Majority, minority and approval: who may vote, and who must abstain

Hook

One boss holds seventy per cent, another holds thirty. The one with seventy wants to sell a piece of the company's land to another company in his own name. He calls a general meeting, they vote, seven to three, carried. The procedure looks complete. But the transaction may be void. And more surprising still — in a private limited company he really can cast his own vote. The place where the law stops him is not the vote.

First, who is a "substantial shareholder"

Start with a threshold most people guess wrong. What is a substantial shareholder? Most people guess fifty per cent, or thirty. The provision says five per cent. Hold not less than five per cent of the voting shares and you are a substantial shareholder. Five per cent. That threshold is low enough that almost every shareholder in an SME is a substantial shareholder. Why start there? Because the rule that follows — the one about needing shareholder approval — governs directors, substantial shareholders, and persons connected with them. With a threshold that low, it happens to you far more often than you think.

Which transactions need shareholder approval

Section 228 of the Companies Act 2016: where a company is to buy from or sell to a director, a substantial shareholder, or a person connected with them, shares or non-cash assets of the requisite value, it must first obtain shareholder approval in general meeting. So what is the requisite value? For an unlisted company the provision gives two tests. First: value above two hundred and fifty thousand ringgit — approval needed. Second: even if it is below two hundred and fifty thousand, if it exceeds ten per cent of the company's net assets and is not less than fifty thousand ringgit — approval is needed just the same. Net assets are taken from the previous financial year's accounts. So, in one line: below fifty thousand, no. Between fifty thousand and two hundred and fifty thousand, check whether it exceeds ten per cent of net assets. Above two hundred and fifty thousand, always. And there is a trap a lot of people do not see coming: "non-cash asset" is wider than you think. The provision says it includes the release of any person's obligation. Which means that writing off the debit balance sitting in the boss's name is itself a transaction that needs approval. It is not only transferring the car into the boss's name that counts. Striking a figure out of the books counts too.

The consequences of no approval

What happens without prior approval? First, the transaction itself is void. It is not a matter of paying a fine — in law that sale never happened. Second, the person who received the benefit must account for the gain, and must indemnify the company for its loss — together with the directors who knowingly authorised it. Third, the criminal liability: five years, or three million ringgit, or both. And a parallel rule while we are here: section 223. If what the company is disposing of is an asset of substantial value — and the provision's test is the highest of three: more than twenty-five per cent of total assets, or net profits from it of more than twenty-five per cent of the company's total net profits, or more than twenty-five per cent of issued share capital — that needs shareholder approval as well. Same again: no approval, and the transaction is void.

The most counter-intuitive part: who must abstain

Now the question we opened with. The boss with seventy per cent is an interested party in this transaction. May he cast his own vote? The instinct is: of course not, he has to abstain. What does the provision actually say? Section 228 says: "in the case of a public company, or a holding company or subsidiary of a public company", the interested director, substantial shareholder or connected person shall abstain from voting. Note that — the provision says public company. A private company is not inside that sentence. In other words: in a private limited company, an interested controlling shareholder is not legally barred from voting. He can use his seventy per cent to approve his own transaction. And that is not an oversight. Another provision, the one on compensation for loss of office of a director, also writes the abstention duty for public companies only — the two are drafted consistently. So what does the minority do?

The minority's four lines of defence

The minority does not rely on abstention. It relies on these four. First line: a transaction with no meeting is void in itself. This is the most practical of the four — no number of votes can save a transaction that never went through approval. A great many disputes are not really about an unfair vote; they are about a meeting that was never held at all. Second line: the person who benefited must account for the gain and indemnify the company, and the directors who knowingly authorised it are liable alongside him. Third line: any shareholder may apply to the court for an injunction and stop the transaction before it is carried out. Fourth line, and the most important: the oppression remedy. Section 346: where the affairs of the company are being conducted, or the powers of the directors are being exercised, in a manner oppressive to some of the members or in disregard of their interests; or where some resolution unfairly discriminates against some of the members — the court may set aside or vary that transaction, may regulate how the company is run in future, and may even order that the applicant's shares be bought out by the other members or by the company. That last sentence is the real bargaining chip in the hands of the shareholder with thirty per cent.

Two lines, one for each side

I want to leave two lines from this episode, one for each side. For the minority: in a private limited company you cannot stop the majority from voting. Do not spend your energy there. But you can stop a transaction that was done without a meeting, and you have section 346 in your hand. For the majority, the line is the reverse: votes cannot cure procedure. However many people you have and however many shares you hold — no meeting, a resolution that does not say enough, a value nobody worked out, and the transaction is void all the same. And the person left clearing up a void transaction is usually the one who thought at the outset that he had it won.

To close

That is four episodes done: lending to a director, moving funds inside a group, preference shares, and today's approval and abstention. All four are really about one thing: the company's money is not your money — even if the company is one hundred per cent yours. There is procedure in between. Get the procedure right and every one of these things can be done. Want the director's current account, the group lending and the resolutions that should be there all cleared up in one go? Grab a coffee first and talk about your business. For the accounting, come to LTT. I am LTT, helping SME bosses get their accounts straight. Follow us, and see you next time.