Shareholders’ prior approval required for allotment of shares

Company Law

The consequence of not getting shareholders’ prior approval for allotment of shares (if the approval is required under the Companies Act 2016 of Malaysia) could be severe.

Therefore, if the scope of due diligence for an M&A transaction includes verifying shares in the target company have been duly allotted, the verification should include whether shareholders’ prior approval has been obtained for directors to exercise their power to allot those shares.

The directors of a company are prohibited under section 75(1) of the Companies Act 2016 from exercising their power to allot shares in the company unless shareholders’ prior approval by way of resolution has been obtained.

Any issuance of shares without shareholders’ prior approval in contravention of section 75 is void and consideration given for the shares is recoverable.

A director of the company who permits the contravention of or fails to take all reasonable steps to prevent the contravention of section 75 with respect to any issue of shares commits an offence.

The director is liable to compensate the company and the person to whom the shares were issued for any loss, damages, or costs which the company or that person may have incurred.

The limitation period to commence proceedings to recover any such loss, damages or costs is 3 years from the date of issue of the shares.

There are exceptions under section 75(2) to the requirement to get shareholders’ prior approval for allotment of shares. The exceptions include:

(1) rights issue or bonus issue of shares to the shareholders in proportion to their shareholdings;

(2) allotment of shares to a promoter of the company which the promoter has agreed to take; or

(3) shares which are to be issued as consideration for the acquisition of shares or assets by the company and shareholders of the company have been notified of the intention to issue shares at least 14 days before the date of issue of the shares.


This post was first posted on Linkedin on 18 April 2022.

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