Under the Listing Requirements issued by Bursa Malaysia Securities Berhad (“Bursa Securities”), a corporation which intends to be listed on Bursa Securities (“Applicant”) must ensure that at least one third of its board of directors are independent directors. The Malaysian Code on Corporate Governance (“MCCG”) issued by the Securities Commission Malaysia recommends that at least half of the board comprises independent directors. For a company on the FTSE Bursa Malaysia Top 100 Index or a company with market capitalisation of RM2 billion and above, the MCCG recommends that the board comprises a majority of independent directors.
One of the frequently asked questions in initial public offerings is whether an adviser who has provided professional advisory services to the Applicant, such as a lawyer or an accountant, meets the criteria to be an independent director of the Applicant.
Definition and Disqualifying Criteria
Under the Listing Requirements, an “independent director” means a director who is independent of management and free from any business or other relationship which could interfere with the exercise of independent judgement or the ability to act in the best interests of an applicant or a listed issuer (“said Corporation”).
The definition of “independent director” under the Listing Requirements sets out a non-exhaustive list of criteria which disqualifies a person from acting as an independent director. One of the criteria states that an independent director is one who:
- has not been engaged as an adviser by the said Corporation under circumstances as prescribed by Bursa Securities; or
- is not presently a partner, director (except as an independent director) or major shareholder, as the case may be, of a firm or corporation which provides professional advisory services to the said Corporation under circumstances as prescribed by Bursa Securities.
The circumstances prescribed by Bursa Securities (“Bursa Prescribed Circumstances”) are set out in Practice Note 13 of the Main Market Listing Requirements and Guidance Note 9 of the ACE Market Listing Requirements (collectively, “Notes”). The Notes provide that a person who is proposed to be or is an independent director (“said Director”) is disqualified from being an independent director if he or she:
- had personally provided professional advisory services to the said Corporation within the last two years; or
- is presently a partner, director (except as an independent director) or major shareholder, of a firm or corporation (“Entity”) which has provided professional advisory services to the said Corporation within the last two years;
and the consideration in aggregate is more than 5% of the gross revenue on a consolidated basis (where applicable) of the said Director or the Entity or RM1 million, whichever is the higher.
Where the Entity is a corporation, the computation of the gross revenue of the Entity must be based on its annual audited financial statements for the last two financial years. Where the service is rendered by the said Director personally or by an Entity other than a corporation, the computation of the gross revenue must be based on the income tax returns of the said Director or the Entity, as the case may be, submitted to the Inland Revenue Board for the last two years.
Relationship between Adviser and Applicant
The MCCG provides that in considering independence, it is necessary to focus not only on whether a director’s background and current activities qualify him or her as independent but also whether the director can act independently of management. Stakeholders are increasingly concerned about the potential negative impact that directors’ long tenure may have on their independence. The long tenures of independent directors and familiarity may erode the board’s objectivity. Due to long or close relationship with board and management, an independent director may be too sympathetic to their interests or too accepting of their work. There could also be occasions where an independent director may become a ‘dependent’ director due to prolonged insular recruitment processes and attractive remuneration packages and material benefits.
Therefore, notwithstanding the professional advisory services provided by an adviser to the Applicant do not fall within the Bursa Prescribed Circumstances, it does not mean that the adviser will automatically qualify to be an independent director. The relationship between the adviser and the Applicant and other circumstances surrounding the professional advisory services provided by the adviser to the Applicant should be considered carefully. If the adviser has a long or close relationship with the board or management of the Applicant or is advising the Applicant on ongoing major or material transactions, such factors may cast doubt on the independence of the adviser. The overriding test for independence is whether the said adviser is able to exercise independent judgment and act in the best interests of the Applicant.
The information in this article is intended only to provide general information and does not constitute any legal opinion or professional advice.
On 13 August 2020, Bursa Malaysia Berhad announced amendments to the Main Market and ACE Market Listing Requirements. The definition of independent directors is enhanced by extending the cooling-off period for specific persons (such as an existing or former officer, adviser, or transacting party of the listed issuer or its related corporation), from the current two years to three years.