In Malaysia’s fiercely competitive business landscape, the ability to attract and retain top talent is more crucial than ever for corporate growth and sustainability. Companies are increasingly recognizing that the key to employee retention lies not just in traditional rewards but in offering more substantial stakes in the company’s success. Equity Incentive Plans (EIPs) are becoming pivotal in this strategy, providing a robust mechanism to acknowledge and reward employees’ hard work and dedication.

Equity Incentive Plans not only offer varied benefits such as bonuses, salary increments, and promotions but also include more direct forms of participation in company growth, like Stock Options and Employee Share Option Schemes (ESOS). As these incentive structures become more sophisticated and widely recognized for their effectiveness, they play an essential role in motivating employees and fostering a deep sense of belonging and loyalty. This article discusses the various types of Equity Incentive Plans, with a focus on the increasingly popular ESOS, exploring their mechanisms and strategic benefits in enhancing employee retention and company development.

Legal and Regulatory Framework

In Malaysia, the governance and regulation of Equity Incentive Plans, including Employee Share Option Schemes (ESOS), are overseen by one of the key regulatory bodies, Bursa Malaysia. This ensures that all equity incentive offerings align with financial regulations and corporate governance standards.

Bursa Malaysia plays a pivotal role in regulating ESOS under the framework of the Capital Markets and Services Act 2007 (CMSA) along with specific Guidelines on Employee Share Option Schemes. These regulations are designed to ensure transparency and fairness in the administration of equity incentives, safeguarding both corporate interests and employee rights.

Additionally, under Section 129 of the Companies Act 2016, stringent requirements are set for the management of share options. Companies are mandated to maintain a detailed register of all options granted to eligible employees. This register must include critical information such as the grant date, the number and details of shares offered, the terms for exercising the options, and the consideration involved, if any. The company must update this register within fourteen days of granting any options to ensure compliance and maintain transparency.

Failure to adhere to these regulatory requirements, especially those stipulated in Section 129, can lead to significant legal consequences, including penalties under the Companies Act 2016. This underscores the importance of rigorous compliance and accurate record-keeping in the implementation and management of Equity Incentive Plans.

This rigorous regulatory framework not only ensures the proper functioning of equity-based compensation schemes but also reinforces the trust and confidence of employees participating in such plans, ultimately enhancing their effectiveness as tools for retention and motivation.

Types of Equity Incentive Plans

Equity Incentive Plans offer a versatile range of options for Malaysian companies aiming to enhance employee engagement and retention while driving organisational growth. These plans are designed to align the interests of employees with the long-term goals of the company, offering them a stake in the company’s success. Among the various types available, each serves a distinct purpose and offers different benefits. Below, we discuss the popular Employee Share Option Schemes (ESOS) in detail and briefly cover other types of Equity Incentive Plans.

Employee Share Option Scheme (ESOS)

The Employee Share Option Scheme (ESOS) is becoming increasingly popular in today’s competitive business environment, offering selected employees the opportunity to purchase company shares at a price usually below the current market value. This scheme is suitable for companies of any size and serves as a direct way for employees to engage in the growth and profit-sharing of their company.

Under an ESOS, employees are granted options that provide them with a contractual right to purchase shares at a predetermined price within a specific period. The structure and quantity of these options are usually determined by the company’s board of directors or a compensation committee, ensuring that the allocation aligns with broader corporate objectives. These options typically include a vesting period, requiring employees to remain with the company for a certain duration before they can exercise their purchasing rights. This vesting period is strategically designed to enhance employee retention, often staggered over several years to incentivize long-term commitment.

Implementation of ESOS

Implementing an ESOS can occur at any stage of an employee’s career and can be introduced as part of a new hire’s employment package or offered to existing employees as part of their career development and retention strategy. It is critical that the terms of the ESOS are clear and unambiguous to ensure all participants understand their rights and obligations.

The process begins with the grant date, often referred to as the ‘offer date’ or ‘award date,’ which marks the start of the vesting period. Employees must then meet specific criteria set out in the plan, such as duration of service or performance targets before they can exercise their options. Once these conditions are satisfied, employees enter an exercising period during which they can purchase the shares. If they do not exercise their options within this timeframe, the options expire, making it crucial that employees are aware of these timelines. Key terms include:

  • Grant Date: Also known as the ‘offer date’ or ‘award date,’ this is the official date when the options are made available to employees, marking the beginning of the vesting period. This date is crucial as it sets the timeline for all future actions related to the options.
  • Vesting Period: The vesting period defines the time frame employees must wait before they are eligible to exercise their options. This period can be determined by various factors, including:
  • Tenure-Based Vesting: Options vest based on the duration of the employee’s service to the company.
  • Performance-Based Vesting: Vesting occurs upon achieving specific performance targets.
  • Hybrid Vesting: A combination of tenure and performance criteria. This method specifies a timeline that employees must meet to exercise their options, aligning their contributions directly with company goals.
  • Exercising Options and Period: After the vesting conditions are met, employees have the right to purchase shares at the predetermined price.
  • Exercise Period: This is a set period during which vested options can be exercised. It is crucial for employees to act within this timeframe; otherwise, the options may expire if not utilised.

Consider the case of Jenny, who joined Company A in early 2021. Upon completing her probationary period, she was offered ESOS options to buy shares at RM0.20 each, starting after two years of employment. By 2023, having met the vesting criteria, Jenny can exercise her right to purchase these shares. However, if she does not act by July 2025, her options will lapse, underscoring the importance of timing in such schemes.

Strategic Benefits of ESOS

Implementing an Employee Share Option Scheme (ESOS) offers substantial benefits to both the company and its employees, driving mutual growth and success:

  • Profit Sharing and Success Participation: ESOS provides employees with a direct stake in the company’s profitability. By granting options to purchase shares at a predetermined price, employees stand to gain financially as the company’s stock value increases. This alignment helps cultivate a workforce that is deeply invested in the company’s success, enhancing their motivation to contribute effectively.
  • Enhanced Retention and Recruitment: One of the primary benefits of ESOS is its power to attract and retain top talent. Employees who see a clear path to sharing in the company’s growth are more likely to stay committed over the long term. This scheme not only helps in retaining valuable employees but also makes the company more attractive to potential high-calibre recruits. By offering a share in future profits, ESOS acts as a compelling incentive for employees who value financial growth and company loyalty.
  • Motivation and Employee Engagement: ESOS incentivizes employees to contribute to the company’s objectives since their financial gain is tied directly to the company’s performance. As employees see their efforts translate into tangible rewards, their ongoing commitment to the company’s goals strengthens, driving a more engaged and productive workforce.
  • Financial Liquidity and Control: From a corporate finance perspective, ESOS can enhance cash flow. As employees exercise their options, the company receives capital in exchange for shares, boosting liquidity without compromising control. Unlike external financing methods, ESOS allows the company to raise funds while retaining ownership and decision-making powers, ensuring that control remains with current owners and stakeholders.
  • Long-term Commitment to Company Goals: The structure of ESOS, requiring a vesting period before the options can be exercised, ensures that benefits accrue to employees who demonstrate long-term commitment to the company. This setup aligns employee interests with corporate goals, as the rewards are realised only when the company achieves specific milestones.

Implementing ESOS effectively creates a partnership between the company and its employees, where both parties benefit from the company’s success. This symbiotic relationship fosters a culture of ownership and participation, crucial for sustaining growth and innovation in competitive markets.

Stock Options

Stock options are a form of equity-based compensation companies use to incentivize their employees. It grants the employees the right to purchase a specific number of company shares at a predetermined price within a specified period. Stock options allow employees to benefit from any increase in the company’s stock price over time. This arrangement allows employees to potentially profit from increases in the company’s stock price over time, aligning their efforts with the company’s financial success.

However, stock options do not grant the individual employee such a right to become a shareholder immediately. The individual employee will only become a shareholder when the vesting period has passed, permitting them to exercise their rights as agreed upon under the scheme. Once the vesting period is completed, employees can exercise their options to buy shares, thereby becoming shareholders with voting rights and eligibility for dividends. This phased approach ensures that the benefits of stock options are tied closely to an employee’s ongoing contribution to the company, reinforcing their commitment to the company’s long-term success.

Restricted Stock Units (RSUs)

Restricted Stock Units (RSUs) can be used by public listed companies to benefit their employees as part of their overall compensation package. When companies grant RSUs to employees, they are essentially promising to give the employee a certain number of company shares at a future date. Employees earn ownership of the shares over time, typically based on the length of their employment or meeting certain performance goals. During a vesting period, RSUs are considered restricted as the employee cannot sell or transfer them. However, they may receive dividends or have voting rights depending on company policy. If an employee leaves the company before the vesting period is delivered, equity awarded under the RSUs will cease to have any effect.

Unlike stock options, RSUs grant the company’s employees guaranteed shares after employees reach certain conditions, whereas stock options give employees the opportunity to buy shares of the company at a specified price – usually below market price.

Overall, RSUs can be a valuable component of an employee’s compensation package, offering the potential for ownership in the company and alignment of interests between employees and shareholders. However, it is essential for employees to understand the terms associated with RSUs before accepting them as part of their compensation.

Performance Share Units (PSUs)

Similar to RSUs, Performance Share Units (PSUs) are used by companies to monitor the various goals and metrics achieved by employees. Like RSUs, PSUs are granted to employees as part of their compensation package. However, instead of being based solely on time, PSUs are tied to predetermined performance metrics, such as financial targets, operational goals, or stock price targets.

The performance period during which the employee must meet or exceed the specified performance criteria can vary depending on the company’s policies but it is typically within 1 to 3 years. Performance goals or targets associated with PSUs can also vary widely depending on company objectives. They may include metrics such as revenue growth, earnings per share, total shareholder return or other key performance indicators relevant to the company’s industry and strategic objectives.

PSUs typically have both performance-based vesting criteria and time-based vesting criteria. Once performance goals are met at the end of the performance period, the PSUs may begin to vest according to the predetermined schedule. If the performance goals are not met, the PSUs may be forfeited.

While PSUs can be an effective way for companies to motivate and reward employees based on their contribution to achieving company goals, they can be more complex than traditional equity awards like RSUs due to the performance criteria involved.

Employee Stock Purchase Plans (ESPPs)

Employee Stock Purchase Plans (ESPPs) are company-run plans that allow participating employees to purchase company stock at a discounted price. ESPPs are plans automatically implemented by the employee’s contribution through salary deductions. On the purchase date, the company will utilise the employee’s accumulated funds to purchase stock in the company on behalf of the participating employees. This allows employees a convenient and affordable way to acquire company shares without having to expend additional costs for purchasing the shares.

Some ESPPs have holding requirements that require employees to hold onto the purchased shares for a certain period before they can be sold. This is intended to encourage long-term ownership and align employee interests with those of shareholders. While ESPPs can be a valuable employee benefit, they also come with risks. Employees who participate in ESPPs are subject to fluctuations in the company’s stock price, and there is no guarantee that the stock will increase in value.

Conclusion

An Equity Incentive Plan like ESOS creates a win-win situation for the company and the employees as it brings long-term benefits to the company and employees, where both the company and employees can enjoy and share success. A company may consider approaching and implementing an ESOS for the benefit of the company. Nevertheless, a company may also consider other types of Equity Incentive Plans depending on the company’s structure, goals and objectives.

Nevertheless, an Equity Incentive Plan can be challenging to implement as it can be complex depending on the scheme offered by the company. As such, companies must understand the benefits and the complexities behind the scheme before proceeding. Companies should further ensure that any implementation of such Equity Incentive Plan complies with the current laws and regulations.

If you would like to further understand the mechanism or implementation of Equity Incentive Plans or ESOS, please reach out to our legal team for consultation and guidance. Our lawyers are equipped with the necessary expertise and we are committed to assisting your company in understanding the mechanism of your preferred Equity Incentive Plans and the implementation aspects of the scheme.

By Aaron Liew and Jasmine Wee

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Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.

Wednesday, 31 July 2024

3:00 pm – 4:00 pm Online Defamation and Social Media

About this talk

In today’s digital age, your online reputation can be your most valuable asset. With the explosion of social media, businesses and individuals have unprecedented opportunities to showcase their offerings and talents. However, the dark side of digital interaction – cyberbullying, trolling, harassment, and misinformation – can tarnish reputations overnight. Understanding how to spot and address defamation is crucial in protecting your online presence. Join our next webinar us as we explore effective strategies to recognise and combat online defamation, ensuring you know your rights and the actions you can take to safeguard your reputation.

The talk will be delivered over video conference using Zoom.us. You can either view the talk from your web browser or download the Zoom app.

Talk Points

  • Defamation and Social Media
  • Common Culprits of Online Defamation
  • Reputation Management and Responses
  • Legal Remedies for Online Defamation

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The foundation of organisational order for any company lies in well-structured corporate governance practices. A central instrument in achieving this is the company constitution, which outlines crucial rules governing the company’s internal affairs and management. Under the repealed Companies Act 1965, all companies in Malaysia were required to file a memorandum and articles of association. Today, under the Companies Act 2016, the memorandum and articles are collectively referred to as the constitution and are no longer a mandatory document for certain companies. This article answers some frequently asked questions concerning a company constitution under the Companies Act 2016.

What is a Company Constitution?

A company constitution is a legal document that sets out the objects of a company and governs the internal affairs and management. It effectively binds the company and its members, including directors, shareholders and officers as provided under Section 33 of the Companies Act 2016:

“33. Effect of constitution

(1) The constitution shall, when adopted, bind the company and the members to the same extent as if the constitution had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the constitution

Section 35(1) of the Companies Act 2016 further states that the constitution of a company may contain provisions relating to:

(a) the objects of the company;

(b) the capacity, rights, powers or privileges of the company if the provision restricts such capacity, rights, powers or privileges;

(c) matters contemplated by the Act to be included in the constitution; and

(d) any other matters as the company wishes to include in its constitution.

Section 35(1), in particular subsection (d), illustrates that a company has great flexibility in drafting the terms of its constitution. It is important to obtain legal expertise to draft a constitution to align with the company’s goals while safeguarding the interests of stakeholders.

Is it Mandatory for all Companies to have a Constitution?

No, it is not mandatory for all companies to have a constitution. Section 31(1) of the Companies Act 2016 provides that a constitution is optional for unlimited companies and companies limited by shares. However, it is mandatory for companies limited by guarantee to have a constitution according to Section 38 of the Companies Act 2016. A company limited by guarantee must lodge a constitution with the Companies Commission of Malaysia (CCM) at the time the company is incorporated.

For companies that opt not to adopt a constitution, the provisions of the Companies Act 2016 will apply to govern the company’s internal affairs and management. Meanwhile, it is important that a constitution adopted by a company does not fall foul of the Companies Act 2016.

For companies that were incorporated before the enactment of the Companies Act 2016 (i.e. incorporated under the Companies Act 1965), the following options are available:

  • Maintain the company’s current memorandum and articles of association. This is permitted under Section 619(3) of the Companies Act 2016;
  • Abolish the current memorandum and articles of association without adopting a new constitution. In this case, the company will be governed by the provisions provided under the Companies Act 2016; or
  • Amend its existing memorandum and articles of association or adopt a new constitution.

What is the Significance of having a constitution?

Without a constitution, a company will be governed exclusively by the broad and generalised provisions of the Companies Act 2016. This lack of specificity can result in confusion, disputes, and other challenges in managing the company’s affairs effectively. For instance, the absence of clearly defined company objects increases the risk of transaction uncertainty and misuse of company resources, while inflexible shares and shareholder rights can hinder business collaborations and growth.

A robust constitution not only provides clarity and structure, but also serves as a safeguard against various structural and legal pitfalls.

Even though a constitution is only mandatory for a company limited by guarantee, it is advisable for all companies to draft and adopt a constitution. Investing some time, effort, and resources to craft a constitution, even though it is not mandatory, is crucial because it significantly supports the company’s unique business goals and objectives:

  • Risk Management: Companies operating in high-risk industries or facing potential legal challenges may include specific clauses in their constitutions to mitigate risks. For example, a company may need specific clauses for outlining decision-making processes, conflict resolution mechanisms and liability limitations.
  • Governance and Management: The constitution defines the roles, responsibilities, and powers of directors, officers and shareholders. The size of the board, voting rights, appointment procedures, and decision-making processes are all influenced by the company’s nature and scale.
  • Compliance Requirements: Industries with specific compliance requirements, such as financial services or healthcare, may consider including additional provisions to align their Constitution with regulatory standards which may include provisions related to reporting, auditing, confidentiality and data protection.
  • Flexibility and Innovation: Companies in dynamic or innovative sectors may design their Constitutions to allow flexibility in adapting to market changes, entering new markets, or pursuing strategic partnerships and alliances.

In essence, the structure of a constitution reflects its unique regulatory, governance and strategic considerations, tailored to support its business objectives while ensuring legal compliance and effective management. Recognising the individuality of each company, a constitution allows for the establishment of consistent rules and preemptively defining processes and protocols to minimise the likelihood of internal disputes.

What should be included in a Constitution?

A well-drafted constitution is paramount for any company seeking to establish a strong governance foundation and protect all stakeholders’ interests. Any omission of essential provisions in the constitution could lead to ambiguities and complications. Hence, a well-drafted constitution will go beyond setting rules and will be able to address uncertainties and potential conflicts. Below are several matters which should be included in a constitution:

1. Appointment and Removal of Directors: The process of appointing and removing directors is crucial for maintaining effective governance within a company. Clear guidelines in the constitution regarding director appointments, nomination procedures, qualifications, and grounds for removal help streamline board composition and ensure the selection of competent and suitable candidates.

“The board of directors shall consist of [insert number] members, who shall be elected by a majority vote of shareholders at the annual general meeting. Any director may be removed from office by a special resolution of shareholders.”

This clause establishes the process for director appointments and removals, emphasising the importance of shareholder involvement in key decisions affecting board composition. This clause may be further tailored to include specific grounds for the removal of directors and the specific procedure a company may want to adopt in the event of any indiscretions by a director.

2. Meeting Protocols: Proper conduct of meetings, whether a meeting of members or the board, is essential for effective decision-making and communication among the members of a company. The constitution should outline rules for meeting frequency, notice requirements, quorum, voting procedures, and record-keeping obligations to promote transparency and accountability at the board level.

“Regular meetings shall be held [state frequency, e.g., monthly], with at least [insert number] days’ notice provided to all directors. Quorum for meetings shall be [insert percentage], and decisions shall be made by a majority vote of members present.”

This clause can be expanded to define the procedures and protocols for conducting board meetings, ensuring that meetings are conducted regularly based on the ability and availability of its members, decisions are correctly made and records are maintained accurately.

3. Reserved Matters: Certain strategic or sensitive matters require special consideration and approval from a higher authority, such as shareholders or a designated board committee. Identifying and delineating these reserved matters in the constitution helps safeguard the company’s interests and prevents unilateral decisions that could impact the company’s direction.

“The following matters shall be considered reserved matters requiring approval by a special resolution of shareholders: .”

This clause identifies key decision areas where additional scrutiny and approval mechanisms are necessary, ensuring that critical decisions align with the company’s strategic goals and stakeholders’ interests.

4. Death of a Member: Planning for contingencies such as the death of a shareholder is essential for continuity and stability within the company. A well-crafted clause on the transmission of shares in the constitution addresses the transfer or disposition of shares, the appointment of successors and procedural steps to manage such events seamlessly.

“In the event of the death of a shareholder, the deceased shareholder’s shares shall be transferred to [insert name of designated beneficiary or executor], subject to approval by the board of directors.”

This clause outlines the process for handling shares in case of a shareholder’s demise, ensuring a smooth transition of ownership and compliance with legal requirements.

5. Right of First Refusal: Protecting existing shareholders’ interests in share transfers or sales is accomplished through a first right of refusal clause, which grants them rights of first refusal or pre-emption. This mechanism allows shareholders to maintain proportional ownership and prevents unwanted third-party ownership changes.

“Before any shareholder may transfer or sell their shares to a third party, they must first offer said shares to existing shareholders in proportion to their current shareholdings, at a price determined in good faith.”

This clause ensures fairness and preserves shareholder control over ownership changes, aligning with principles of equitable treatment and governance.

6. Anti-Dilution: Preserving existing shareholders’ ownership percentages during equity issuances or dilution events is critical for maintaining equity value and investor confidence. An anti-dilution clause in the constitution safeguards against undue dilution and protects shareholders’ investment interests.

“In the event of a new issuance of shares, existing shareholders shall have the right to subscribe to additional shares in proportion to their current shareholdings, to maintain their relative ownership percentages.”

This clause allows shareholders to participate in new share issuances, mitigating dilution effects and ensuring fairness in capital structure adjustments.

Companies can maintain transparency, fairness and stability by incorporating mechanisms to improve governance, defining reserved matters and addressing key events such as death, refusal, and anti-dilution scenarios.

Can a Constitution be Amended once it is Adopted?

Yes, a constitution may be amended once it is adopted. In fact, as part of good governance, it is essential for the company to periodically review its constitution and ensure it accurately aligns with its current objectives and activities. Additionally, verifying that the company’s processes remain responsive to practical requirements is crucial. This approach fosters increased flexibility and certainty in governance, empowering better control as the company evolves or expands over time.

Common reasons for amendments include changes in the company’s structure and governance, addressing specific issues during its business operations, allowing for the issuance of a new class of shares or accommodating to individual members’ intended estate planning (with respect to the transmission of shares), to name a few

A constitution can be amended either by a special resolution passed by the company or by obtaining a court order

  1. Amendment by special resolution: Pursuant to Section 36 of the Companies Act 2016, a company can amend its constitution by passing a special resolution by a majority of not less than 75% of the members. Once it has been passed, the company secretary shall notify and lodge the amended constitution with CCM within thirty (30) days from the special resolution’s date. Upon the date the special resolution was passed or any other specified date mentioned in the resolution, the amendment is binding on the company and all its members.
  2. Amendment by the court: Pursuant to Section 37 of the Companies Act 2016, the court may order the amendment of the constitution if it is satisfied that it is not practicable to amend the constitution by the standard procedures provided under the Companies Act or the constitution. This can be done by an application by a director or a member of the company. Once the court has granted the order, the company secretary must submit and lodge the order with CCM within thirty (30) days from the date of the order.

Failure to observe either of these provisions is a criminal offence. Upon conviction, the company and its officers will be liable to a fine not exceeding RM10,000 and in the case of a continuing offence, to a further fine not exceeding RM500 for each day the offence continues after the conviction.

Is a Constitution the same as a Shareholders’ Agreement?

No, a constitution and a shareholders’ agreement are not the same. Although they may contain similar provisions, they serve distinct purposes and address different stakeholders and issues. The main difference between the two documents is their scope: while a constitution will bind the entire company, including its shareholders and directors, a shareholders agreement binds the shareholders who are parties to the shareholders’ agreement (the company has to be a party to the shareholders’ agreement if it is to be bound by the agreement).

Moreover, while a constitution sets out the fundamental rules governing the company’s internal affairs and management, a shareholders agreement focuses on the rights and obligations of the shareholders in relation to the shares they hold in the company. Further, amendments to the constitution necessitate either a special resolution or a court order. In contrast, modifications to a shareholders’ agreement can be accomplished through mutual consent expressed in writing, typically through either the execution of a supplemental shareholders agreement or the execution of a new shareholders agreement.

It is not uncommon for specific clauses within the shareholders’ agreement to mirror those found in the constitution to ensure consistency. In cases where conflicting provisions arise between the constitution and the shareholders’ agreement, the constitution usually stipulates that its terms take precedence.

The main distinctions between a Constitution and a shareholders agreement are summarised in the table below:

Conclusion

A company constitution serves as a vital document establishing internal governance regulations specific to a company. Although having a constitution is only mandatory for companies limited by guarantee, all other types of companies are strongly advised to adopt a constitution as a guiding document that delineates crucial rules governing internal affairs and management. The importance of having a constitution goes beyond mandated requirements and a well-drafted constitution is critical in fostering a transparent, fair and stable corporate environment for all types of companies. Please contact us for assistance in reviewing or drafting your constitution.

By Anis Mohd Sohaimi and Mira Mashor

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Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.

Wednesday, 24 July 2024

3:00 pm – 4:00 pm Within and Beyond the Will: Strategies to Prevent Family Feuds

About this talk

Wills and estate planning are intended to provide individuals with a mechanism to direct the distribution of their assets upon death. However, disputes frequently emerge due to inadequate planning, invalid or unenforceable wills, or when administrators or executors fail to fulfil their duties to beneficiaries. We invite you to join us for this online seminar, where we will explore a variety of estate administration conflicts and the legal remedies available to resolve these issues.

The talk will be delivered over video conference using Zoom.us. You can either view the talk from your web browser or download the Zoom app.

Talk Points

  • Estate Planning and Administration
  • Disagreements over Enforcing Wills
  • Conflicts arising from Estate Administration
  • Strategies for Preventing and Resolving Estate Disputes

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MahWengKwai & Associates is proud to announce that our Consultant, Dato’ Mah Weng Kwai, has been appointed as a member of the Protem Committee for the AIAC Court of Arbitration.

According to the announcement by the Legal Affairs Division of the Prime Minister’s Department, the formation of this committee is a key initiative towards enhancing the Asian International Arbitration Centre (Malaysia) (AIAC). This follows the signing of the Supplementary Agreement to the Host Country Agreement on 20 February 2024 between the Malaysian Government and the Asian-African Legal Consultative Organization (AALCO).

The committee, chaired by Dato’ Mary Lim Thiam Suan, includes distinguished legal experts worldwide and aims to establish the mechanisms, protocols, and operational framework for the AIAC Court of Arbitration. The chairperson and committee members are appointed by the Hon. Dato’ Sri Azalina Othman Said, Minister in the Prime Minister’s Department (Law and Institutional Reform), Malaysia, and include:

  • Datuk Dr. Prasad Sandosham Abraham (Malaysia)
  • Justice K.S.P. Radhakrishnan (India)
  • Dato’ Seri Mohd Hishamudin bin Md Yunus (Malaysia)
  • Professor Karuiki Muigua (Africa)
  • Professor Steven P. Finizio (United Kingdom)
  • Mr. Juan Fernánde-Armesto (Spain)
  • Mr. Zeyad Khoshaim (Saudi Arabia)
  • Mr. Chan Leng Sun, SC (Singapore)
  • Ms. Kamilah Kasim (Malaysia)
  • Ms. Shanti Abraham (Malaysia)
  • Dr. Christopher To (Hong Kong SAR)
  • Dr. Can Eken (United Kingdom)
  • Mr. Ng Jern-Fei, KC (Singapore)
  • Mr. Kumar a/l Thangaraju (Malaysia)
  • Mr. Jonathan Lim (United Kingdom)

Dato’ Mah Weng Kwai, a former High Court and retired Court of Appeal judge, is an AIAC arbitrator and mediator. His experience as an arbitrator spans commercial and construction disputes and includes disputes in the technology, telecommunications and marine sectors.

We extend our heartfelt congratulations to Dato’ Mah Weng Kwai on this significant appointment and look forward to the establishment of the AIAC Court of Arbitration.

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Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.

Wednesday, 12 June 2024

3:00 pm – 4:00 pm Navigating Medical Negligence Claims: Guidance for Families of Deceased Patients

About this talk

Losing a loved one due to medical negligence is undoubtedly a devastating experience. Families left behind often grapple with grief, confusion, and a multitude of questions surrounding their rights and options for seeking justice, redress, compensation, etc.

Join our online webinar, where we aim to provide clarity and guidance to families who have lost a loved one due to medical negligence. Members of our firm’s dedicated medical department as well as our dedicated wills, trusts and probate department will cover issues concerning the obtaining of medical records, the applicable limitation periods for such claims, as well as issues involving drafting and preparing of wills, obtaining the grant of probate or letters of administration. Our speakers will also answer questions posed by our webinar participants.

The talk will be delivered over video conference using Zoom.us. You can either view the talk from your web browser or download the Zoom app.

Talk Points

  • Obtaining discovery of medical records
  • Types of claims and limitation periods
  • Damages claimable for medical negligence
  • Applying for grants of representation

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Malaysia is a prime destination for events in Southeast Asia and offers unique opportunities for event organisers. However, the success of events ranging from international conferences to local cultural festivals depends on a thorough understanding of the country’s legal landscape. This includes obtaining necessary permits and licences, ensuring attendee safety, protecting intellectual property, and managing contractual relationships.

This article is a comprehensive guide to the legal considerations essential for organising an event in Malaysia. It aims to equip organisers with the knowledge required to navigate the complexities of legal and commercial planning, ensuring compliance with local regulations and a successful event outcome. By focusing on these critical aspects, organisers can not only mitigate potential legal risks but also enhance the overall event experience for all stakeholders involved.

Permits and Licences

Securing the appropriate permits and licences from the relevant authorities is a critical step in organising an event in Malaysia. The specific permits or licences required vary based on the event’s unique characteristics, including its nature and scale. Given Malaysia’s diverse event landscape, which encompasses cultural festivals, corporate conferences, sporting events, and entertainment spectacles, organisers must be well-informed about the common permits and licences that might be necessary. This knowledge ensures compliance with local regulations and contributes to the smooth execution of the event.

1. Temporary Entertainment License: For temporary events such as concerts, funfairs, warehouse sales, or any other provision of entertainment for a limited period of time, a temporary entertainment licence will have to be applied for and obtained from the local municipal council. When considering the application for licences, the local municipal council will consider whether certain safety and security standards have been met.

It was reported by the News Straits Times in its article “Police: Puncak Alam funfair operating without licence” that a funfair in Eco Grandeur in Puncak Alam commenced operations even though the local council had rejected its licence application on the grounds of failing to meet safety standards. An accident occurred two days after its illegal opening when two women and a child were thrown off a ride and suffered injuries. According to the report, the funfair operators were investigated under Section 6 of the Selangor State Entertainment & Places of Entertainment Enactment 1995 for operating without a licence. The offence carries a maximum fine of RM25,000 or imprisonment of up to five years if convicted.

2. Direct Selling Licence: A company requires a direct selling licence to sell their products or services directly to consumers without involving intermediaries such as wholesalers or retailers. This licence is issued by the Ministry of Domestic Trade and Cost of Living (KPDN). A direct selling licence is required by direct sales companies wherein a sales representative conducts a demonstration or presentation of products to the attendees during an event.

3. Music Licence: The event organiser must obtain a music licence if copyrighted music is to be played in a public or commercial setting. The organiser must identify the correct licensing body to obtain the licence from based on the music usage, as there are three main music licensing bodies in Malaysia:

a. Music Authors’ Copyright Protection Berhad (MACP) administers the public performance and broadcast rights of songwriters, composers and music publishers.

b. Public Performance Malaysia Berhad (PPM) represents local and international recording companies in issuing licences and collecting royalties from commercial users of sound, music videos and karaoke recordings.

c. Recording Performers Malaysia Berhad represents recording performers in licensing matters and distribution of royalties granted to performers with respect to the public performance and broadcast of their performances embodied in sound recordings.

4. Liquor licence: The sale of alcoholic beverages during an event will require a liquor licence issued by the local municipality. Organisers should check with the premises owner whether they already have a licence for their premises. Organisers will also have to ensure that restrictions related to the sale of alcohol are observed during the event, such as the minimum age of purchasing and prohibition of selling alcohol to Muslims.

5. Concerts and live shows by foreign artists: For concerts or live shows by foreign artists, an application must be made to the special committee called the Central Agency for Application for Filming and Performance by Foreign Artistes (PUSPAL) established by the Ministry of Communications and Multimedia of Malaysia. All applications must comply with the PUSPAL Guidelines, which set out the code of conduct and specified ‘blackout’ dates when concerts and live performances are not permitted to be held. A foreign artist who is approved by PUSPAL and subsequently fails to adhere to the guidelines imposed will be blacklisted and prohibited from performing again in Malaysia.

During a performance in July 2023 at the Good Vibes Festival in Malaysia, Matty Healy of the music band, The 1975, kissed his bandmate and criticized Malaysian laws against homosexuality. This act led to the band being blacklisted and banned from future performances in Malaysia. PUSPAL described the act as disrespectful to local laws and cultural values. The incident caused the cancellation of the festival and elicited strong responses from government officials, who summoned festival organizers for explanations. The backlash extended beyond Malaysia, prompting The 1975 to cancel scheduled shows in Indonesia and Taiwan. The controversy also highlighted the sensitivity around LGBTQ+ issues in the region, impacting the band’s tour plans and stirring debates on cultural and legal norms concerning sexuality​.

Click on the links to read news reports by The Star (The 1975 blacklisted, banned from performing in Malaysia, says Puspal and Fahmi raps The 1975 over kissing incident at Good Vibes Festival, organisers to explain), Al Jazeera (Pop band The 1975’s set stopped in Malaysia after onstage kiss and The 1975 cancels Indonesia, Taiwan gigs after Malaysia LGBTQ row), and CNA (Malaysia halts Good Vibes music festival after same-sex kiss by UK band The 1975)

Legal Compliance

Organising an event in Malaysia requires adherence to various legal regulations beyond just obtaining permits and licences. This includes ensuring attendee safety and security, maintaining insurance, abiding by data protection and food safety laws, and managing environmental impacts. Effective planning and execution across these areas are essential for legal compliance and the overall success of the event. Below, we outline the key legal considerations every organiser must navigate:

1. Safety and Security: A crucial part of the planning process involves ensuring the safety and security of the attendees. An organiser must implement comprehensive yet flexible security measures based on the unique characteristics of the event. This involves conducting risk assessments to identify potential hazards before the event, which will depend on different factors such as the venue, number of attendees and type of event. A clear emergency evacuation plan has to be established with exit routes and assembly points, and the procedure must be communicated to the attendees.

The 2014 Future Music Festival Asia (FMFA) incident, where six attendees tragically died from heatstroke, underscores the legal responsibility event organisers hold regarding the safety and security of their attendees. Investigations later revealed that these fatalities were not due to drug overdoses as initially reported by the police, but rather resulted from severe heat conditions and insufficient hydration provided at the event. The harsh weather was a combination of choking haze, high humidity and a temperature of 35°C. This mischaracterisation not only led to a misinformed public but also impacted the festival’s reputation significantly. This disaster was likely the result of inadequate safety measures and highlights a lapse in the duty of care that event organisers owe to their attendees to keep them safe. It serves as a stark reminder of the importance of providing sufficient medical facilities, hydration points, and appropriate guidance on managing extreme weather conditions at such large-scale events.

See news reports by the Malay Mail (FMFA deaths caused by heatstroke, not drugs, says pathologist) and The Straits Times (Six deaths at Malaysia’s Future Music Festival Asia caused by heatstroke, not drug overdose).

2. Insurance: Public liability insurance is an essential component of the risk management strategy for any event, providing financial protection against potential liabilities and unexpected incidents. In Malaysia, securing public liability insurance is required for organisers of sporting events. This requirement ensures that in the event of an accident or injury, compensation claims made by attendees are covered, regardless of the organiser’s financial condition.

While public liability insurance does not prevent incidents, it is critical as it covers potential legal fees and compensation claims from attendees who may suffer injuries or whose property may be damaged due to event activities. For event organisers, obtaining adequate public liability insurance is crucial to managing potential financial losses from such claims, thus safeguarding the organiser’s financial stability.

3. Ticketing and Privacy Laws: When selling tickets and collecting attendees’ personal information, the organisers must comply with data protection laws. This includes obtaining consent from the attendees and informing them on how their data will be used and stored. The terms and conditions relating to the purchase of the tickets must be disclosed, including refund policies, event risks, disclaimers and other restrictions. Organisers must also ensure that any third-party ticketing platforms used are secure and comply with data protection and privacy laws.

In the data breach incident at Brock University in Canada, the third-party vendor AudienceView Campus, handling online event ticket sales for a hockey playoff game, experienced a security compromise that exposed customers’ credit card information. The breach led Brock University to suspend the ticketing platform and notify affected individuals. This incident underscores the responsibility event organisers have in ensuring the privacy and security of attendee data, particularly when outsourcing to third-party services. Organisers must themselves have or choose vendors with robust security measures and ensure compliance with data protection laws. In the event of a data breach, rapid response strategies to maintain trust and minimise liability are critical.

See the disclosures by The Brock News (Brock alerted to third-party data breach involving event ticket sales) and Brock Badgers (Brock suspends access to event ticketing platform).

4. Food and Beverages: The sale of food and beverages within the event must comply with food safety regulations, such as adherence to proper hygiene practices, food storage and sanitation procedures. Food vendors should provide clear labelling and information regarding the ingredients in the food sold so that customers with allergies or religious restrictions can make informed decisions. Please read our article “Food Safety in Malaysia: Criminal Liability for Selling Poisonous Pufferfish and Other Harmful Foods” for more information on the regulations governing food sales in Malaysia.

5. Environmental Regulations: The event must have proper waste management systems, which include providing adequate waste bins for the attendees and arranging for the proper disposal of food-related waste for food vendors. This is important for maintaining cleanliness and complying with environmental regulations. The organiser should also be mindful of noise pollution and ensure that the event’s activities, such as music or announcements, comply with local noise level restrictions that the municipality council or the venue owners have set.

Contracts and Agreements

Organising an event involves coordination among various stakeholders, each contributing to different facets of the event’s execution. Event organisers should formalise relationships with all parties through definitive agreements, which establish clear expectations and delineate responsibilities. These agreements not only help in managing liabilities and risks but also ensure that every aspect of the event is conducted as planned. Below are some essential contracts that event organisers might consider to secure confidentiality, define service parameters, manage sponsorships, address risks, and ensure data privacy:

1. Non-Disclosure Agreement (NDA): An NDA allows the parties to establish a confidential relationship and outline the information that is classified as confidential. For example, if the event involves intellectual property such as unique event concepts, innovative elements, marketing strategies or technological innovations, an NDA will help prevent unauthorised use and maintain the originality. An NDA can also be crucial during the planning phase to ensure that sensitive information such as financial information, budget details, attendee lists, or other confidential data would only be disclosed to third parties with prior authorisation, if at all. You can learn more about the importance of an NDA from our article “Non-Disclosure Agreements: Why are they important?

2. Contract for Service: Service contracts are crucial when coordinating with various service providers during event planning, such as influencers, caterers, entertainers and security services. This agreement clearly defines the roles and responsibilities of each provider, detailing essential aspects such as the scope and duration of services, payment conditions, liability and indemnity provisions, terms for contract termination, and dispute resolution mechanisms. Ensuring clarity on these key elements helps in managing expectations, facilitating smooth event execution, and minimising potential conflicts or misunderstandings.

3. Sponsorship Agreement: It is common for sponsors to provide financial support for specific events in return for visibility and exposure for their brand or products. This is where a sponsorship agreement will specify, among other things, the amount of the financial contribution, payment terms, promotional opportunities provided to the sponsor and media coverage of the event.

4. Waiver Form: An effective waiver serves as a crucial document in events where there are inherent risks, by securing participants’ acknowledgement of these risks and their consent to not hold the organiser liable for any resultant injuries or accidents. This form is especially relevant for sporting events such as marathons, cycling races, or triathlons, where the likelihood of injury is higher. By signing the waiver, participants explicitly agree to release the event organisers from liability, ensuring both parties are aware of and agree to the risk involved.

5. Privacy Policy: For events that require collecting and storing personal data from the participants, it is vital to have a privacy policy to obtain the consent of the participants and to inform them on how their data is being handled, stored, protected and the sharing of their data to third parties in certain circumstances. This policy must be easily accessible to attendees, especially when purchasing tickets.

The agreements listed above are among the common agreements that are entered into by relevant parties to promote transparency, mitigate risks, protect the interests of the parties involved and ensure the successful execution of the event. It is advisable to involve lawyers in the drafting and reviewing of these contracts to ensure legal compliance and clarity.

Dangers of Not Having a Written Agreement

The failure to enter into a written agreement may affect the preparation or execution of the event. It may further lead to disputes before or after the event. Not setting out agreed terms in an agreement may cause the following issues to arise:

1. Unclear Expectations: Without a formal agreement, the expectations may be vague and lead to uncertainty on the roles and responsibilities of each party involved. Important terms such as scope of work, milestones, or payment terms must be set out to prevent any misunderstandings, miscommunication, or disagreements.

2. Difficulty in Cancellation: A termination clause included in an agreement will cater for the unfortunate event of cancellation. It may provide for the events that may trigger termination and the recourse for the innocent party. In the absence of this clause, terminating the services may be more complicated and may result in financial loss.

In the case of Live Scape Sdn Bhd v World Wonder Fest Sdn Bhd [2023] MLJU 96, the High Court awarded Live Scape with damages for the breach of contract committed by World Wonder Fest relating to a K-pop concert that was supposed to be held in Malaysia. The latter failed to comply with its obligations to pay the required sums within the agreed period as stipulated in the written agreement. In response, Live Scape terminated the contract. The court found that the notice of termination complied with the termination clause contained in the agreement and was valid. The dispute was also reported by the News Straits Times in its article “#Showbiz: Event organiser Livescape wins lawsuit against K-Pop producers”.

3. Inadequate Risk Management: Effective risk management is crucial for event organizers to address uncertainties that may arise during the planning and execution of an event. It is essential to have written agreements with all vendors involved to clearly define the allocation of risks for unforeseen circumstances. Such contracts help ensure that both parties understand their responsibilities and are prepared to handle unexpected challenges efficiently.

4. Lack of Legal Protection: Lack of legal protection can make it difficult for parties to enforce their rights, complicating efforts to seek legal remedies in disputes. For instance, the absence of a non-disclosure agreement (NDA) makes it challenging to legally address issues such as unauthorized use of intellectual property, including original concepts or logos. Contracts can include clauses for liquidated damages, which pre-determine the compensation amount for specific breaches, providing a clear, enforceable remedy. Specifying dispute resolution mechanisms, such as arbitration or mediation, in the agreement helps streamline the process of resolving disputes outside of court, offering a faster, often less adversarial path to settlement. These provisions ensure that all parties have a clear understanding of their responsibilities and the consequences of their actions, thus safeguarding their rights and facilitating more effective legal protection.

Conclusion

Organising an event requires meticulous planning and a thorough understanding of the legal framework governing such activities. From obtaining permits and licences to ensuring the safety and security of the attendees to entering into a formal agreement for legal protection, it is essential that organisers are aware of all legal and commercial considerations involved. Given the various aspects that are required to be taken into account when organising an event in Malaysia, it is advisable for organisers to refer to legal professionals for assistance in managing their risks and liabilities. Our legal team will be more than happy to assist and guide you through the process.

By Mira Mashor

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Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.

Wednesday, 8 May 2024

3:00 pm – 4:00 pm Applying to Commute Death and Life Sentences under Malaysia’s 2023 Criminal Law Reforms

About this talk

Join us for an essential webinar designed to guide families through the process of applying for commutation for loved ones facing the death penalty or natural life imprisonment. With recent sentencing reforms pursuant to the Mandatory Death Penalty Act 2023 and the Revision of Sentence of Death and Imprisonment for Natural Life (Temporary Jurisdiction of The Federal Court) Act 2023, new avenues have opened for challenging the most severe sentences. Our lawyers will provide insight into eligibility, application procedures, and the impact of recent court decisions, equipping you with the knowledge to navigate these critical changes.

The talk will be delivered over video conference using Zoom.us. You can either view the talk from your web browser or download the Zoom app.

Talk Points

  • Overview of Sentencing Reforms
  • Eligibility for Sentence Commutation
  • Commutation Application Process
  • Recent Court Decisions

Speakers

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Past Seminars

In today’s fast-paced corporate landscape, shareholders play a pivotal role in the success and governance of private limited companies. They not only provide essential capital and liquidity but also oversee management decisions, forming a diverse community that includes family, friends, and professional acquaintances. While the prospect of business ventures and partnerships holds excitement, the complexity of shareholder relationships necessitates vigilance to prevent potential disputes or deadlocks that could disrupt operations.

At MahWengKwai & Associates, we specialise in guiding our clients through the intricate process of drafting shareholder agreements and company constitutions. Our focus is on creating documents that accurately reflect shareholder rights and establish a robust corporate governance framework. Among the myriad of shareholder provisions, drag-along rights and tag-along rights stand out for their critical, albeit contrasting, roles in safeguarding shareholder interests during significant corporate transactions. This article delves into the nuances of these rights, outlining their functions, benefits, and legal considerations to ensure a harmonious and equitable corporate environment.

Functions of Drag-Along Rights

Drag-along rights empower majority shareholders with the benefit and power to compel minority shareholders to participate in a proposed sale of the company’s shares. These rights, if expressly agreed in a shareholders’ agreement or company constitution, can be exercised by majority shareholders when a purchaser has made an offer to the majority shareholders to acquire the shares of the company, especially if the offer comes with a condition that the proposed sale and purchase transaction include the entire issued share capital of the company. Minority shareholders may be allowed to oppose a proposed sale of shares under certain circumstances. Still, without any clear expression of such circumstances, majority shareholders may be able to exercise the drag-along rights and compel the minority shareholders to participate in the proposed sale of shares. However, the majority shareholders need to ensure all relevant terms and conditions are fair and equal to the minority shareholders.

Drag-along rights strongly benefit majority shareholders in companies. The example below highlights how drag-along rights can facilitate a complete sale of a company, ensuring that majority shareholders can capitalise on lucrative offers by including minority shareholders’ shares in the sale:

  • BBG Sdn Bhd has a total issued share capital of RM100,000 consisting of 100,000 ordinary shares, which are made up of RM1.00 per share.
  • Mr Ong holds 50,000 ordinary shares (50%), while Mr Chen and Mr Ooi hold 25,000 ordinary shares (25%) each.
  • Mr Wong tabled an offer to Mr Ong to acquire BBG Sdn Bhd in whole at a purchase consideration of RM10.00 per share. It is a strict condition that this proposed sale and purchase transaction must include 100% of the shares in BBG Sdn Bhd, failing which the acquisition offer shall not proceed.
  • Under the shareholders’ agreement between Mr Ong, Mr Chen, and Mr Ooi, there is a drag-along right provided to the majority shareholder. Accordingly, Mr Ong can exercise the drag-along right to compel Mr Chen and Mr Ooi to include their respective shares in the proposed sale of BBG Sdn Bhd to Mr Wong.

Functions of Tag-Along Rights

Conversely, tag-along rights safeguard the interests of minority shareholders, who will have the option to participate in a proposed sale of shares with the majority shareholders. If expressly provided under a shareholders’ agreement or company constitution, these rights can help to prevent minority shareholders from being cast aside or excluded from a proposed substantial change in control in the company that could result in an undesired partnership with the new incoming majority shareholder. In this regard, tag-along rights give minority shareholders a sense of fairness and security.

In the example below, the protective mechanism tag-along rights offer to minority shareholders, enabling them to exit the company alongside a majority shareholder under equal conditions, while still allowing others, the choice to retain their stake:

  • BBG Sdn Bhd has a total issued share capital of RM100,000 consisting of 100,000 ordinary shares, which are made up of RM1.00 per share.
  • Mr Ong holds 50,000 ordinary shares (50%), while Mr Chen and Mr Ooi hold 25,000 ordinary shares (25%) each.
  • Mr Wong tabled an offer to Mr Ong to acquire Mr Ong’s shares in BBG Sdn Bhd at a purchase consideration calculated at RM10.00 per share. The offer tabled by Mr Wong to Mr Ong was made known to Mr Chen and Mr Ooi.
  • Upon receiving this information, Mr Chen informed Mr Ooi that he would like to exercise the tag-along right as agreed and provided under their shareholders’ agreement. On the other hand, Mr Ooi does not intend to exercise the tag-along right.
  • Accordingly, Mr Ong informs Mr Wong that the proposed sale and purchase of shares in BBG Sdn Bhd can proceed on the condition that Mr Wong’s offer includes the purchase of Mr Chen’s shares in BBG Sdn Bhd on the same terms and conditions offered to Mr Ong, while Mr Ooi shall remain as a shareholder of BBG Sdn Bhd.

Legal Considerations

Although these drag-along and tag-along rights offer a form of protection to shareholders, it is still common to come across draft shareholders’ agreements and company constitutions that do not contain these rights. Whether shareholders are aware of such rights beforehand, drag-along and tag-along rights contribute to the governance of the transfer of shares in a company and the safeguarding of the interests of majority and minority shareholders.

In determining whether to incorporate either or both of these rights, majority and minority shareholders need to consider the following elements which may be different under both of these rights.

Drag-along Rights

  • Parameters and structure should be clearly defined in a shareholders’ agreement or company constitution.
  • Terms of drag-along rights must not infringe on or violate the rights of the minority shareholders, as the laws of Malaysia provide protection against minority oppression.
  • Minimum percentage of shares required to trigger the drag-along rights to compel the inclusion of minority shareholders.
  • Right for minority shareholders to object to the exercise of drag-along rights under certain circumstances, including where a proposed sale is not in the company’s best interests.

Tag-along Rights

  • Parameters and structure of tag-along rights should be clearly defined in a shareholders’ agreement or company constitution.
  • Minimum percentage of shares required to trigger the tag-along rights to participate with the majority shareholder in a proposed sale of shares.
  • Collective participation of all minority shareholders in the proposed sale of shares in the event of an exercise of tag-along rights by one minority shareholder.

Majority and minority shareholders will undoubtedly look to protect their respective interests; thus, all shareholders should discuss, negotiate, and achieve a proper balance between the rights of majority and minority shareholders. The exercise of certain rights, such as drag-along and tag-along rights, can be structured to be exercised proportionately without violating the rights of the other shareholders.

Conclusion

Drag-along and tag-along rights play an essential role in safeguarding the interests of shareholders and promoting transparency and fairness in corporate governance. These rights are excellent mechanisms that balance the competing interests of majority and minority shareholders and ensure all parties are treated equitably in the sale of shares or transfer of ownership of a company. By understanding the legal framework surrounding drag-along and tag-along rights and incorporating them into a shareholders’ agreement or company constitution, the shareholders can minimise or prevent potential conflicts and uncertainties, and foster a conducive business environment for sustainable growth and investment.

Our Corporate and M&A Team has vast experience advising shareholders and investors on their rights in shareholder agreements and company constitutions. We ensure that all agreements and corporate documents are drafted clearly and meticulously that set out all of our clients’ desired rights. If you would like to establish a balanced and fair corporate governance structure for your company and stakeholders, our lawyers in the Corporate and M&A Team will be happy to assist you with your enquiry.

By Tommy Wong and Aaron Liew

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Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.

Wednesday, 17 April 2024

3:00 pm – 4:00 pm Termination of Employment: Types, Requirements and Remedies

About this talk

Is your business looking to terminate the employment of certain employees? Are you an employee facing a risk or indication from your employer that you’ll be sacked? Join our upcoming webinar to understand when and how the employer-employee relationship can be terminated. Our speakers will provide insight into how terminations can be lawfully carried out, what amounts to unfair dismissal and the remedies available. Whether you are an employer or an employee looking to protect your rights, our talk will provide you with practical guidance on handling terminations in the workplace.

The talk will be delivered over video conference using Zoom.us. You can either view the talk from your web browser or download the Zoom app.

Talk Points

  • Malaysian Law on Unfair Dismissal of Employees
  • Differences between Direct and Indirect Termination
  • Guidelines for Employers and Employees in the Termination Process
  • Common misconceptions and case laws on termination practices

Speakers

  • Naveen Joshua, Senior Associate, Dispute Resolution Practice Group
  • Carolyn Ng, Associate, Dispute Resolution Practice Group
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Past Seminars

The Construction Industry Payment and Adjudication Act 2012, often abbreviated as “CIPAA”, was enacted to address issues related to payment disputes within the construction industry in Malaysia. According to the Asian International Arbitration Center (AIAC), over 5,000 adjudication disputes have been registered at the AIAC since CIPAA came into force. The amounts in dispute in 2023 alone total RM1.3 billion.

Adjudication under CIPAA was introduced to promote prompt payments and provide a mechanism for resolving payment disputes quickly. An adjudication decision is expected within 90 days from the date the notice of adjudication is issued.

Adjudication was intended to provide “rough justice.” Adjudication results in a decision which is “temporary.” Section 13 of CIPAA expressly provides that an adjudication decision is binding unless the dispute is decided by arbitration or the court.

In this article, we summarise the adjudication process before diving into one of the remedies provided by CIPAA to enforce the adjudication decision – with a favourable adjudication decision, an unpaid party can suspend or reduce its rate of progress of performance until the adjudication decision is satisfied.

Overview of the Adjudication Process

The adjudication process typically begins with the unpaid party issuing a payment claim to the non-paying party. If the claim is disputed, a non-paying party may issue a payment response and, the unpaid party may issue a notice of adjudication to commence the adjudication process. Once the adjudicator is appointed, parties will submit their respective documents and evidence through the adjudication claim, adjudication response and adjudication reply. The adjudicator will then decide on the dispute within 45 days from the date of the adjudication reply.

Once an unpaid party obtains a favourable decision, the next step would be to cash in the decision. Ideally, the losing party complies with the decision, promptly paying the adjudicated amount within the specified time. However, such outcomes are few and far between. Often, the unpaid party will have to initiate proceedings in the High Court to enforce the decision under section 28 of CIPAA and be faced with an opposing application to either set aside the decision pursuant to section 15 of CIPAA or stay the decision pursuant to section 16 of CIPAA.

However, post-adjudication remedies are not limited to the usual enforcement proceedings. There are alternatives available to the unpaid party. A special feature of CIPAA is that it provides two additional options to an unpaid party to lawfully pressure the non-paying party to comply with the decision. One of these options is to suspend or reduce the rate of progress of performance of the construction works.

Section 29(1) of CIPAA provides:

Suspension or reduction of rate of progress of performance

A party may suspend performance or reduce the rate of progress of performance of any construction work or construction consultancy services under a construction contract if the adjudicated amount pursuant to an adjudication decision has not been paid wholly or partly after receipt of the adjudicated decision under subsection 12(6).

Procedure for Suspension

The procedure or mechanism to suspend or reduce the rate of progress is set out in Section 29 of CIPAA and is as follows:

a) Give the other side a written notice of intention to suspend performance or reduce the rate of progress of performance if the adjudicated amount is not paid within 14 calendar days from the date of receipt of the notice (section 29(2) of CIPAA).

b) Only after 14 days from the date of the receipt of the notice has lapsed can an unpaid party reduce or suspend the performance (section 29(3) of CIPAA).

c) Resume performance within ten working days after having been paid the adjudicated amount (section 29 (4) of CIPAA).

Suspension or Slow Down without Penalty

The procedure or mechanism to suspend or reduce the rate of progress is set out in Section 29 of CIPAA and is as follows:

a) Give the other side a written notice of intention to suspend performance or reduce the rate of progress of performance if the adjudicated amount is not paid within 14 calendar days from the date of receipt of the notice (section 29(2) of CIPAA).

b) Only after 14 days from the date of the receipt of the notice has lapsed can an unpaid party reduce or suspend the performance (section 29(3) of CIPAA).

c) Resume performance within ten working days after having been paid the adjudicated amount (section 29 (4) of CIPAA).

Suspension or Slow Down without Penalty

If a contract already provides that the contractor can suspend works (for example, clause 16.15 of PAM 2006 Sub-Contract) in the case of non-payment, an unpaid party can choose to suspend works under the mechanism provided under the contract. However, many contracts do not permit the suspension or slowing down of work based on non-payment.

Contractors with contracts that do not expressly allow the slowing down of work have to choose between termination or continuing work without payment. The non-payment of claims does not confer on the contractor a right to suspend work – two wrongs do not make a right.

For example, in the case of Kah Seng Construction Sdn Bhd v Selsin Development Sdn Bhd [1996] MLJU 359 the developer exercised its rights of set-off and withheld payment for two payment certificates. The main contractor proceeded to suspend work in protest. However, there was no provision in the contract to allow for the suspension of work. The court held that in the absence of a specific provision in the contract, a contractor has no automatic right to suspend works simply because one or two of his certificates have not been paid. Even if the contractor could have established that the developer was in breach of contract, the contractor would have no right to suspend works, but instead would have had to elect to either terminate the contract or insist on due performance.

Section 29 of CIPAA provides the unpaid party with the statutory right to suspend or slow down work if an adjudication decision remains unpaid. This right should be seen as a boon to contractors who may not have this option included as a term in their contract. It provides the unpaid party with an effective tool to compel payment from the non-paying party. Given that the notice to suspend works can be issued once the adjudicated amount is unpaid past the specified deadline, this provides a relatively quick recourse for the unpaid party.

The statutory right to suspend or slow down works means that the non-paying party cannot retaliate against the unpaid party by terminating the contract or imposing liquidated damages for delays. Section 29 of CIPAA provides that the unpaid party is entitled to a fair and reasonable extension of time and is also entitled to recover any loss and expenses incurred as a result of the suspension or slowdown. What exactly constitutes actual costs claimable is difficult to state categorically since it depends on a whole range of factors.

In some contracts, there may be an express contractual provision that prohibits the contractor from slowing down work in the event of a payment delay. In our view, such a clause will not oust the application of section 29(1) of CIPAA. Under such a contract, a contractor cannot slow down works on the allegation of non-payment but can do so when a favourable adjudication decision remains unpaid.

Concurrent Remedy

Suspending or reducing the rate of progress pursuant to section 29 of CIPAA may be done concurrently with other remedies. If the unpaid party chooses to ‘enforce’ the decision, whether by way of garnishee proceedings or seeking direct payment, it can still choose to suspend the works concurrently.

In Hmn Nadhir Sdn Bhd v Jabatan Kerja Raya Malaysia & Ors [2018] 1 LNS 1938, the High Court deliberated upon the issue of whether the three remedies provided “for the recovery of payment in the construction industry” under Part IV of CIPAA (i.e. sections 28 to 30 of CIPAA) may be applied either concurrently or in combination with each other or singly. Lee Swee Seng J (now JCA) ruled as follows:

[77] “Concurrently” cannot be read as “Sequentially” or “Consecutively” after exercising its remedy under section 28 of CIPAA. That is not borne out by the words used which can only be interpreted one way which is that the successful Claimant may exercise any or all of the remedies concurrently and each of the remedy under sections 28, 29 and 30 may be exercised singly or in combination in the enforcement of the Adjudication Decision.

[78] Again with section 31(2) the Legislature must be presumed to know that there is already a mode of execution available under the Rules of Court 2012 with respect to a garnishee proceeding and to insist on an enforcement order first under section 28 to enforce the Adjudicate Decision as if it is a judgment of the High Court would be to make the remedy available under section 30 a duplication of what is already available under a garnishment order.

[79] The three (3) remedies under sections 28 – 30 may be applied either concurrently or in combination with each other or singly as part of the arsenal available to the successful Claimant to activate and deploy in its efforts to recover the payments due under an Adjudication Decision.

Relief for the Non-Paying party

CIPAA has been described as social legislation that is intended the address the imbalance in bargaining and financial power between developers and contractors or contractors and sub-contractors. However, there may still be valid reasons for an unsuccessful respondent, be it a developer or contractor, to be gravely concerned about paying an unfavourable adjudication decision.

An unsuccessful respondent in adjudication can attempt to challenge the decision by applying to the High Court to set it aside under section 15 of CIPAA or to take the dispute to court or arbitration. While these proceedings are pending, the respondent can also for a stay of the decision under section 16 of CIPAA. Grounds for the stay may include concerns about the insolvency of the claimant and the dissipation of funds before the dispute reaches a final resolution in court or arbitration. However, until a stay under section 16 of CIPAA is granted, the unpaid party can make use of section 29, making it necessary to file any application for a stay as swiftly as possible.

Conclusion

While enforcing adjudication decisions may come with challenges, CIPAA provides mechanisms and remedies that offer parties involved in construction disputes a means to assert their rights effectively and resolve disputes in a timely manner.

Section 29 is an additional remedy under CIPAA to help unpaid parties without going through the process of enforcing a favourable adjudication decision. The benefits of section 29 extend beyond just the ability to suspend works; it also safeguards against liquidated damages claims by ensuring that the unpaid party is entitled to extensions of time and reimbursement for any losses incurred due to the suspension or reduction in work progress.

By Michael Koh

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Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.

Thursday, 18 April 2024

3:00 pm – 4:00 pm Applying for Planning Permission: Overcoming Approval Challenges in Project Development

About this talk

Join us to understand the intricate legal framework governing land development and learn about the key processes and challenges involved in obtaining planning approvals or development orders. From zoning regulations to environmental and social impact assessments, our speakers will provide valuable insights for developers and property owners. Whether you are embarking on a new development project or looking to challenge decisions by the authorities, this talk will offer essential guidance and practical tips for navigating applications for planning permission in Malaysia.

The talk will be delivered over video conference using Zoom.us. You can either view the talk from your web browser or download the Zoom app.

Talk Points

  • Overview of the Planning Permission Process
  • Environmental and Social Impact Assessments
  • Challenges and Practical Tips for Successful Applications
  • Case Studies and Recent Court Decisions

Speakers

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Past Seminars

Wednesday, 27 March 2024

3:00 pm – 4:00 pm Resolving Disputes at the Strata Management Tribunal

About this talk

Facing strata management challenges and looking for an alternative to court proceedings? Join our upcoming webinar to discover how the Strata Management Tribunal provides a cost-effective dispute resolution forum for strata property owners, joint management bodies, management corporations and developers. Understand the pros and cons of bringing a claim to the Tribunal and how to go about it. Learn also how to resist a claim and challenge an unfavourable decision. Don’t let strata disputes overwhelm you. Sign up now!

The talk will be delivered over video conference using Zoom.us. You can either view the talk from your web browser or download the Zoom app.

Talk Points

  • Pros and Cons of the Strata Management Tribunal
  • How to File and Defend a Tribunal Claim
  • Enforcing a Strata Tribunal Order
  • Challenging a Strata Tribunal Decision

Speakers

  • Carolyn Ng, Associate, Dispute Resolution Practice Group
  • Jasmine Wee, Associate, Dispute Resolution Practice Group
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Past Seminars

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