Points to consider when investing in shares in a private limited company

Company Law

1. Should the investor subscribe to new shares issued by the company or acquire shares from the current shareholder(s) of the company?

The stamp duty for instrument of transfer of shares is 0.3% of the price or value of the shares on the date of transfer, whichever is higher. The stamp duty for document in relation to allotment of shares is RM10.

Although stamp duty is more favourable for share subscription, there are practical reasons why investors acquire shares from current shareholder(s) in certain circumstances instead of subscribing to new shares.

Section 85 of the Companies Act 2016 provides that subject to constitution of the company, shareholders have pre-emptive rights to new shares. Therefore, unless the constitution of the company provides otherwise, or the current shareholders waive their pre-emptive rights, the investor would not be able to subscribe to new shares.

Allotment of new shares by the company to a new investor would dilute the shareholding of the current shareholders, which some shareholders may not agree to.

2. The investor should check the constitution (if the company has adopted a constitution) and shareholders’ agreement (if any) for provisions which restrict allotment of shares by the company or transfer of shares.

There may be provisions which provide for pre-emptive rights of existing shareholders in the case of allotment of new shares by the company or first right of refusal by existing shareholders if a shareholder wants to dispose its shares. In such instance, waiver of these rights by the existing shareholders is required in order for the new investor to subscribe or acquire shares.

3. Are there any approvals required from existing shareholders, financial institutions (if the company has loans), regulators (pursuant to laws or conditions of licences), counterparties to agreements (pursuant to terms of agreements entered by the company) for allotment of shares by the company or change of shareholders or change of shareholding?

4. Would the payment be paid in cash consideration or by way of share swap or other form consideration?

5. Would the payment be made in a single payment or multiple tranches?

6. Is the investor going to hold a majority or minority stake in the company?

7. Would the investor have the right to nominate any director to be appointed to the board of the company?

8. If the investor is a minority shareholder, consider having reserved matters at the shareholders’ or board level which can only be passed with the assenting vote of the investor or director nominated by the investor.

The investor should also consider conducting due diligence on the company if the amount of investment is material to the investor.


This post was originally posted on Linkedin on 23 February 2022. Follow me on Linkedin.

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