The provisions under the Companies Act 2016 which have the effect of restricting business owners from using funds of companies to acquire shares of those companies catch some business owners off guard. Some business owners, who are directors and shareholders of private limited companies which they set up to carry out business, are surprised to learn that they cannot use freely, funds of such companies, to acquire shares of those companies.

What is the Issue?

The Prohibition

Section 123(1) of the Companies Act 2016 prohibits a company from giving any financial assistance, whether directly or indirectly and whether by means of a loan, guarantee or provision of security or otherwise, to any person to purchase or subscribe for any shares in the company or its holding company.

Section 123(2) of the Companies Act 2016 further prohibits a company from giving financial assistance directly or indirectly for the purpose of reducing or discharging any liability of a person who has acquired shares in the company or in its holding company where the liability has been incurred for the purpose of the acquisition of the shares.

Exceptions to Prohibition

The prohibition under section 123 does not apply:

(1) where the lending of money is part of the company’s ordinary course of business;

(2) where it is for a trust scheme for employees of the company or its subsidiary including any director holding a salaried employment or office in the company or its subsidiary;

(3) where the financial assistance is given to persons (other than directors) bona fide in the employment of the company or its subsidiary with a view to enabling those persons to purchase fully-paid shares in the company or its holding company;

(4) where the company is regulated by written law relating to banking, insurance or takaful or is subject to the supervision of the Securities Commission.

Further, a company (other than public listed company) is allowed under section 126 of the Companies Act 2016 to give financial assistance for the purpose of acquisition of shares in the company or its holding company or for the purpose of reducing or discharging liability incurred for such acquisition, provided that the following whitewash procedures are complied with:

(i) the aggregate amount of the financial assistance and any other financial assistance that has not been repaid does not exceed 10% of the aggregate amount received by the company in respect of the issue of shares and reserves of the company (i.e. shareholders’ funds) based on the most recent financial statements of the company;

(ii) shareholders of the company have passed a special resolution to approve the financial assistance;

(iii) the directors of the company must pass a board resolution by at least majority votes to resolve, before the financial assistance is given, that the company may give financial assistance; the giving of the assistance is in the best interest of the company; and the terms and conditions under which the assistance is to be given are just and reasonable to the company. The resolution must set out in full the grounds for the conclusions of the directors;

(iv) the company fulfils the solvency test as provided under the Companies Act 2016. The directors who voted in favour of the resolution specified in paragraph (iii) above must make a solvency statement on the same day the said board resolution is passed;

(v) the company receives fair value in connection with the giving of financial assistance; and

(vi) the financial assistance is given not more than 12 months after the solvency statement was made.

Within 14 days from giving financial assistance, the company must send to all shareholders a copy of the solvency statement and a notice setting out details of the financial assistance as required under section 126(5) of the Companies Act 2016.

So What?

The Penalties

Any officer (who includes a director) of the company who contravenes the aforesaid restrictions under section 123 of the Companies Act 2016 commits an offence. On conviction, the officer is liable to a fine not exceeding RM3,000,000 or to imprisonment for a term not exceeding five years or to both.

In addition to the above penalties, the Court may order the convicted person to pay compensation to the company or another person who has suffered loss or damage as a result of the contravention that constituted the offence.

The company and every officer who contravene section 126 of the Companies Act 2016 commit an offence and on conviction, is liable to a fine not exceeding RM3,000,000 or imprisonment not exceeding five years or to both and, in the case of a continuing offence, to a further fine not exceeding RM1,000 for each day during which the offence continues after conviction.

Now What?

Takeaway

A company (other than public listed company) may provide financial assistance for the purpose of acquisition of shares in the company or its holding company or for the purpose of reducing or discharging liability incurred for such acquisition. As such, business owners (i.e. directors and/or shareholders of companies) may get financial assistance from companies to acquire shares of the companies save where those companies are public listed companies. However, this is subject to the whitewash procedures provided under the Companies Act 2016 as set out above. Failure to comply with the whitewash procedures is an offence which may result in fine and/or imprisonment. The issue of financial assistance typically catches up with business owners when they want to list the companies or dispose of their companies to private equities which intend to list the companies.

The information in this article is intended only to provide general information and does not constitute legal opinion or professional advice.