Resources

Corporate governance in Malaysia has seen significant efforts to advance transparency, integrity and sustainability within companies. This article discusses three key areas of focus in the context of corporate governance.

The Malaysian Communications and Multimedia Commission (“MCMC”) announced on 1 August 2024 that a new regulatory framework for Internet messaging service and social media service will come into effect on 1 January 2025.

Two Ministerial orders were gazetted on 1 August 2024 to amend the following subsidiary legislation under the Communications and Multimedia Act 1998 (“CMA”):

(i)       Communications and Multimedia (Licensing) Regulations 2000; and

(ii)      Communications and Multimedia (Licensing) (Exemption) Order 2000

With the amendments, service providers of “Internet messaging services” and “social media services” with more than 8 million users in Malaysia must be registered under an Applications Service Provider Class (“ASP (C)”) licence under the CMA (collectively referred to as the “Relevant Service Providers”).

“Internet messaging services” and “social media services” are defined as follows:

“Internet messaging services” means an applications service which utilizes Internet access service that enables a user to communicate any form of messages with another user.

“Social media services” means an applications service which utilizes Internet access service that enables two or more users to create, upload, share, disseminate or modify content.

MCMC has also published an Information Paper and FAQ Guide on the new licensing framework which can be accessed here.

MCMC has stated that end users of services offered by these Relevant Service Providers will not be affected by the new regulatory framework. It also reiterated that end users can expect a safer online environment, better protection against harmful content, and clearer avenues for addressing complaints and concerns.

The Relevant Service Providers are given a grace period of five months from 1 August 2024 to apply for the ASP (C) licence and comply with the relevant licensing requirements. The validity period for ASP (C) licence held by the Relevant Service Providers is one year from the registration date and the licence is required to be renewed annually.

For further enquiries, you may contact Nadarashnaraj Sargunaraj, Stanley Lee Wai Jin,  Vivienne Caitlin Michael of Zaid Ibrahim & Co.

In the third edition of the KPMG Intellectual Property Newsletter for 2024, our Senior Associate, Stanley Lee Wai Jin, has contributed an article on the protection of sui generis or unique IP rights in Malaysia. The article explores key issues pertaining to geographical indications, layout designs of integrated circuits and protection of plant varieties.

‍

Bank Negara Malaysia (“BNM”) has introduced enhanced requirements through the Policy Document on the Disposal and Purchase of Impaired Loans/Financing (“Policy Document”), which came into effect on 25 June 2024.

The Policy Document aims to encourage more buyers for the impaired loans/financing market, providing better protection to borrowers and elevating efficiency in disposal and purchasing of impaired loans/ financing.[1] Accordingly, the Policy Document covers requirements prior to and post the disposal and purchase of impaired loans/financing.[2]

This Policy Document applies to licensed banks, licensed investment banks, licensed Islamic banks (excluding international Islamic banks) and non-bank buyers.

This article summarises notable provisions of the Policy Document.

Section 100 of the Financial Services Act 2013 and section 112 of the Islamic Financial Services Act 2013 allows parties intending to enter into any agreement or arrangement to transfer the whole or any part of the business of a licensed person. They are required to submit a joint application to obtain BNM’s approval prior to effecting such agreement or arrangement.

Loans/financing eligibility criteria

From the seller’s perspective, the following criteria must be met prior to submitting the joint application:

(a) whichever occurs earlier:

    (i) the impaired loans/ financing remains classified as impaired for a minimum period of 12 months from the date it was first classified as impaired; or

    (ii) all reasonable efforts to recover the impaired loans/financing have been exhausted by the seller; and

(b) the impaired loans/financing must not be loans/financing that was granted for or linked to projects of strategic importance.[3]

Further, a seller must only sell such impaired loans/financing to the following parties:

(a) domestic banking institutions or locally incorporated foreign banking institutions in Malaysia; or

(b) non-banking institutions that are locally incorporated and are a resident for tax purposes.

From the buyer’s perspective, the following criteria must be met:

(a) proven track record in debt management and recovery, and minimal complaints against its debt management and recovery practices;

(b) adopted satisfactory recovery approaches, including having a dedicated unit with competent personnel to effectively manage debt collection and complaints from borrowers;

(c) adequate and competent staff with recognised qualifications from reputable institutions of higher learning, or adequate knowledge and training, including, if applicable, in Islamic banking and finance or Shariah law; and

(d) where a buyer has the intention to outsource the collection or recovery of the impaired loans/financing to a service provider, the buyer must meet the above criteria.

Note that the buyer must comply with the above requirements on a continuous basis, even after receiving approval from BNM.

Business conduct requirements

From the seller’s perspective, a written notification must be given to affected borrowers of its intention to dispose of its impaired loans/financing to buyer within 90 calendar days prior to entering into an agreement or arrangement for the disposal of the impaired land/financing to the buyer.

The seller must allow borrowers a period of 90 days from the date of the notice to regulate and settle their outstanding loans/financing, before entering into an agreement or arrangement for the disposal of the impaired loans/financing to the buyer.

Upon completion of the disposal of impaired loans/financing, the seller must give written notification to the affected borrowers on the following within seven days:

(a) completion of the disposal, including name and contact number of the buyer; and

(b) all complaints or any matters related to such impaired loans/financing prior to completion of the disposal shall be directed to the seller.

From the buyer’s perspective, the buyer must inform the affected borrowers within seven days of the completion of disposal that:

(a) any complaints or queries pertaining to the purchase, management and recovery procedures of the impaired loans/financing must first be directed to the buyer, unless the complaint or query relates to matters prior to the completion date of the purchase of the impaired loans/financing; and

(b) if the affected borrowers are not satisfied with the decision of the buyer on the complaints or queries raised, the buyer must inform the affected borrowers on the availability of alternative redress avenues.

Other Requirements

1. Accounting Treatment

A seller must recognise any losses that may arise at the point of the completion of the disposal of the impaired loans/financing to a buyer.

A buyer that is a banking institution must at all times comply with paragraph 10 of the Policy Document on Financial Reporting or the Policy Document on Financial Reporting for Islamic Banking Institutions and the Malaysian Financial Reporting Standards (MFRS9), as the case may be.

2. ‍Disposal of impaired loans/financing to entities within the same group

In a situation where the seller and buyer are banking institutions within the same group, they shall ensure that for purposes of accounting, the impaired loans/financing are consolidated at the group level.

3. Additional requirements for Non-bank Buyers

Note that BNM has clearly set out additional requirements to be complied by non-bank buyers, once the non-bank buyer assumes the rights and titles to such impaired loans/financing.

Frequently Asked Questions

To clarify and assist in understanding some of the provisions of the Policy Document, BNM has issued a set of Frequently Asked Questions on the Policy Document on 25 June 2024. This document can be accessed here.

Conclusion

The enhanced Policy Document provides comprehensive definitions, explanations and clear requirements. Key provisions include stricter eligibility criteria for sellers, increased requirements for buyers, particularly non-bank buyers, and strengthened borrower protection measures. The policy also outlines accounting treatments and prohibits onward sales of impaired loans.

Further, the enhanced Policy Document eliminates the 49% foreign ownership limit found in the previous guideline and introduces stringent safeguards to protect borrowers. In addition, third-party buyers must now demonstrate a proven track record in debt management and recovery.

The notification period to borrowers regarding the intention of sellers to dispose the impaired loans/financing is also clearly set out in the Policy Document. The 90-day notification period mandate enhances transparency and fairness for affected borrowers.

If you have any questions or require any additional information, please contact Chan Xian Ai, or the Zaid Ibrahim & Co partner you usually deal with.

This alert is for general information only and is not a substitute for legal advice.

‍

[1] Bank Negara Malaysia, ‘ Policy Document on Disposal and Purchase of Impaired Loans/Financing’ <https://www.bnm.gov.my/-/pd-dpil-en > accessed 26 July 2024.  

[2] Policy Document on Disposal and Purchase of Impaired Loans/Financing, para 1.4.

[3] This includes loans/financing granted for or related to national infrastructure projects (such as, in the area of transportation, telecommunications, energy, logistics and utilities), as well as those identified by the Government as strategic through its various developmental plans (such as projects involving circular economy, integrated water resource management and digital connectivity under the 12^th Malaysia Plan 2021-2025).

‍

Nadarashnaraj Sargunaraj and Nurul Syahirah Azman have recently contributed their insights to the Malaysia Chapter of the Global Legal Insights – Merger Control 2024 published by the Global Legal Group. The publication covers practical insights on merger control in Malaysia, with particular focus on the Communications and Multimedia Act 1998, the Malaysian Aviation Commission Act 2015 and the merger controls proposed to be introduced to the Competition Act 2010. Recent approval and exemption decisions by the relevant Malaysian sector regulators are also discussed. The publication can be viewed at GLI’s website or alternatively, a copy of the publication can also be downloaded in the link provided below.

‍

Birth, old age, sickness and death – these are the inevitable stages in human life.

The legal procedure after a person’s death can be complex, especially when a person dies intestate, or without leaving a will.

There are clear advantages to having a will. It allows the person making the will to choose their beneficiaries, determine how assets are to be distributed, and to appoint an executor to administer the estate.

On the other hand, when a person dies intestate, assets will be distributed in accordance with the Distribution Act 1985 and a court-appointed trustee or executor will administer the estate. This more cumbersome process may give rise to assets being distributed in a way that is not in accordance with the deceased person’s wishes, or family disputes.

That said, there are certain distributions that are considered distinct from a deceased’s inheritable estate. This article explores the distribution of insurance benefits and Employment Provident Fund (“EPF”) upon the death of an insured person or EPF member, respectively, in Malaysia.

Insurance

In Malaysia, monies under insurance policies do not form part of the deceased’s estate. This is to protect the interests of the insured’s spouse and children in the policy against a claim by any creditor of the insured.

This is provided for in section 23(1) of the Civil Law Act 1956:

23.  Moneys payable under policy of assurance not to form part of the estate of the insured

(1) A policy of assurance effected by any man on his own life and expressed to be for the benefit of his wife or of his children or of his wife and children or any of them, or by any woman on her own life and expressed to be for the benefit of her husband or of her children or of her husband and children or any of them, shall create a trust in favour of the objects therein named, and the moneys payable under any such policy shall not so long as any object of the trust remains unperformed form part of the estate of the insured or be subject to his or her debts.

The relationship between the insurer and the insured (or the “deceased” for the purpose of the article) is a contractual one (see the Federal Court decision in Malaysian Assurance Alliance Bhd v Anthony Kulanthai Marie Joseph (suing as a representative of the estate of Martin Raj a/l Anthony Selvaraj, deceased) [2010] 4 MLJ 749).

Therefore, upon the death of the insured, the terms of the insurance contract will take effect – all monies payable under the insurance policy will then be paid to the named nominee in accordance with the insurance policy and the Financial Services Act2013 (“FSA 2013”).

The payment of policy monies is not automatic. The nominee must make an application to the insurer, notifying of the death of the insured and accompanied by proof of death. Upon receipt of such claim, the insurer shall pay the policy monies to the nominee. However, if the nominee fails to claim the policy monies within 60 days of the insurer becoming aware of the death of the insured, the insurer shall immediately notify the nominee in writing of his/her entitlement to claim the policy monies. Where the insurance company has been made aware of the death of the policy owner and notified the nominee of their entitlement, and within 12 months the nominee has failed to claim the policy monies, the insurer shall proceed as though no nomination was made.

In situations where the insured did not make any nomination in the policy, the insurer shall pay the policy monies to the lawful executor or administrator of the estate. Where the insurer is satisfied that there is no lawful executor or administrator of the estate at the time of payment, the insurer may pay the policy monies to the deceased’s spouse, child or parent in accordance with the Distribution Act 1958.

Therefore, insurance policy holders are advised to take necessary steps to nominate the intended recipients of the policy monies. This ensures that after the death of the insured, the policy monies will be paid to the intended recipient.

It is also advisable for the nominee to make the insurance claim as soon as possible after the death of the insured to ensure efficient payment of the policy monies.

It must be noted by virtue of section 25 of the Civil Law Act 1956, the nature of nomination varies for Muslim policy owners (also known as takaful participant). The nominee of a Muslim policy owner can either be an executor or a beneficiary of the takaful benefits. If a person is nominated as an executor, he/she will take the takaful benefits only as an executor and must distribute the monies in accordance with Faraid laws. However, a nomination for a nominee to be a beneficiary under a conditional hibah (granting ownership of property from one party to another without any consideration) [1] shall have the effect of transferring ownership. The takaful benefits payable to the nominee upon the death of the insured person shall be transferred to the named nominee.

Employees Provident Fund

The distribution of EPF mirrors that of insurance policies. The contributions and interest do not form any part of the deceased’s estate, and upon the death of the deceased, it shall remain separated from the deceased’s other assets (How Yew Hock (Executor of The Estate of Yee Sow Thoo, deceased) v Lembaga Kumpulan Wang Simpanan Pekerja [1996] 2 MLJ474). If nomination was made, the fund will then be payable to the nominee.

Section 54 (1A) of the Employees Provident Fund Act 1991 provides that the EPF member may make nomination for the purpose of payment of credit after the death of the member. When a nomination is made, it has the effect of appointing an individual or institution to receive and oversee the EPF savings in the event of one’s demise. A nominee would then be entitled to the nominated portion of the deceased’s EPF savings.

However, where the EPF member dies without first nominating a beneficiary, the member’s next-of-kin is entitled to make a claim for the monies in the savings. This includes:

• the member’s widow/widower, children (or their guardian);
• parents, or siblings for married members; or
• parents or siblings for unmarried members.

If the deceased left a will with a residuary estate clause (a clause that disposes of assets that have been overlooked or are left over), then the EPF savings will form part of the residuary estate of the deceased EPF member and shall be distributed in accordance with his or her express wishes. If a grant of probate or letter of administration has been taken out for the deceased’s estate, the executor or administrator may then act accordingly to apply for the withdrawal of the savings for the benefit of the named beneficiaries or the next-of-kin, as the case may be.

The amount varies according to when the application is made: [2]

In the event of one’s untimely demise, EPF savings may serve as an assurance that the deceased’s next-of-kin are financially cared for. For easy and convenient withdrawal upon death, all EPF members are highly encouraged to make nominations of beneficiaries early on.

Earlier this year, EPF clarified that where there is more than one beneficiary nominated and one of them dies, then only the portion that was bequeath to the deceased beneficiary will be invalid. If the EPF member failed to update his/her nomination before they died, then the surviving beneficiaries will receive their portion accordingly. However, if the member has named only one beneficiary and the beneficiary dies, then the nomination will be deemed void until a new beneficiary is nominated. [3]

Commentary

Other than making nominations for your insurance policies and EPF, it is important to remember that when creating wills and testaments, insurance policies and EPF savings are not to be included as assets.

The separation of both insurance and EPF from the estate of a deceased are restrictions created by lawmakers for the purpose of public policy, ensuring that loved ones are provided for upon the death of an insurance policy owner or EPF member. Hence, one should not consider insurance policies and EPF credits as a part of one’s inheritable assets.

If you have any questions or require additional information, please contact Jeyakuhan Jeyasingam or the partner you usually deal with at Zaid Ibrahim & Co.

This alert is for general information only and is not a substitute for legal advice.‍

‍

[1] “Managing Hibah” (My Government) <https://www.malaysia.gov.my/portal/content/27730> accessed 11 June 2024.

[2] “Helping Loved Ones in Times of Need” (EPF) <https://www.kwsp.gov.my/member/account-centre/death> accessed 11 June 2024.

[3] “Chain Messages on Nomination” (EPF) <https://www.kwsp.gov.my/w/chain-email-on-nomination> accessed 11 June 2024.

‍

‍

Nadarashnaraj Sargunaraj and Stanley Lee Wai Jin have recently contributed their insights to the Malaysia Q&A Chapter of the International Comparative Legal Guide -Product Liability 2024 published by the Global Legal Group. The publication covers common issues pertaining to laws and regulations on product liability in Malaysia – including causation, defences, legal procedures, limitation periods, remedies and potential costs of litigation. The publication can be viewed at ICLG’s website or alternatively, a copy of the publication can also be downloaded in the link provided below.

In a recent landmark decision, the Federal Court resolved several critical issues on pre-emptive rights and shareholders’ approval impacting Malaysia’s corporate governance landscape.

In Concrete Parade Sdn. Bhd. v Apex Equity Holdings Berhad & Others, the Federal Court overturned the earlier Court of Appeal decision, and affirmed the High Court decision on the interpretation of sections 85(1) and 223(1) of the Companies 2016 (“CA 2016”). These sections respectively provide for shareholders’ pre-emptive rights and the requirement to procure shareholders’ approval for an acquisition or disposal of a company’s property or undertaking of a substantial value or portion.

The decision provides clarity on the approach to be adopted when there appears to be statutory constraints under the CA 2016 that may limit the operational and expansion capabilities of a company. It highlights the importance of striking a balance between the rights and interests of shareholders, powers of directors and commercial interests of a company. In this article, we will be examining the Federal Court’s decision and its impact on managing the complexities of corporate governance.

Background of the case

Concrete Parade Sdn. Bhd. (“Concrete Parade”), a shareholder of Apex Equity Holdings Berhad (“Apex Equity”), commenced a lawsuit against Apex Equity and 15 other defendants for minority oppression under section 346 of the CA2016. The lawsuit was due to the following transactions:

• share buy-back transactions conducted by Apex Equity between 2005 and 2017; and
• proposed merger of the stockbroking businesses of Mercury Securities Sdn. Bhd. (“Mercury Securities”) and JF Apex Securities Berhad (“JF Apex”), a subsidiary of Apex Equity. The merger involved (i) cash consideration of RM48 million, funded by issuance of new Apex Equity shares through private placement with other defendants (including Mercury Securities), and (ii) non-cash consideration of RM92 million in the form of new Apex Equity shares issued to Mercury Securities (collectively, the “Mercury Transaction”).

Under the Mercury Transaction, Apex Equity, JF Apex and Mercury Securities entered into a business merger agreement (“BMA”) which sets out conditions precedent to be satisfied before the Mercury Transaction can be completed, including obtaining approval of the existing shareholders of Apex Equity for the Mercury Transaction. Such shareholders’ approval was obtained only after the execution of the BMA. The same conditions precedent in the BMA are applicable in the individual share subscription agreements (“SSA”) executed in relation to the private placements.

Prior to the execution of the BMA, Apex Equity and Mercury Securities entered into a heads of agreement (“HOA”), which sets out the salient terms of the BMA, including the condition precedent relating to the approval of the existing shareholders of Apex Equity for the Mercury Transaction. The HOA is expressed to be legally binding.

Concrete Parade claimed the following:

• Contravention of section 85(1) of the CA 2016 – the proposed private placement exercise has dilutive effects on the respective shareholdings of the existing shareholders of Apex Equity. Further, there was no resolution expressly asking such shareholders to waive their pre-emptive rights prior to approving the Mercury Transaction.
• Contravention of Section 223(1) of the CA 2016 – the HOA does not contain shareholders’ approval as a condition precedent. No shareholders’ approval was obtained prior to the execution of the BMA.

Decision by the Federal Court

Section 85(1) of the CA 2016: What constitutes a waiver of pre-emptive rights?

Section 85(1) provides that where a company issues new shares which rank equally to existing shares as to voting or distribution rights, the company must first offer the new shares to the existing shareholders on a pro rata basis, unless otherwise provided in the company’s constitution. This provision safeguards the existing shareholders from a dilution in share ownership, as a result of the company issuing new shares to raise capital.

Under the constitution of Apex Equity, any issuance of new shares or other convertible securities by Apex Equity is subject to any “direction to the contrary” given by the shareholders of Apex Equity. The Federal Court held that the shareholders’ approval for the Mercury Transaction constitutes a valid “direction to the contrary” and hence amounts to waiver of pre-emptive rights.

The court ruled on the grounds that:

• Pre-emptive rights under section 85(1) are not absolute mandatory legal rights. Section 85(1) only grants statutory privilege for the existing shareholders of a company to maintain their proportional ownership in the company. Pre-emptive rights can be waived by the shareholders if the company’s constitution (which represents the contractual position between the shareholders and the company as well as among the shareholders themselves) allows so.
• There is no need for the shareholders’ resolution to expressly set out all requisite information regarding pre-emptive rights under section 85(1) (including what amounts to a waiver of such rights and the consequences of doing so). It is also not necessary for the existing shareholders to expressly stipulate their consent to waive their pre-emptive rights, as the shareholders would have known the dilutive effects of a proposed corporate transaction that involves issuance of new shares when they voted in favour of it.  
• It is not practical to offer new shares to the existing shareholders of a company and obtain their approval prior to entering into any agreement that sets out the terms for a corporate transaction which will only be performed and carried into effect upon satisfaction of certain conditions. This would only delay or prolong negotiations and potentially result in abortion of the corporate transaction.  

Section 223(1) of the CA 2016: When to obtain shareholders’ approval?

Section 223(1) provides that the directors of a company shall not enter or carry into effect any arrangement or transaction for the acquisition or disposal of an undertaking or property of a substantial value or portion unless:

• the entering into such arrangement or transaction is made subject to the shareholders’ approval by way of resolution; or
• the carrying into effect of such arrangement or transaction has been approved by the shareholders by way of resolution.

This case raises the question on the precise point in time when directors of a company are to obtain shareholders’ approval in relation to the acquisition or disposal of assets within the company.

In reversing the Court of Appeal’s decision, the Federal Court held that shareholders’ approval should not be obtained twice – first, prior to the entry into an agreement for such acquisition or disposal, and second, prior to effecting such acquisition or disposal. This was on the basis that shareholders cannot be giving approval without the full terms of the agreement having been worked out and fair comprehension of the proposed transaction. The need to procure two sets of shareholders’ approval on the same transaction would affect the business efficacy and performance of the company. It is sufficient to just have one set of shareholders’ approval, either by entering into an agreement that contains a condition precedent to obtain shareholders’ approval or by obtaining shareholders’ approval before ownership of asset is effectively acquired or divested.

Concrete Parade claimed that the contravention of section 223(1) was due to the execution of the HOA and the BMA. The Federal Court agreed with the High Court that the HOA is a mere record of the mutual understanding between Apex Equity and Mercury Securities in respect of the Mercury Transaction (including the execution of the BMA). It does not have any effect of creating enforceable obligations on Apex Equity to acquire the shares of Mercury Securities through JF Apex. Hence, the HOA does not need to contain a condition precedent to obtain shareholders’ approval. The Federal Court disagreed with the Court of Appeal that the execution of the BMA was the carrying into effect of the HOA and prior shareholder’s approval should be obtained. According to the Federal Court, the BMA contained a condition precedent to obtain shareholders’ approval and its execution cannot possibly have the effect of carrying into effect of the HOA and the Mercury Transaction. Thus, no shareholders’ approval is required prior to the execution of the BMA.

Commentary

The Federal Court’s decision is significant as it highlights the importance of striking a balance between the rights and interests of shareholders, the powers of directors and the commercial interests of a company. It provides pragmatic guidance to companies navigating the complexities of corporate governance.

From a practical standpoint, it is not feasible for a company to notify its shareholders of any intention to enter into a corporate transaction (including fundraising exercise that involves issuance of new shares and acquisition or disposal of assets) and seek their approval even before negotiations begin. The terms of such transaction are agreed upon in term sheets or similar agreements. Opportunities for growth will slip away if the company delays its expression of interest to partake in a corporate transaction due to any setback in getting votes from shareholders in a short span of time. Further, especially if the company is publicly listed, any early announcement for such intention to enter into a corporate transaction will excite the market even before any agreement is entered into, resulting in share price fluctuation which may adversely affect the bargaining position of parties to the transaction and create deal uncertainty.

If you have any questions or require any additional information, please contact Chan Xian Ai, or the Zaid Ibrahim & Co partner you usually deal with. This article was prepared with the assistance of Jean Lee Jia Ying, Senior Associate at Zaid Ibrahim & Co.