1. Introduction
The business landscape in Malaysia is governed by a set of laws and regulations designed to ensure transparency, fairness and accountability. Among such regulations is the prohibition of providing financial assistance by a company for the acquisition of its own shares or the shares of its holding company, a legal position with rich historical background that has seen substantial changes over the past decades in the region. Due to the intricacies of the legal concept, there may be certain instances where business owners or stakeholders overlook such prohibition in undertaking their business or corporate transactions.
2. The Prohibition
Section 123(1) of the Companies Act 2016 (“CA 2016”) prohibits a company from providing any financial assistance, whether directly or indirectly and whether by means of a loan, guarantee or provision of security or otherwise, to any person for the purpose of or in connection with a purchase or subscription of any shares in the company or its holding company, or for the purpose of reducing or discharging a liability incurred for such an acquisition.
The underlying principle governing this prohibition is that the assets of a target company should not be used directly or indirectly to finance the purchase of its own shares or the shares of its holding company. This prohibition aims to shield the company’s creditors and shareholders from unwarranted financial exposure and prevent the abuse or misapplication of the company’s capital by its directors or controlling shareholders.
3. What constitutes “financial assistance”?
It is apparent that the term “financial assistance” is couched in broad terms in our CA 2016. Essentially, there are two key components to the meaning of financial assistance within the scope of Section 123 of the CA 2016:
- Firstly, there must be some financial assistance given by the company.
- Secondly, such financial assistance has been given ‘for the purpose of or in connection with’ the purchase of the company’s shares or the shares of its holding company.
As financial assistance is broadly defined, the interpretations offered by judicial decisions are crucial in understanding the relevant legal parameters.
- Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd [1990] 1 MLJ 356 – a company bought shares in a hotel using a loan from a bank secured by the hotel’s land. The Supreme Court held that there was financial assistance which was prohibited under section 67 of the then Companies Act 1965.
- Kidurong Land Sdn Bhd & Anor v Lim Gaik Hua & Ors [1990] 1 MLJ 485 – shareholders in a company owning 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. The Supreme Court held that the arrangement to fund the building and transfer of the houses amounted to financial assistance.
- Belmont Finance Corporation v Williams Furniture Ltd and others (No 2) [1980] 1 All ER 393 – the Court of Appeal held that there was financial assistance where a company purchased property from a person at an inflated price with the sole purpose of enabling that person to purchase the company’s shares.
Interestingly, in Wallersteiner v Moir; Moir v Wallersteiner and others [1974] 3 All ER 217; [1974] 1 WLR 991 (CA) at p 1014, Lord Denning described financial assistance in the following words:
“You look to the company’s money and see what had become of it. You look to the company’s shares and see into whose hands they have got. You will then see if the company’s money has been used to finance the purchase”.
While the terms ‘for the purpose of’ and ‘in connection with’ are not explicitly defined within the CA 2016, guidance may be sought from Singapore’s Companies Act 1967 which provides persuasive guidance on the intended meanings of these terms:
- “A company is taken to have given financial assistance for the purpose of an acquisition if (i) the company gave the financial assistance for purposes that included the relevant purpose; and (ii) the relevant purpose was a substantial purpose of the giving of the financial assistance.”
- “A company is taken to have given financial assistance in connection with an acquisition when the financial assistance was given to a person, the company was aware that the financial assistance would financially assist the acquisition by a person of shares or units of shares in the company.”
- where the lending of money is part of the company’s ordinary course of business;
- where it is for a trust scheme for employees of the company or its subsidiary;
- where the financial assistance is given to employees of the company or its subsidiary (other than directors) with a view to enable those persons to purchase fully-paid shares in the company or its holding company;
- where the company is regulated by written laws relating to a bank, insurance or takaful or which are subject to the supervision of the Securities Commission Malaysia; or
- where the company is not a public listed company and it has complied with the ‘whitewash’ procedure stipulated in Section 126 of the CA 2016.
The ‘whitewash’ procedure introduced under Section 126 of the CA 2016 allows a company whose shares are not quoted on Bursa Malaysia to provide financial assistance for the acquisition of its own shares or shares in its holding company, or for the purpose of reducing or discharging a liability incurred for such an acquisition. This ‘whitewash’ procedure requires the following to be observed:
- a special resolution is passed by the shareholders to approve the financial assistance;
- a majority of the directors of the company resolve, before the assistance is given, that the company may provide financial assistance, that the provision of financial assistance is in the best interest of the company and that the terms and conditions pursuant to the financial assistance are just and reasonable to the company;
- each director who voted in favour of the financial assistance makes a solvency statement that complies with the provisions of the CA 2016;
- the aggregate amount of the financial assistance (including financial assistance previously given that has not been repaid) does not exceed 10% of the aggregate amount received by the company in respect of the issue of shares and reserves of the company, as disclosed in the most recent audited financial statements of the company (“10% Cap”);
- the company receives fair value in connection with the giving of the financial assistance; and
- the financial assistance is given not more than 12 months after the day the solvency statement was made by the directors.
5. Penalties
The penalty that may be imposed on an officer of the company contravening the prohibition under Section 123 of the CA 2016 is a fine not exceeding RM3 million or a term of imprisonment not exceeding 5 years, or both. Additionally, the court may order the convicted person to pay compensation to the company or the person who has suffered loss or damage as a result of the contravention.
It is important to note that Section 124 of the CA 2016 provides that a transaction conducted in contravention of the financial assistance prohibition does not render the transaction invalid by reason of the contravention. This implies that the counterparty engaged in the transaction typically does not bear the regulatory risks. Instead, the onus of legal repercussions for non-compliance rests on the director or officer responsible for ensuring the company’s adherence to the law.
6. Perspective
While it safeguards stakeholders and promotes transparent practices, the prohibition on financial assistance may bring a double-edged impact constraining the competitiveness and financial agility of companies across various facets of corporate operations.
- Growth constraints: It adds complexity to transactions involving share acquisitions or related financing arrangements which can hinder business growth and expansion plans.
- Restriction on business flexibility: It limits a company’s flexibility in utilising its own resources for strategic purposes.
- Market competitiveness: It puts Malaysian companies at a disadvantage in the international market where similar financial assistance restrictions may not apply or have been substantially relaxed.
It cannot be denied that the introduction of the 10% Cap (as described above) is a significant milestone. However, it is crucial to note that the prohibition has seen a very different path in various parts of the world. It is interesting to note that the United Kingdom abolished this prohibition in relation to private companies in 2008, followed suit by Singapore in 2015. Guided by the experiences of the United Kingdom and Singapore, to invigorate the competitiveness of Malaysia-incorporated companies, it is perhaps worthwhile for the financial assistance prohibition under the existing Malaysian laws to be reevaluated in order to assess whether global approaches may be tailored accordingly to suit Malaysia’s custom, economic and social requirements.
Should you have any queries as to how these developments affect your business, please do not hesitate to contact us.
This article was co-authored by Yau Khai Ling, Lau Yuet Sian and Chan Yi Ling.
Yau Khai Ling
Principal Partner
E: ykl@khailinglaw.com
Lau Yuet Sian
Partner
E: lys@khailinglaw.com
Chan Yi Ling
Associate
E: cyl@khailinglaw.com