Government Directive to GLCs on Tajuddin Ramli Breaches Fundamental Company Laws

The curious case of being instructed to settle a case by the Government who has no business to give such an instruction, and who should really mind its own business.

It is wrong for the Government to direct GLCs (“Government Linked Companies”) to settle their court cases with Tajuddin Ramli in relation to MAS, and to appoint a specific lawyer to represent the GLCs for that purpose. See here for the direction. Such a direction breaches many fundamental principles of company law, and is odious to notions of accountability and transparency.

In law, a company is regarded as a separate legal entity from its shareholders. The power to manage the company resides with its board of directors. This power does not belong to the shareholders. If the shareholders are unhappy with the board’s decision, they may call for a general meeting to remove the board and replace them.

The board is not free to use its powers at its whims and fancies; it has to exercise those powers in the best interests of the company. The board cannot exercise it in the best interest of a particular group of shareholders. Not even the majority shareholders. Many of the laws governing the internal administration of companies exist for the protection of minority shareholders.

The board’s powers of management include controlling the conduct of litigation involving the company – for example, making decisions as to whether to sue, who to sue, which lawyer to appoint, whether to settle out of court, or continue with suit. Such power, like all the board’s other powers, has to be exercised in the best interests of the company.

In corporate Malaysia, a directive from the Government has too long been treated as sacrosanct. This myth was recently busted by Mohd Hishamudin Mohd Yunus, JCA in Tenaga Nasional Berhad v Manfield Development Sdn Bhd [2011] 2 AMR 826. This was what the learned Judge held:

Although the government has some indirect control over the defendant through its nominees on the board of the defendant, yet as a matter of strict law Tenaga Nasional Berhad (the defendant/appellant) is a separate legal entity from the Government of Malaysia. As a company, the defendant has its own board of directors who owes a fiduciary duty and is accountable to the shareholders; and the company is subject to the Companies Act 1965 and to legal principles concerning corporate governance. It cannot just obey the directive of the government blindly.

Perhaps in the past there might had been occasions where the defendant had abided by the directive of the government on matters pertaining to commercial dealings of the defendant with private entities. But in those situations, unless a directive is clearly pursuant to a specific statutory provision, compliance with the government’s directive was merely out of deference to the government, and not as a matter of legal obligation.

In the present case, in respect of the commercial dealing or transaction of the defendant with the plaintiffs, the government cannot legally make a decision on behalf of the defendant.

Four key points emerge from the above passage:

1. A company’s board of directors owes a fiduciary duty and is accountable to the shareholders. The company is subject to the Companies Act 1965 and to legal principles concerning corporate governance.
2. A company’s board of directors cannot just obey the directive of the government blindly.
3. A company’s board of directors is under no legal obligation to comply with the government’s directive, unless such directive was clearly pursuant to a specific statutory provision.
4. A GLC — which in that case was Tenaga Nasional — is no different, and is equally subject to the above legal principles like any other company.

Applying the key points to the MAS – Tajuddin Ramli directive, it is for the GLCs’ respective board of directors to decide whether or not they should settle their court actions against Tajuddin Ramli. It is also for them to decide on their choice of lawyer. The Government’s directive on those two points was not made pursuant to any specific statutory provision. The Government therefore had no legal power to issue such a directive. As a corollary, the GLCs are not under any legal obligation to comply with such a directive.

The GLC directors have to independently assess whether the settlement and appointing the recommended lawyer are in the best interests of their respective companies.

The directive is an attempt by the Government to improperly interfere with the running of the GLCs. Such interference is an endemic problem in a country where the Government is in business, and both governing and business have been mixed up for so long that the wall separating the two is now dangerously porous.

WTF (or Bizarre Business Begets Bile)

Aside from the above, the directive bizarrely starts off by declaring that the Government and the Ministry of Finance have agreed to settle all civil claims cases against Tajuddin Ramli. Bizarre because the Government and the Ministry are not the ones making those claims. The GLCs are the claimants. And under the law these GLCs are different persons from the Government and the Ministry.

To top it off, the GLCs are not told of the settlement proposal (assuming it exists); if they want to know, they have to appoint the lawyer nominated by the Government to act for them! See here for this shocker.

Apparently, only that lawyer and Tajuddin Ramli know what is the settlement proposal. So, not even the Government or any other person knew. Taking this at face value, albeit very cynically, it would mean that the Government and the Ministry agreed on settlement when both did not know what that settlement entails. And not knowing what it is, they had the gall to direct the GLCs to take it!

We either have morons helming the ship, or something else is going on.

The opaque way that the Government has gone about this is highly dubious by any standard. From the circumstances, the conclusion is inescapable — whatever this deal is, the minority shareholders of the GLCs and the public at large are going to lose out. Again.