Classes of shares

• Section 69 of the CA 2016-shares in a company may

(a) be issued in different classes
• In general, it can be categorised into:
• (a) ordinary shares
• (b) preference shares
 Ordinary shares
• The term ‘equity share’ is used to represent ‘ordinary shares’.
• Section 71(1) prescribes the rights enjoyed by the holder of an
ordinary share as follows:
• (a) the right to attend, participate and speak at a meeting
• (b) the right to vote on a show of hands on any resolution of the company
• (c ) the right to one vote for each share on a poll on any resolution of the
company
• (d) the right to an equal share in the distribution of the surplus assets of the
company; OR
• (e) the right to an equal share in dividends authorised by the board
• The word ‘or’ in the section shows that it is not necessary
for a holder of an ordinary share in a company to enjoy
all the rights prescribed in section 71(1).
• Section 71(2) provides that the right to an equal share in
dividends may be modified by the company’s constitution
or in accordance with the terms on which the shares is
issued.
• Thus, the company may issue ordinary shares with
different entitlements to dividends.
 Preference shares
• “Preference share” is defined as a share by whatever name
called, which does not entitle the holder to the right to vote on
a resolution or to any right to participate beyond specified
amount in any distribution whether by way of dividend.
• The holder of a preference share may not have:
• (a) the right to vote
• (b) the right to participate beyond specified amount in the distribution
of
• -dividend
• -Surplus assets
• Section 90(4), the company’s constitution shall stipulate the
rights of the holders of preference shares with respect to:
• (a) repayment of capital
• (b) participation in surplus assets and profits
• (c) cumulative or non cumulative dividends
• (d) Voting
• (d) priority of payment of capital in relation to other shares and other
classes of preference shares; and
• (e ) priority of payment of dividend in relation to other shares and
other classes of preference shares.
 Variation of class right

• Classes of shares should be stated in the

constitution.
• Section 89 provides that shares are in the same class
if the right attached to the shares are identical in all
respects.
• When a company issues shares with different rights
the company is said to have issued different classes
of shares.
• Rights attached to the shares may differ in regard to
• (a) entitlement of dividends
• (b) priority in relation to payment of dividend
• (c) voting rights
• (d) priority in the repayment of capital; and
• (e ) right to surplus assets upon winding up.
 Transfer of Shares

A shareholder may transfer all or any of his shares or

debentures in the company, subject to any written law,
by a duly executed and stamped instrument of transfer
and shall lodge the transfer with the company (Section
105(1), CA 2016).
• For the purpose of effecting the transfer of shares or
debentures, the company shall enter the name of the
transferee in the register of members or register of
debenture holders.
• In comparison to Section 103(1) of the CA 1965, the
position now is clearer since a company can only register a
transfer of shares if the company has received a duly
executed and stamped instrument of transfer. Previously
under the CA 1965, it is only stated as “a proper
instrument of transfer”.
• Section 106(1) of the CA 2016 requires a company to
enter or cause to be entered the name of the
transferee in the register of members as shareholder
within 30 days from the receipt of the instrument of
transfer under Section 105(1) of the CA 2016 unless:
• (a) the CA 2016 or the constitution of the company
expressly permits the directors to refuse or delay
registration for the reasons stated;
• (b) the directors passed a resolution to refuse or delay the
registration of the transfer within 30 days from the receipt
of the instrument of transfer and the resolution sets out in
full the reasons for refusing or delaying the registration;
and
• (c) the notice of the resolution, and in the case of a
public company including the reasons referred to in
Section 106(1)(b) of the CA 2016 is sent to the transferor
and to the transferee within 7 days of the resolution being
passed.
 Transmission of shares

• Transmission of shares occurs by operation of law

where a shareholder dies, become incapable through
mental or physical incapacity or becomes bankrupt.
• The shares vest in the deceased shareholder’s
personal representative or the trustee in bankruptcy.
• Proof of personal representative’s status must be
furnished to the company such as grant of probate
or letters of administration and shall be accepted by
the company as sufficient evidence.
 Maintenance of share capital

• The concept of capital maintenance is geared

substantially toward the protection of creditors of
the company who, in the eyes of law, have an interest
in the paid of share capital and other assets of the
company.
• The general rule is that a limited liability company
must maintain their issued share capital.
• Rules regarding maintenance of share capital;-
• A company may not purchase or acquire its own shares
• A company may not lend money on the security of its own
assets
• A company may not give financial assistance to any person to
enable him to acquire its shares
• A company may not pay dividend to its members unless there
are profit available for the purpose
• A company may not return assets to its members or reduce its
capital except in the manner provided by the CA 2016.
 Solvency Statement

• There are 4 instances where a company needs to be

solvent at the time of transaction under the CA 2016
• 1. redemption of preference shares,
• 2. share buyback,
• 3. reduction of share capital and
• 4. financial assistance to acquire shares.
Under Section 112(1) of the CA 2016, a company satisfies the solvency test in relation
to the transaction mentioned above if:
(a) immediately after the transaction there will be no ground on which the company
could be found to be unable to pay its debts;
(b) either-
(i) it is intended to commence the winding up of the company within 12 months
after the date of the transaction, the company will be able to pay its debts in full
within 12 months after the commencement of the winding up; or
(ii) in any other case, the company will be able to pay its debts as the debts become
due during the period of 12 months immediately following the date of the
transaction; and
(c) the asset of the company is more than the liability of the company at the date of
the transaction.
 Share buyback

• A company limited by shares is not permitted to buy

back its shares. The purchase by a company of its
shares will be void even though the purchase may be
authorised by its constitution or is sanctioned by the
general meeting of members.
• Companies are only allowed to purchase their own
shares subject to certain conditions:
• It must be a public company
• The constitutions authorised the purchase
• The company must be solvent at the date of the purchase
and must not become insolvent as a result of the purchase
• The purchase must be made through the stock exchange
• The purchase must be made in good faith and in the
interests of the company.
For the purpose of share buyback, a company satisfies
the solvency test if:
(a) the share buyback would not result in the
company being insolvent and its capital being impaired
at the date of the solvency statement; and
(b) the company will remain solvent after each
buyback during the period of 6 months after the date
of the declaration made under Section 113(5) of the
CA 2016
• For the purposes of Section 112(2) of the CA 2016, a
company shall be deemed to be solvent if it is able to
continue to meet its debts as and when the debts become
due without any substantial disposition of its assets
outside the ordinary course of its business, restructuring
its debts, externally forced revisions of its operations or
other similar actions and the capital of a company shall be
deemed to be impaired when the value of its net assets is
less than the aggregate amount of all the shares of the
company after the share buyback.
• A solvency statement in relation to a transaction is a
statement that each director making the statement has
formed the opinion that the company satisfies the
solvency test in relation to the transaction (Section 113(3),
CA 2016).
• In forming an opinion for the purpose of making a
solvency statement, a director shall inquire into the
company’s state of affairs and prospects and take into
account all the liabilities of the company, including
contingent liabilities.
• A director who makes a solvency statement without
having reasonable grounds for the opinion expressed
in the statement commits an offence and shall, on
conviction, be liable to imprisonment for a term not
exceeding 5 years or to a fine not exceeding
RM500,000.00 or both.
Notwithstanding Section 127(2)(b) of the CA 2016 above, a
company may purchase its own shares otherwise than
through a stock exchange if the purchase is:
(a) to cancel the shares so purchased;
(b) to retain the shares so purchased in treasury which is
referred to “treasury shares” in this Act; or
(c) to retain part of the shares so purchased as treasury
shares and cancel the remainder of the shares.
• The requirement under Section 127(2)(a) above is similar
to those under the CA 1965. The company shall now
satisfy the solvency test provided in Section 112(2) of CA
2016.
• These requirements under the CA 2016 are also consistent
with the requirements in Regulation 18A of the
Companies Regulations 1966.
• Upon satisfaction of the solvency test, the company is to
prepare a solvency statement by majority of the directors
pursuant to Section 113(2) of the CA 2016.
• Section 113(5) of the CA 2016 provides that where a
company proposes to purchase its own shares under
a share buyback, the directors shall make a
declaration that:-
• (a) it is necessary for the company to buy back its
own shares; and
• (b) the share buyback is made in good faith and in
the interests of the company.
• It should be noted that all shares purchased by a company
under Section 127 of the CA 2016, unless held in treasury,
shall be deemed to be cancelled immediately on purchase
pursuant to Section 127(5) of CA 2016.
• Where such shares are held as treasury shares, the
company shall hold such shares in a securities account in
accordance with the relevant rules of the stock exchange
or the central depository (Section 127(6), CA 2016).
• More powers are granted to directors in dealing with the
treasury shares under the CA 2016 in comparison to the
CA 1965.
• In addition to distributing the treasury shares as share
dividends, reselling on the market or cancelling them, the
CA 2016 allows the directors to transfer the shares, or any
of the shares for the purposes of or under an employees’
share scheme, any of the shares as purchase consideration
or sell, transfer or otherwise use the shares for such
purposes as the Minister may prescribe.
 Reduction of Capital

• Section 115 of the CA 2016 provides that a company

may reduce its share capital by
• (i) a special resolution and confirmation by the Court in
accordance with Section 116 of the CA 2016 or
• (ii) a special resolution by a solvency statement in
accordance with Section 117 of the CA 2016.
 Court Order for Capital Reduction

Subject to confirmation by the Court, under Section 116 of

the CA 2016, a company may by a special resolution, reduce
the share capital of the company in any way which includes
all or any of the following:
(a) by extinguishing or reducing the liability on any of the
shares of the company in respect of unpaid share capital;
(b) by cancelling any paid-up share capital which is lost or
unrepresented by available assets;
(c) by returning to the shareholders any paid-up share
capital which in excess of the needs of the company.
To ensure that the creditors are not prejudiced by the
capital reduction, the Court has the power under Section
116(2) of the CA 2016 to inquire as to the creditors of the
company if the proposed reduction of share capital
involves either diminution of liability in respect of unpaid
share capital or the payment to any shareholder of any
paid-up share capital.
The resolution for reducing share capital as confirmed by
the order of the Court shall take effect upon lodgment of
such order with the Registrar.
Reduction of Share Capital by Private
or Public Company

This is a new method for reduction of share capital

introduced under the CA 2016. A company may reduce its
share capital by a special resolution if the company:
(a) sends a notice to the Director General of the Inland
Revenue Board referred to in Section 134 of the Income
Tax Act 1967 and the Registrar within 7 days of the date of
the resolution and the notice shall state that the resolution
has been passed and contain the text of the resolution and
the resolution date; and
(b) meets the solvency requirements under Section 117(3)
of the CA 2016
The company meets the solvency requirements under Section 117(3)
of the CA 2016 if:
(a) all directors of the company make a solvency statement in
relation to the reduction of share capital;
(b) the statement is made:
(i) in the case of a private company, within the period of 14
days ending with the date of the resolution but shall be within time
to comply with Section 117(5) of the CA 2016; or
(ii) in the case of a public company, within the period of 21
days ending with the date of the resolution but shall be within time
to comply with Section 117(6) of the CA 2016; and
(c) a copy of the solvency statement is lodged with the Registrar
together with the notice required to be lodged under Section
117(1)(a) of the CA 2016.
A company need not meet the solvency requirements
if the reduction of share capital is solely by way of
cancellation of any paid-up capital which is lost or
unrepresented by available assets (Section 117(4) of
the CA 2016).
Subject to Section 117(4) of the CA 2016, Section 117(5)
of the CA 2016 states that a private company shall:
(a) if the resolution for reducing share capital is a special
resolution to be passed by a written resolution, ensure that
every copy of the resolution served is accompanied with a
copy of the solvency statement; or
(b) if the resolution for reducing share capital is a special
resolution to be passed in a general meeting, make the
solvency statement or a copy of the solvency statement
available for inspection by the members through that
meeting; and
• (c) make the solvency statement or a copy of the
solvency statement available at the company’s
registered office for inspection free of charge by any
creditor of the company for a period of 6 weeks
from the date of the resolution.
A public company shall:
(a) make the solvency statement or a copy of the solvency
statement available for inspection by the members at the
meeting throughout the meeting at which the resolution is
to be passed; and
(b) make the solvency statement or a copy of the solvency
statement available at the company’s registered office for
inspection free of charge by any creditor of the company
for a period of 6 weeks from the date of the resolution
(Section 117(6) of the CA 2016).
• Section 118(2) of the CA 2016 allows any creditor of the
company to apply to the Court for the resolution to be
cancelled within 6 weeks from the date of the resolution.
• This is applicable to a creditor of the company who is entitled
to any debt or claim which would be admissible as proof
against the company at the date of his application to the Court
as such date was the commencement of the winding up of the
company.
• When such application is made under Section 118(2) of the CA
2016, the creditor shall serve the application on the company
and serve a notice of the application on the Registrar.
 PROHIBITION ON GIVING OF
FINANCIAL ASSISTANCE (s 123-s 126)

• Historically, under the Companies Act 1965:

• (a) a company is prohibited from financially assisting a
person for the purpose of or in connection with a
purchase or subscription of the company's shares
• (b) a subsidiary company is prohibited from financially
assisting a person for the purpose of or in connection with
a purchase or subscription of holding company's shares.
• Rationale:
• Economic reason - if a company supports the purchase of
its own shares, it causes a reduction in the company’s value
in the hands of other shareholders as well as artificially
inflates the share price above its market level.
• The Companies Act 2016 (“2016 Act”) retains the
general prohibition, but introduced a ‘whitewash
exemption’ thereby liberalizing the financial
assistance framework.
• It is a more flexible regime
• The prohibition is also maintained by the new Act 2016:-
• A company is prohibited from giving any financial
assistance, whether directly or indirectly and whether by
means of a loan, guarantee or the provision of security or
otherwise, for the purpose of or in connection with a
purchase or subscription made or to be made by any
person of or for any shares in the company or in the case
where the company is a subsidiary, any shares in its
holding company or in any way purchase, deal in or lend
money on its own shares (Section 123(1), CA 2016).
• In Chung Khiaw Bank Ltd v Hotel Rasa Sayang
Sdn Bhd & Anor [1990] 1 MLJ 356, a company
bought shares in the hotel using a loan from a bank
on the security of the hotel's land. The Supreme
Court held that there was financial assistance which
was prohibited under s 67 of the CA 1965.
• In Kidurong Land Sdn Bhd & Anor v Lim Gaik Hua & Ors
[1990] 1 MLJ 485; [1990] 1 MSCLC 90, at p 402, shareholders
in a company owing land transferred their shares to a developer.
It was agreed that the developer would build houses on the land
and transfer some of the houses to the shareholders. The
developer financed the development by charging the company's
land to a finance company.
• As the developer failed to deliver on its promise, the
shareholders sued and obtained judgment under the contract.
The developer appealed and argued that the transaction was in
breach of s 67(1).
• The Supreme Court held that the arrangement to fund the
building and transfer of the houses amounted to financial
assistance within the meaning of s 67(1).
 Whitewash procedures-section 126

The exemption is not applicable to public companies listed on

the Malaysian Stock Exchange. The non public-listed company
should meet the requirements set out below:

• Special resolution must be passed by the shareholders (at least

75% of the shareholders of the company approved the financial
assistance);
• approved and resolved by the majority of company directors that it
is in company’s best interests to give financial assistance and the
terms and conditions under which the assistance is to be
given are just and reasonable to the company;
• company to satisfy the solvency test where the directors in
favour of the resolution will be required to provide a
solvency statement on the day the board resolution is
passed;
• the aggregate amount of the assistance does not exceed
10% of the company’s current shareholders funds;
• company must receive fair value for giving such
financial assistance; and
• financial assistance must be given not more than 12
months after the date of the solvency statement.
• Section 126(5) provides that the company shall
within 14 days from giving financial assistance under
Section 126 send to each member of the company a
copy of the solvency statement and a notice
containing the following information:
• (a) the class and number of shares in respect of
which the assistance was given;
• (b) the consideration paid or payable for those
shares;
• (c) the name of the person receiving the assistance and,
if a different person, the name of the beneficial owner of
those shares;
• (d) the nature, the terms and, if quantifiable, the amount
of the assistance.
• This notification provision is to ensure that all members
of the company are aware of the financial assistance given
by the company.
 Consequences of THE
Contravention
• If a company gives financial assistance in contravention
of the provisions under the 2016 Act, the validity of the
financial assistance and of any transaction will not be
affected.
• However, the company and every officer who contravenes
Section 126 of CA 2016 commits an offence and shall, on
conviction, be liable to a fine not exceeding RM3 million
or imprisonment not exceeding 5 years or to both and, in
the case of a continuing offence, to a further fine not
exceeding RM1,000 for each day during which the offence
continues after conviction
DIVIDEND/DISTRIBUTION OF
PROFIT
• The term “dividend” under the CA 1965 has been
replaced by “distribution” under the CA 2016.
• Section 365(1) required payment of cash dividends to
be made out of only the company’s profit.
• The court in Hilton International Ltd (1989) held
that the company could do so if the payment of the
dividends would not cause the company to go into
insolvency.
• In accordance with the introduction of the solvency
test by the CA 2016, Section 131(1) of the CA 2016
now provides that a company may only make a
distribution to the shareholders out of profits of the
company available if the company is solvent, subject
to Section 132 of the CA 2016.
• In other words, companies are now required to
satisfy the solvency test before it can proceed under
Section 131(1) of the CA 2016.
• An additional criteria of “available profits” is
imposed under the CA 2016 compared to mere
“profits” under the CA 1965. Whether the term
“available profits” necessitates offsetting past losses
of the company remains to be tested for clarification.
• The company may pay dividends only if the
following conditions are fulfilled:
• The company is solvent
• The company has distributable profit
• Before a distribution is made by a company to any
shareholder, such distribution shall be authorized by the
directors of the company pursuant to Section 132(1) of
the CA 2016.
• In addition, section 132(2) of CA 2016 provides that the
directors may authorize a distribution at such time and in
such amount as the directors consider appropriate, if the
directors are satisfied that the company will be solvent
immediately after the distribution is made
• For the purposes of Section 132 of CA 2016, the
company is regarded as solvent if the company is
able to pay its debts as and when the debts become
due within 12 months immediately after the
distribution is made.
• The requirement that directors are now required to
be satisfied that the company will be solvent
immediately after the distribution is made is a new
provision under the CA 2016
• Section 132(4) provides that if, after authorization of
a distribution but before it is made, the directors
cease to be satisfied on reasonable grounds that the
company will be solvent immediately after the
distribution is made, the directors shall take all
necessary steps to prevent the distribution from
being made.
• Re Exchange Banking Co (Flitcroft’s Case)
• The director of the company had presented false account
reports before shareholder meetings. They paid half yearly
dividends totalling £3,192 during a five year duration when they
knew items in the accounts were bad debts, irrevocable and
consequently there were no distributable profits. The
shareholders acted on the reports and declared dividends. The
liquidator issued a summons against five former director.
• The court held that the directors were liable not only to pay
back the dividends which they have received, but also to refund
the company in respect of the dividends which they had paid to
the other shareholders.
 Consequences

• What are the consequences if the distribution is

made not out of the company’s profits or without
fulfilling the solvency test?
• Director's liability
• The directors’ civil liability on payment of dividends not of
the company’s profit or without fulfilling the solvency test
is found in section 133(2), which reads as follows:
• Every director or manager of the company who wilfully pays or
permits to be paid any dividend in contravention of section 131 or
132, which he knows from his knowledge is not profits shall also be
liable to the company to the extent of the amount exceeded the value
of any distribution of dividend that could properly have been made
• Members’ liability
• Section 133(1) provides that the company may recover the
amount of distribution received by shareholder, ‘which
exceeds the value of any distribution that could properly
have been made unless the shareholder:
• (a) has received the distribution in good faith
• (b) has no knowledge that the company did not satisfy
the solvency test required under subsection 132(3)
• It appears that a shareholder is liable only where the
company did not satisfy the solvency test and the
shareholder was aware of it.
• Auditor’s liability
• An auditor who is negligent in auditing the accounts of a
company is liable to the company.
• It thus follows that if the company declared and paid
dividends in reliance on the inaccurate audited accounts,
the company may take action against the auditor for breach
of duty.
• Criminal liability
• Section 132(5) of the CA 2016 states that without
prejudice to any other liability, every director or officer of
the company who willfully pays or permits to be paid or
authorizes the payment of any improper or unlawful
distribution shall, on conviction, be liable to
imprisonment for a term not exceeding 5 years or a fine
not exceeding RM3 million. The fines are increased from
RM250,000 under the CA 1965 to RM3 million under the
CA 2016.