Sheba Gumis discusses the constitution and no-par value regime under the Companies Bill 2015.
The Companies Bill 2015 (“Bill”) was passed by the Dewan Rakyat and the Dewan Negara on 4 and 28 April 2016 respectively. The Bill is pending Royal Assent and will come into operation on a date to be determined by the Minister.
The Bill, which seeks to promote a more modern, simplified and business-friendly corporate environment, will introduce many significant changes to the company law regime in Malaysia. Several legal concepts which have been enshrined in Malaysian company law have been deemed archaic and have been omitted from the Bill.
ONE MEMBER AND DIRECTOR COMPANY
The Companies Act 1965 (“Act”) expressly provides that a company may be formed by two or more persons and is required to have at least two Malaysian resident directors. The Bill will bring about changes to these long-standing requirements by allowing a single person to form a company (Clause 14(1)) and a private company to have only one Malaysian resident director (Clause 196(1)(a)).
A significant fatality of the Bill is the memorandum and articles of association (“M&A”). The M&A, which are the constitutive documents of a Malaysian company, will be replaced by a constitution (Division 5 of the Bill).
In replacing the M&A with a constitution, Malaysia follows the example of Singapore, which in its Companies (Amendment) Act 2014 merged both the memorandum of association and the articles of association of a company into a constitution. The use of a constitution, instead of an M&A, has already been adopted in the United Kingdom, New Zealand and Australia.
Unlike the mandatory requirement to have an M&A under the Act, a constitution will be optional (Clause 31(1)). The constitution may be adopted by a company by way of special resolution, and shall be binding on the company, its directors and its members (Clause 32).
Rights, Powers, Duties and Obligations under a Constitution and the Bill
Where a company elects to forego a constitution, the company, each director and each member of the company shall have the rights, powers, duties and obligations as set out in the Bill (Clause 31(3)).
However, where a company chooses to have a constitution, the rights, powers, duties and obligations of the directors and members will be as set out in the Bill save insofar as they are modified (to the extent permitted under the Bill) by the constitution (Clause 31(2)). The Bill further provides that the constitution has no effect to the extent that it contravenes or is inconsistent with the provisions of the Bill (Clause 32 (2)).
Company Limited by Guarantee
It is mandatory for a company limited by guarantee to have a constitution (Clause 38(1)). The Bill further provides, inter alia
, that a company limited by guarantee must be a public company (Clause 11(2)) and must prohibit the payment of dividend to its members (Clause 45(2)(b)).
Clause 34(c) provides that for a company registered under the Act, its M&A will be deemed to be its constitution. It should be noted that the provisions of the M&A have no effect if they contravene or are inconsistent with the provisions of the Bill.
Power of Court to Amend the Constitution
Clause 37(1) confers power on the Court to amend the constitution of a company if it is satisfied, upon the application of a director or member of the company, that it is not practicable to do so using the procedure set out in the Bill or in the constitution.
The Act only confers power on the Court to amend the M&A of the Company in the event of oppression under Section 181.
CERTIFICATE OF INCORPORATION
The Bill provides that upon the incorporation of a company, the Registrar of Companies (“Registrar”) will issue a notice of registration which is conclusive evidence that the company is duly registered (Clauses 15 and 19). Unlike the Act, a certificate of incorporation will only be issued upon application by the company and payment of a prescribed fee (Clause 17).
The Bill will make it optional for a company to have a common seal (Clause 61(1)). The Bill provides for two methods of executing a document by a company, either by affixing a common seal, or by signature. If a company does not adopt a common seal, the manner in which it executes documents must comply with the provisions of the Bill (Clause 66(1)). A document is validly executed by a company if it is signed on behalf of the company by at least two authorised officers (one of whom must be a director), or in the case of a sole director, by that director in the presence of a witness who attests the signature (Clause 66 (2)).
Upon the coming into operation of the Bill, a company shall have full capacity to carry on and undertake any business or activity and be capable of exercising all functions of a body corporate (Clause 21(1)). This represents a paradigm shift from the position under the Act where a company’s powers and capacity are restricted to those specified in its memorandum of association.
The doctrine of constructive notice will be abolished except in respect of documents relating to instruments of charge (Clause 39). In other words, a person will not be deemed to have notice of the contents of a company’s constitution or any document (other than an instrument of charge) which has been registered by the Registrar or is available for inspection at a company’s registered office.
NO PAR VALUE
The par value concept is one that has its roots in common law and has been gradually phased out in various common law jurisdictions. Australia, New Zealand, Hong Kong and Singapore have abolished this concept. Malaysia too will follow suit under the Bill.
Par Value and Authorised Capital
Par (also known as nominal value of shares) refers to the minimum amount of monies worth that is, or will be, paid to a company for a share. For example, where a company’s share has a par value of RM1.00, the minimum amount that the company must receive for that share is RM1.00.
A corollary of the par value concept is that a company is prohibited from issuing, or agreeing to issue, shares at a discount (i.e. below par value). A further concept that flows from the par value concept is the concept of authorised capital which imposes a ceiling on the number of shares that can be issued by a company.
The Corporate Law Reform Committee (“CLRC”) in its Consultative Document on Capital Maintenance Rules and Share Capital, considered whether the concepts of par value and authorised capital protected shareholders and creditors.
For example, authorised capital purportedly restricts the further issue of shares which may dilute existing shareholders’ rights and the value of their existing shareholding. The authorised capital and the par value concepts purported to protect creditors because the company implicitly warrants that the authorised capital of the company is the amount of capital it has available to pay creditors.
These protections were debunked by the CLRC in the above Consultative Document. The CLRC concluded that the protections are only illusory in the present business environment. New shares can always be issued in excess of the company’s original authorised capital subject to increase of the authorised capital by the shareholders. Additionally, the authorised capital is not indicative of the actual issued and paid-up capital of the company. Accordingly, the purported protection to the creditors and shareholders does not exist.
The CLRC also took the view that the concepts of par value and authorised capital complicated the workings of company law and misled shareholders and creditors into believing that because of a company’s authorised capital and par value, the company will have reserves and will be able to pay its debts to creditors. Additionally, shareholders were under the perception that they were entitled to receive at the very minimum the par value of the shares held by them in the company upon winding up of the company.
In order to simplify and streamline share capital rules, the CLRC proposed that the concepts of par value and authorised capital be abolished.
Moving to the No Par Value Regime
Clause 74 of the Bill effectively removes the concept of par value by providing that all shares issued before or upon the commencement of this Act shall have no par or nominal value.
In order to aid the transition into the no par value environment, the Bill provides for transitional provisions relating to the abolition of par value (Clause 618). A company may, within 24 months of the commencement of Clause 74, use the amount standing to the credit of its share premium account for certain purposes. These include, inter alia,
the provision of premium payable on redemption of debentures or redeemable preference shares, payment of balance unpaid on bonus shares and payment of dividends to be satisfied by the issue of shares to members, so long as the aforementioned events occur before the commencement of Clause 74.
Any amount standing to the credit of a company’s share premium account and capital redemption reserve shall upon the commencement of Clause 74, become part of the company’s share capital.
Effects of No Par Value Regime
The most important effect of the no par value regime is that it will simplify the concept of share capital and a Malaysian company will cease to be encumbered by par values and authorised capital.
All monies paid for such shares will become the share capital of the company. This simplifies accounting as the share premium account will become extinct.
Subdivisions and consolidation of shares will become easier as companies will no longer have to consider the par value of shares when dividing and consolidating shares. One share will simply be divided into two shares, instead of dividing one share of RM1.00 each into two shares of RM0.50 each under the Act.
Shares can also be easily issued (subject, if required, to members’ approval) since there will not be a need to increase the company’s authorised capital, as the concept will cease to exist.
The CLRC also concluded that the abolition of the par value concept will not affect the voting rights of shareholders as the number of votes held by a shareholder will be based on the number, and not the par value, of shares held by him.
Another radical change to be introduced under the Bill is that it will no longer mandatory for a company to issue share certificates. A company is only obliged to issue share certificates if it is required to do so under its constitution or upon application by a member (Clause 97(1)).
In the absence of evidence to the contrary, the entry of a person’s name in the register of members constitutes prima facie
evidence that legal title to the shares is vested in that person (Clause 101(1)).
Notwithstanding the dispensation of a mandatory requirement to issue share certificate, the transfer of shares will still require the execution and lodgement of a duly stamped instrument of transfer unless the shares are deposited with a central depository established under the Securities Industry (Central Depositories) Act 1991 and are transferred in accordance with the rules of such depository (Clauses 105 and 148(1)).
To safeguard the interest of members, the Bill imposes obligations on the secretary to cause the register of members to be properly maintained and all issuance and transfers of shares to be properly entered into the register (Clause 102(1)).
REGISTER OF MEMBERS
The Bill will introduce a new requirement for a company to inform the Registrar, within 14 days, of any change of any shareholder in the register of members or upon any person becoming or ceasing to be a member (Clause 51(1)). Under the current regime, company searches do not reflect recent share transfers as there is no requirement for the company to inform the Registrar of share transfers in the company, save when the filing of the annual return of the company. It is hoped that this requirement will result in more up to date information on shareholders being available when company searches are carried out.
By removing outdated concepts, the Bill dispenses with the old and brings in the new. It is anticipated that after the coming into effect of the Bill, the Malaysian corporate landscape will be substantially overhauled and become more business-friendly. Stakeholders who are used to the concepts of an M&A, par value and authorised capital will have to adapt to the new regime introduced under the Bill.