A person can be a substantial shareholder in a company without directly holding any shares in that company.

One of the challenges that often arises when I work on IPOs or other equity capital market exercises is the assessment of whether an individual holds an indirect substantial shareholding in a company.

Sections 8 and 136 of the Companies Act 2016 of Malaysia are the relevant provisions to consider when determining whether someone is an indirect substantial shareholder.

In a straightforward example shown in the diagram, Z is a substantial shareholder in Company X because:

👉 A person is a substantial shareholder in a company if the person has an interest in one or more voting shares in the company and the aggregate number of such shares is not less than 5% of the total number of all the voting shares in the company (s136, Companies Act 2016 of Malaysia).

👉 A person shall be deemed to have an interest in a share where a body corporate has an interest in a share and that person is entitled to exercise or control the exercise of not less than 20% of the votes attached to the voting shares in the body corporate (s8(4)(c), Companies Act 2016).

Z is entitled to exercise 20% of the votes attached to the voting shares in Company Y, which in turn holds 5% of the total number of the voting shares in Company X. Therefore, Z is deemed to have an interest in 5% of the total number of the voting shares in Company X in accordance with s8(4)(c) of the Companies Act 2016. This makes Z a substantial shareholder of Company X under s136.

The issue gets more interesting when additional layers of companies exist between Z and Company X, or when relationships among the shareholders need to be closely examined to determine whether they are associates of each other.

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This post was first posted on LinkedIn on 9 November 2023.