When non-compliance with laws is discovered during legal due diligence, clients often ask about potential penalties.

Some common instances of non-compliance encountered in legal due diligence include administrative aspects of running a company, such as failure to:

• lodge statutory forms with the Companies Commission of Malaysia within the prescribed period
• pass the necessary resolutions required under the Companies Act
• comply with the company constitution.

In the context of M&A, potential acquirers of companies want to know the likelihood of penalties for non-compliance highlighted in legal due diligence reports being imposed, particularly for private companies, where their affairs are generally more private compared to public listed companies which are subject to public scrutiny.

I am often asked whether regulators really impose penalties for seemingly administrative breaches of the Companies Act.

The answer is “yes”. Regulators do impose penalties, even on private companies, for what may seem like administrative non-compliance with the Companies Act.

In one recent case, a private company was fined by the Court for allotment of preference shares without such allotment being provided for in the company’s constitution. This was a breach of section 90(4) of the Companies Act 2016, which provides that no company shall allot any preference shares unless provided by the constitution and the constitution must set out the rights of the shareholders with respect to repayment of capital, participation in surplus assets and profits, cumulative or non-cumulative dividends, voting and priority of payment of capital and dividend in relation to other shares or other classes of preference shares.

In another case, a director of a private company was charged in court for using the property of the company without the consent or ratification of a general meeting i.e. shareholders’ approval, in breach of section 218(1) of the Companies Act 2016.

These cases show that enforcement action will be taken in the event of a violation of company laws to ensure good corporate governance and compliance with company laws in Malaysia.

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I am a corporate lawyer based in Malaysia. I focus on M&A particularly on corporate acquisitions, shareholders’ agreements, joint venture arrangements and company constitutions. Feel free to contact me if you have any queries.

This post was first posted on LinkedIn on 11 April 2024.