A Review of the Companies Bill 2013-Part II

Kok Chee Kheong continues the review of the Companies Bill 2013

We commenced our review of the Companies Bill 2013 (“Bill”) in Legal Insights 3/13. We now continue the review.


SHARE CERTIFICATES

The Bill introduces a new regime in relation to the issue of share certificates by a company. As a general rule, clause 98(1) provides that a company shall within 60 days after allotment or registration of a transfer or receipt of a request from a shareholder of a private company under clause 97(2), send a share certificate to every holder of the shares which states the name of the company, the class and the number of shares held by that person. The obligation to issue share certificates does not apply to –

  1. shares which are transferable under a system for electronic trading approved by a stock exchange (clause 98(2)), that is, shares which are listed on Bursa Malaysia and are transferable by book entry under the scripless trading system operated by Bursa Malaysia Depository Sdn Bhd; or
  2. shares of a private company unless it is expressly provided otherwise by the constitution of a private company or an application is received by a company from its shareholder (clause 97(2)).

Where a share certificate has been issued in respect of shares, clause 98(3) prohibits a transfer of such shares from being registered unless the form of transfer is accompanied by the share certificate or by evidence of its loss or destruction.

Where shares to be transferred are accompanied by a share certificate, the company is not required to issue a new certificate to the transferee unless it is required to do so under clause 98(1) or a request has been received from the transferee (Clause 98(4)).

Clauses 100(1) and 100(2) are substantially in pari materia with sections 89(1) and 89(2) of the New Zealand Companies Act 1993 (“NZCA”). Clause 100(1) provides that, in the absence of evidence to the contrary, the entry of a name of a person in the register of members (“Register”) as shareholder is prima facie evidence that legal title to the share is vested in that person. This provision is essential in view of the fact that clauses 97(2) and 98(2) of the Bill require only certain companies to issue share certificates.

Clause 100(2) provides that the company may regard the registered shareholder as the only person who is entitled to: (i) exercise the voting right attached to the share; (ii) receive notices; (iii) receive a distribution, if any, in respect of the share; and (iv) exercise any other rights and powers attached to the share.

Clause 100(3) accords rights which are similar to those set out in clause 100(2) to members of a company that does not have share capital, i.e. a company limited by guarantee (“CLBG”). There is no corresponding provision in the NZCA.


RECTIFICATION OF REGISTER

If the name of a person has been wrongly entered in, or omitted from, the Register, the court may, upon the application of the person aggrieved, order (i) the Register to be rectified by the company; (ii) payment of compensation by the company, or an officer of the company who is in default, for any loss sustained; or (iii) both rectification and payment of compensation (clause 102). This provision is adopted from section 102 of the NZCA and is narrower in scope than section 162 of the Companies Act (“CA”) which, in addition to conferring powers on the court to rectify the Register if a person’s name has been entered therein or omitted therefrom “without sufficient cause”, also confers power to rectify the Register if default is made, or if unnecessary delay occurs, in entering therein the fact that a person has ceased to be a member.


TRANSFER OF SHARES

Formal requirements

Similar to the CA, the Bill requires a transfer of shares to be effected by the lodgement of an instrument of transfer (Clause 104(1)). The CA refers to a “proper instrument of transfer in the prescribed form” whereas the Bill sets out the requirement in greater detail by referring to “a proper duly executed and stamped instrument of transfer.

The Bill expressly states that in order to effect a transfer of shares, the company is to enter the name of the transferee on the Register (clause 104(2)).

The Bill also sets out the obligations of the company in relation to the transfer of shares in great detail. Clause 105(1) requires the company to enter the name of the transferee on the share register (sic) within 30 days after the receipt of the instrument of transfer unless –

  1. the Act, or the company’s constitution, permits the directors to refuse or delay the registration for reasons stated;
  2. the directors resolve within 30 days of receipt of the transfer to refuse or delay the registration and the resolution sets out the full reasons for doing so; and
  3. notice of the resolution, including the reasons for refusing or delaying the registration, is sent to the transferor and transferee within seven days of the resolution being passed.

Subject to the constitution of the company, the directors may refuse or delay the registration of a transfer of shares under clause 105(1) if the holder of the shares has failed to pay an amount due in respect of those shares, whether by way of consideration for the issue of the shares or in respect of any sum payable by the holder in accordance with the constitution (Clause 105(2)).

If a company refuses to register a transfer of shares, the court may, upon application of the transferor or transferee, order the company to register the transfer if the court is satisfied that the application is “well-founded” (Clause 106). There is no corresponding provision in the CA.


TRANSMISSION OF SHARES

As the Bill does not require a company (other than a CLBG) to have a constitution, clause 109 of the Bill contains detailed provisions to regulate the transmission of shares. Although expressed differently, the provisions are substantially similar to regulations 25 and 26 of the Fourth Schedule (Table A) of the CA (“Table A”).


LIEN ON SHARES

For the same reason as in the case of transmission of shares, the Bill includes detailed provisions to deal with liens on shares and the procedure by which such security may be enforced. The provisions of clause 110 are substantially similar to regulations 9 to 12 and 22 of Table A. A significant difference is that the lien under Table A applies only to partly paid shares whereas clause 110(2) permits a company (other than a listed company) to extend the lien to fully paid shares by including a provision to such effect in its constitution.


SOLVENCY STATEMENT

The Bill introduces the concepts of a “solvency test” and “solvency statement”, which are adopted from the United Kingdom Companies Act 2006 (“UKCA 2006”), the Singapore Companies Act and the NZCA.

Purpose

Before a company undertakes a redemption of preference shares, provision of financial assistance, reduction of capital or a share buy-back, its directors are required to make a solvency statement to confirm that the company satisfies the solvency test in relation to the transaction (clause 112(1)).

Solvency test

In relation to the redemption of preference shares, provision of financial assistance or reduction of capital, clause 111(1) provides that the solvency test is satisfied if –

  1. immediately after the transaction, there will be no ground on which the company could be found to be unable to pay its debts;
  2. either (i) it is intended that the company commences winding up within 12 months after the transaction and that it will be able to pay its debts in full within 12 months after the commencement of winding up; or (ii) in any other case, the company will be able to pay its debts as they fall due during the 12 months immediately following the date of the transaction; and
  3. the assets of the company exceed its liabilities as at the date of the transaction.

In the case of a share buy-back, the solvency test is satisfied if the share buy-back does not result in the company being insolvent or its capital being impaired at the date of the solvency statement (clause 111(2)). The test to be applied in determining whether a company is deemed insolvent or its capital is deemed impaired as aforesaid is set out in clause 111(3).

The Bill also requires a director to inquire into the company’s state of affairs and prospects and to take into account all liabilities of the company, including contingent liabilities, when he forms an opinion for the making of a solvency statement (clause 112(2)).


REDUCTION OF CAPITAL

The Bill retains the existing provisions of the CA on capital reduction. In addition, it introduces an alternative means of effecting a capital reduction without the need for confirmation by the court.

Clause 116 allows a company, whether private or public, to reduce its share capital by passing a special resolution to that effect if it satisfies the solvency test. There is no requirement to satisfy the solvency test where the reduction is to cancel capital which is lost or no longer represented by available assets (clause 116(3)).

To adopt this method of capital reduction, a company must comply with the relevant procedures set out in sub-clauses (1), (4), (5) and (6) of clause 116 which includes, inter alia, (i) passing a special resolution to reduce its share capital; (ii) providing the prescribed particulars to the Director General of the Inland Revenue and the Registrar within seven days of the resolution being passed; and (iii) the issuance of a solvency statement by all directors of the company within the relevant prescribed time frame. 

Clause 117 confers the right on an affected creditor to object to the proposed reduction by filing an application in court for an order that the resolution be cancelled. Such application is to be filed within six weeks from the date of the resolution.

The reduction of capital under this new procedure will take effect when the resolution has been lodged with the Registrar and he has recorded the information in the appropriate register (clause 118(3)). Where any objections to the proposed reduction have been filed in court, these applications have to be dismissed or withdrawn before the resolution can be lodged with the Registrar (clause 118(2)).

While the Bill requires a company to make the solvency statement available for inspection at its registered office by creditors for six weeks from the date of the resolution, the company is not obliged to notify its creditors of the resolution, whether before or after it has been passed. This is a significant weakness in the new capital reduction procedure as creditors may not be aware that such a resolution has been passed until the time frame for objecting to it has lapsed.

The new procedure for a capital reduction under clause 116 is modelled after the provisions of the UKCA 2006 but the latter apply only to private companies. These new provisions are welcomed as they will substantially reduce the cost of undertaking a capital reduction.


FINANCIAL ASSISTANCE

The Bill retains the provisions in the CA that prohibit a company from providing financial assistance in connection with the purchase of its own shares or shares in its holding company, as well as the exceptions where financial assistance is permitted.

In addition, the Bill clarifies the prohibition by expressly prohibiting a company from providing financial assistance, directly or indirectly, to reduce or discharge a liability incurred by a person in acquiring the shares in the company or its holding company (clause 122(2)).

The Bill also introduces three new exceptions to the general prohibition. First, it allows a company whose activities are regulated by any written law relating to banking, finance or insurance or are subject to the supervision of the Securities Commission (such as a stockbroking company) to provide loans, guarantees or other security in the ordinary course of its business where the loan is made on ordinary commercial terms as to rate of interest, the terms of repayment of principal and payment of interest, the security to be provided and otherwise (clause 122(3)). The CCM should clarify whether this exception applies to financial institutions that provide Islamic finance and takaful operators.

Second, the Bill permits the giving of financial assistance by a company for the acquisition of shares in its holding company, or for the purpose of reducing or discharging a liability incurred for such an acquisition, where its holding company is a company incorporated outside Malaysia. This new exception will be welcomed by foreign holding companies as it will enable their Malaysian subsidiaries to participate in leveraged buy-outs (clause 122(4)). 

Third, clause 125(1) allows a company, by way of a special resolution, to provide financial assistance for the acquisition of its shares or those of its holding company if the conditions set out therein are satisfied. Among the conditions are the following –

  1. before the assistance is provided, the directors must resolve that the giving of the assistance is in the best interest of the company and the terms on which the assistance is to be given are fair and reasonable to the company;
  2. the directors who vote in favour of the resolution must make a solvency statement on the day on which the board resolution is passed;
  3. the aggregate of the assistance rendered that has not been repaid does not exceed 10% of the share capital received by the company for its shares and its reserves, based on its most recent audited financial statements;
  4. the company receives fair value in connection with the provision of the assistance; and
  5. the assistance is given not more than 12 months after the date of the solvency statement.

The directors are also required to set out in full, the grounds for their conclusion under sub-paragraph (1) of the preceding paragraph (clause 125(2)) and to provide the documents and particulars enumerated in clause 125(4), such as the name of the person to whom the assistance is given and the nature, terms and amount of the assistance, to each member within 15 days of the assistance being given.

Consequences of breach

Clause 122(7) of the Bill inter alia preserves the right of a company or other person to recover the loan or losses suffered in consequence of a contravention of the prohibition against financial assistance. Clause 123 augments the foregoing by stating that the validity of the financial assistance made in contravention of the provisions of the Bill and of any contract or transaction made in connection therewith shall not be affected only by reason of the contravention.


SHARE BUY-BACK

The provisions in section 67A of the CA in relation to share buy-backs are substantially retained in the Bill, that is, only a company whose shares are listed on Bursa Malaysia is allowed to purchase its own shares.

The provisions of the Bill clarifies section 67A of the CA in the following respects –

  1. the shares purchased through a share buy-back are deemed to be cancelled immediately upon purchase, unless they are held as treasury shares (clause 126(4));
  2. the company’s name is to be entered in the Register as the holder of the treasury shares (clause 126(5));
  3. in addition to the existing rights under section 67A of the CA to resell the treasury shares, distribute them as share dividends or transfer them pursuant to an employee share scheme, the Bill permits a company to cancel treasury shares or deal with them in such manner as the Minister may prescribe (clause 126(6)); and
  4. the treasury shares are entitled to participate in a bonus issue of fully paid shares declared by the company and such bonus shares are to be treated as though they had been purchased by the company at the time they were allotted (clause 126(10)).

Where directors cancel any shares purchased or held as treasury shares, the distributable profits of the company are to be reduced by the cost of those shares. When treasury shares are purchased at different times and at different prices, it may be difficult to identify the price paid for the particular shares which are to be cancelled. It would be helpful if this issue is clarified by the CCM.


DIVIDEND

Insofar as payment of cash dividend is concerned, section 365(1) of the CA provides that “No dividend shall be payable to the shareholders of a company except out of profits …” What constitutes “profit” is largely based on case law.

Clause 130(1) substantially reiterates section 365(1) by providing that a company may only make a distribution to its shareholders out of the company’s profits available for the purpose. However, clause 130(2) clarifies that “profits available for distribution” refers to a company’s “accumulated profits so far as (it is) not previously utilised by distribution or capitalisation, less its accumulated losses, so far as not previously written off in reduction or reorganisation of capital duly made.”

Clause 130(2) will prohibit a company from declaring a dividend so long as it has incurred accumulated losses which have not been duly written off. It is a radical departure from the practice under the CA which, among others, permits dividends to be paid out of current year profits without regard to losses incurred in the previous years, i.e. nimble dividends, and from unrealised profits on a revaluation of fixed assets.

Procedure for making distribution

Clause 131(2) provides that the directors may authorise a distribution when they are satisfied that the company will satisfy the solvency test immediately after the distribution is made. In this case, the solvency test is satisfied if the company is able to pay its debts as and when they fall due in the normal course of business (clause 130(3)).

The Bill imposes an obligation on the directors to refrain from proceeding with the distribution if, after authorising the same, they cease to be satisfied on reasonable grounds that the company will satisfy the solvency test immediately after the distribution is made (clause 131(4)).

Clawback

The Bill introduces a provision that enables the company to recover from a shareholder any distribution made in excess of the amount that could properly have been made unless the shareholder has received the distribution in good faith and without knowledge that the company did not satisfy the solvency test.

We shall continue our review of the provisions of the Bill in the next issue of Legal Insights.

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