KUALA LUMPUR STOCK EXCHANGE INVESTORS WEEK 2001

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KUALA LUMPUR STOCK EXCHANGEINVESTORS WEEK 2001

• SHAREHOLDERS RIGHTS FROM THE SHARIAH PERSPECTIVE
• BY
• MOHAMED ISMAIL BIN MOHAMED SHARIFF
• LL.B. (HONS) (SPORE), LL.M. (LOND.), FCIArb
• OF LINCOLNS INN, BARRISTER AT LAW
• ADVOCATE SOLICITOR
• HIGH COURT OF MALAYA
• THE SUPREME COURT OF THE REPUBLIC OF SINGAPORE
• DIRECTOR, BANK MUAMALAT MALAYSIA BERHAD

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INTRODUCTION

• Shareholders limited liability company comes to
  mind.
• Concept of a company a legal entity separate
  from its members it has rights and obligations
  of its own.
• So shareholders have rights in and against the
  company.

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INTRODUCTION (ctd.)

• Limited liability
• Shareholders their position owners of the
  company but have no complete control.
• A partnership differences between a company and
  a partnership.

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SHAREHOLDERS RIGHTS

• What are shareholders rights? Normally three
  (1) a right to receive dividends (2) right to a
  return of capital on a winding up (or if there is
  a reduction of capital) and (3) right to attend
  and vote at meetings.

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SHAREHOLDERS RIGHTS (ctd.)

• Where do they derive from?
• Memorandum and Articles of Association
• Companies Act 1965
• Case law

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CONCEPT OF COMPANY IN SYARIAH

• There is no similar institution in Syariah.
• So, is the concept of a company contrary to
  Syariah principles?
• It has not been dealt with in Islamic legal
  theory, but the concept of an entity other than
  an individual person having rights and powers is
  not alien to the Syariah. E.g. A wakaf a
  religious institution which can own property in
  its name.

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MUSYARAKAH

• The concept that comes close to a company (though
  in legal theory it is a very different creature)
  is the musyarakah. This is essentially a
  partnership which does not have the attributes of
  a company discussed above.

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MUSYARAKAH (ctd)

• What is a musyarakah?
• This is a type of joint venture in which both the
  initiator of the project and the financier will
  provide the capital for the project in agreed
  proportions and they will also share the profits
  from the project in agreed proportions (which
  need not be the same as the capital
  contributions).

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MUSYARAKAH (ctd)

• Both parties have the right to take part in the
  management of the project but any party may waive
  its right of participation. The capital will be
  returned to the investors upon completion of the
  project.
•  
• If there is a loss, both parties bear the loss in
  the ratios of their respective capital
  contributions.

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SHAREHOLDERS RIGHTS IN SYARIAH

• From the foregoing, it is apparent that it is
  inappropriate to talk of shareholders rights in
  Syariah in the same sense as we talk of
  shareholders rights in a limited liability
  company registered under the Companies Act.

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APPROVED SECURITIES BY S A C

• We know there are certain companies whose shares
  are designated as approved securities by the
  Syariah Advisory Council of the Securities
  Commission.
• This means the companies concerned are trading in
  accordance with the syariah criteria established
  by the SAC.

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APPROVED SECURITIES BY S A C (ctd)

• Criteria 4 basic criteria are used by the SAC
• Whether the operations are based on riba, e.g.
  commercial banks, finance companies, etc.
• Whether the operations involve gambling and
  gaming activities

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APPROVED SECURITIES BY S A C (ctd)

• 3.Whether the operations involve the manufacture
  or sale of haram products, e.g. liquor, pork and
• Whether the activities contain an element of
  gharar (uncertainty), e.g. conventional insurance
  business.

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APPROVED SECURITIES BY S A C (ctd)

• Shares in companies whose securities are approved
  by the SAC are suitable for investment in an
  Islamic way.
• What is the legal effect of such designation?
  None, if the activity is within its objects.

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APPROVED SECURITIES BY S A C (ctd)

• Is there a legal impediment to those companies
  engaging in non-Islamic activities? The answer
  is, no. A shareholder who has bought shares in
  such a company cannot stop it from doing or
  acquiring a non-halal business if the objects of
  the company allow it.
• The sanction if it does so The SC will remove
  the securities from its approved list.

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APPROVED SECURITIES BY S A C (ctd)

• What the foregoing means is that there is no
  legal assurance that the business of the
  companies concerned and hence their securities
  will remain halal.
• Can there be such an assurance? No, not as the
  law is as it is now.

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ISLAMIC COMPANIES

• At present companies registered under the
  Companies Act are companies that can do any type
  of business authorised by their objects in the
  Memorandum and Articles of Association.
• Such companies may by choice do only halal
  business. But there is nothing to stop them from
  engaging in lawful but non-halal business.

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ISLAMIC COMPANIES (ctd)

• Is there any other way? Yes, if the companies
  become Islamic companies.
• How? This can only be done by legislation, i.e.
  by amending the Companies Act to allow for the
  registration of a company as, or the conversion
  of an existing company from a general nature
  company to, an Islamic company.

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ISLAMIC COMPANIES (ctd)

• The amendment can be a simple one.
• The amendment should state that any company that
  desires to be an Islamic company must have a
  clause in its Memorandum that allows it to do
  carry on only Islamic business.

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ISLAMIC COMPANIES (ctd)

• There is a precedent in Islamic banks.
• A bank (which is also a company) can become an
  Islamic bank by being licensed under the Islamic
  Banking Act 1983.
• If it is an Islamic bank it can only do Islamic
  banking business.

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ISLAMIC COMPANIES (ctd)

• The wording can adopt that in the Islamic Banking
  Act to say that the companys objects must
  contain a provision stating that its business
  must not include any element that is not approved
  by the religion of Islam, or any other
  appropriate wording.

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ISLAMIC COMPANIES (ctd)

• In this way a company can become an Islamic
  company in a way that a bank is an Islamic bank.
• An investor in such a company can be sure that
  his investment will remain Islamic in character.

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ISLAMIC COMPANIES (ctd)

• In this manner the character of a shareholders
  investment will enjoy the protection of the law,
  so that an investor in an oil palm refining
  company (a halal business) will not find himself
  holding shares in a beer brewing concern (a
  non-halal business).
• Adapting an example in Gowers Company Law
  book.

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CONCLUSION

• Whilst it is not appropriate to talk of
  shareholders rights under the syariah in
  relation to companies in the present state of the
  law, if, as proposed above, provisions are made
  for the registration of Islamic companies then
  the question of shareholders rights under the
  syariah becomes a real issue.

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CONCLUSION

• A shareholder in an Islamic company in the sense
  envisaged above will have all the rights of a
  shareholder in a typical company. In addition he
  will also have the protection of the syariah in
  relation to an entity that does business in
  accordance with the syariah, i.e. as an Islamic
  company. End.