Sdn Bhd, took out an action against Apex Equity and its directors, JF Apex, Mercury Securities and the private placees for colluding to oppress the minority shareholders by diluting their shareholding and facilitating a covert reverse takeover of Apex Equity without needing to comply with the Rules on Take-Overs, Mergers and Compulsory Acquisitions.
The alleged dilution stems from a breach of Section 85 of the Companies Act 2016 which provides a statutory pre-emptive right to subscribe for new shares, and a breach of Section 223 of the Companies Act 2016 which restricts acquisitions and disposals of substantial company property and undertaking. After this action, a shareholders’ meeting was convened during which the merger exercise was approved on the terms set out in the BMA and Subscription Agreements.
High Court’s Decision
High Court dismissed the Plaintiff’s action, holding that:
- there was no breach of Section 85 of the Companies Act 2016 given that the merger was approved at the shareholders’ meeting
- there was no need to specify in the circular to shareholders that they would be effectively waiving their pre-emptive rights to subscribe for the new shares, because any reasonably incumbent shareholder would have understood that the private placement would have the effect of diluting his shares in Apex Equity. There was no need to use specific words denoting the waiver of a right of pre-emption, and the failure to do so would not amount to an act of oppression
- given that the BMA has made the shareholders’ approval as a condition precedent, there was no contravention of Section 223(1) of the Companies Act 2016
- directors could rely on Section 75 of the Companies Act 2016 to obtain the shareholders approval later
- the HOA, though expressed to be legally binding, did not have the effect of creating enforceable obligations on a company to acquire an asset of substantial value or to dispose a substantial portion of its assets. It was therefore not subject to the requirement of shareholders’ approval under Section 223(1) of the Companies Act 2016
- the HOA has in any event been superseded by the BMA, and the question of whether it was void has become academic
- there was accordingly no prejudice to Concrete Parade as a shareholder entitling a claim for oppression.
Court of Appeal’s Decision
The Court of Appeal completely overturned the High Court’s decision. It found, amongst others, that:
- Section 85 of the Companies Act 2016 had been breached, and could not be cured by a subsequent shareholders’ meeting
- Any waiver by election is only valid if the shareholder had knowledge of his legal rights and consciously chose not to exercise it
- Any such waiver of the pre-emptive right must be obtained even before the shares are offered to outsiders, before any agreement to offer, issue or allot shares to outsiders are executed regardless of whether they are made conditional on a shareholders’ resolution being procured
- Any resolution for such waiver must set out all the requisite information regarding the shareholders’ pre-emptive rights under Section 85 of the Companies Act 2016. This includes expressly informing shareholders that existing shareholders have a statutory pre-emptive right to be offered any new shares which rank equally to existing shares (read together with corresponding Article 11 of the company’s constitution providing for pre-emptive rights), and that by voting for in favour of the resolution, the shareholders would be waiving their statutory pre-emptive right
- Section 75 of the Companies Act 2016 cannot be used to bypass the safeguard under Section 85 of the Companies Act 2016. This would mean that prior approval by the shareholders would still be required before directors can invoke Section 75 of the Companies Act 2016 to issue fresh shares to outsiders
- Regarding Section 223 of the Companies Act 2016:
- it is to be construed as requiring that any arrangement or transaction, for the acquisition or disposal of a substantial asset or undertaking, contain a condition precedent for shareholder approval, OR that before such arrangement is ‘carried into effect’, a prior shareholder approval is obtained
- this means that any starting point is the initial ‘arrangement’ which must include a condition precedent. On the facts, the starting point is the HOA which was stated to be legally binding. This is in line with the principle that where parties have entered into a contract which outlines the principal terms, such obligation is enforceable irrespective of whether further terms will be incorporated in a subsequent agreement
- the execution of the BMA is considered as ‘carrying into effect’ the HOA, and must be preceded by a shareholders’ resolution. Given the failure to first obtain a shareholders’ resolution, the BMA is therefore illegal.
Impact on Deals and Practice
In terms of impact on corporate practice:
- A shareholders’ resolution by existing shareholders must be obtained prior to executing any agreement to issue fresh shares to outsiders. The resolution must specifically contain a waiver of pre-emptive rights under Section 85 of the Companies Act 2016
- Naturally, this may have implications on the sensible practice of keeping corporate deals and transactions confidential prior to finalisation
- A possible solution would be to pass a resolution approving a general mandate for the Board of Directors to issue fresh shares up to a certain percentage of the existing issued share capital. Such an early mandate would address the need to keep certain transactions confidential until finalised at the management level and ready to be voted on by shareholders in terms of its execution. On the flipside, the board of directors will need to be prepared to explain and justify the utility of such a mandate
- As for Section 223(1)(A) of the Companies Act 2016, it is more applicable for the acquisition and disposal of assets and undertakings of substantial value. The point to take away is that the exception under this section is only applicable to the first legally binding document (which includes, if we take the definition at its widest, any letter of offer, memorandum of understanding, agreement to agree, and any agreement which is subject to more comprehensive terms being agreed on), agreements relating to or concerning the issuance of fresh shares which are meant to precede a finalised comprehensive agreement or document should include a clause expressly stating that it is not legally binding. Conditions precedents alone will be insufficient to completely remove the risk of a challenge by shareholders.
Note: This article does not constitute and should not be relied on or treated as legal advice on or with respect to any particular case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.