Removing a Director from a Malaysian Private Company

The Statutory Power to Remove Directors

Section 206 of the Companies Act 2016 gives shareholders of a Malaysian company a statutory right to remove any director before the expiry of their period of office. This power exists regardless of anything in the company's constitution or in any agreement between the company and the director.

This means that even if a director was appointed for a fixed term, or the constitution says a director can only be removed for specific reasons, shareholders can still use section 206 to remove them. The statute overrides any contractual or constitutional provisions that would otherwise protect the director's position.

However, while the shareholders can remove the director from office, this does not affect any claim the director may have for damages arising from the termination. If the director had a service contract with the company, removing them as a director may amount to a breach of that contract.

Special Notice Requirements

A resolution to remove a director under section 206 requires what the law calls "special notice." Section 207 of the Companies Act 2016 sets out this requirement in detail.

Notice to the Company

The shareholder who wants to propose the removal resolution must give notice of their intention to the company at least 28 days before the meeting at which the resolution will be moved. This is not the same as the notice for the meeting itself—it is a separate notice that must be given to the company.

Notice to Shareholders and the Director

Once the company receives this special notice, it must do two things:

• Send a copy of the notice to all shareholders entitled to attend the meeting, at the same time and in the same manner as the notice of the meeting
• Send a copy of the notice to the director who is proposed to be removed

If this is not practicable because there is insufficient time, the company must give notice by advertisement in a newspaper circulating in the place where the company's registered office is situated, or by any other means allowed by the constitution, at least 14 days before the meeting.

The Director's Right to Make Representations

The Companies Act 2016 gives the director facing removal important rights to be heard. These rights ensure that shareholders can make an informed decision.

Written Representations

The director may make written representations to the company, not exceeding a reasonable length, and request that these be sent to every shareholder who receives notice of the meeting. If the company receives these representations in time, it must state in the notice of the meeting that representations have been made and send a copy to every shareholder.

If the representations are received too late or the company fails to send them, the director may require that they be read out at the meeting before the resolution is voted on.

Speaking at the Meeting

Whether or not the director makes written representations, they have the right to be heard at the meeting on the resolution to remove them. This is a personal right that the director can exercise even if they are not a shareholder of the company.

Court Intervention

The company or any person who claims to be aggrieved may apply to the court for an order that the representations need not be sent out or read at the meeting. The court may make such an order if it is satisfied that the director is using the right to make representations to secure needless publicity for defamatory matter.

The Resolution and Voting

The resolution to remove a director is an ordinary resolution, meaning it requires a simple majority of the votes cast by shareholders entitled to vote. However, this straightforward position can be complicated by the company's constitution.

Weighted Voting Rights

While section 206 prevents the constitution from making a director irremovable, it does not prevent the constitution from giving certain shares weighted voting rights on a resolution to remove a director. A well-known example from English case law, which Malaysian courts have followed, established that a constitution may validly provide that a director's shares carry extra votes when a resolution to remove them is proposed.

This means that in some private companies, particularly those set up as quasi-partnerships or joint ventures, the constitution may effectively make it very difficult or impossible to remove a director who holds shares with weighted voting rights.

Quorum Requirements

The constitution may also specify quorum requirements for general meetings. If the director being removed must be present for a quorum and refuses to attend, this can create practical difficulties in holding the meeting.

Common Disputes Following Removal

The removal of a director often triggers further legal disputes, particularly in private companies where directors are also shareholders or have service agreements.

Breach of Service Contract

If the removed director had a contract of employment or a service agreement with the company, their removal may constitute a wrongful termination. The director may claim damages for breach of contract, including loss of salary, benefits, and any notice period they were entitled to.

Unfair Prejudice Claims

In private companies where the director is also a shareholder, removal may form the basis of a claim for relief from unfairly prejudicial conduct under section 346 of the Companies Act 2016. This is particularly common where the company was operated as a quasi-partnership and there was an understanding that all shareholders would participate in management.

Shareholder Disputes

The removal of a director frequently escalates into broader shareholder disputes. These may involve allegations about the management of the company, access to company information, dividend policies, or the valuation and purchase of shares.

Defamation

Disputes sometimes arise from statements made during the removal process. The director's representations, or statements made by shareholders proposing the removal, may give rise to claims in defamation if they contain untrue and damaging allegations. The Defamation Act 1957 governs such claims in Malaysia.

Practical Considerations

Before initiating the removal process, shareholders should consider several practical matters.

First, review the company's constitution carefully. Check for any weighted voting provisions, quorum requirements, or other mechanisms that may affect the outcome.

Second, consider whether the director has any agreements with the company that may give rise to claims if they are removed. This includes service contracts, loan agreements, or guarantees.

Third, ensure that the proper procedures are followed precisely. Failure to comply with the notice requirements can invalidate the resolution and expose the company to challenge.

Finally, in companies with complex shareholding structures or where the director holds a significant stake, it may be worth exploring whether a negotiated exit would be more practical than a contested removal.

Common questions

Can shareholders remove a director even if the constitution says they cannot?

Yes. Section 206 of the Companies Act 2016 gives shareholders this power regardless of anything in the company's constitution or any agreement with the director. The statute overrides conflicting constitutional provisions.

How much notice must be given to remove a director?

The shareholder proposing removal must give the company at least 28 days' special notice before the meeting. The company must then notify all shareholders and the affected director before the meeting takes place.

Can the director being removed speak at the meeting?

Yes. The director has a statutory right to be heard at the meeting and may also submit written representations to be circulated to shareholders beforehand or read out at the meeting.

What majority is needed to remove a director?

An ordinary resolution is required, meaning a simple majority of votes cast by shareholders entitled to vote. However, the constitution may give certain shares weighted voting rights that affect the outcome.

Can a removed director claim damages under a service contract?

Removal does not affect any contractual rights. If the director had a service agreement with the company, they may claim damages for breach of contract, including lost salary and benefits.