Division Of Powers Between Shareholders And Directors

Author:Mr Lee Shih and Joyce Lim Hwee Yin

Lee Shih and Joyce Lim discuss the effect of the Federal Court's decision in the Petra Perdana case.

On 14 December 2017, the Federal Court delivered its grounds of judgment in the case of Tengku Dato' Ibrahim Petra bin Tengku Indra Petra v Petra Perdana Bhd [2018] 2 MLJ 177 ("Petra Perdana"). This case relates to two appeals which emanated from a High Court action relating to questions in company law on governance and management of a company as between its directors and shareholders in general meetings. In particular, it gives guidance on the division of powers between the shareholders and directors on managing the affairs of a company and sets out the test to be adopted in determining whether a director has acted in the best interest of the company.


The plaintiff, Petra Perdana Berhad ("PPB"), owned 126 million ordinary shares in Petra Energy Berhad ("PEB"), amounting to approximately 64.62% of the issued and paid up capital of PEB. At all material times, the three defendants were directors of PPB.

In April 2007, an ordinary resolution was passed and a general mandate was given to PPB to, among others, divest up to 19.5 million of its shares in PEB ("Shareholders' Divestment Mandate"). On or about 10 December 2007, PPB divested 9 million of its PEB shares (which represented approximately 4.62% equity stake in PEB), thereby reducing PPB's holding in PEB from 64.62% to 60%. The Shareholders' Divestment Mandate was renewed on an annual basis.

Subsequently, pursuant to payment demands by a ship builder in respect of the balance purchase price of a vessel, PPB's board of directors resolved in August 2009 to sell 10.5 million PEB shares (5.38% equity stake in PEB) ("August Board Mandate"). Pursuant to the August Board Mandate, PPB divested 10.5 million PEB shares on 10 September 2009, reducing its stake in PEB from 60% to 54.62% ("Second Divestment").

By November 2009, PPB was facing serious financial difficulties and cash flow problems. After considering various fundraising options, PPB's board of directors resolved to divest PPB's remaining 54.62% shareholding in PEB ("November Board Mandate"). Pursuant to the November Board Mandate, PPB sold 48.8 million PEB shares (25.03% equity stake in PEB) to Shorefield Resources Sdn Bhd ("Shorefield"), resulting in Shorefield becoming the controlling shareholder of PEB ("Third Divestment"). The proceeds of the disposal obtained from the Third Divestment were utilised to pare down bank borrowings and the gearing ratio of PPB's group of companies. The Third Divestment also resulted in a gain of approximately RM13.7 million for PPB's group of companies.

During the board of directors' meeting on 22 December 2009, the PPB board deliberated on the divestment of the remaining 29.59% shareholding in PEB pursuant to the November Board Mandate ("Intended Fourth Divestment"). The Intended Fourth Divestment did not take place as an injunction was obtained in the High Court by one of PPB's directors to restrain...

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