By Iva Karen
KUALA LUMPUR, June 18: Company directors who fail to conduct proper due diligence may be held personally liable for corporate losses, especially if found to have breached their statutory duties under Malaysia’s Companies Act 2016, says corporate lawyer Datuk J. Shamesh.
He said that under Sections 213 and 218 of the Act, directors are required to exercise reasonable care, skill and diligence, and to act in good faith in the best interests of the company.
“Personal liability arises if it is shown that a director acted recklessly, failed to exercise proper judgment, or knowingly withheld material information during the due diligence process.
“If a failed due diligence results in financial losses to the company or third parties, the directors involved may be civilly liable for negligence or breach of fiduciary duty,” he said.
Shamesh, nevertheless, added that under Section 214 of the Act, the business judgement rule offers a legal presumption that protects directors from personal liability for decisions made during diligence –provided it can be proven that they acted in good faith, without personal interest, and with reasonable care and informed judgement.
Furthermore, the business judgement must be reasonably believed to have been in the best interest of the company, he said, adding that the protection, however, would not apply if a director is found to have been negligent, had ignored expert advice or red flags, and has a conflict of interest, or had engaged in fraud or misconduct.
He also highlighted several red flags often overlooked during due diligence, such as undisclosed legal liabilities, regulatory non-compliance, related party transactions, conflicts of interest, and high due diligence costs.
“Consequences can range from financial losses and reputational damage to legal penalties and, in some cases, criminal liability under Malaysian company laws,” he said.
On what steps directors should take if serious compliance or legal risks are uncovered during due diligence, Shamesh said the board must promptly assess the materiality and impact of those risks on the company’s interests.
“Directors should seek independent legal and financial advice to fully understand the consequences, and consider disclosing such risks to shareholders and regulators as required under the Companies Act.
“The board must then decide whether to renegotiate terms, implement risk mitigation strategies, or withdraw from the transaction to avoid potential liability. Failure to properly address significant risks in an acquisition may expose the directors to personal liability,” he added.
–WE