Directors' Fees and Compensation: Who Approves What

In a family Sdn Bhd the fees are usually decided in a conversation and written up afterwards, if at all. That is close to what s.230(2) of the Companies Act 2016 permits — but only close. The subsection that follows imposes a fourteen-day duty to tell the shareholders, on penalty of RM250,000, and the one after that gives a ten per cent minority the power to turn the fee into a debt owed back to the company.

Who approves directors’ fees?

Section 230(1) requires the fees of the directors, and any benefits payable to them including any compensation for loss of employment of a director or former director, to be approved at a general meeting where the company is:

• (a) a public company; or
• (b) a listed company and its subsidiaries.

Section 230(2) provides the alternative for everyone else: in the case of a private company, the Board may, subject to the constitution, approve the fees of the directors and any benefits payable to them, including compensation for loss of employment of a director or former director.

Two conditions govern that board power, and both are in s.230(3):

1. the approval shall be recorded in the minutes of the directors’ meeting; and
2. the Board shall notify the shareholders of the approval of the fees within fourteen days from the date of the approval.

Failure to comply with s.230(3) is an offence by the company and every officer, punishable under s.230(7) by a fine not exceeding RM250,000.

What is the shareholder threshold?

Section 230(4) is the provision that gives the rule teeth in an owner-managed company. Where a fee or other benefit is paid under s.230(2), members holding at least ten per cent of the total voting rights who consider that the payment was not fair to the company may, within thirty days after they have knowledge of the payment, require the company to pass a resolution approving the payment — either by written resolution or at a general meeting.

And s.230(5) supplies the consequence: unless an approval has been obtained through a resolution passed under s.230(4), the payment shall constitute a debt due by the director to the company.

The mechanics deserve care:

Element	Detail
Threshold	10 per cent of total voting rights
Trigger	The members consider the payment was not fair to the company
Clock	30 days after they have knowledge of the payment
Route	Written resolution or general meeting — both available here
Effect if the resolution fails or is not passed	The payment is a debt due from the director

Note the interaction with s.230(3). The fourteen-day notification is what gives shareholders the knowledge that starts their thirty-day clock. A board that skips the notification commits a RM250,000 offence and leaves the payment exposed indefinitely, because the members’ clock only ever runs from knowledge.

For contravention of s.230(1) — a public or listed company paying without a general-meeting approval — s.230(6) fines the company up to RM3 million, and the payment likewise constitutes a debt due by the director to the company.

What about payments for loss of office?

This is a different section and it is often merged into s.230 by mistake.

Section 227(1) makes it unlawful:

• (a) for a company to make any payment to a director by way of compensation for loss of office as an officer of that company or of a subsidiary, or as consideration for or in connection with his retirement from such office; or
• (b) for any payment to be made to a director in connection with the transfer of the whole or any part of the undertaking or property of the company,

unless particulars with respect to the proposed payment, including the amount, have been disclosed to the members and the resolution for the proposal has been approved by the members. Where such a payment is unlawfully made, the amount received is deemed to have been received by the director in trust for the company.

There is no percentage threshold in s.227(1) — it requires member approval of the resolution, on full disclosure of the amount. The percentage that does appear is in s.230(4), and it is the minority’s challenge right, not the approval threshold. Guidance that reports “a shareholder threshold for loss-of-office payments” is usually conflating the two.

Section 227(2) adds an abstention rule for public companies only: the interested director and persons connected with him shall abstain from voting on the resolution.

Section 227(3) covers a payment connected with a transfer of shares following an offer to shareholders — the director must take all reasonable steps to secure that particulars, including the amount, are included in or sent with the notice of the offer, unless furnished under takeover law. Under s.227(4), where the price paid to an outgoing director for his shares exceeds what other shareholders could have obtained, the excess is deemed to be compensation for loss of office.

Section 227(5) lists what is not a payment for loss of office:

• a payment under an agreement entered into before the commencement of the Act;
• a payment under an agreement whose particulars have been disclosed to and approved by special resolution;
• a bona fide payment by way of damages for breach of contract;
• a bona fide pension or lump sum for past services, including a superannuation, retiring allowance or gratuity, provided the value does not exceed the director’s total remuneration in the three years immediately preceding his retirement or death, except so far as attributable to his own contributions; and
• a payment under an agreement made before he became a director, as consideration for agreeing to serve as a director.

Section 227(7) extends “director” to any person who has at any time been a director of the company or of a related corporation — so a payment to someone who left years ago is still within the section.

Two adjacent rules worth knowing

Section 226 — no tax-free remuneration. A company shall not pay a director remuneration free of income tax, or calculated by reference to or varying with the amount or rate of his income tax. Any provision to that effect is read under s.226(2) as providing for a gross sum, subject to tax, of the net amount specified. Contravention carries up to five years or RM3 million or both.

Section 232 — service contracts, public companies only. Section 231(1) defines a director’s service contract in relation to a public company, and s.232 requires a public company to keep copies available for inspection at the registered office for at least one year after termination or expiry. A private company is outside this regime.

Common mistakes

Skipping the s.230(3) notification. A private-company board that approves fees and tells nobody has committed a RM250,000 offence and left the members’ thirty-day clock unstarted.

Approving fees without checking the constitution. Section 230(2) is expressly subject to it. A constitution may reserve fees to the members.

Treating s.230 as covering loss-of-office payments in a private company. Section 230(2) does refer to compensation for loss of employment, but s.227(1) independently requires member approval, on disclosed particulars, for compensation for loss of office. Both need to be satisfied.

Reading the 10 per cent as an approval threshold. It is the minority challenge right in s.230(4). The approval standard in s.227(1) is a members’ resolution on full disclosure.

Paying a director’s tax. Prohibited outright by s.226.

Forgetting the disclosure at year end. Paragraph 2 of the Fifth Schedule requires the directors’ report to state fees and other benefits separately, inclusive of compensation for loss of office, plus the estimated money value of non-cash benefits, amounts paid to third parties for a director’s services, and the total of any indemnity or insurance effected for a director, officer or auditor.

What’s next

Fees approved at board level need to survive year end, so read this with the directors’ report, where paragraph 2 of the Fifth Schedule forces the numbers into the open. Where money moves to a director as credit rather than remuneration, see loans to directors, and where a director votes on his own package, disclosure of interest.