FOR many company directors, company secretaries and even shareholders, Section 195 of the Companies Act 2016 is perhaps best known as the provision that allows members to ask questions at annual general meetings.
It is frequently cited by chairpersons when opening the floor for questions and equally relied upon by shareholders to seek clarification on the company’s affairs.
Yet, reducing Section 195 to merely a “question-and-answer” provision overlooks what may arguably be its more significant purpose.
Hidden within the section is a mechanism that allows shareholders not only to question management, but also to make recommendations on how the company should be managed.
More interestingly, the Companies Act itself contemplates circumstances in which those recommendations may become binding on the board.
This article is not written from the perspective of a legal practitioner, nor is it intended to offer a legal opinion on the interpretation of Section 195.
Rather, it is written through the lens of a minority shareholder advocate who has attended hundreds of general meetings over the years and observed how the provision operates in practice.
The objective is not to debate statutory construction.
The objective is to explore whether the current application of Section 195 truly reflects the spirit of shareholder participation that Parliament intended when the Companies Act 2016 was enacted.
Recent developments at the general meetings of Talam Transform Bhd
and Tan Chong Motor Holdings Bhd have reignited an important discussion on the practical operation of Section 195.
While the issues before the two companies were entirely different, both meetings tested the boundaries of shareholder participation in ways that few general meetings have done before.
In doing so, they exposed several unanswered governance questions, particularly on whether Section 195, as currently practised, has become a statutory right that offers shareholders a voice, but seldom meaningful influence.
No one disputes that directors are entrusted with managing the company’s affairs.
Section 211 of the Companies Act makes that abundantly clear, and directors remain subject to fiduciary duties to act honestly, in good faith and in the best interest of the company.
Equally, shareholders should not expect to manage the day-to-day affairs of the business through resolutions at general meetings.
Yet, Section 195 suggests that shareholders should play a more meaningful role than merely asking questions and receiving prepared answers.
If so, an important question arises: when shareholders make recommendations under Section 195, who ultimately determines whether those recommendations deserve to carry legal effect?
Perhaps the time has come for regulators, practitioners and market participants to revisit not what Section 195 says, but how it actually works.
A recommendation – But only if the board agrees?
The most interesting aspect of Section 195 is not subsection (1), which requires the chairperson to provide members with a reasonable opportunity to question, discuss, comment or make recommendations on the management of the company.
That principle is now widely accepted and forms part of the routine conduct of most general meetings.
The more thought-provoking provision lies in subsections (2) and (3), which contemplate that recommendations made by shareholders may become binding under certain circumstances.
Broadly speaking, the section envisages two possible pathways. The first is where the directors consider the recommendation to be in the best interest of the company.
The second is where shareholders pass the recommendation by way of a special resolution. On paper, this appears to strike a sensible balance.
Directors retain their statutory responsibility to manage the company, while shareholders retain an avenue to influence management where there is overwhelming support.
The balance between board primacy and shareholder democracy appears, at least conceptually, to have been preserved.
The practical difficulty, however, lies in the first pathway. Who determines whether a recommendation is in the best interest of the company?
The answer appears to be the board itself.
That may seem perfectly logical where shareholder recommendations concern ordinary operational matters.
However, the position becomes considerably more complicated where the recommendation itself concerns board accountability, governance failures or an independent investigation into matters involving the directors.
Can shareholders realistically expect the board to conclude that such recommendations are in the company’s best interest?
More importantly, should the effectiveness of a shareholder recommendation depend almost entirely upon the willingness of the board to endorse it?
The alternative route, a special resolution, is available but considerably more demanding.
Achieving a 75% majority is rarely straightforward, particularly in companies with concentrated shareholdings.
Consequently, most shareholder recommendations are likely to be proposed as ordinary resolutions and, unless endorsed by the board, remain non-binding from the outset.
This raises an intriguing governance question. Has Section 195 unintentionally evolved into a provision where shareholder recommendations are, in reality, almost always destined to remain recommendations?
If so, is the statutory right more symbolic than substantive?
Talam test: When the board becomes the gatekeeper
The recent extraordinary general meeting of Talam Transform Bhd illustrates why these questions are far from theoretical.
Among the resolutions proposed by the requisitionists was a recommendation that the company appoint forensic auditors to undertake an independent review.
The recommendation was significant because it related directly to corporate governance and oversight rather than the ordinary conduct of business.
It was, in essence, a request for the board to initiate an independent process that the requisitionists believed was necessary in the interests of shareholders.
The board, however, did not share that view. It considered that the proposal was not in the best interest of the company.
As a result, the resolutions proceeded as ordinary resolutions and, irrespective of the eventual voting outcome, could only amount to non-binding recommendations under Section 195.
This sequence of events exposes an interesting governance dilemma.
If shareholder recommendations questioning board conduct or seeking independent investigations are assessed by the very board whose actions may be under scrutiny, can the first limb of Section 195 ever realistically operate?
Put differently, does the provision create a theoretical mechanism for binding shareholder recommendations that, in practice, may be almost impossible to invoke?
None of this suggests that directors should simply follow every recommendation made by shareholders.
Directors must continue to exercise independent judgment and discharge their fiduciary obligations. However, where recommendations concern governance and accountability, one may legitimately ask whether the current framework gives the board an effective veto over the operation of Section 195.
If the answer is yes, does that diminish the practical significance of the provision?
These are not merely legal questions. They are governance questions.
The Tan Chong dilemma: Can the board simply stay silent?
If Talam tested one aspect of Section 195, the recent requisitioned meeting of Tan Chong Motor Holdings Bhd tested another.
Unlike Talam, the more interesting issue was not whether the board considered the proposed governance-related resolutions to be in the company’s best interest.
Rather, the board appeared to adopt no position at all. The requisitionists themselves tabled the proposed governance and disclosure resolutions as ordinary resolutions, thereby making them non-binding from the outset.
This raises what may be an even more difficult question.
Can a board simply decline to determine whether a recommendation is in the company’s best interests?
If directors neither support nor oppose the recommendation, does Section 195 simply default to a position where the recommendation remains non-binding?
If that is indeed the practical outcome, does the legislation inadvertently allow boards to avoid engaging with the first limb of Section 195 altogether?
There may well be legitimate reasons for boards to remain neutral, particularly where the resolutions originate from requisitionists rather than the company itself.
Equally, directors may consider it inappropriate to advocate for or against shareholder proposals in certain circumstances.
Nevertheless, the governance implications deserve closer examination.
If boards are able to remain silent, should they at least be required to explain whether they considered the recommendation to be in the company’s best interest and, if not, why?
Otherwise, silence itself may become a governance strategy. That surely cannot have been the intended outcome of a provision designed to encourage meaningful shareholder participation.
The voting paradox
The recent meetings also raise another question that appears to have received little attention.
If everyone accepts that a recommendation is non-binding, should controlling shareholders vote on it at all?
From a strictly legal perspective, there may be nothing preventing them from doing so.
Yet from a governance perspective, the issue deserves further thought. If the recommendation carries no binding legal effect, the vote arguably serves a different purpose. It becomes a mechanism for shareholders to express their collective sentiment on an issue affecting the company’s governance.
Viewed through that lens, there may be merit in controlling shareholders voluntarily abstaining.
Doing so would allow the company, the market and the board to better understand the views of independent shareholders without altering the legal consequences of the resolution.
If the recommendation is non-binding in any event, why should there be concern about allowing minority shareholders to express that sentiment without being diluted by the votes of controlling shareholders?
The analysis may become even more compelling where shareholders seek to pursue the statutory pathway that would render a recommendation binding.
In such circumstances, particularly where the subject matter concerns governance, accountability or potential conflicts, there is at least a credible governance argument that controlling shareholders should voluntarily abstain. Such abstention would enhance confidence that the outcome genuinely reflects the views of those shareholders whom the governance framework is principally designed to protect.
The Companies Act and the Listing Requirements do not presently address this issue. That, however, should not prevent the market from considering whether good governance ought to demand more than the minimum legal requirement.
From shareholder voice to shareholder influence
The recent meetings at Talam Transform and Tan Chong Motor Holdings were never simply about the resolutions placed before shareholders.
Instead, they exposed several unanswered questions regarding the practical operation of Section 195 itself. They demonstrated that while the statutory framework seeks to balance shareholder participation with board authority, its application in practice may not always produce the outcomes that shareholders envisage.
Perhaps the time has come for a broader discussion. Should directors be expected to expressly determine whether shareholder recommendations are in the best interest of the company instead of remaining silent? Should Bursa Malaysia or the Securities Commission issue guidance on the practical operation of Section 195, particularly where recommendations concern governance and board accountability?
Should boards provide post-meeting explanations where they reject or decline to adopt shareholder recommendations?
And should controlling shareholders voluntarily abstain on non-binding governance recommendations to allow minority shareholder sentiment to be more accurately measured?
These questions are unlikely to find easy answers, nor is this article intended to suggest that the current framework is legally flawed.
However, from the perspective of minority shareholder advocacy, they are questions worth asking.
The Companies Act introduced Section 195 to strengthen shareholder participation, not merely to provide shareholders with another opportunity to speak.
After all, there is an important distinction between having a voice and having influence.
Unless the market is prepared to confront the practical challenges exposed by recent meetings, Section 195 risks becoming remembered not as the provision that empowered shareholders, but as the provision that allowed them to make recommendations that were never intended to matter.
Dr Ismet Yusoff is the chief executive officer of the Minority Shareholders Watch Group. The views expressed here are the writer’s own.
