Introduction
On 17 November 2023, it was announced that OpenAI's board had made the decision to remove Sam Altman as CEO. The board said that Altman "was not consistently candid in his communications" and such decision was made after the board had taken a deliberative review process. What Altman had allegedly hidden from his company's board was not clear.
The departure of Sam Altman marks a significant upheaval in Silicon Valley. His prominence soared following the introduction of ChatGPT, OpenAI's highly acclaimed chatbot, positioning him as a prominent figure in the tech world and a renowned authority on artificial intelligence. This generative AI chatbot quickly gained over 100 million users in under a year. At 38, he has been at the forefront of developing "artificial general intelligence" (AGI), an AI system with the ability to perform any task that a human can.
The sudden dismissal of Sam Altman, CEO of OpenAI, has brought to light the complexities of corporate governance, particularly in terms of the powers held by boards of directors and shareholders to dismiss top executives such as directors and CEO immediately.
This article seeks to deepen the understanding of executive dismissals by examining the legal framework and business implications in Malaysia, as governed by the Companies Act 2016. Drawing inspiration from the recent case of Sam Altman's dismissal from OpenAI, we will explore whether a similar scenario could transpire under Malaysian law.
Through a detailed analysis, including case studies and expert insights, we aim to dissect the nuances of executive termination in the Malaysian corporate landscape and assess the potential parallels with high-profile international cases like that of Sam Altman.
Legal Framework and Corporate Governance
How To Remove a Director from the Board?
The Malaysian Companies Act 2016 sets the stage for the appointment and dismissal of directors. Under Section 206 of the Companies Act 2016, the process for the removal of directors varies between private and public companies.
For public companies, the power to remove directors is derived from Section 206 of the Companies Act 2016.
For private companies, the power to remove a director can either be derived from the company's constitution or from Section 206 of the Companies Act 2016.
If the private company has a constitution:
If private companies have existing company's constitution with specific procedures for the removal of directors, the companies should follow the company constitutions to remove the director. For example, the company constitutions may stipulate methods of removal such as removal made by the board of directors or removal made by the shareholders who appointed such director, and whether such removal can be done immediately or by giving certain notice period.
In the case of Thiam Hoe & Anor v Sri Serdang Sdn Bhd & Ors [2020] 1 LNS 75, Justice Darryl Goon Siew Chye determined that the removal of the plaintiffs by the 1st to 4th defendants in private companies was valid even without issuing a special notice in advance, as their articles of association did not explicitly require it.
If the private company does not have a constitution:
In cases where private companies do not have a company constitution (because it is not compulsory to have one under the law), or if their company constitution does not contain specific provisions on the removal of director, then by default, they should follow the procedures set out in Section 206 of the Companies Act 2016 i.e.:
- an ordinary resolution passed by the shareholders of the company at a general meeting;
- the company cannot bypass a general meeting through a circular written resolution;
- a special notice has to be issued on the director to be removed 28 days before the general meeting is convened; and
- the director who is to be removed has the right to be heard and to make representation against the proposed removal.
How to Remove a CEO from the Company?
The process for the dismissal of a CEO is typically governed by the terms of their employment contracts or appointment letters. Usually, the dismissal process should adhere to the requirement of providing due notice, as stipulated in the contracts or other relevant documents, such as an employee handbook. This ensures that the process aligns with both the specific contractual agreements and standard employment practices.
Grounds of Removal/Termination
Do you Need a Reason to Remove a Director from the Board?
If removal is initiated by the shareholders of the company, shareholders are generally not required to provide any reason to remove a director. The High Court's ruling in Low Thiam Hoe & Anor v Sri Serdang Sdn Bhd [2020] 4 CLJ 618 underscores the unfettered power of shareholders in removing directors. The court noted that this statutory right to remove a director is unqualified and does not require reasons for a director's removal. This ruling emphasises the authority shareholders hold, allowing them to remove directors for a variety of reasons, including dissatisfaction with performance or strategic direction.
The courts are of the view that appointment and removal of directors belong to the internal management or affairs of the company and the court will not interfere with the internal management of a company, as illustrated in the case of Chan Tai Ping V. Ning Yang Properties Sdn Bhd & Ors [2022] 1 LNS 1441. The appointment of a director and the removal of a director are essentially business decisions to be made by the businessmen themselves, and the Companies Act 2016 stipulates for such business decisions to be made by the shareholders in a general meeting of the company.
Can You Remove a CEO/Director Immediately?
The standard procedure and best practice typically involve dismissal through a written notice that provides reasons or justifications for the dismissal.
If the contractual agreements stipulate certain mechanisms in place such as conducting a due inquiry before immediate dismissal, the company should observe and follow the prescribed procedures to ensure proper dismissal. Failure to follow these procedures may result in the CEO or director having grounds to claim wrongful termination against the company.
If the contractual agreements stipulate conditions under which immediate dismissal is justified, for example, gross misconduct or breach of duty, then such immediate dismissal (with or without reasons) may be applicable provided such dismissal follows the procedures stated therein.
However, be that as it may, dismissal should properly be based on valid reasons or proper grounds, as a matter of good practice and to avoid other potential legal claims.
Consequences of Termination without Valid Reasons/Proper Grounds
Legal Consideration
- Claims for Wrongful Termination of Employment
If a CEO or a director is also an employee of the company, he can claim wrongful termination, if there is evidence showing unfair dismissal. A pertinent case is Shaharuddin bin Zainuddin v Bank Pembangunan Malaysia Berhad Award No 1249 of 2020, where the Industrial Court awarded RM1.8 million compensation to a former CEO and non-executive director of a local bank for being unfairly dismissed, as the court did not find any evidence of financial misconduct or personal gain in his role as the bank's top executive. The court noted the claimant suffered unjust treatment and victimization, including being blacklisted by BNM, without any proven allegations against him.
- Claims for Oppression
In the case of Tan Kian Hua v Colour Image Scan Sdn Bhd & Others [2004] 6 CLJ 174, the director was removed without any basis with the aim of discriminating against him, excluding him from the active management of the company and removing all the benefits granted to him. Based on the evidence presented to the court, the court held that there was an oppression on him to force him out of the company.
The High Court in the case of Ng Ka Giap V. Lim Poh Chai & Ors [2023] 1 LNS 712 held that it is important to produce evidence of oppressive conduct that goes beyond normal business disagreements or decisions made by the majority shareholders in order to prove oppression. If removal as a director was carried out through a resolution passed at a members' meeting in accordance with the Companies Act 2016, and there is no evidence of oppressive conduct, the Court may not find fault in the removal process and may not interfere with the internal management.
- Claims for Breach of Equitable Principles
According to Mohamad Ariff Yusof J (as His Lordship then was) in Dato' Raja Azwane Raja Ariff v Dato' Man Mat & Ors [2011] 8 CLJ 633:
"It needs to be also stated as a competing general proposition that the exercise of corporate powers, although technically they might be consistent strictly with the procedure of the company's constitution, can be open to challenge on the basis of equitable principles depending on the precise circumstances of a particular case. One basis for this jurisdiction is the principle that power cannot be used for a collateral or improper purpose."
Examples of such misuse include removing a director to stifle or discontinue a civil suit [see Koh Jui Hiong @ Koa Jui Heong & Ors v Ki Tak Sang @ Kee Tak Sang & Ors [2009] 8 MLJ 818]; or through backdating resolutions to deny effective notice to the director (Dato' Raja Azwane case).
Business Consideration
- The sudden dismissal of a high-ranking executive is not just a boardroom event, it resonates throughout the entire organisation, potentially affecting its corporate culture and employee morale. When a leader is abruptly removed, it can create a climate of uncertainty and anxiety among employees, leading to questions about job security, the company's direction, and the values it upholds.
- Beyond internal disruptions, the instant dismissal of a high-ranking executive can have far-reaching implications on a company's external relationships. It can strain partnerships, as collaborators may reassess their trust and confidence in the company's leadership and stability. Client relationships might also be tested, especially if the dismissed executive was a key liaison or had a significant role in ongoing projects. Furthermore, such dismissals can affect the company's market positioning, potentially opening up vulnerabilities to competitors or altering investor perceptions in the industry.
Conclusion
In conclusion, immediate dismissal of CEOs or directors comes with significant responsibilities and potential legal and business ramifications. Companies must be mindful of the consequences of wrongful termination. To navigate the delicate process of executive dismissals, Malaysian companies and their boards may consider the following recommendations:
- Ensure transparent and clear communication with all stakeholders to maintain trust and confidence.
- Develop robust succession plans and contingency strategies to minimise disruptions.
- Engage in ethical decision-making by considering not only legal requirements but also the broader impact on employees, partners, and the market.
Originally published by 20 November, 2023
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.