Corporate and Commercial

On 1 April 2024, we welcomed the introduction of amendments to the Companies Act2016 (“CA 2016”) on beneficial owners (i.e its definition, duty to disclose, annual return requirements, etc.). Subsequently, in a bid to improve transparency and accountability within limited liability partnerships (“LLP”), the Limited Liability Partnership (Amendment) Act 2024 (“LLPAA 2024”) was gazetted on 17 October 2024, though it has yet to come into force.

The LLPAA 2024 introduces several amendments to the Limited Liability Partnership Act 2012 (“LLPA 2012”) including time for compliance with the requirements under the LLPA 2012 (new section 70A), substitution of section 76 of the LLPA 2012 to include electronic means as way of service of documents, and a new section 76A on publication or advertisement on the website of the Companies Commission of Malaysia (“CCM”).

This article will be focusing on two pertinent amendments to the LLPA 2012 — ­­­­­the introduction to the beneficial ownership reporting and disclosure framework (introduced as a new Part IIIA) and the concept of corporate voluntary arrangement and judicial management of LLPs (new sections 49A and 49B).

Introduction to Beneficial Ownership Reporting and Disclosure

The LLPAA 2024 has introduced a new Part IIIA to govern beneficial ownership reporting and disclosure framework of LLPs.

It sets out the definition of beneficial owner and grants the registrar of the CCM (“Registrar”) the power to issue guidelines on identifying beneficial owner of LLPs. In line with this, CCM has issued a consultation on the proposed guideline for the reporting framework for beneficial ownership of LLPs. This consultation, together with case studies and illustrations, relatively similar to the approach taken for the beneficial ownership reporting under the CA 2016, contains step by step approach for the application of the new Part IIIA. It covers proposed scopes of reporting, entry points of the beneficial ownership information and criteria to determine beneficial owners. However, do note that this is still a consultation document and has yet to be enforced or finalised by CCM.

Further, Part IIIA provides a list of details that must be included in the register of beneficial owners. These can be found in section 20B(1) which states:

LLPs are obligated to require any partners to disclose if they are the beneficial owner. If they are not, then to indicate persons (whether by name or other particulars to make identification easy) who are beneficial owners. LLP has 14 days from the date the information is received to record the information in the register of beneficial owners (section 20C(4) of the LLPA 2012).

Additionally, a beneficial owner is to notify the LLP if there are any changes to their particulars, including when they cease to be a beneficial owner. The date and particulars of the cessation must be notified as soon as practicable (section 20D(3) of the LLPA 2012).

LLPs that are already subjected to similar reporting obligations may be exempted from their obligations under Part IIIA by the domestic trade minister. The exemption maybe subjected to such terms imposed by the Minister. Failure to abide by the requirements in Part IIA, LLPs and every partner and compliance officer can be liable for the following:

• Section 20B: Fine not exceeding RM 20,000. If the offence continues, a further fine not exceeding RM 500 for each day.
• Section 20C (1)-(6): Commits an offence.
• Section 20D: Any person who contravenes this section commits an offence.

Corporate voluntary arrangement and judicial management

In addition to the introduction of the beneficial ownership framework, the LLPAA 2024 introduces the concept of corporate voluntary arrangement and judicial management. Section 49A of the LLPA 2012 provides that Division 8 of Part III (in so far as they relate to a company limited by shares and except for sections 395 and 403 and paragraph 1 of the Eight Schedule) of the CA 2016 and the Companies (Corporate Rescue Mechanism) Rules 2018 shall apply to the voluntary arrangement and judicial management of an LLP. Nonetheless, this is subject to such modifications and adaptations as may be necessary.

Moreover, Section 49B imposes that an insolvency related clause in any contract for the supply of essential goods and services shall not be exercised against LLPs. However, it is pertinent to note that section 49B(2) provides an avenue to a supplier who wishes to exercise his rights pursuant to an insolvency related clause in a contract. They must inform the LLP of their intention in writing at least 30days before exercising their rights and taking any action.  

Section 49B shall not prevent a supplier from exercising his other rights, including right to payment for essential goods and services provided to an LLP, under a contract for supply of essential goods and services. The newly inserted Fourth Schedule provides a list of the essential goods and services that is covered.

In conclusion, the recent amendments introduced in the LLPAA 2024 marks a promising shift towards improved governance and accountability in LLPs. With these new frameworks and future guidelines, stakeholders have the opportunity to enhance cooperate governance and embed greater transparency in their reporting practices.

If you have any questions or require any additional information, please contact Chan Xian Ai, or the Zaid Ibrahim & Co (in association with KPMG Law) partner you usually deal with. This article was prepared with the assistance of Ellesya Myra Faredz, Associate at Zaid Ibrahim & Co (in association with KPMG Law).

This article highlights predictions from Corporate and M&A professionals from the KPMG global Legal Operations Transformation Services practice concerning the expected changes in mergers and acquisitions (M&A) markets. We focus on how these changes are expected to affect future legal functions and legal practice. As predictions, they are not intended to guarantee any specific outcomes.

After a strong rally post-pandemic, the world’s M&A markets have been quiet in recent months as ongoing high interest rates, inflation and global political uncertainty continue to create financing challenges and dampen appetites for new transactions.

While deal volumes may be muted, digitalization continues its rapid advance, with innovations such as Generative AI (Gen AI) being embraced by businesses and their legal teams with increasing enthusiasm. When M&A markets ultimately rebound — as is widely expected before the end of 2024 — the pressure and pace of the deal making process will likely create significant challenges for legal professionals.

How will rapidly changing approaches to M&A transform the legal functions of the future?

Here are our top predictions:

1. Legal professionals who use technology effectively in the deal-making process can gain a competitive advantage by boosting the speed and efficiency of M&A transactions.

Around the world, M&A deal-making will continue at a more rapid rate and complexity as advancing technology and more available data drive new efficiencies and transparency across the deal cycle. From matching buyers and sellers to post-integration planning, the role of M&A lawyers will likely evolve as routine tasks are standardized and automated.

With the huge volumes of data that are typically relevant in international reorganizations, legal professionals will increasingly assign technology to do more basic work. This includes scanning and producing documents, summarizing information, preparing reports and tracking time and expenses.

Approaches to due diligence will also change. Technology tools, especially Gen AI will streamline the scope of the legal review by delivering reliable information summaries quickly on matters such as standardized contracts, litigation, market terms and insurance policies. With Gen AI facilitating first drafts and research, the lawyer’s legal knowledge and review capabilities will need to be updated to ensure quality and accurate deliverables.

In fact, the opportunities that technology can bring to M&A transactions are so vast that they can seem overwhelming. As deals continue to pick up pace and workflows are adapted, it will be important for lawyers to understand that their role in the process remains fundamentally the same: to negotiate sound terms, execute and optimize buy-sell agreements, apply prior deal knowledge and create strategic business solutions for their clients.

Technology is designed to make the journey faster and smoother, but the destination is unchanged. The most successful legal teams will likely be those who use technology appropriately and efficiently to bring more added value services to their clients in a collaborative format.

2. Rapid technological adoption can help level the playing field for players in developing countries.

The digital divide between developed and developing countries will continue to narrow as businesses in countries such as Indonesia and Vietnam skip over previous technologies, and create the new infrastructure to support Gen AI, mobile, 5G and other contemporary advances. The latest wave of technology offers another opportunity for developing countries to “leapfrog” in areas such as developing precedents and running major due diligence exercises.

This may level the playing field by allowing new M&A players in developing markets to ramp up their capabilities quickly and compete on more equal footing with established investors and strategic buyers in developed jurisdictions. This speed of development will require extra effort and vigilance in areas such as training, the ethical use of AI and cybersecurity.

3. Proliferating environmental, social and governance (ESG) rules will require more detailed due diligence and access to significant volumes of previously unreported data.

New ESG reporting regulations are set to take effect in Europe, and similar rules are likely to be adopted in the Asia-Pacific and other regions. This aims to greatly expand the level of due diligence and data that potential buyers will need to manage to meet new compliance, reporting and other requirements.

While these rules are scheduled to come into effect over a period of years, companies should currently be developing systems to track the relevant information needed for future deal-making. This will be no small task since companies will have to provide detailed information and potentially obtain external assurance about topics that they may never have reported on before. Complying with the rules and opening new windows of transparency into the acquired company may also prompt changes to a target’s operations, structure and supply chain.

Similarly, deal lawyers will need to consider what diligence needs to be conducted to assess the maturity of target businesses to comply with these obligations and the associated representations, warranties and covenants that provide the contractual protections that underpin the diligence.

4. Evolving international tax rules will complicate international structures, planning and due diligence.

Following the pandemic, escalating trade tensions between the US and China and more recent geopolitical conflict in Europe, the Middle East and other areas, have caused many international companies to reconsider the locations of their operations and supply chains.

At the same time, the sweeping international tax rules developed by member countries of the OECD’s Inclusive Framework are being implemented by many global jurisdictions. Commonly referred to as BEPS 2.0, the two-pillar framework of the rules will reallocate a portion of corporate profits to market jurisdictions (Pillar One) and impose a minimum tax to ensure corporate profits are taxed at a 15 percent minimum.

In view of these new rules, many international companies and investors are streamlining their subsidiaries and holdings to minimize complexity and tax exposure. More attention is being paid to the location of their business’ value drivers. Increasing tax transparency under BEPS 2.0’s reporting rules is also influencing the structure of M&A transactions, with some buyers seeking to carve out activities, entities or geographies from agreements to insulate the core business or obtain watertight indemnities around potential liabilities that may come with the target business.

Legal teams will have their hands full dealing with the impacts of these new rules as jurisdictions set different effective dates and impose their own variations of safe harbors and other aspects of the BEPS 2.0 package. During this implementation period, it will be particularly important for due diligence teams to include a full complement of tax professionals to identify and advise on specialty areas such as international corporate tax, transfer pricing and indirect tax.

5. As the balance of deal-making shifts to Asia and developing countries, legal teams will require more linguistic and cultural diversity to prosper in all M&A markets.

Legal practice will continue to become more universal. Due to the historical and increasing dominance of US legal firms in global markets, English will likely continue to be the common legal language and concepts rooted in common law will continue to dominate training, deal negotiations and transaction arrangements. But legal teams of the future will need to include legal professionals with skills and experience to understand and manage the differences between US law and other common-law jurisdictions such as the UK, Malaysia and other Commonwealth countries.

In addition, capital flows from outside the historical largest players tend to be much more complex and harder to tap into than was once the case since there are now major companies, banks and funds doing deals from a greater array of countries. For example, big Indian corporates are making acquisitions in countries such as Brazil and Indonesia; Malaysian companies are making acquisitions in Türkiye and other parts of the world. This is not new, but as the number of economies providing outbound capital, or local banks become able to fund larger deals (and not rely on US/European/Japanese or Chinese banks), the need for a different footprint becomes more acute. To capture global M&A deal flows, there is an ever-increasing requirement to have relationships in a broader array of business centres and have senior lawyers in country who can build those relationships and execute those deals.

This will be particularly important in the Association of Southeast Asian Nations (ASEAN) region. With the region’s broad diversity of cultures and legal foundations, legal teams there may need to comprise lawyers who can deliver advice, review documents, negotiate terms and navigate cultural differences to deal with outbound, and especially inbound, transactions involving such disparate jurisdictions as China, Japan, Taiwan and India.

6. As deal cycles tighten, legal teams will need strong information management skills to get deals done quickly while mitigating risk.

Speed is vital for competitive due diligence work, but as the pace of deal making increases, risk management and controls will become even more important. For example, when one or both parties are involved are public companies or in a regulated industry, the due diligence process can involve 100 or more people. Beyond legal professionals, the proposed transaction may also need review by and input from banking, finance, tax, ESG, IT consultants and other specialists.

Each individual should be assigned the right level of access to different layers of information, much of it proprietary or confidential. The security of data rooms is a huge concern since inadvertent leaks could create problems preserving privilege, expose sensitive information and impair negotiations.

Further, as technology automates many common, lower-level due diligence tasks, junior-level stakeholders at investment banks and insurers, may lack the experience or training they need to properly recognize and manage sensitive information.

Due diligence in the future will therefore require robust information management, and legal teams will increasingly lead the process. This will likely include:

• deciding who needs access to what information
  
• coordinating the work of specialists
• sensitizing participants to matters of confidentiality, legal privilege and cybersecurity
• synthesizing key information for decision-makers
• maintaining high standards of risk management.

Skills in information management can enable legal teams to take charge of maintaining the fast flow of documents while mitigating confidentiality, regulatory and other risks. Communication and stakeholder relations skills will also be key.

Conclusion

As the world of M&A evolves, the legal profession is being given a tremendous opportunity to utilize new technologies and approaches to enhance deal flow and improve client results. However, lawyers should also be aware that these new technologies and approaches also require a new skill set. Lawyers who are able to respond quickly to shifting global attitudes, an increased use of AI and new regulations will likely be able to gain a substantial advantage both for their own teams and their clients.

This article is prepared by Hanim Hamzah, Head of Asia Pacific, KPMG Law; Gilbert Gan, Managing Partner, Zaid Ibrahim & Co. (in association with KPMG Law);  Stuart Bedford, Head of KPMG Law UK, KPMG in the UK; Franck Bernauer, Partner, Head of Legal, Avocat; Jeffrey Issacs, Head of GLS Strategy Implementation, KPMG in the US and Director, Global Legal Managed Services, KPMG International; and Lucia Lorenti, Partner, Ferraz de Camargo e Matsunaga Advogados Associados.

During the recent parliamentary session in July 2024, the Customs (Amendment) Bill 2024, Excise (Amendment) Bill 2024, Free Zones (Amendment) Bill 2024, Sales Tax (Amendment) Bill 2024 and Services Tax (Amendment) Bill 2024 was passed to designate Pulau 1 as a duty-free island similar to Langkawi, Labuan and Pangkor islands. The Bills have yet to be gazetted and the date of Royal Assent has yet to be determined. However, it is anticipated that the implementation of the Bills will promote the trade and tourism aspects of the Iskandar region as less stringent restrictions will be imposed on tax permits and applications for the sale of duty-free goods.[1]

Forest City, covering 14 square kilometres of reclaimed land on four artificial islands near the border of Malaysia and Singapore, is a mega project developed by Country Garden Pacificview Sdn. Bhd., a joint venture between Country Garden Pacificview Sdn.Bhd.  and Esplanade Danga 88 Sdn. Bhd.

Pulau 1, a 700-acre artificial island, is the most developed out of the four planned islands. It currently comprises a sales gallery, sales spaces, Marina Hotel, commercial units, duty-free shops, an international school, a small office/home office tower offering co-working space, waterpark, beach bar, and a beach activity area.[2]

As a duty-free island, Pulau 1 is set to offer duty free products, like liquor, chocolate, cosmetics and perfume, provided that the necessary eligibility criterias have been met. Deputy Finance Minister Lim Hui Ying proposed that the visitors who leave the island for Malaysia must submit receipts, invoices or documents of their purchases to the Royal Malaysia Customs Department, proving that the visitor has been in Pulau 1 for no less than 40 hours to ensure transparency and law enforcement in Pulau 1.[3]

The Johor government has also proposed for the Forest City Special Financial Zone to be included within the Johor-Singapore Special Economic Zone to boost the economy in Iskandar Malaysia. The incentives proposed, among others, include granting knowledge workers a 15% flat income tax rate, and companies and individuals will be offered special-rate tax incentives and expedited immigration lanes to facilitate the entry of experts from aboard.[4] The incentives shall result in lower cost of doing business and to attract talent and international businesses into the zone. The said incentives for Forest City Special Financial Zone, as stated by Johor Menteri Besar Datuk Onn Hafiz Ghazi, is targeted to be finalized in August before the signing of the Johor-Singapore Special Economic Zone agreement between Malaysia and Singapore.[5]

Forest City has additionally applied for Malaysia Digital status recognized by the Malaysian Digital Economy Corporation to attract hi-tech sector investors where enterprises related to digital centres, smart technology and green intelligence fields such as big data analysis, artificial intelligence and financial technology will enjoy income tax exemptions up to 10 years.[6]

There have also been on-going discussions for infrastructure projects, including the Kuala Lumpur-Singapore High-Speed Rail, and the Johor-Singapore Special Economic Zone, embarked for the area to increase cross-border economic connectedness as Forest City is at the most ideal location which had a significant influence in pioneering these new measures on tourism and economic activity.[7]

The enactment of the Bills and the continuous development at Forest City are poised to usher in a new era of economic vitality in the Johor region. This transformation provides job opportunities and represents a gateway to a thriving economy and a vibrant business landscape. As the development unfolds, it is expected to open doors to a myriad of work opportunities, attracting a diverse pool of talent and fostering innovation and growth for Johor.

If you have any questions or require any additional information, please contact Lee Lily @ Lee Eng Cher, or the Zaid Ibrahim & Co (in association with KPMG Law) partner you usually deal with. This article was prepared with the assistance of Lee Jean, Associate at Zaid Ibrahim & Co (in association with KPMG Law).

[1] ‘Pulau 1 in Johor’s Forest City to be duty-free island’ (Malay Mail,18 July 2024) <https://www.malaymail.com/news/malaysia/2024/07/18/pulau-1-in-johors-forest-city-to-be-duty-free-island/144135>.

[2] Ben Tan, ‘What is Pulau Satu in Johor’s Forest City, Malaysia’s next duty-free island?’ (Malay Mail, 31 July 2024) <https://www.malaymail.com/news/malaysia/2024/07/31/what-is-pulau-satu-in-johors-forest-city-malaysias-next-duty-free-island/145199>.

[3] 'Pulau 1 in Johor’s Forest City to be duty-free island’ (Malay Mail,18 July 2024) <https://www.malaymail.com/news/malaysia/2024/07/18/pulau-1-in-johors-forest-city-to-be-duty-free-island/144135>.

[4] Jassmine Shadiqe, ‘Forest City granted special financial zone status to attract foreign investment, PM reveals’ (New Straits Times, 25August 2023) <https://www.nst.com.my/news/nation/2023/08/947406/forest-city-granted-special-financial-zone-status-attract-foreign>; Official Portal of Ministry of Finance, ‘Special Financial Zone to be created in Forest City –PM Anwar’ <https://www.mof.gov.my/portal/en/news/press-citations/special-financial-zone-to-be-created-in-forest-city-pm-anwar>.

[5] Jassmine Shadiqe, ‘Forest City’s SFZ to be integrated into Johor-Singapore SEZ’ (New Straits Times, 12 August 2023) <https://www.nst.com.my/news/nation/2024/08/1090368/forest-citys-sfz-be-integrated-johor-singapore-sez>.

[6] Malaysia Digital Economy Corporation, ‘Announcement on the official launch of Malaysia Digital (MD) Tax Incentive’ <https://mdec.my/announcement/md-tax-incentive>; ‘Forest City expansion fuels growth’ (The Star, 5 August 2024) <https://www.thestar.com.my/news/nation/2024/08/05/forest-city-expansion-fuels-growth>.

[7] ‘Immediate returns on investment, 5 Highlights of Forest City Prime Commercial Units with Lease’ (Forest City, 2 August 2024) <https://forestcitycgpv.com/news/245-immediate-returns-on-investment-5-highlights-of-forest-city-prime-commercial-units-with-lease>; ‘KL-S’pore high speed rail to boost sentiment on the property sector’ (The Star, 29 January 2024) <https://www.thestar.com.my/business/business-news/2024/01/29/kl-spore-high-speed-rail-to-boost-sentiment-on-the-property-sector>.

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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 (in association with KPMG Law) partner you usually deal with.

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

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[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).

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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 (in association with KPMG Law) partner you usually deal with. This article was prepared with the assistance of Jean Lee Jia Ying, Senior Associate at Zaid Ibrahim & Co (in association with KPMG Law).

The Companies (Amendment) Act 2024 (“Amendment Act”) brings about a raft of changes to the current Companies Act 2016 (“Companies Act”). The amendments establish the disclosure and reporting framework for beneficial ownership in companies; strengthen the existing provisions in relation to corporate governance, schemes of compromise or arrangement and corporate rescue mechanisms; and introduces a new Division 9 on protection for essential goods and services.

The Amendment Act was gazetted in February 2024 and is expected to come into force in 2024. Companies in Malaysia, in particular foreign companies, will need to familiarise themselves with the new provisions and ensure compliance with the new legal requirements, while also leveraging any opportunities presented by the enhanced corporate governance framework and corporate rescue mechanisms.

Definition of “beneficial owner"

Prior to the Amendment Act, the Companies Act interpreted “beneficial owner” as the ultimate holder of the shares and excludes any nominee of any description.

The new interpretation now distinguishes between the beneficial owner in relation to shares, and beneficial owner in relation to a company. Notably, the existing definition of a beneficial owner in relation to shares remains unaltered.

Beneficial ownership reporting framework

A new Division 8A, encompassing sections 60A to 60E, in relation to beneficial ownership of a company has now been introduced.

The new section 60A(1) specifies that a person is considered as a beneficial owner of a company if he is a natural person who ultimately owns or controls over a company, and includes those who exercises ultimate effective control over a company. Note that reference to a “company” also includes reference to a “foreign company”. Additionally, section 60A(2) grants the Registrar of the Companies Commission of Malaysia ("Registrar") the authority to establish guidelines for the identification of a company's beneficial owner.

Prior to the Amendment Act, the Companies Act was silent on any register of beneficial owners. The new section 60(B) sets out the requirements in relation to the beneficial owners register (“BO Register”) of a company.

In relation to the BO Register, note that:

Non-compliance with these requirements by the company and its officers constitutes an offence. Upon conviction, the company and/or its officers can be fined up to RM20,000, with an additional daily fine of up to RM500 for a continuing offence. Prior to the amendments, while both the Companies Act[1] and the Beneficial Ownership Guidelines[2] outlined this obligation, they did not enforce non-compliance as an offence.

In addition, section 60(B) also:

Company to require disclosure of beneficial owner of company

The new section 60(C) requires any member of the company to inform the company whether they are a beneficial owner of the company. If they are not, they would have to provide particulars sufficient to enable persons to be identified as the beneficial owners of the company and any other information as specified in section 60B(1). An important implication of this change is that a trust company which holds shares on behalf of individuals or entities would be considered as legal owners of the shares, and hence, may be obligated to disclose the beneficial ownership of the trust company itself.

Notices in relation to the identity of beneficial owner

When a company possesses knowledge or reasonable grounds to believe that an individual is a beneficial owner, sections 60C(1)-(3) obliges the company to issue a written notice. Once the information has been provided, they have 14 days from the date when the information was received to record it in the BO register.

Notice must also be given to the beneficial owner of the company with regards to any changes to the particulars of a beneficial owner listed in the register. If the company has reasonable grounds to believe that a change has occurred, it must notify the beneficial owner to confirm the change and provide the relevant details. Similarly, if there are reasonable grounds to suspect inaccuracies in the particulars listed, the company must notify the beneficial owner to confirm or correct the information. This ensures transparency and accountability by compelling companies to actively seek and confirm beneficial ownership information.

In addition, a company and every officer who contravenes sections 60C(1)-(6) commits an offence. Violating any notice under section 60C is an offence, unless they can demonstrate that the company is already in possession of the relevant information or that the request for information was frivolous or vexatious. False statements or recklessly providing false information while purportedly complying with a notice issued is also considered an offense.

Duty of beneficial owner of company to provide information

Any individual who believes they are a beneficial owner of a company must promptly inform the company and provide the required information. Beneficial owners are also obligated to update the company about any changes in their details listed in the BO Register. Furthermore, if a person ceases to be a beneficial owner, they must promptly notify the company, specifying the cessation date and relevant details. Violation of the provisions outlined in section 60D constitutes an offence. However, it is worth noting that the Minister has the authority to exempt certain categories of companies from complying with the new Division 8A. This exemption can be granted through an official order published in the Gazette, with or without conditions, as long as these companies are already subject to similar requirements under other laws.

Beneficial Ownership of foreign company

A new section 573A clarifies that the provisions relating to beneficial ownership in Division 8A is also applicable to all foreign companies. In addition, section 576(2), detailing the content of an annual return for foreign companies, requires beneficial ownership information and address of where the BO Register is maintained if it differs from the foreign company's registered office.

Enhancements on Corporate Rescue Mechanism

In summary, the Amendment Act sets out changes relating to compromise or arrangement provisions under Division 7 - Charges, Arrangement and Reconstructions and Receivership, and Subdivision 2 Arrangements and Reconstruction. Key changes include the following:

Amended provisions on Judicial Management orders

In summary, Division 8 - Corporate Rescue Mechanism, Subdivision 2 Judicial Management of the Companies Act has been amended to include the following:

New protection for essential goods and services provisions

The new Division 9 of the Companies Act introduces protective measures for suppliers of essential goods and services in commercial contracts. The automatic exercise of insolvency-related clauses against companies for the supply of such goods and services is prohibited. Suppliers must notify the company at least 30 days in writing before exercising insolvency-related clauses. This aims to promote communication and potential resolution. The new section 430A(3) ensures that suppliers can still exercise other contractual rights, including payment for essential goods and services. Further, "insolvency-related clauses" are defined comprehensively, encompassing terms that allow automatic termination or modification due to the company's involvement in compromise, arrangement, voluntary arrangement, or judicial management. "Essential goods and services" are specified in the Ninth Schedule, namely the supply of water, electricity or gas, point of sale terminals, computer software and hardware, information, advice and technical assistance in connection with the use of information technology, data storage and processing and website hosting.

Conclusion

With regards to the beneficial ownership framework, the new provisions bring about amore comprehensive beneficial ownership reporting framework under the Companies Act as well as to address the gaps identified by the Financial Action Task Force (FATF) through the Malaysian Mutual Evaluation Report published in 2015 (MER 2015).[3] The new amendments are critical to prepare Malaysia, a member of the FATF and the Asia Pacific Group on Money Laundering for the upcoming Mutual Evaluation exercise starting from 2024 to 2025.[4] To minimise the risks faced by companies in Malaysia against illicit activities, the new provisions relating to the beneficial ownership reporting framework aims to promote corporate transparency through a disclosure regime, in line with the current international standards and best practices.

The separate objectives of the Amendment Act in relation to corporate rescue mechanisms and protection for essential goods and services aim to maintain a balance between the interests of suppliers and companies, offering clear guidelines and stability in crucial supply chains during insolvency-related difficulties. It serves to protect companies in Malaysia by regulating insolvency-related clauses in contracts for the supply of essential goods and services. It is crucial for businesses to comprehend and follow these rules for successful management of commercial partnerships.

If you have any questions or require any additional information, please contact Chan Xian Ai, or the Zaid Ibrahim & Co (in association with KPMG Law) partner you usually deal with. This article was prepared with the assistance of Sarah Menon, an Associate at Zaid Ibrahim & Co (in association with KPMG Law).

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

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[1] Section 56 of the Companies Act 2016.

[2] Guideline for the Reporting Framework for Beneficial Ownership of Legal Persons.

[3] FATF, ‘Anti-money laundering and counter-terrorist financing measures Malaysia Mutual Evaluation Report’ (Sept 2015) <https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/Mutual-Evaluation-Report-Malaysia-2015.pdf>.

[4] Bank Negara Malaysia, ‘Preparation for Malaysia's Mutual Evaluation 2024-2025’ (7 June 2023) <https://amlcft.bnm.gov.my/documents/6312201/10624487/Preparation+of+Malaysia%27s+MEE+2024-2025.pdf/ea9e1196-17bb-db01-2614-c9902446dc58?t=1686211932154>.