Share and Capital Maintenance under the Companies Act 2016

This article is fifth in a series entitled A New Corporate Landscape: Key Changes under the Companies Bill 2015 that our clients should know about.

In this article, we outline the major changes relating to the management and restructuring of share capital under the Companies Act 2016 (“new Act”).

Key Change 10: No Par Value for Shares

Par value is the minimum price at which shares can be issued. Under the old Companies Act 1965, shares are issued with a par or nominal value and companies are required to declare authorised share capital. The new Act abolishes this concept.

Consequently, share premium and capital redemption reserve will be converted to share capital. The new Act expressly provides for this transition, and there is no need to pass any resolution. The transitional provisions of the new Act however allows a 24 month period where the existing amounts in the share premium account and capital redemption reserve can be utilized, but only for certain purposes set out in the Act.

Authorised share capital represents the maximum amount of share capital that a company can issue. Under the 1965 Act, it would be represented by the number of shares a company can issue multiplied by its par value.

Share premium represents the additional amount shareholders paid for their issued shares that was in excess of the par value of those shares.

Capital redemption reserve is a reserve created when preference shares are redeemed or where a company purchases its own shares in circumstances that result in a reduction of share capital.

There is further no need to amend existing contracts and other documents that rely on the par value concept as the new Act also provides for transitional provisions relating to the interpretation of these documents.

Key Change 11: Alternative Procedure for Reduction of Share Capital

The new Act introduces solvency tests which will apply to capital reduction, share buyback or redemption and the giving of financial assistance. Note also that there is a solvency test of a different form related to the declaration of dividends.

In addition to the recognised procedure for reduction of capital under the old Companies Act 1965 (special resolution required, followed by court order), the new Act introduces an alternative procedure based on a solvency test, and devoid of the requirement to go through the courts.

The solvency test is satisfied if immediately after the transaction:-

(a)        There are no grounds on which the company could be found to be unable to pay its debts; and

(b)        The assets of the company are greater than its liabilities of a company.

All directors of a company must make a solvency statement to the effect that the company satisfies the solvency test in relation to the reduction of capital. Due to the increased sanctions on directors (No hiding in the shadows: Directors’ accountability under the Companies Act 2016), it is important to note that directors should not make any solvency statement unless they can be reasonably sure that the solvency tests are satisfied: directors can otherwise be subject to up to five (5) years imprisonment or a RM500,000 fine or both upon conviction.

Solvency Statement is a statement to be executed by the directors stating their opinion that the company can satisfy the solvency test as described above. The Companies Commission of Malaysia (SSM) has indicated that they will issue a prescribed form.

Key Change 12: Reformation of Shares Buy-Back

Under the old Companies Act 1965, a listed company is allowed to buy back its own shares if a majority of its directors declares that the company is solvent at the date of purchase and will not become insolvent as a result of the buy-back. The new Act expands on this and also requires a solvency statement to be made. However, unlike reduction of share capital, only majority and not all of a company’s directors need to make a solvency statement for shares buy back.

Key Change 13: New Financial Assistance Whitewash Procedure

The old Companies Act 1965 straightout prohibited a company or any of its subsidiaries from giving any financial assistance, for the purpose of (or in connection with) the purchase of its own shares or any shares in its holding company.

The new Act however loosens the prohibition and introduces a “whitewash” (a gateway) exemption.

Other than public listed companies, a company may give financial assistance for the purpose of the acquisition of its shares or for the purpose of reducing or discharging liability  incurred for such an acquisition, provided that the following requirements are met:–

a) Approved by at least 75% of the shareholders of the company;

b) Approved and resolved by a majority of company directors that it is in the best interests of the company;

c) Company to satisfy the solvency test and each director who voted in favour of the financial assistance will be required to make a solvency statement on the same day this resolution is passed;

d) The aggregate amount of the assistance and any other financial assistance previously given that has not been repaid does not exceed 10% of the company’s current shareholders funds;

e) Company must receive fair value in connection with giving the financial assistance; and

f) The financial assistance must be given not more than twelve (12) months after the day on which the solvency statement is made.

It is specified in the new Act that any contravention of this provision will not invalidate any financial assistance given by the company nor any transaction in relation to the financial assistance. However, the company and every officers (including directors) may be held liable for the contravention and the maximum penalty may amount to RM3 million or imprisonment for a term not exceeding 5 years or both, if convicted.

What do the above Key Changes mean for you?

Amongst other things, the key changes above would have the following impact:

  • As there is no longer a par value regime, the hassle of having to increase authorised share capital is done away with; you will have more flexibility in valuing and pricing your shares;
  • Companies have increased options and flexibility in making use of capital reduction, and financial assistance mechanisms;
  • Ultimately though, directors should take note of and keep in mind their duties and risk of sanctions under the Act in making the requisite solvency statements. It would be prudent to seek financial/ accounting advice as necessary.

 

CCLC Corporate and Commercial advises and supports clients on an extensive range of matters including in mergers and acquisitions, takeovers, security dealings, capital and fund raising, restructuring, joint ventures, financial instruments, and general regulatory and compliance issues.