Case Background & Strategy

Removing a director is one of the most contentious steps a company can take. Done correctly, it is a shareholders’ decision that the Companies Act 2016 fully supports. Done incorrectly, it produces an invalid resolution, a director who is still lawfully in office, and in many cases an oppression petition under section 346. This guide explains the procedure for private and public companies and the traps that turn a routine removal into litigation.

The shareholders remove directors, not the board

The starting point is that directors are removed by the shareholders. The board has no inherent power to remove one of its own members. A board resolution purporting to remove a director is ineffective unless the company’s constitution expressly gives the board that power. Section 206 of the Companies Act 2016 vests the power of removal in the members in general meeting.

Private companies

For a private company (Sdn Bhd), section 206(1) provides that a director may be removed by ordinary resolution, that is a simple majority of the votes cast, subject to the constitution. The words “subject to the constitution” are important. The constitution may impose a higher threshold, require a special resolution, give a particular shareholder the right to appoint and remove a director, or entrench a director’s position. The constitution and any shareholders’ agreement must be read before the notice of meeting is issued. If the company has no constitution, the default provisions of the Act apply and an ordinary resolution suffices.

The Act also requires the members to be given notice of the meeting in accordance with the Act and the constitution. For a private company the default notice period is 14 days. Shorter notice is possible only with the consent of the required majority of members. A written resolution of members can be used in a private company for most decisions, but a resolution to remove a director before the expiry of the director’s term is one of the matters that cannot be passed by written resolution and must be dealt with at a meeting.

Public companies

For a public company, section 206(2) and (3) require an ordinary resolution passed at a meeting, and special notice of the resolution must be given to the company at least 28 days before the meeting. On receiving the special notice the company must send a copy to the director concerned. Under section 207, the director is entitled to make written representations to the company and to require that they be circulated to members, and to be heard at the meeting. A removal resolution passed without special notice, or without giving the director the opportunity to be heard, is invalid.

After the resolution

Once the resolution is passed, the company must lodge the change with the Companies Commission of Malaysia (SSM) within 14 days. The board should also deal with the practical consequences: bank mandates, authorised signatories, statutory registers and any regulatory licences that name the director. Where the removed director is also an employee, the employment must be terminated separately and lawfully; removal from the board does not end a contract of service.

Compensation is preserved

Section 206(4) provides that nothing in the section deprives a removed director of compensation or damages payable in respect of the termination of the appointment as director or of any appointment terminating with it. A director with a service agreement that provides for notice or severance retains those rights. Any additional payment for loss of office must be approved by shareholders under section 227.

When removal becomes oppression

This is the trap that catches most family businesses and joint ventures. Where a company is in substance a partnership between its shareholders, with a shared understanding that each of them will participate in management, the removal of a shareholder-director by the majority can amount to oppression or conduct in disregard of the minority’s interests under section 346 of the Companies Act 2016. The removal may be procedurally valid under section 206 and still unlawful as oppression.

Malaysian courts have repeatedly granted relief where a minority shareholder was removed from the board and then excluded from information, denied dividends and left with a shareholding that could not be sold. The usual remedy is an order that the majority buy out the minority at a fair value without a minority discount, and in extreme cases the winding up of the company. A majority planning to remove a shareholder-director should therefore consider whether the shareholders’ agreement or the history of the company gives that director a legitimate expectation of continued involvement, and whether a negotiated exit is safer than a resolution.

Resignation and vacation of office

A director may resign by giving written notice to the company under section 208, and the resignation takes effect on the date stated in the notice or on receipt. A sole director of a private company cannot resign unless a replacement is in place. A director’s office is also automatically vacated in the circumstances set out in the Act and the constitution, including bankruptcy, disqualification, death and, where the constitution so provides, prolonged absence from board meetings.

Frequently asked questions

Can the board of directors remove a director in Malaysia?

Not unless the constitution expressly allows it. Under section 206 of the Companies Act 2016 directors are removed by the shareholders by ordinary resolution.

How much notice is required to remove a director of a Sdn Bhd?

The removal must be decided at a general meeting called with at least 14 days’ notice unless the constitution provides otherwise. The resolution cannot be passed by written resolution.

Is special notice required to remove a director in Malaysia?

Special notice of at least 28 days is required for a public company under section 206(3). The director must be sent a copy and is entitled to make representations and to be heard at the meeting.

Can a removed director sue the company?

Yes. A removed director may claim compensation under any service agreement, may bring an unfair dismissal claim if also an employee, and if a shareholder may petition for oppression under section 346 where the removal disregards his interests.

How NZSK Legal can help

NZSK Legal advises majority shareholders on removing directors lawfully and without triggering an oppression claim, and acts for shareholder-directors who have been pushed out of the companies they helped build. Our Corporate Litigation team handles the general meeting process, injunctions to restrain invalid removals and section 346 petitions in the High Court.