FEATURED ARTICLES _ARTICLE ONEGroup Governance:<strong>Directors</strong> with Many HatsBy Philip Koh Tong NgeeThe Modern corporation is many hydra forms. Complexstructures include pyramidal form, chain –ownershipforms (popular in Asia as entrepreneurs leveraged their ninvestments with outsider investors). There could also benetwork cross –holdings with dominant substantial block.but at another the law holds her accountable to dischargeher duties for the interests of the corporation in which sheholds office irrespective of her being an employee of theappointer. The dualities and overlapping duties coalesceespecially in contested and questionable transactions.MALAYSIAN DIRECTORS ACADEMYBob Tricker has observed that there are two distinctoptions in governance and management structureof conglomerates. One which embraces Group selfgovernancewith each company governing itself subjectto overall group policies. Alternatively group widegovernance where entities are treated as divisions ordepartments of holding company.Group entities abound and directors find that their rolesmay intertwined and that whilst being a director at theholding board level they may be nominated to hold office ina subsidiary or related company to represent, defend andensure that interest of the appointer corporation. It is alsocommon that joint venture company have nominee directorswhich specifically are appointed to ensure that the distinctinterest of the joint venture partners are not negated.The dilemmas confronting a nominee director are acuteand complex. At one level she owes duty to her appointerNominee <strong>Directors</strong> in MalaysiaThe first time it was recognised in legislation was in thePengurusan Danaharta Nasional Berhad Act 1998, whichconferred a right on the special administrator to appoint aperson on to the board of a defaulting company to overseeand represent the interest of the special administrator.Section 132(1E) of the Companies Act 1965 now recognisesthat there can be a director who has been appointed by virtueof being an employee of a company or as a representative ofa shareholder, employer or debenture holder.Section 132(1E) of the Companies Act 1965 statescategorically that a nominee director “shall act in the bestinterest of the company and in the event of any conflictbetween his duty to act in the best interest of the companyand his duty to his nominator, he shall not subordinate hisduty to act in the best interest of the company to his dutyto his nominator.”4
FEATURED ARTICLES _ARTICLE ONEIn an earlier version of a consultative bill that lead topassage of Companies (Amendment) Act 2007 it was firstproposed by the Companies’ Commission of Malaysia(“CCM”), a nominee director is to owe an exclusiveduty to the company to which he has been appointed.If these wordings had prevailed, nominee directors inMalaysia would have found themselves in an impossibleand untenable role. It is laudable that the CCM wassensible, and took into account representations from themarketplace so that the law on nominees is now put on arealistic footing.In Malaysia, institutions such as Permodalan NasionalBerhad, Khazanah Nasional Berhad and the Employees’Provident Fund have many such appointees who act asnominee directors on boards of corporations in which theyhold substantial interests.Non –Fettering of DiscretionIn one early case Kregor v Hollins (1913) the principle wasestablished that a director cannot fetter his discretion byway of a contract with an outsider. Hollins invested £5, 000and agreed to pay remuneration to Kregor to act as hisnominee director. Hollins defaulted in paying and Kregorsucceeded in a suit when there was a finding of fact that theagreement did not obligate Kregor to put Hollin’s interestabove that of the company. Implicit however to the findingis that if Kregor was to prefer the interest of Hollins tothat of the shareholders and that if there is “ conflict that(Kregor) was to promote (Hollin’s) interests rather thanthe interests of the whole body of shareholders whichwere in conflict ,” then the agreement will be unlawful .Governance & Nominee in Joint ventureA case involving minority oppression which highlighted theplight of nominee was the Scottish Co-operative wholesalesociety ltd v Meyer & Ors [1959] The Scottish Co-operativeWholesale (Co-Op) with Meyer formed a Joint ventureCompany (JVC) to manufacture rayon cloth. The Co–Op isthe majority shareholder and had three nominee directorswhilst Meyer and his partner have the expertise to securelicense and held the balance of board seats. When thecommercial basis for the JVC ceased as licensing was nolonger required the Co-Op embarked on corporate actionsthat effectively transfer the business to another and alsoby stopping supplies of raw materials to the JVC.In the telling words of Lord Denning, “so long as theinterest of the two companies was in harmony, there isno difficulty. The nominee directors could do their dutiesto both companies without embarrassment. But so soonas the interests of the two companies were in conflict,the nominee directors were placed in an impossiblesituation.”The passivity of the nominee directors werejudicially criticised as “they did nothing to defend theinterests of the JVC against the conduct of the Co-Op. TheHouse of Lords held that by subordinating the affairs ofthe JVC to that of the appointer Co-op that the affairs ofthe JVC has been conducted oppressively and remediesare available to the minority .What the case illustrates is that matters concerning JVCbusiness must be dealt with at the JVC level in accordancewith the laws which the JVC is incorporated. JV partnersmust resolve matters between themselves throughnegotiated settlement and if necessary amendment of theJV agreement.Multiple Duties of Nominees RecognisedThe Kuwait Asia Bank holds 40% shares in AICS, aNZ company, which was involved in deposit takingfrom public. Two employees, H and A, of the bank wasappointed to be two of five directors of AICS when AICSwent into liquidation NMLN , as trustees of depositorsbrought action against H and A and also the bank .ThePrivy Council held that whilst there is prima facie caseagainst H and A for negligence a claim against the bank( in absence of bad faith or fraud ) failed. H and A owedthree separate duties. Firstly, to AICS of which they aredirectors. Secondly H and A owed duties of care to NMLNto ensure that honouring of certificates complied with theterms of Trust deed. and finally H and A owed duties theiremployer Bank to exercise reasonable diligence andskill in their performance of their duties as directors ofAICS .both in the scope and nature these are separate anddistinct duties . the appointer bank is not responsible forbreaches of H and A duties to AICS as nay breaches onthe facts do not expose the Bank to vicarious liabilities tocreditors. It was also held that the bank is not a “shadowdirector.”Realism & PracticeIn fact, case law long recognized the amphibious aspectof a nominee director. In the Australian case of Levin vClark (1962), it was argued that the appointments of amortgagee-lender, who had appointed two individuals tothe board of a mortgagor-borrower were invalid, as theywould be acting solely in interests of mortgagee. Thejudge however rejected this argument, and observed that:“to argue that a director particularly appointed for thepurpose of representing the interests of a third party,cannot lawfully act solely in the interests of that party,is in my view to apply the broad principle, governingthe fiduciary duty of directors, to a particular situation,where the breadth of fiduciary duty has been narrowed byagreement amongst the body of shareholders.”However in one <strong>Malaysian</strong> case, it was made clear thata nominee director cannot completely abdicate his dutiesand seek only to advance the interests of his appointer.In one <strong>Malaysian</strong> case, the Judge (Dato’ James FoongJ, as he then was) castigated severely the actions of aMALAYSIAN DIRECTORS ACADEMY 5
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