COMPANY FORMATION IN MALAYSIA
1.1 CLASSIFICATION OF COMPANIES
1.3 COMPANY FORMATION
1.4 STATUTORY RECORDS AND ANNUAL RETURNS1.5 CAPITAL STRUCTURE
1.6 CLASSES OF SHARES
1.7 LOAN CAPITAL (DEBENTURES)
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1.1 CLASSIFICATION OF COMPANIES
There are two basic types of companies, namely; statutory companies and registered companies.
Statutory companies (Statutory Authorities or Bodies) are incorporated under Acts of Parliament and fall outside the scope of this written knowledge.
Registered companies are formed under the Companies Act, 1965. Basically such companies can be grouped into;
(a) public companies;
(b) private companies;
(c) exempt private companies;
(d) foreign companies; and
(e) investment companies.
Brief explanations are as follow;
1.1.1 Public Company
A public company is a company which is not a private company. The minimum number of members is two, with no limit on maximum numbers.
Public companies have the advantage of being able to offer its shares and debentures to the public in order to raise capital. Public limited companies have the word Berhad (Bhd.) as part of, and at the end of, their names. Many large companies seek a listing on the stock exchange and, if listed are referred to as listed companies. All listed companies are public companies but not all public companies are listed companies.
Companies may seek a listing on the main board or on the second board of the Kuala Lumpur Stock Exchange (KLSE). While the main board is open to both local and foreign companies, the second board admits only companies incorporated in Malaysia. The second board, launched on November 11, 1988 provides small and medium sized companies which are profitable and have good growth prospect, access to the capital market.
The KLSE listing manuals have laid down the necessary requirements for companies seeking a listing either on the main or second board.
The Securities Commission has, however, revised the Initial Public Offering (IPO) guidelines for companies seeking a listing on the KLSE. From 1997, the minimum paid-up capital requirement for companies seeking a listing on the main board is RM50,000.00 (no maximum specified) and the company should have traded successfully for five consecutive years earning a minimum after tax profit of RM2,000,000.00 each year and an aggregate after tax profit of not less than RM25,000,000.00 over five years.
Companies undertaking major infrastructure projects can now be listed on the KLSE without having to make profits for five consecutive years provided that these companies have at least 18 years of the concession left with the project costing not less than RM500,000,000.00.
For listing to the second board, the minimum capital requirement is RM10,000,000.00 with a maximum of not more than RM50,000,000.00 and it should have earned at least RM2,000,000.00 in profits for three years in row.
As from January 1998, the Secutirties Commission has also revised the shareholding spread requirement for both boards of the KLSE. Main board companies must have at least 25% of the issued and paid-up capital in the hands of the minimum number of public shareholders holding not less than 1,000 shares each. For companies with a paid-up capital of less than RM100,000,000.00 the minimum number of shareholders is 750 and for company with a paid-up capital more than RM100,000,000.00 the required minimum number of shareholders of 1,000.
For companies on both boards, the minimum number of shareholders should exclude employees of the companies. However, up to 5% of issued and paid-up capital could be held by employees to make the 25% shareholding spread.
Year end results for companies listed on the main board must be announced within 6 months from year end whereas for second board, it must be announced within 3 months from year end.
Foreign-based companies with substantial Malaysian interests with at least 50% paid-up capital in the hands of Malaysian shareholders having management control and a minimum paid-up capital of RM50,000,000 are allowed to seek a listing in the KLSE. These companies will adhere to the same requirements applicable to main board companies.
1.1.2 Private Company
A private company is one which is prohibited from inviting the public to subscribe for any of its shares or debentures. The number of shareholders is restricted to a maximum of fifty and there is a restriction on the transfer of shares. Many family-owned business and small businesses are registered as private companies. Ownership is usually retained within its family members. Private companies are required to add the words Sendirian Berhad (or Sdn. Bhd.) as part of, and at the end of, their names.
1.1.3 Exempt Private Company
An exempt private company is a private limited company with not more than 20 members. Its shares cannot be held directly or indirectly or indirectly by any other company. An exempt private company need not file its annual accounts with ‘Registrar of Companies’ provided that the company files a certificate, signed by a director, the secretary and the auditor of the company, stating that the company is able to meet its liabilities as and when they fall due.
1.1.4 Foreign Company
A company incorporated outside Malaysia but which carries on business in Malaysia or establishes a place of business in Malaysia is referred to in the Companies Act as a foreign company. Such a company has to lodge certain documents as laid down in section 332 (1) of the ‘Companies Act’ 1965 and pay the appropriate fees before commencing business in Malaysia. A foreign company registered under the ‘Companies Act, 1965’ has the power to hold immovable property in Malaysia.
1.1.5 Investment Company
An investment company is a public company engaged primarily in investments in marketable securities for the purpose of revenue and profit and not for the purpose of exercising control. It is declared an investment company by the proclamation of the ‘Yang Dipertuan Agong’ which can be revoked if the purpose of its formation changes.
The ‘Companies Act, 1965’ also places certain restrictions on investment companies, such as restrictions on investment in other companies for the purpose of exercising control. Neither is it allowed to borrow an amount if the sum of that amount previously borrowed exceeds an amount equivalent to twice its net tangible assets and which has not yet repaid.
A balance sheets of an investment company must show a complete list, descriptions and quantities of investments held as at the date of the balance sheet. The net profits or losses from the purchase and sales of investments must be credited or debited to a reserve account called the “investment fluctuation reserve”.
1.2 ISSUE OF SHARES AND DEBENTURES
Business entities may be in the form of sole proprietorship (one/sole owner), partnership (two to twenty owners) or companies (corporations).
They differ not only in the number of owners but in many other respects, e.g., sole proprietorships and partnerships do not enjoy limited liability and do not have easy access to the capital market. They are unincorporated bodies and are not legal entities. The registration of such business entities is governed by the ‘Registration of Business Act, 1965’ which administrated by the ‘Registrar of Business’.
Companies, on the other hand, have the opportunity to raise large amounts of capital through the issue of shares and debentures. They also enjoy special advantages such as a limited liability, perpetual existence and the opportunity for their shares to be traded on the stock exchange. There is no need to wind up a company in the event of death or changes in the shareholders or directors.
A company can be defined as a body of persons (minimum of two persons, of local citizen) joined together for purposes of business as a separate legal entity: having a separate and distinct existence apart from the natural persons who created in. And if there is foreigner added as shareholder into the company, the foreigner must not own more than 30% out of total ordinary shares.
A company is created under the provisions of the ‘Companies Act, 1965’. As a consequence of being a separate legal entity, the company therefore has perpetual existence; i.e., it is unaffected by changes of ownership when shares are transferred or when shareholders die.
A company is able to buy or sell property, enter into contracts, sue or be sued, have its own bank account and employ people to work for it. It is liable for its debts, and if the company is unable to meet its debts the company’s owners (i.e., shareholders) are not personally liable for the company’s debts. Their liability is limited to the amount of capital invested in the company.
1.3 COMPANY FORMATION
Any two or more persons associated for any lawful purpose can apply to form a company by subscribing their names to a memorandum and complying with the requirements as to the registration of a company.
The constitution of the company must be drawn up prior to the registration of a company. The constitution of a company comprises of:
(a) the Memorandum of Association; and
(b) the Articles of Association.
The Memorandum of Association regulates the company’s relations with outside persons, i.e. the external affairs of the business. It must contain the following items:
(a) the name of the company;
(b) situation of the company’s registered office;
(c) the objects of the company for which it is formed, i.e., those activities in which the company may legally operate;
(d) statement that the liability of the members is limited (for a limited liability company); for an unlimited liability company, it must state that the liability is unlimited; and
(e) the amount of the authorized capital for each class of shares and the nominal value of each share.
The company’s Memorandum of association may be altered as long as its alterations are permitted by the “Companies Act, 1965”. Examples of such alterations include the change of company’s name, change of objects clause, etc. A special resolution has to be passed when an amendment to the Memorandum of Association is made.
The Articles of Association set out the rules covering the internal affairs of the company such as the rights of shareholders and the powers and duties of the management of the company. Some of the clauses cover include:
(a) the rights of different classes of shareholders;
(b) the transfer of shares;
(c) the duties, powers and proceedings of directors;
(d) notice and proceedings of meetings; and
(e) the borrowing power of the company, etc.
The ‘Companies Act, 1965” has a model set of Articles of Association in Table A of the Fourth Schedule. If a company does not lodge its own Articles of Association then Table A of the Fourth Schedule of the “Companies Act, 1965” will become applicable as the Articles of Association of that company.
In contrast to the Memorandum of Association, the Articles of Association may be freely altered or added, subject to section 31(1) of the “Companies Act, 1965”. A special resolution is also required to alter the articles.
Both the Memorandum of Association, the Articles of Association must be signed by at least two persons who are to be the first directors of tha proposed company. After the documents are signed it is binding between the members and the company (not outsiders). These two documents, together with the appropriate fee (based upon the amount of the authorized capital) and other relevant documents, must be lodged with the Registrar of Companies.
Once the Registrar is satisfied that the necessary legal requirements have been met, a Certificate of Incorporation is issued. Upon issuance of the Certificate, a private company may commence business. In the case of a public company, however, it must receive the Certificate to Commence Business before business may be commenced.
A public company, having a share capital, will raise its funds by issuing shares to the public. To do so, a prospectus is designed setting out the background of the company and circulated to the public, usually through a newspaper and advertisement. The minimum amount of capital to be raised must be specified. After this minimum capital has been raised, the Registrar of Companies will issue a Certificate to Commence Business. Then only can trading operations commence.
Company formation is a more complex process than a sole proprietorship and partnership and is therefore more costly. All organizational costs involved with the establishment of a company are known as preliminary or formation expenses and examples of such expenses are:
(a) registration fees paid to the Registrar of Companies;
(b) fees paid to solicitors for drawing up the Memorandum of Association and Articles and Association;
(c) printing costs of the various documents, e.g., the prospectus; and
(d) payments made to the promoters or organizers of the company.
1.4 STATUTORY RECORDS AND ANNUAL RETURNS
A limited company having a share capital has the statutory duty to keep and maintain up-to-date information on its records and books such as register of members, register of director, managers and secretaries, minute of meetings, etc.
It is also required to prepare an annual return made up to the date of the Annual General Meeting (AGM) of the company in the year or a date not later than 14th day after the date of the AGM. The annual return together with the register of members must be lodged with the Registrar of Companies (ROC) within one month after the AGM.
1.5 CAPITAL STRUCTURE
The capital of a company comprises of shares invested by the owners who are known as shareholders. Share capital can be divided into different types. The entire amount of the capital is not raised in one lump sum but is built up over a period of time as and when the need to increase its funds arises.
The following is a list of terms used in connection with the capital structure of a company.
1.5.1 Authorised/Nominal/Registered Capital
This represents the total amount of capital with which the company is registered. This amount must be stated in the Memorandum of Association and the company is not required to issue the total amount immediately. The amount issued to the public must not exceed the total authorised capital. The authorised capital may comprise of more than one class of shares.
1.5.2 Par of Nominal Value
Par value or nominal value is the face value attached to each unit of share, e.g., ordinary shares of RM1/- each means that the par or nominal value is RM1/-. This is the price that the company will change for each share in its initial issue of shares.
1.5.3 Issued Capital
This represents that part of the nominal capital which has been issued to the public for cash or for other consideration. The issued capital may either be partly or fully paid.
1.5.4 Unissued Capital
This is the difference between the authorised capital and the issued capital and represents the amount of capital that the company can still issue to the public.
1.5.5 Called Up Capital
This is the amount of money that the company has called up on the issued capital which the subscribes are required to pay within a specified time.
1.5.6 Uncalled Capital
This is the amount of money on the issued capital that has not been called. In other words, the subscribes are not required to pay up the money yet.
1.5.7 Paid Up Capital
This represents the amount of called up capital that has been paid by the subscribers.
1.5.8 Unpaid Capital
This is the amount of the called up capital that the subscribers failed to pay when the money was called. The unpaid amount is also referred to as call in arrears.
1.6 CLASSES OF SHARES
A company may have more than one type of shares. They differ in their voting rights, in priority to receive dividends and in the return of capital in the event of liquidation of the company.
The following are the different classes of shares:
1.6.1 Ordinary Shares
All companies must have ordinary shares and generally the ordinary shares comprise the bulk of the company’s capital. It carries the right to vote and the ordinary shareholders are entitled to share in the profits or dividends only after the dividends, if any, have been paid to the other classes. In this sense, ordinary shareholders are considered to be risk takers because should the business fail they can lose their capital. On the other hand, should the business prove to be successful, the rewards can also be very high. The rate of dividends paid to ordinary shareholders is not fixed. It is dependant upon the company’s level of profits and the company’s dividend policy. The ordinary shareholders are effectively the owners of the company.
1.6.2 Preference Shares
Generally these shares carry preferential rights as to the payment of dividends and repayment of capital in the event of liquidation (if set out to be so in the Articles of Association) over the other classes of shares.
Preference shareholders receive a fixed rate of dividend which is expressed as a percentage of the nominal value. For example, 4% preference shares of RM1/- each carries a right to receive a gross dividend of 4 sen per share per annum. The rights attaching to the preference shares are set out in the Memorandum of Articles of the company.
The Memorandum or Articles of the company will state the rights of the preference shares with respect to repayment of capital, participation in surplus profits, and priority of repayment of capital and dividends as to other classes of capital. Preference shareholders do not have any voting rights and therefore leave the management of the company to the ordinary shareholders.
However, in the event of non-payment of dividend, i.e., where the preferential dividends remain unpaid or in arrears for a period of time as provided in Articles of Association, preference shareholders may be allowed to vote. In other words these preference shares become voting shares.
Preference shares may be cumulative, non-cumulative, participating, non-participating, redeemable or convertible.
(a) Cumulative preference shares
The holders of these are entitled to receive a fixed dividend perannum. Should insufficient or the absence of profits prevent payment of dividends in any year, the arrears can be carried forward and become payable in the future.
(b) Non-cumulative preference shares
Holders of this class of shares receive a fixed rate of dividend only when the company have sufficient profits to declare a dividend. However, should the company not have sufficient profits to declare a dividend, the dividends for that year are forfeited and cannot be carried forward.
(c) Participating preference shares
In addition to the fixed dividend that they receive, participating preference shareholders are allowed to participate, that is, to receive additional dividends to the extent expressed in the Articles, in any further profits, after all the other classes of shareholders have receive their dividends.
(d) Non-participating preference shares
These shareholders are not allowed to participate in the excess profits after all the other classes of shareholders have been paid their dividends.
(e) Redeemable preference shares
Redeemable preference shares can be repurchased from the shareholders at a future dates as pre-determined at the time of the issue of the redeemable preference shares. This type of shares allows the company to obtain capital of a semi-permanent nature at a fixed rate of dividend.
(f) Convertible preference shares
These preference shareholders are entitled to convert their preference shares to ordinary shares as expressed in the Articles. The date and the rate of conversion will be specified.
1.6.3 Deferred Shares
Deferred share also known as founder’s shares. They are normally issued to the founders/promoters of the company as a token of appreciation of their efforts in forming the company. Their rights to dividends and returns of capital come after rights of the ordinary shareholders have been satisfied.
1.7 LOAN CAPITAL (DEBENTURES)
A company may raise funds by borrowing from the public. The document that the company issues stating the terms of the borrowing is called the debenture. Debentures are loan capital with a fixed rate of interest payable by the company to the debenture holders regardless of the performance of the company.
Debentures may be redeemable, that is, repayable at or by a specified that. Debentures may be convertible, that is, the debentures are eligible to be converted into ordinary shares at or by specified date. The conversion rate will be specified when the debentures are issued. Debentures may be listed on the stock exchange, which means that the debentures can be traded on the stock exchange.
Therefore, the rights attached to the debentures are transferable and a debenture holder need not hold on to the debentures if he does not want to. He can sell the debentures to anyone.
1.7.1 Differences between Debentures and Shares
Some of the main differences between debentures and shares are:
(a) The company pays a fixed rate of interest on the nominal value of the debentures at a specified time regardless of whether the company makes a profit or not. Payment of dividends on ordinary shares is not compulsory; the amount and frequency of payment are dependent upon the company’s divided policy and level of profits. Dividends on preference shares are fixed but payment is not compulsory.
(b) The debenture holders are creditors of the company and do not have any voting rights, unlike ordinary shareholders who are the owners of the company and have voting rights. Trustees are appointed to act on behalf of the debenture holders. The rights and responsibilities of the trustees will be spelled out in the trust deed.
(c) Debenture holders have a priority claim over the shareholders of the company to the assets of the company in the event of the company winding up as they are creditors of the company.
(d) Debenture interest is an expense, which is charged to the profit and loss account, whereas dividends are distribution of profits and shown in the profit ad loss appropriation account.
(e) Since the number of debenture holders is often numerous and constantly changing, it will difficult for the debenture holders as a group to exercise their rights. It is therefore a common practice for trustees to be appointed to act on the behalf of the debenture holders.
1.7.2 Charges over Debentures
Debentures are often secured to certain assets of the company. In the event that the company is unable to pay interest or fails to repay the loan capital on the due date, the trustees can take possession of the charge assets and sell the assets to repay the debenture holders. However, this does not prevent the company from using these assets in the normal course of its business.
There are two types of charges:
(a) Floating charge
The debentures are secured to a group of assets. The assets so charged are not specified as to type, and can vary from time to time. In other words, the company may replace an asset from the group of assets charged with another asset. Assets with a floating charge will become fixed if the company defaults in observing the terms of the debentures.
(b) Fixed charge
A specific asset, such as property, is charged to the debentures. As like a floating charge the company can use the asset in the nominal course of business but will be unable to dispose of the asset. In the event of default, the asset is sold and the proceeds are used to pay the debenture holders the principal and interest (if any due), and surplus proceeds, will be handled to the company.
