“BEST OF BOTH WORLDS”
Can I hold the position of a director in two different companies having the same business nature?
Firstly, we need to know what are the duties of a company’s director.
When a company’s director is exercising his powers as a director, he owes a fiduciary duty to the company. A fiduciary duty is a legal or moral duty to do what is best for someone else i.e., in this case, the company.
The law generally treats a company director, being its trustee and agent as a fiduciary (see Percival v Wright [1902] 2 Ch 421).
Hence, a director is required to act in the best interest of the company, and he must use his rights and powers for the benefit of the company. This fiduciary duty is provided under Section 213 of the Companies Act 2016. This means that a director must not put himself in a position where his duties as a fiduciary and his personal interests come into conflict with one another.
In doing so, a director by right, should not be involved in a business that competes with the company, in order to gain a benefit for himself or cause harm to the company.
However, it is worth noting that Section 218(1)(e) of the Companies Act 2016 states:
218 Prohibition against improper use of property, position, etc.
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- A director or officer of a company shall not, without the consent or ratification of a general meeting–
(e) engage in business which is in competition with the company, to gain directly or indirectly, a benefit for himself or any other person, or cause detriment to the company.
The provision above shows that the law actually does not prohibit a director from holding multiple directorships in competing companies at a time PROVIDED ONLY IF it is allowed by CONSENT OR RATIFICATION OF A GENERAL MEETING (see Innobina Sdn Bhd v Innoseal (M) Sdn Bhd [2010] MLJU 183).
So, how does the CONSENT OR RATIFICATION OF A GENERAL MEETING WORK?
In Shanghai Hall Ltd v Chong Mung Foo [1967] 1 MLJ 254, a director is not barred from holding multiple directorships in rival companies provided that the company’s constitution allows for it.
Next, in Kea Holdings Pte Ltd & Anor v Gan Boon Hock [2000] 3 SLR 129 the court held that as long as the director of Company A discloses to Company B, which competes in business with Company A, that apart from being a director in Company A he is also a director in Company B, and this is subsequently approved by Company B in its general meeting, the holding of cross-directorships is not a breach of duty. However, this does not mean that, when the interests of both companies are in conflict, the director could then give priority in any way to Company B while disregarding Company A.
On the RATIFICATION OF A GENERAL MEETING, this general meeting is not to be confused with the annual general meeting, as a general meeting actually means a members’ meeting which is convened either by the Board of Directors under Section 310(a) or the members of the company under Section 310(b), or the Board of Directors upon request by the members under Section 311, of the Companies Act 2016 respectively.
To conclude, yes, you can be a director of competing companies.
BUT, if you are seeking to be a director of another competing company, you need to ensure that there is nothing in the company’s constitution forbidding the action OR you must inform your board of directors and obtain their approval via a general meeting of your company.
Failure on your part to disclose your directorships in competing companies may open you to liability, carrying either a term of imprisonment for a term not exceeding five years or a fine not exceeding RM3 million or both as provided under Section 219(6) of the Companies Act 2016.
Moreover, you may be found to be in breach of your fiduciary duty and the company may claim damages against you.
LASTLY, WHAT IF THE INTEREST OF COMPANY A CONFLICTS WITH THE INTEREST OF COMPANY B?
In the event that while you are holding directorships in competing companies and you are faced with a situation where the interest of Company A conflicts with the interest of Company B, your cause of action in regard to the situation must be disclosed and approved to the company (Kea Holdings Pte Ltd & Anor v Gan Boon Hock [2000] 3 SLR 129). You have to persuade the company to allow you to deal in such a manner that you desire to handle such a situation. While you have to act in the best interests of both companies as their director, the consequential duty that flows from that is you must not subject the interest of one company to another.
Perhaps the words of Lord Justice Upjohn in Boulting v Association of Cinematograph, Television and Allied Technician [1963] 2 QB 606 may be helpful:
“Directors…may sometimes be placed in such a position that though their interest and duty conflict, they can properly and honestly give their services to both sides and serve two masters to the great advantage of both. If the person entitled to the benefit of the rule is content with that position and understands what are his rights in the matter, there is no reason why he should not relax the rule, and it may commercially be very much to his advantage to do so.”
Disclaimer: This article is for informational purposes only and does not constitute any legal advice. If you have any questions, please contact us directly.
