Saturday, January 21, 2017

Companies Act 2017 - Commentary

Below is an interesting set of observations made by a fellow legal practitioner-

THE Companies Act 2016 (Act 777) and The Companies Commission (Amendment) Malaysia Act will come into operation on Jan 31 this year. There are two major exception provisions found in Division 8 (Corporate Rescue Mechanism) relating to corporate voluntary arrangement and judicial management (JM) which is pursuant to S.1(2) where the Minister “may appoint different dates for its coming into operation”. 

The Winding Up provisions Pt IV (Cessation of Companies) will also be effective as of Jan 31.
However the existing Winding Rules which was passed under the 1965 Act will still be applicable (reliance is placed on S.35 (2), Interpretation Act). 

There will be a new set of Company Regulations 2017.

This new Act replaces the 1965 Act which has governed for over 50 years the rules and framework of business organisation that has sought limited liability status.

In the 617 provisions of the Act 777 (the old Act has only over 350 provisions) inter alia major new areas that has been reformed include: 
  • one shareholder entity, 
  • setting up a company without a constitution, 
  • non-application of doctrine of constructive notice, 
  • no par value shares, 
  • solvency test, 
  • liberalisation of financial assistance prohibition for company to purchase its own shares, 
  • continuing enhancement of directors’ duties and governance responsibilities, 
  • AGM for private companies can be dispensed with; 
  • provision for convening of a meeting of members at more than one venue by use of technology, 
  • proxy can be appointed without them having qualifications (eg advocate, approved company auditor), 
  • approval for directors remuneration, 
  • share buyback regime amendments.
In terms of enforcement regime the Act 777 introduced civil and administrative proceedings for selected types of breaches of the Companies Act alongside penalty sanctions. Such sanctions to be imposed against the officers as personal liabilities. 

Act A1478 also introduces a plethora of provisions enhancing to levying of compound fines on offenders who contravenes provisions of Act 777. Also significant is the introduction of the presumption that officers who are in management control could also be fastened with personal liabilities if a company has been found to have committed a company law offence unless the officer could rebut the presumption. 

Business people will baulk at the length of company laws and this is before taking into account stock exchange regulatory rules, corporate governance codes, accounting standards and practices issued by various boards and bodies. 

Company laws are not known to be brief legislation. But is brevity an end in itself?
The true issue is whether a law reform is based on sound principles which conduce to clarity, certainty and simplicity. A brief law that does not assist corporate decision makers in aligning their decisions with what is proper and legal will in fact lead to higher costs and efforts in dealing with the complexity of market choices. 

Legislators and reformers are faced with unenviable choices as there are users who clamour for more detailed guidance and those who urged for less prescriptive directions and more principled based norms.

As a practitioner, we are often asked by clients to look for and exploit loopholes when a provision is not crafted adequately to deal with issues at hand. There is therefore an inexorable tension between certainty and simplicity. 

Since 1965, there has been piecemeal reform which has created a patchwork of amendments. The major amendments then were often made in reaction to perceived gaps in law dealing with directors’ duties and insolvency which demanded corporate restructuring. 

The new Act is a comprehensive undertaking implementing recommendations which a Corporate Law Reform Committee (CLRC) set up under the auspices of Corporate Commission Malaysia (SSM) in December 2003. The SSM established the Corporate Law Reform Committee as part of SSM’s strategic direction to establish a dynamic regulatory environment for business in Malaysia while dealing with corporate accountability and governance that is in line with global standards. 

The law reform committee in turn had a number of working committee and devoted hundreds of hours in deliberation and consultation with relevant stakeholders in arriving at their recommendations. It was heartening for us members to see the fruition of their work in form of the Act.

It must be pointed out however that the CLRC has been functus officio upon tabling its report and the recommendations. The CLRC is neither involved in the actual drafting of the Act nor responsible for any infelicities. Kudos or brickbats should be directed to SSM and the Attorney General Chambers.
The new Act drew its lessons from various Commonwealth jurisdictions including the UK, Canada, New Zealand, Australia, Singapore and Hong Kong. 

Whether Act 777 will fulfill its laudable objectives remains to be seen.

Sourced from here.

Monday, April 11, 2016

Features of the new Malaysia Companies Act 2016

In a nutshell, the new Malaysian Companies Act 2016 will contain the following new features that were previously not available in the old Companies Act 1965-
  • Allowing unlimited capacity for companies;  
  • Single shareholder and single director companies;  
  • Removal of mandatory Annual General Meetings for private companies;  
  • Removal of the unanimity rule for written shareholder resolutions for private companies; 
  • Removal of the par value regime;  
  • New financial assistance treatment;  
  • New reduction of capital and share buy-back procedures;  
  • Increased oversight over directors' remuneration;  
  • Relaxation of restrictions against indemnification of directors; and  
  • Introduction of alternative corporate rescue mechanism e.g. corporate voluntary arrangement and judicial management schemes.

Monday, April 4, 2016

Dewan Rakyat approves Companies Bill 2015 and Interest Schemes Bill 2015

It has been reported here that the Dewan Rakyat has approved the Companies Bill that was tabled for a Second Reading this week. With this, it appears that the new companies legislation is on track to be enacted within 2016.

In the same vein the Interest Schemes Bill was also approved by the Dewan Rakyat on 4th April 2016.

Tuesday, December 29, 2015

Crowdfunding - Some thoughts

Crowdfunding has morphed into many forms. Many crowdfunding initiatives have charitable or socio-political objectives. Such types of crowdfunding are not the focus here. It is the "investment-based crowdfunding" exercises that I wish to examine. 

Malaysia is one of the jurisdictions that has established investment guidelines on crowdfunding. As such, the current swirls of discussion on the matter of crowdfunding is highly relevant. 

We have always maintained that Malaysia still needs a large degree of Merit-Based Regulations (MBR) largely due to the rustic mindset of many investors. The retail investor is still indolent and very susceptible to market noise. 

That is why Malaysia's regulators need to maintain guidelines and regulations that require regulatory scrutiny and some degree of regulatory prescription. 

HKex has an excellent paper that critically examines DBR versus MBR and there is, therefore, no need for me to delve too much into it. Read the paper here if you are interested to understand these policy principles in greater detail. 

In the past decade we have witnessed the Securities Commission (SC) make attempts to institute the Disclosure-Based Regime (DBR). Officially, the SC has shifted from the MBR to the DBR as stated in a guidance note here

But, with everything said and done, we have IOSCO reminding regulators and investors alike that while DBR still holds as the prevailing principle, I would submit that there is clearly a need for some degree of MBR-type prescription especially when the IOSCO has flagged the ever-present issue of "information asymmetry" which may be loosely defined as- 

A situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Sourced here

 IOSCO's timely survey findings on Crowdfunding 

Here are excerpts of what IOSCO's report says-The goal (of the report) is to achieve a balance between promoting crowdfunding and ensuring investor protection and market integrity. Some of the regulatory measures described in the Crowdfunding Report include- 

The goal (of the report) is to achieve a balance between promoting crowdfunding and ensuring investor protection and market integrity. Some of the regulatory measures described in the Crowdfunding Report include-

• Customizing entry, registration, or licensing requirements;
• Setting disclosure requirements for issuers and funding portals;
• Limiting the services that may be provided by crowdfunding platforms;
• Requiring the appointment of a third party custodian to hold investor assets;
• Imposing measures to favour the channeling of resources into local businesses;
• Addressing crossborder issues.

The report also seeks to raise investors’ understanding of crowdfunding, e.g., that crowdfunding may differ from investing in more traditional securities products. In addition to take note of risks common in traditional finance such as conflicts of risks, data protection and fraud, it suggests that investors pay attention to certain key aspects, including-
  • Information asymmetry: Risk of default or high failures is often associated with start- up businesses. The risk of fraud may be high in case of internet offers. Investors should review disclosure and education materials to further their understanding of the essential features and main risks of the crowdfunding offer and see if third party custodians are being used.
  • Platform failure: There is risk of platform failure for crowdfunding portals. Portals should be evaluated based on their credibility and soundness, including if it has the proper IT systems, back-up facilities and procedures to ensure continued service.
  • Investing limits: Investors should consider if the investment amount is appropriate for their net worth.
  • Rescission, cancellation: Investors should be informed of and understand the investment terms including cancellation or rescission rights.
  • Illiquidity: As restrictions could be put on the resale of crowdfunding securities, investors should pay attention on warnings and information regarding liquidity and the availability of secondary market.
  • Suitability: Investors should consider that a crowdfunding offer may not be suitable and consistent with their investment objectives and risk profile.

Tuesday, December 15, 2015

SME Funding in Malaysia - Some thoughts

It is heartening to see the "renewal of vows" of sorts on the part of the Malaysian government towards small and medium enterprises (SME). There is an awareness that in most developed countries SMEs contribute 65% employment and 50% of the GDP. These are staggering numbers.

But we have found that this generic generalisation hardly does justice to SMEs in Malaysia simply because of the diversity of the economic and commercial activities undertaken by Malaysian SMEs. The official definition of an SME (circa. 2013) is an objective one that states as follows-

Manufacturing: Sales turnover not exceeding RM50 million OR having full-time employees not exceeding 200 workers; and 

Services and other sectors: Sales turnover not exceeding RM20 million OR full-time employees not exceeding 75 workers.

Within this classification is pretty much everyone that runs a business in Malaysia. It ranges from the sexiest teenage virtuoso working on the latest smartphone app in Cyberjaya to the kedai kopi operator in Kinarut. This observation is not meant to trivialise the position but, on the contrary, to highlight the sheer diversity of SME activities.

In fairness to the Malaysian government, there is a finite amount of financial resources to allocate to the fostering and development of SMEs. Specific sectors have to be picked. Those that has the highest economic impact and multiplier effect will be selected. Moreover, any assistance is, at best, in the form of mentoring, benchmarking and soft loans.

We believe there is scope for Malaysia to focus on the creation of another eco-system that will match investors with SMEs in a virtuous cycle. 

The crowdfunding platform is excellent and more needs to be done to create awareness of this funding solution beyond the tech start-ups. 

We will have more on this topic in due course.

Monday, December 14, 2015

Interest Schemes Bill 2015 Malaysia

After some gestation time, the Interest Schemes Bill 2015 has been tabled for First Reading at the last Parliamentary Session. With the First Reading, the passage of the legislation should be relatively smooth and we expect to see the enactment some time in 2016.

It is interesting that the Companies Commission of Malaysia (better known with its Bahasa Malaysia name, Suruhanjaya Syarikat Malaysia or SSM) made the determination that the interest scheme sector that has been regulated under the Companies Act 1965 deserves a separate regulatory framework. Many industry players regard this as a positive move.

The Federation of Interest Scheme Operators Malaysia (FISOM) hails this new legislation as an important first step in the SSM's big picture plan to address the crying need for funding solutions for the small and medium enterprises (SME) sector in Malaysia.

In one sense, the Interest Schemes Bill transitions the regulation of right to use public offerings such as sports and recreational clubs and timeshare as well as common enterprise investment models from the Companies Act 1965 to the new regulatory framework.

In another sense, the new Bill offers another alternative to SMEs for medium to long term funding that is quite outside of the conventional capital market and financial market models of equity and debt instruments.

Interest schemes is a medium that facilitates the matching of SMEs with funding needs to expand their enterprises and businesses with astute investors who have an appetite for a regulated exotic investment product that allows them to enjoy direct returns on their investments. Where equity investments depend upon dividend returns, common enterprise investment models offer either contractually committed annual or semi-annual payouts calculated on the percentage value of the investment or, as a percentage of gross profits or net yield.

Due to their relative ignorance of the potential of the Malaysian common enterprise interest scheme sector, the Malaysian capital market intermediaries and the financial press media tend to be reticent and outright cynical about the relative importance and role that common enterprise interest schemes can play in the development of the Malaysian economy. Their conventional wisdom is that only the Securities Commission knows best.

It should be pointed out that the precursor to the Capital Markets and Securities Act 2007 was the Securities Industry Act 1983 that was actually managed and regulated by the Registry of Companies (ROC) which is now better known by its statutory alter ego, the SSM. Within the old ROC was a body known as the Capital Issues Committee (CIC).

It was only in 1993, that the Securities Commission was created from the proverbial rib of the ROC via the Securities Commission Act 1993.

It should also be pointed out that, within the existing regulatory framework, the procedure for the prescription of securities is still at the behest of the Minister responsible for the Companies Act 1965.

It is rather unfortunate that the commonplace perception is that the SSM's statutory role is confined only to the regulation of the incorporation of companies and company secretaries. This misconception must be dispelled through greater public awareness of the important economic role played by the SSM beyond company incorporations and company secretaries.

Together with Bank Negara Malaysia, SSM is the leading regulator that protects Malaysian investors against investment scams. And, as the principal regulator that deals with ALL incorporated business entities in Malaysia, SSM is the most appropriate government agency to look into and, address the need to facilitate the SME sector's funding needs via the common enterprise interest scheme model.

Friday, November 20, 2015

Dismissal of Employees - What Employers Must Do

We have come across far too many incidents involving dismissal of employees in Malaysia where the actual conduct or misconduct of the employee does appear to justify or warrant the decision by the employer to dismiss the employee.

Yet, in many such cases, the employer had an adverse decision from the Industrial Court. 

This has left many employers in Malaysia with the perception that the Malaysian Industrial Court tends to favour the grievances of employees over the the plight of employers who had to deal with a recalcitrant employee.

Are employers correct in this perception?

Of course, that perception is incorrect.

Based on our experience in matters of employment, we find that the Malaysian employers are alarmingly ignorant of some basic principles of dealing with employees on matters of discipline.

First of all, employers must be made aware that in any complaint involving labour and industrial relations, the burden of proof lies with the employer. The employer must prove, always with documentary evidence i.e. letters, emails, memoranda, showing that the employer has conducted itself properly.

So, what is the standard or test used by the Industrial Court to measure an employer's conduct in relation to dismissal of employees?

Other than extreme cases of misconduct, usually involving criminal elements that justifies summary dismissal, the test used by Industrial Court involves 3 steps-
  1. Was the employee warned about the poor performance or misconduct? Here, written warnings are 100% better than verbal warning.
  2. Was the employee given an opportunity to improve?
  3. Despite being given the opportunity to improve, the employee failed to do so.
As with all court matters, the employer can only discharge its burden of proof in 2 basic ways-
  • Witness testimony; and
  • Documentary evidence.
Documentary evidence is absolutely important. If an employer relies purely on oral evidence from witnesses, there is a high degree of risk that the Industrial Court will not be impressed at all with the employer's conduct.

Why would the Industrial Court be unimpressed?

Employers must understand that by dismissing an employee, the employer has removed the employee's livelihood or means of earning a living. The right to a livelihood is protected by the Federal Constitution.

So, employers must be made aware that the dismissal of an employee is a process. This process must always be in writing and documented.