Company Law Column Part 5: Issuance, Transfer and Holding of Shares in Malaysia
2019/08/16
1. Issuance of shares
Under the old Companies Act, a company was required to set the amount of capital, face value, and number of shares in the constitution. In order to issue new shares in excess of the amount of capital prescribed in the constitution, the company had to amend the constitution at shareholder’s meeting. The new Companies Act has abolished the authorized capital system (a system that allows for flexible fund procurement within the total number of authorized shares as specified in the constitution) for the sake of flexibility in fund procurement and employed no par value shares (Section 74).(1) Procedures for issuing shares
In principle, a director shall not exercise any power to allot shares without obtaining prior approval from the shareholders' meeting (Section 75(1)), and therefore it is understood that the primary authority concerning the issuance of shares belongs to the shareholders. If a resolution to approve the issuance of shares is adopted at a general meeting of shareholders, the company must notify the Registrar (CCM) within 14 days (Section 76 (1) and (2)). On the other hand, ① in the case of allotting shares to existing shareholders in accordance with the ratio of shares held, ② in the case of allotting shares to the incorporators to the extent agreed in advance, or ③ in the case of issuing shares as consideration for the acquisition of shares and other assets, a prior approval from the shareholders' meeting is not required (Section 75 (2)). Any issue of shares that contravenes these provisions shall be void and any consideration given for the shares shall be recoverable accordingly (Section 75 (4)). In addition, any directors involved in the procedures shall be liable to compensate the company and person to whom the shares were issued for damages (Section 75 (5)). The court may issue an order to confirm the validity and terms of the issuance of shares upon an application by the company, shareholder, creditors, and mortgagee of any of the shares shareholders (Section108).(2) Pre-emptive rights of existing shareholders
In order to protect existing shareholders, the new Companies Act provides that, subject to the constitution, shares which rank equally to existing shares as to voting or distribution rights shall first be offered to the existing shareholders in accordance with the shareholding ratio (Section 85 (1)).A company shall notify the existing shareholders of the offer for the allotment of shares with the time frame, and if the existing shareholders fail to accept the allotment or fail to respond within the time frame, the directors may allocate the shares to a third party (Section 85 (2 ) and (3)).
In accordance with Section 85 (1), if a company offers an allotment of shares to an existing shareholder in accordance with the shareholding ratio, approval at the shareholders' meeting is not be required (Section 75 (2)(a)).
(3) Procedures after Allotment of Shares
A company shall ① update the register of its members (Sections 50 and 77) and ② lodge with the Registrar a return of the allotment (Section 78) within 14 days of the change.2. Transfer of shares
(1) Restriction on transfer
The Japanese Companies Act provides that, unless otherwise provided in the articles of incorporation, the transfer of shares shall be approved by resolution of the board of directors in the case of a company with a board of directors, or by the shareholders in the case of other companies (Article 139 of the Japanese Companies Act). In Malaysia, although a private company is required to restrict the transfer of shares (Section 42 (2)), there is no specific provision regarding the restriction on the transfer of shares. Therefore, the details of the specific restrictions on the transfer of shares must be stipulated in the constitution.(2) Method to Transfer Shares
When transferring shares, it is necessary to prepare a deed of transfer, pay the stamp duty in accordance with the law, and submit it to the company (Section 105 (1)). If share certificates have been issued, they must be accompanied with the share certificates (Section 98 (2)).3. Pledging of Shares
In Japan, financial assistance by company is provided by means of pledging of shares (Japanese Companies Act Article 146 (1)) and mortgage by transfer. In Malaysia, the old Companies Act prohibits a company from giving to a third party any financial assistance through the provision of funds and security when the third party acquires or accepts shares in the company or its holding company. However, under the new Companies Act, in order to provide flexibly in fund procurement in M & A, a company may give financial assistance if ① it is approved by a special resolution and by a majority of directors, ② directors makes a solvency statement, ③ the amount of assistance does not exceed 10% of the company's share capital, and ④ the company receives fair value in connection with the giving of the assistance (Section 126 (2)).
4. Purchase by a company of its own shares
(1) Prohibition of purchase of its own shares
In the case of public companies, a company can purchase its own shares if it is approved by the constitution (Section 127 (1)). Even in the case of a private company, it is possible to purchase its own shares if certain requirements are met. However, the holder of treasury shares shall not confer the rights as shareholders (Section 127 (8)).The new Company Law introduced the solvency test for certain matters to prevent the leakage of company assets. A company can purchase its own shares if the share buyback would not result in the company being insolvent and its capital being impaired and if the company will remain solvent for six months after the date of the declaration (Section 112 (2) and Section 127 (2)).
(2) Acquisition of shares by subsidiaries
In Japan, the acquisition of shares by subsidiaries is permitted under certain circumstances (Japanese Companies Act Article 135 (2)). In addition, subsidiaries shall dispose their parent company’s shares at an appropriate time (Japanese Companies Act Article 135 (3)), and the period until such disposition is not expressly stipulated. In Malaysia, under the new Companies Act, a subsidiary may not become a shareholder of its parent company (Section 22 (1)). In addition, in the event that a company becomes a subsidiary of a company whose shares the company already hold, the company must, in principle, dispose of the parent company's shares within 12 months (Section 22 (5) (b)). In addition, it is stipulated that a subsidiary has no right to vote at meetings of shareholders of the parent company (Section 22 (5)(a)).
5. Consolidation and Split of Shares
Consolidation of shares and split-up of shares are acts to uniformly reduce or increase the number of shares held by each shareholder. Under Japanese Companies Act, these acts play a role in adjusting the number of shares outstanding. Unless otherwise provided in the constitution, a company may consolidate and split shares by special resolution (Section 84 (1)).All data and commentary included in this material was edited and written by Legal Professional Corporation One Asia based on published information at the time of this material creation, but it does not guarantee its accuracy and completeness. In addition, we are not responsible for any damage caused by using the information in this material.
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