Learning Objectives
Introduction
Range of Business structures
Companies
A Company’s Constitution
General Management and Administration
Administration and Management of a Participating Organisation
Summary
Self-Assessment Questions and Answers
Learning Objectives
At the end of this topic, you should be able to:
(a) List the various legal structures available for conducting a business
(b) List the main powers and liabilities of a company
(c) List and distinguish among the various types of companies
(d) Distinguish between a public company and a private company
(e) Describe and explain the functions of the two fundamental
documents which make up a company’s constitution
(f) List and explain the main duties of directors
(g) Describe and explain corporate governance
(h) Explain the specific requirements in relation to the administration and management of a Participating Organisation.
Introduction
Individuals who wish to start a business have a choice of business structures. These business structures differ from each other in many ways. The chief characteristic of these structures is that they are formed mainly for the benefit of either the business itself or its owners. The choice of structure is often determined by tax considerations.
In this topic, we focus on companies and then look specifically at Participating Organisations.
RANGE OF BUSINESS STRUCTURES
Introduction
In this section we discuss the following business structures:
(a) Sole proprietorships
(b) Partnerships
(c) Companies
(d) Collective Investment Schemes.
Sole Proprietorships
Basically, a sole proprietorship is a type of business organisation where the business is owned by one person only. In Malaysia, only Malaysian citizens or permanent residents can register a business as a sole proprietorship.
It is considered to be the simplest form of a business structure with minimal legal requirements and can be started fairly easily with minimal capital requirements. The owner is entitled to receive all the profits made but has to bear unlimited liability for any losses incurred by the
business. No public disclosure of accounts is required and business affairs can be kept private. In the event the owner dies, the sole proprietorship will immediately cease business.
Partnerships
Two or more persons may carry on business together under a partnership agreement. In Malaysia, a large number of small businesses and professional firms (in particular accountants And lawyers) are partnerships. Partners are co-owners of an ongoing business, set up for profit.
Partnerships are easy to establish and are preferably, though not necessarily, governed by a written agreement.
In Malaysia, a partnership is defined under the Partnership Act 1961 as “the relation which subsists between persons carrying on business in common with a view of profit”.
Unlike e a company, a partnership is not a separate legal entity with a legal existence on its own from its members. Partners are jointly and individually liable to third parties for the debts and other obligations of the partnership. This means that a person can make a claim against the
assets of any one or more of the partners.
In 2012, the Limited Liability Partnerships Act was enacted, creating a new business vehicle that Is a hybrid between a company and a partnership. A limited liability partnership (LLP) accords limited liability to its partners, is a separate legal entity from its partners, allows for perpetual succession and has unlimited capacity.
Companies
In Malaysia, companies are incorporated under and governed by the Companies Act 2016 (CA).
A foreign company (a company which is formed outside Malaysia or a body which does not have its head office or principal place of business in Malaysia) which carries on a business or has a place of business in Malaysia is also regulated by the CA (see s.561 and s.579).
A company is a legal entity formed by two or more persons that has the following distinct characteristics:
(a) It has a legal identity of its own separate from its members
(b) Its members generally have limited liability for its debts and obligations.
(c) It can own property, has the capacity to enter into contracts and sue on these contracts.
(d) It has perpetual succession unless liquidated.
Companies and the different types and classifications of companies are discussed in further detail in subtopic 2.3.
Collective Investment Schemes
A collective investment scheme is a business structure which involves the collection of funds from several investors with the same investment objective and then pooling these funds into the investment. These types of investment vehicles are suitable for those who have little or no time to manage their own investment portfolios, or for those who are new to stock market investment. A collective investment scheme is generally similar to a mutual fund.
Unit Trusts
Unit trusts are a form of a collective investment scheme. Unit trusts allow investors to pool their funds to be invested in a portfolio of securities or asset classes in accordance with stated investment objectives. Investors purchase units in the unit trust scheme and so are known as unit holders. Unit holders do not own the securities in the portfolio directly. Ownership of the fund is divided into units of entitlement. As the fund increases or decreases in value, the value of each unit increases or decreases accordingly. The assets of a trust fund are held by an independent trustee, a fund manager or the management company which manages the funds. The trustee’s role, therefore, is to act as custodian of the fund and to safeguard the interests of unit holders.
The role of the management company is to carry out the administration of the fund, and in most cases, the management of the portfolio of investments.
Any person intending to establish a unit trust fund in Malaysia and to issue, offer or invite any person to subscribe or purchase units of the unit trust fund is governed by the Capital Markets and Services Act 2007 (CMSA) and Guidelines on Unit Trust Funds. Both the management company and the trustee must be approved by the SC. The regulations provide, among other things, detailed provisions on the content of the trust deed, which governs the unit trust scheme and the duties of the management company to the unit holders.
Closed-end Funds
A closed-end fund is an investment fund with a limited number of units of securities in issue and has a limited offer period. As the shares are traded on a stock exchange, present owners can exit the fund by selling their shares on the stock exchange.
A closed-end fund must appoint either a fund manager or a designated person (if the investments are internally managed) to manage the fund. The SC must approve both the fund manager and designated person. A custodian (a Malaysian public limited company independent of the fund manager) approved by the SC must also be appointed to hold or ensure the safekeeping of the investments of the fund.
The SC is responsible for the regulation of closed-end funds and has issued the Guidelines for Public Offerings of Closed-End Funds. A closed-end fund can offer securities by way of an issue, offer for sale or private placement.
Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) means a unit trust scheme that invests or proposes to invest primarily in income-generating real estate. While unit trusts and closed-end funds seek to mobilise retail funds for professionally managed investments in a portfolio of investment
comprising equities, fixed income, balance funds and other types of investments, a REIT specifically invests its funds in real estate. REITs invest in real property and provide an opportunity for investors with limited means to invest. They provide investors access to retail and commercial (office) properties.
Real estate has tangible asset backing unlike shares and bonds. This makes it a safer source of investment as real estate can never fall to zero, unlike a company’s shares or bonds when it goes bankrupt. Investing in REITs also assures investors of a high rate of pay out as REITs are
required to pay out at least 90% of their revenue to the holders in order to enjoy preferential tax treatment. This is unlike dividends which are at the sole discretion of the company to pay.
Real estate property is generally indivisible. While you can sell half of the shares you own, you cannot sell half a house. Real estate is more illiquid as compared with other asset classes such as shares and bonds where there is a ready market of buyers and sellers and you can sell your
investment almost instantly any time you want. The entry and exit costs of investing in real estate can also be high when capital gains tax or stamp duties are involved.
There are risks that come with investing in physical property such as illiquidity risk. If you need to raise cash, you may have to liquidate your entire property sometimes at the wrong time even though you only need a portion of the cash. However, these difficulties can be overcome if you manage in REITs instead. When you invest in REITs, there will be a professional manager who will manage the portfolio. He will be responsible for maintaining the properties and renting them out at good yields. He also takes over the role of looking for good buys to add to the portfolio.
The liquidity risk is also removed if investors invest in REITs. If the investors need to raise some cash, they could just sell a portion of their REIT holdings.
REIT prices are also generally less volatile than share prices. This is because REIT holders get the main bulk of their total returns from income rather than capital appreciation. Assets that have a higher percentage of their total return from income tend to have lower price volatilities.
The CMSA provides that the SC is responsible for regulating all matters relating to unit trust schemes, which include REITs. The SC has issued a set of guidelines with the objective of providing a regulatory framework that will protect the interests of the investing public and facilitate an orderly development of the REITs industry, which includes the Guidelines on Listed Real Estate Investment Trusts and Guidelines on Real Estate Investment Trusts. These guidelines were issued by the SC under s.377 of the CMSA.
The Guidelines on Listed Real Estate Investment Trusts set out requirements for a proposal in relation to the listing and quotation of units of a conventional or Islamic REIT on the Main Market of Bursa Malaysia Securities Berhad, which may include the establishment of a conventional or Islamic REIT in Malaysia and issue and offering of units of such REITs.
Meanwhile, the Guidelines on Real Estate Investment Trusts set out requirements to be complied with by any person intending to establish a conventional or Islamic unlisted REIT in Malaysia and issue, offer or invite any person who falls within the category of sophisticated investors to subscribe for or purchase units of the conventional or Islamic unlisted REIT.
Exchange Traded Funds (ETF)
An exchange traded fund (ETF) means a listed fund structured as a unit trust scheme, which principle aim is to track, deliver multiples of or deliver opposite of the performance of an index or a benchmark using a passive investment strategy. An index is made up of a basket of securities (e.g. bonds, commodities, equities) that shows the movement or change in a specific securities market. An ETF is an open-ended investment fund that comprises a portfolio of securities, equities, bonds or other commodities. ETFs are listed and traded on Bursa Malaysia Securities Berhad. The main feature which distinguishes ETFs from other collective investment schemes such as that of unit trust funds or REITs is that ETFs are designed to track the performance of an index in a particular market or sector. An ETF combines the features of an index fund and a stock.
As an ETF is designed to track a designated index, investors will reap profits if the index goes up and incur losses if there is a downturn in the sector being tracked. The liquidity of an ETF reflects the liquidity of the underlying basket of shares. An ETF may offer units by any of the following methods:
(a) An offer of subscription
(b) A placement
(c) Such other methods as may be acceptable by the Sc.
Investors who wish to purchase an ETF will be required to open a Central Depository System (CDS) account and a trading account maintained with a broker. They can buy or sell ETFs through their broker, remisier or via the online trading during trading hours. Similar to buying a share, investors need to pay brokerage commission, stamp duty, clearing fees where applicable.
The following are the important information that investors need to obtain before they proceed to purchase or invest on ETF.
(a) Investment objective and strategy of the ETF
(b) Information on the index that the ETF is tracking
(c) Dividend policy
(d) Fees and charges that will be borne by investor
(e) Sources of trading information of the ETF
(f) Information about the management company
Types of ETF
(a) Commodity ETF
Commodity ETF means an ETF that invests in physical commodities with the aim of providing investors with returns that track a benchmark relating to a single commodity.
(b) Futures-based ETF (including Leverage or Inverse ETF)
Futures-based ETF means an ETF that invests primarily in futures contracts, whose principal aim is to track, deliver multiples of or deliver opposite of the performance of an index or a benchmark.
(i) Leverage ETF
Leverage ETF means an ETF which aim is to deliver the multiples of the daily performance of the index or benchmark.
(ii) Inverse ETF
Inverse ETF means an ETF which aim is to deliver the opposite of the daily performance of the index or benchmark being tracked.
(c) Synthetic ETF
Synthetic ETF means an ETF that adopts synthetic replication strategy by entering into over-the-counter (OTC) derivatives contracts to replicate the index’s performance without directly holding the underlying constituents of the index or benchmark.
The advantages of ETF
ETFs combine the benefits of stocks, unit trusts and index funds because they share common characteristics:
(a) Easy access to diversification — ETFs hold a basket of securities which can be made up of shares, bonds or commodities, depending on the index that the ETF is based on with the objective of imitating the performance of an index
(b) Flexibility — Buy and sell during trading hours just like a stock
(c) Cost effectiveness — Lower annual management fees as compared to unit trusts make ETFs economical to buy and to maintain in the long run
(d) Transparency — Investors know what they are buying as the underlying securities are disclosed. The ETF prices are available real-time throughout the trading day
(e) Liquidity – Investors can redeem units easily and obtain cash by the third market day after trade date (1+3)
(f) Affordability — For a small sum of money, investors can invest in their desired securities investment.
Management Company
A management company is a company that establishes an ETF, issues, offers for subscription, makes an invitation to subscribe for or purchase units of the ETF and operates and manages the ETF in Malaysia. The management company must be the holder of Capital Markets Services Licence (CMSL) for the regulated activity of fund management in relation to portfolio management (excludes digital investment management and boutique portfolio management company).
The roles and responsibilities of a Management Company
The roles and responsibilities of a management company are as follows:
(a) Exercise the degree of care and diligence that a reasonable person would exercise in the position of a management company.
(b) Act in the best interest of unit holders and, if there is a conflict between the unit holders’ interest and its own interest, the management company must give priority to unit holders’ interest.
(c) Observe high standards of integrity and fair dealing in managing the ETF to the best and exclusive interest of unit holders.
(d) Ensure that the assets of the ETF are clearly identified as the ETF’s assets and held separately from the assets of the management company and any other fund managed by the management company.
(e) Conduct all transactions for the ETF on arm’s length basis.
(f) Appoint a full-time executive.
(g) Appoint a compliance officer who must report directly to the board of directors.
(h) Appoint an individual as a designated person responsible for the fund management function of the ETF, whether the function is undertaken internally within the management company or externally. If the fund management function is undertaken by an external party, the management company must ensure that the fund manager appoints a designated person for the ETF.
(i) Maintain an internal audit function to report on the adequacy, effectiveness and efficiency of the management, operations, risk management and internal controls.
(j) Take all necessary action to rectify any breach of the Guidelines on Exchange Traded Funds as soon as practicable, and must not enter into any transaction that could increase the extent of the breach.
(k) In the case of Islamic ETF, the management company must appoint a Shariah adviser to advise on all Shariah matters in relation to Islamic ETF. The Shariah adviser must either be an individual or a corporation registered with the SC, a licensed Islamic bank or a licensed bank or licensed Investment Bank approved to carry on Islamic banking business, and they must be independent from the management company.
(l) In the case of Islamic ETF, the management company must ensure that the compliance officer appointed has basic knowledge of Shariah laws and principles.
Participating Dealer
The participating dealer is appointed by the management company of an ETF to undertake the creation (either in-kind or in cash or a combination of both) and redemption (either in kind or in cash or a combination of both) of ETF units. The participating dealer appointed by the management company is from the following entities:
(a) A Participating Organisation of the Exchange
(b) A financial institution licensed by Bank Negara Malaysia
(c) A market maker registered with Bursa Malaysia Securities Berhad
(d) A trading participant of the derivatives exchange
COMPANIES
Background
The Companies Act 2016 (CA) came into force in January 2017. This Act provides the comprehensive legal framework governing companies in Malaysia.
One of the most important features of a company is that its shareholders’ liability is limited to the nominal or face value of their shares, making it easier to raise capital from the investing public for large-scale ventures and to continue activities beyond one specific venture.
The constitution of a company is called its memorandum and articles of association.
Liabilities and Powers
In a partnership, each partner is personally liable for debts incurred by the other partners in the course of the partnership business. However, the shareholders of an incorporated company usually have a limited liability for company debts; this is the main business reason for trading as incorporated company.
A company can only be formed under the CA. A company becomes a separate legal entity upon is incorporation. Pursuant to s.21 of the CA, companies have unlimited capacity, and as such is capable of exercising all the functions of a body corporate and have the full capacity to carry on or undertake any business or activity.
However, s.45 (1) of the CA states that no company other than a company limited by guarantee shall be formed for the purpose of providing recreation or amusement, promoting commerce and industry, promoting art, promoting science, promoting religion, promoting charity, promoting pension or superannuation schemes, or promoting any other objects useful for the community or country. Such a company also may apply to the Minister for a licence to omit the word “Berhad” (or “Bhd”) from its name or to hold land (s.45 (3) of the CA).
Classification of Companies
Companies can be classified in several different ways. From a business perspective, companies are usually classified either in accordance with the liability of its members or types of membership.
Under s.10 of the CA, a company may be either of the following:
(a) A company limited by shares
(b) A company limited by guarantee
(c) An unlimited company.
Company Limited by Shares
For a company limited by shares, the liability of each shareholder is limited to the amount unpaid on any shares he/she holds. Once the shares are fully paid, a shareholder has no further liability to the company or to anyone dealing with the company. In Malaysia, companies limited by shares are the most common structures.\
Example
If Ms A owns 2,000 shares of RM1.50 each in a company, and has paid the company RM1.00 on each of those shares, her remaining liability is RM0.50 per share (RM1,000 in total). Until payment in full has been called (i.e. requested by the company) and made, the shares are known as partly paid shares. Once the balance has been paid, the shares are fully paid and Ms A has no further liability to the company.
Shares are the personal property of the shareholders of a company and are freely transferable, subject to the terms of the company’s memorandum and articles of association.
It is important to note that in speaking of a limited liability company, it is the liability of the shareholders (and not of the company) that is limited.
A limited company must have the word “Berhad” or “Bhd” at the end of its name.
Company Limited by Guarantee
For a company limited by guarantee, the liability of each member is limited to the amount the member has guaranteed to contribute if the company has insufficient assets to pay its debts when it is wound up.
One feature that distinguishes a company limited by guarantee from a company limited by shares is that a member cannot be called on to contribute any capital while the company is a going concern.
This type of company is frequently used for non-trading ventures, such as sporting, social and charitable organisations. Trading companies usually need the ability to increase their capital from time to time by further contributions from existing members or from new members. For this reason, trading companies are not usually limited by guarantee.
A company limited by shares shall either be a private company or a public company. S.11 of the CA prohibits a company limited by guarantee with a share capital. Therefore, a company cannot be limited by both shares and guarantee under the present legislation. However, it was possible for such a company to be formed before the Companies (Amendment) Act 1985.
Unlimited Company
In an unlimited company, the shareholders are jointly and individually liable without limit for the debts of the company if the company is wound-up. Such companies are rare and are likely to be used to hold properties and investments passively where liabilities are unlikely to be incurred.
This structure will usually not be used for a trading venture.
It is possible for a company to convert from an unlimited company to a limited company by complying with s.40 of the CA. An unlimited private company must have the word “Sendirian” or “Sdn” at the end f its name.
Although a company may begin as a private, it can be converted to a public or vice-versa if it complies with the requirements of s.41 of the CA.
Companies can also be categorised as either of the following:
(a) Registered as a private company
(b) Registered as an unlisted public company
(c) Registered as a listed public company.
Private Company
5_42 of the CA sets out the provisions that are applicable to private companies. A private company is appropriate where there is a relatively small group of members, as the restriction includes the limitation to not more than 50 the number of its members and the prohibition from inviting the public to subscribe for any shares in or debentures of the company. A private company must have the word “Sendirian” (or Sdn) before the word “Berhad” (or “Bhd”) in its name.
Private companies are further divided into exempt and non-exempt categories. A company will be an exempt private company if it has fewer than 20 shareholders who are all people (i.e. a company cannot be a shareholder) and no company has a direct or indirect beneficial interest in its shares.
An exempt private company is excused from some of the requirements of the CA. For example, need not lodge its last balance sheet, and profit and loss accounts with its annual return, and not prohibited from making loans to directors.
Unlisted Public Company
Any company that does not fall within the definition of a private company noted above is a public company. An unlisted public company is a public company which shares are not listed for quotation on Bursa Malaysia Securities Berhad.
Unlike a private company, there is no maximum number of members for a public company. The distinction between public and private companies lies in the need to protect the investing public against fraud. If a public company wishes to attract investment from the public, it must be prepared to disclose details of its operations for public examination.
Listed Public Company
A public company limited by shares may be listed with Bursa Malaysia Securities Berhad. Listing allows the company’s shares to be freely traded on Bursa Malaysia Securities Berhad. Listed companies are subject to stricter controls. Misted company must comply with all the listing requirements and policies of Bursa Malaysia Securities Berhad, the continuing listing requirements and Bursa Malaysia Securities Berhad’s Corporate Disclosure Policy and the Rules of the Bursa Malaysia Depository Sdn Bhd.
Public listing gives a company a number of advantages:
(a) An efficient and cost-effective way to raise funds from the expansion of the business operations as an alternative to borrowing from banks.
(b) A readily accessible market for the company’s shares.
(c) Greater visibility and a higher profile which will ultimately help stimulate growth in the company and attract new business.
(d) Enhancement of the company’s reputation and credibility.
(e) Greater recognition, which puts the company in a better position to expand its operations overseas.
Share Capital and Certificates
The no-par-value regime introduced in the CA aligns share capital accounting and practices with international standards. The concepts of par or nominal value, share premium and authorised capital are no longer applicable. The price paid for shares will directly be credited to the Share Capital Account.
Share certificates will only be issued upon application and no longer mandatorily issued. The register of members, instead of the share certificates, is the prima-facie evidence as to the title of the shares. Under s.102 of the CA, the company secretary is required to ensure that the register of members is properly kept and maintained regularly, and all particulars on issuance and transfer of shares are entered into the register.
A COMPANY’S CONSTITUTION
Based on the CA 1965, all companies must have Memorandum and Articles of Association (M&A). The memorandum of association sets out the name of the company, the objects of the company, the amount of share capital which the company proposes to be registered, that the members’ liability is limited, the full names and details of the subscribers and that the subscribers are desirous of being formed into a company and agree to take the number of shares in the capital of the company set out opposite their respective names. The memorandum of association commonly identifies the company and its powers. These powers and objects are usually expressed in wide terms to avoid the need to alter the memorandum by special resolution of the members, each time the company changes direction. The articles of association are the company’s internal regulations and cover such matters as the allotment of shares, transfer of shares, appointment of directors, termination of a director’s term of office, directors’ powers and duties, conduct of meetings, declaration of dividends and the use of the company’s seal. They must be printed, divided into numbered paragraphs and signed by every subscriber to the memorandum (s.29).
The current CA has abolished the need to have an M&A and replaced it with a constitution. With the CA 2016 coming into effect, the requirement of having a constitution is no longer mandatory. The exception to this requirement is a company limited by guarantee. If a company has no constitution, s.31 (3) of the CA states that the company, each director and each member of the company shall have the rights, powers, duties and obligations as set out in the Act.
Companies formed under the G4 1965 may still retain its M&A as its constitution as originally registered or as altered in accordance with the corresponding previous written law (s. 34 (c)).
Once adopted, the constitution shall be binding on the company and its members to the same extent that it had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the constitution.
As listed in s.35 of the CA, the constitution may contain:
(a) The objects of the company,
(b) The capacity, rights, powers or privileges of the company,
(c) Matters contemplated by the CA to be included in it, and
(d) Any other matters as the company wishes to be included in it.
Under the s.36 (1) of the CA, the company can alter or amend its constitution by special resolution, unless the constitution itself prohibits such changes.
Incorporation Requirements and Procedures
The main activity of the Companies Commission of Malaysia (CCM) is to serve as an agency to incorporate companies and register businesses as well as to provide company and business information to the public.
A company shall have a name; one or more members; in the case of a limited company by shares, one or more shares; and one or more directors. The incorporation of a company may be made by an individual or individuals who intend to form a company. A private company must have at least one director who ordinarily resides in Malaysia and one promoter. A public company must have at least two directors who ordinarily reside in Malaysia and at least one promoter.
The incorporation procedures include:
(a) Requirement for approval of company name from the CCM.
(b) The company’s incorporation application is online using one of the two incorporation methods:
(i) Direct incorporation — combination of name reservation and incorporation process; or
(ii) Name reservation — submitting the incorporation application within 30 days or such longer period as the Registrar may allow (maximum of 180 days) after the name is approved.
(c) Incorporation information that needs to be completed is as follows:
(i) The proposed company name
(ii) The status of a private or public company
(iii) The proposed type of business
(iv) The address of registered office
(v) The business address
(vi) Complete details of directors(s) and promoter(s)
(vii) Declaration from directors(s) and promoter(s)
(viii) Declaration of compliance from individuals responsible for incorporation
(x) Additional documents (if any)
(d) A registration fee of RM1,000 is payable for registering a company limited by shares. For a company limited by guarantee, the fee is RM3,000.
In addition to the requirements, the company must also lodge under s.58 (3) the consent from each director to act as director of the company.
Where a company is registered upon application with the prescribed fee, the CCM issues a certificate of incorporation, which is conclusive evidence that all requirements for incorporation have been met. Once the certificate is issued, the company is capable of transacting business as a separate legal entity. Upon incorporation, the CCM allocates to the company a company number.
What Must a Company Do After It Is Incorporated?
The registered name and company registration number must be placed at its registered office, every place where its business is carried on, and at every place where its books are kept. The name of the company and its company number must appear on all forms of business correspondence and documentation (see s.30 of the CA). The Registrar of the CCM shall be notified of any changes in the address of the registered office within 14 days (see s.46 (3) of the CA) of such change.
A company secretary must be appointed within 30 days after the incorporation of a company (see s.236 (2) of the CA) and notify the CCM within 14 days of the appointment.
GENERAL MANAGEMENT AMD ADMINISTRATION
Directors
Every company must have at least one director who is at least 18 years of age, and who lives in Malaysia. Previously, a person aged more than 70 cannot be appointed or act as a director of a public company or a subsidiary of a public company unless he is appointed or re-appointed in accordance with s.129 (6) of the C4 1965. However, this age limit has been removed from the CA.
An undischarged bankrupt may only be a director of a company with the leave of the court or Official Receiver. A person convicted of an offence relating to the promotion, formation or management of a corporation, involving bribery, fraud or dishonesty, or other offences stated in the CA may only be a director of a company with the leave of the court.
A company must have at least one secretary of at least 18 years of age, who is a citizen or permanent resident of Malaysia living in Malaysia. A secretary is appointed by the directors, and must be present at the registered office of the company when it is open to the public. In order to act as a company secretary, a person must be a member of a professional body or of a body prescribed in the Fourth Schedule of the CA, or is duly licensed by the CCM.
All private and public companies shall appoint an auditor for each financial year of the company. The Registrar shall have the power to exempt any private company from this requirement. An auditor may resign from his/her office by giving a notice in writing to the company and the company shall send a copy this notice to the Registrar within seven days of receiving it. In the case of a public company, the auditor has the right to make a requisition calling on the directors of the company to immediately convene a general meeting for purposes of receiving and considering the circumstances connected with the auditor’s resignation if the resignation is accompanied by a statement of the circumstances connected with the resignation. The directors shall hold the requisitioned general meeting within 28 days of the receipt of the requisition.
Duties and Liabilities of Directors
Directors, are required to act honestly, in good faith in the best interest of the company and to exercise a reasonable degree of care, skill and diligence at all times. In exercising his/her duties, a director may rely on information, professional or expert advice, opinions, reports or statements including financial statements prepared or presented by others under s.215 of the CA.
Directors have duties under common law, the CA and other regulations. These duties require them:
(a) To act honestly when exercising powers
(b) To take reasonable care and diligence in the exercise of their powers
(c) avoid trading in the company’s securities while making use of confidential price-sensitive information
(d) To avoid misuse of their position as director or of information acquired through that position (s.218)
(e) To avoid situations which might conflict with their duties as director (conflict of interest). Note that s.221 requires directors to disclose, to a meeting of directors, any interest they may have in a contract or proposed contract with the company
(f) To avoid entering into a transaction with the company unless approval of the company by resolution is obtained at a general meeting (s.228).
In addition to the duties under the Act and common law, directors of listed companies must comply with the duties and liabilities contained in the listing requirements which relate to, among other things, related party and interested party transactions, reporting requirements and restrictions on the number of directorships which can be held. There are also provisions in the CMSA, such as prohibitions on insider trading and market manipulation, which affect directors. These are discussed in detail in other topics.
Company Registers
The CA requires various registers to be established and to be maintained by a company such as:
(a) Register of Members (s.50, CA)
(b) Register of Directors, Managers and Secretaries (s.57, CA)
(c) Register of Directors’ Shareholdings (s.59, CA)
(d) Register of Debenture Holders (5.60, CA)
(e) Register of Substantial Shareholders (s.144, C4)
Company Meetings and Resolutions
The business of a company is transacted at meetings of either the directors of the company or meetings of the shareholders.
Directors’ Meetings
The directors of a company manage the business of a company and can exercise all the powers of the company other than those matters set out in the CA, which are required to be exercised by a general meeting of the company (i.e. the shareholders).
The proceedings of the board of directors are governed by the provisions set out in the Third Schedule of the CA, subject to the company’s constitution.
General Meetings
S.290 of the CA provides that a resolution of members of a private company can be passed either by a written resolution or at a meeting of members. Hence, it is no longer compulsory for a private company to hold general meetings. Written resolutions of private companies allow for most matters to be decided, except for the removal of a director or auditor before the expiration of his/her term of office. Written resolutions may be circulated in hard copy or electronic form.
A written resolution shall be proposed by the Board or any member of a private company. Any Member who has at least 5% of the total voting rights may require the company to circulate the resolution, unless the resolution, if passed, is inconsistent with its constitution or any written law, or it would not be in the best interest of the company, or is defamatory, frivolous or vexatious.
A meeting of members may be convened by the Board or any member holding at least 10% of share issued capital, or if the company has no share capital, at least 5% in the number of members.
The notice period required for meeting of members is at least 14 days for a private company and least 21 days for a pubic company’s annual general meeting and 14 days for other meetings.
A public company limited by shares can only pass a resolution at a meeting of members. It must hold its annual general meeting within six months of its financial year end and not more than 15 months from the last annual general meeting. The public company may apply to the Registrar to extend these periods.
For a company having share capital, unless otherwise provided in the constitution, on a vote by written resolution, every member shall have one vote in respect of each share held. On a vote by a show of hands at a meeting, every member shall have one vote. On a vote by poll at a Meeting, every member shall have one vote in respect of each share held.
In the case of a company not having share capital, every member shall have one vote.
Business at a general meeting is transacted by ordinary resolution unless the articles or the Act require a special resolution. An ordinary resolution is passed by a majority of members who are present and voting at the particular meeting.
A special resolution is passed at a meeting by a majority of not less than three-quarters of the members that vote in person or by proxy. A notice of at least 21 days must be given of such a resolution.
Act requires a special resolution for certain matters, for instance:
(a) To alter the company’s name and constitution
(b) To alter the company’s status (limited or unlimited, private or public)
(c) To reduce its share capital; and
(d) To wind up the company voluntarily.
Prohibitions
There are many prohibitions contained in the CA both about companies and company officers. We noted above that companies are generally prohibited from making loans to, or providing financial accommodation to directors or to people connected with directors.
The other prohibitions contained in the CA are listed below. These prohibitions usually require disclosure as well as approval by the company at a general meeting.
(a) Issue of shares by directors. This prohibition applies despite the fact that the articles of the company may give the directors the power to issue shares (s.75).
(b) Company providing financial assistance for the purchase of its own shares (s.123)
(c) Property transactions (or company’s undertakings) involving directors which are substantial, where such a transaction (for the buying or selling of property that is not a cash asset (s.223)
(d) Loans to directors or persons connected with directors (s.224 and s.225)
(e) Tax-free payments to directors. (s.226)
(f) Payments to directors as compensation for loss of office or in connection with transfer of the undertaking or property of the s.227.
(g) Transactions with directors, substantial shareholders or connected persons (s.228).
(h) Indemnifying company officers and auditors. An officer or auditor cannot be indemnified (i.e. saved from loss) by a provision in the company’s constitution or in a contract with the company, for an act or omission for which that officer will be liable at law for negligence, default, breach of duty and breach of trust about the company (s.288). However, there are other circumstances where an indemnity can be provided to an officer by a company, provided under s.289 of the CA.
There are other provisions in the CA which deal with the conduct of company officers, for which if they are found guilty, it is an offence and the penalty is a fine or imprisonment or both.
Corporate Governance
In March 1998, a high-level Finance Committee on Corporate Governance, comprised of both government and industry, was formed for the purpose of swiftly identifying and dealing with weaknesses highlighted by the crisis in the then existing governance framework. The Finance Committee’s findings, which were reported through the publication of the Finance Committee Report on Corporate Governance (Report) in March 1999, represents the end-product of an extensive collaborative effort between government and industry, with the implementation of keyaspects of the Report, such as the introduction of the Malaysian Code on Corporate Governance (MCCG).
According to The High Level Finance Committee’s Report, 1999, corporate governance is defined as follows:
“…the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long-term shareholder value, while taking into account the interest of other stakeholders.”
On 8 July 2011, the SC launched the five-year Corporate Governance Blueprint (Blueprint). The Blueprint provides the action plan to raise the standards of corporate governance in Malaysia by strengthening self and market discipline and promoting greater internalisation of the culture of good governance. It focused on six connected themes of the corporate governance ecosystem as below:
(a) Shareholder rights
(b) Roles of institutional investors
(c) Boards
(d) Gatekeepers and influencers
(e) Disclosure and transparency
(f) Public and private enforcement
MCCG was first introduced by the SC in 2000 and was reviewed in 2007 and 2012, and In in 2017. The code has 36 practices based on three key principles of good corporate govenance, which are as follows:
(a) Board leadership and effectiveness
(b) Effective audit, risk management and internal controls
(c) Integrity in corporate reporting and meaningful relationship with stakeholders
The 2017 edition of the MCCG takes on a new approach to promote greater internalisation of corporate governance culture, not only for listed companies but also encourages non-listed entities including state-owned enterprises, small and medium enterprises (SMEs) and licensed
supporting intermediaries to embrace the code. The new approach seeks:
(a) To understand and internalise the spirit and intention behind the principles and practices including its intended outcomes
(b) To implement the practices in substance to achieve the intended outcomes of building and supporting a strong corporate governance culture throughout the company
(c) To provide a fair and meaningful disclosure on the company’s corporate governance practices.
Other key features of the new approach include:
(a) The Comprehend, Apply and Report approach – CARE
(b) A shift from “comply or explain” to “apply or explain an alternative”
o promote a more meaningful application of good corporate governance practices
(c) Greater focus and clarity on the intended outcomes for each Practice
(d) Guidance to assist companies in applying the Practices
(e) Identification of exemplary practices which support companies in moving towards greater excellence — Step Ups
Why is corporate governance mportant? It is important because corporate governance provides a framework of control mechanisms that support the company in achieving its goals, while preventing unwanted conflicts. The ethical behaviour, accountability, transparency and sustainability are known as the pillars of corporate governance which are important to the governance of companies and stewardship of investors’ capital. Companies that embrace the principles are more likely to produce long-term value than those that are lacking in one or all.
For more details on the MCCG 2017, please refer to https://wwwsc.com.my
Whistle blowing
Whistle blowing is a term used to describe the disclosure of information that one reasonably believes to be evidence of contravention of any laws or regulation or information that involves mismanagement, corruption or abuse of authority.
Under s.266 (8) of the CA, auditors are placed under obligation to report to the Registrar of Companies any breaches of the CA.
MCCG practices recommended that the company’s board establishes, reviews and together with management implements policies and procedures on whistle blowing. The board should encourage employees to report concerns in relation to breach of a legal obligation, miscarriage of justice, danger to health and safety or to the environment and the cover-up of any of these in the workplace. The board should ensure that its whistle blowing policies set out avenues where legitimate concerns can be objectively investigated and addressed. Individuals should be able to raise concerns about illegal, unethical or questionable practices in confidence and without the risk of reprisal.
Auditors
Under the s.320 of the CMSA, auditors of listed corporations are required to provide a written report of breaches or non-performance of:
(a) Securities law to the SC
(b) Rules of a stock exchange to the relevant stock exchange or the SC
(c) Any other case which adversely affects to a material extent the financial position of the listed corporation, to the relevant stock exchange or the SC
The obligation arises when the auditor is of a professional opinion that there has been a breach of such laws.
In return, the auditors are afforded protection from being sued in any court for any report, provided that report was carried out in good faith and in the intended performance of their ties.
The law also provides that the listed corporation shall remunerate the auditor in respect of the discharge by him/her of all or the additional duties.
The SC may at any time during or after an audit require the auditor of a listed corporation to submit additional information in relation to the audit.
Other key personnel
S.32 of the CMSA also provides protection for other persons, namely the:
(a) Chief executive or any other officer responsible for preparing or approving financial statements of financial information.
(b) Internal auditor
(c) Secretary of a listed corporation
against retaliation for reporting to the authorities on breaches or non-performance of any requirements or provisions relating to the securities law or the rules of the stock exchanges and any retaliation in the form of dismissal, harassment or discrimination at work, or any action in court in respect of the disclosure made.
ADMINISTRATION AND MANAGEMENT OF A PARTICIPATING ORGANISATION
Organisation|
Management Structure of Participating Organisations
Rule 3.05 of the Rules of Bursa Malaysia Securities Berhad sets out that a Participating Organisation may have access to the markets or facilities established, maintained or operated by the Exchange and describe itself as a Participating Organisation of the Exchange once it has been admitted as a Participating Organisation. No person, other than a Participating Organisation, shall be entitled to describe itself as a stock broker or stockbroking company.
Rule 3.06 of the Rules of Bursa Malaysia Securities Berhad lists continuing obligations of a Participating Organisation:
(a) Continuously satisfy the qualification criteria stated in the Rule 3.01. Comply with and give effect to the Securities Laws and Commission’s requirements, and comply with the provisions of the rules of the Clearing House and Central Depository
(b) Comply with and give effect to these Rules and the Directives whether or not the provisions are directed at the Participating Organisation specifically and to any undertaking given to the Exchange whether before or after admission as a Participating Organisation
(c) Ensure that its constitution, if any, complies with or is consistent with these Rules or the Directives;
(i) Register with the Exchange the business address of its Principal Office and not change such business address without the prior written approval of the Exchange. Notify the Exchange in writing of any change to the Participating Organisation’s registered address within seven days after the change
(ii) Notify the Exchange in writing of any change to its name as registered by the Exchange within seven days after the change
(iii) Not go into any voluntary liquidation or apply for any order under s.366 of the CA without the Exchange’s prior written approval.
Participating Organisations must also comply with the following (Chapter 12 of Rules of Bursa Malaysia Securities Berhad):
(a) Accounts: A Participation Organisation must keep up-to-date accounting and other books and records which must comply with the Exchange’s requirements and these must be kept for at least seven years.
(b) Financial Statements: A Participating Organisation must submit to the Exchange all financial statements as specified and within a stipulated period.
Annual Statutory Audit
A Participating Organisation must have its accounts audited by a statutory auditor submitted to the Exchange within three months after the close of the financial year.
Prohibited Conduct
A Participating Organisation must not set off a client’s buy Contract against the same client’s sell Contract or vice versa for the purpose of calculating the Contract Value.
A Participating Organisation shall not engage in the following prohibited conduct as listed in Division 1 Part V of the CMSA:
(a) False trading and market rigging transaction
(b) Stock market manipulations
(c) False or misleading statements
(d) Fraudulently inducing persons to deal in securities
(e) Use of manipulative device and deceptive devices
(f) Dissemination of information about illegal transactions
(g) Insider Trading.
A trust account is also required under s.111 of the CMSA to place certain monies received by the Participating Organisation. Withdrawal from the trust account can only be made for the purpose of making payment to or in accordance with the written instructions of the persons entitled to the money or to defray brokerage and other charges.
Branch Offices of a Participating Organisation
The establishment of a branch office by a Participating Organisation is subject to Rule 6 of the Rules of Bursa Malaysia Securities Berhad.
A Participating Organisation needs to ensure:
(a) The proper segregation of duties at the Branch Office
(b) The Branch Office carries signage indicating the name of the Participating Organisation
(c) It maintains an up-to-date record of the address of all Branch Offices.
A Participating Organisation must also ensure its back office system and operations are capable of:
(a) Timely reporting and transmission of data from a Branch Office to the Principal Office
(b) Daily reconciliation of all records of the Principal Office and the Branch Office
(c) Reconciliation of all transactions undertaken by the Branch Office.
Financial Requirements of a Participating Organisation
Apart from the basic financial requirements imposed on a Participating Organisation upon admission, there are other financial requirements that have to be maintained from time to time by the Participating Organisation.
Margin Accounts
The Rules of Bursa Malaysia Securities Berhad state that Participating Organisations may provide margin financing to their clients subject to adherence to the conditions in Rule 7.30.
Rule 7.30 (11) provides that, at any time, the equity in a client’s margin account should not fall below 130% of the outstanding balance.
Rule 7.30 (19) (a)(b) states that a Participating Organisation must request for additional margin and impose haircuts on any collateral and securities purchased and carried in a margin account on the occurrence of:
(a) Unusual rapid or volatile changes in value of the securities
(b) Non-existence of active market for the securities
(c) Suspension of the securities from trading on market (the haircut is 100% if suspension is more than three market days)
(d) No possibility of immediate liquidation for the securities.
Rule 7.30 (20) provides that withdrawals from the margin account can be made by the client from time to time provided that the value of the equity in the margin account does not fall below 130% of the outstanding balance.
Single Client Rule
Rule 7.30 (4) of the Rules of Bursa Malaysia Securities Berhad provides that a Participating Organisation may extend credit facilities to a single client up to a maximum of 20% of its Effective Shareholder’s Funds.
Capital Adequacy Requirements
Capital Adequacy Requirements (CAR) is a tool to enable both Bursa Malaysia Securities Berhad and Participating Organisations to significantly improve and enhance monitoring by:
(a) Incorporating internally recognised approaches and measures, thus setting the standard for the overall risk control framework for
Participating Organisations
(b) Promoting an environment of enhanced risk management by enabling Participating Organisations to identify the capital available to cover the risk of their business.
Therefore, CAR provides a proactive alert mechanism for Participating Organisations to quantify, manage and address the risks inherent in their business.
The focus of CAR is to ensure that a Participating Organisation’s financial resources and capital be maintained in a ready liquid form to meet the sum of individual risk areas of the Participating Organisation.
Rule 13.04 of the Rules of Bursa Malaysia Securities Berhad sets out the capital adequacy requirements which are principally designed to ensure that Participating Organisations are entities of substance so as to foster confidence in the stock market and to create an environment in which Participating Organisations are able to wind down their stockbroking businesses without loss to their clients and without disruption to the stock market.
Rule 13.05 provides that the capital adequacy requirements in relation to an Investment Bank shall be the Investment Bank Capital Adequacy Framework as prescribed in the Guidelines on Investment Banks issued by Bank Negara Malaysia and the SC, and the same shall be deemed to be part of these Rules.
For Participating Organisations other than Investment Banks, specific risk areas are as follows:
(a) Operational risk
(b) Position risk
(c) Counterparty risk
(d) Large exposure risk
(e) Underwriting risk
Compliance by Participating Organisations other than Investment Banks within the CAR is measured by ratio of the liquid capital of the Participating Organisation to its total measured ‘tics from the five specific risk areas listed above. The ratio will alert Bursa Malaysia Securities Berhad and the Participating Organisation of any potential liquidity problems, and therefore ‘bigger closer monitoring of the Participating Organisation at an early stage. The ratio will also enable Participating Organisations to manage their risk proactively.
Participating Organisation must ensure that:
(a) Its Capital Adequacy Ratio is greater than 1.2
(b) Its Core Capital is at all times greater than its Operational Risk Requirements.
Registered Person
Rule 3.10 sets out that a Participating Organisation must register the following persons with the Exchange:
(a) Chief Executive Officer
(b) Director
(c) Head of Dealing
(d) Head of Operations
(e) Head of Compliance
(f) Dealer’s Representative
Heads
A Participating Organisation must have at least three Heads, namely Head of Dealing, Head of Operations and Head of Compliance. No other person other than these heads is permitted to discharge the respective functions of the Heads as stipulated in these Rules.
Rule 3.25 provides that an individual holding the position as head of a Participating Organisation must do so on a full-time basis. The head shall not be engaged in other businesses or hold any interest, or be a director or debenture holder of any entity unless the appointment is non- executive in nature; there is no conflict of interests or duty; it is not in breach of conditions of the Capital Markets Services Representative’s Licence (CMSRL) and prior approval is obtained from the Participating Organisation.
The Heads of Dealing, Operations and Compliance respectively report directly to the Board of Directors of a Participation Organisation. This requirement does not apply in the case of an Investment Bank.
As stated under Rule 3.18(2), if at any time there is a vacancy occurring for the Head of Dealing, Head of Operations and Head of Compliance in a Participating Organisation office, the Participating Organisation must fill in the vacancy within six months from the date of the vacancy occurring.
Head of Dealing
The Head of Dealing is responsible for the activities of the Participating Organisation related to dealing in securities. If there is more than one Head of Dealing appointed, the area and scope of responsibility of each Head of Dealing shall be clearly delineated and documented at the time of appointment of each Head of Dealing (Rule 3.26 (2)).
Head of Operations
The Head of Operations is responsible for the operational activities of the Participating Organisation. If there is more than one Head of Operations appointed, the area and scope of responsibility of each Head of Operations shall be clearly delineated and documented at the time of appointment of each Head of Operations (Rule 3.30 (2)).
Head of Compliance
Each Participating Organisation shall appoint and register at least one Head of Compliance with Bursa Malaysia Securities Berhad. Rule 3.35 lists the criteria for the Head of Compliance.
In general, the Head of Compliance shall carry out such duties as stipulated under Rule 3.36. However, Rule 3.39 of the Rules of Bursa Malaysia Securities Berhad states that the ultimate responsibility for the supervision and compliance of a Participating Organisation shall rest with the Participating Organisation and its board of directors.
As stated earlier, every Universal Broker and Investment Bank shall appoint at least one Head of Compliance unless the compliance functions of a Universal Broker are undertaken at Group level in accordance with Rule 3.34 (3)(b). In this case, the Universal Broker may elect not to appoint a Head of Compliance. The Head of Compliance shall be responsible for all compliance matters set out in the Rules of Bursa Malaysia Securities Berhad and carry out such duties of a Compliance Officer as stated in Rule 3.36.
Summary
In this topic, we looked at various types of business organisations and then focused on registered companies. We saw the procedures for incorporating a company and the associated rights and duties.
We examined the classification of companies and the associated rights and duties. We examined the classification of companies, both by liability and membership.
We then considered a company’s constitution that is detailed in the memorandum and articles of association. We discussed the management and administration of companies in particular, the role and duties of directors, and then looked specifically at Participating Organisations.
Self-Assessment Questions:
Question A:
Match of the following types of companies below with their CPORRECT descriptions.
Company A:
For company A, the liability of each shareholder is limited to the amount unpaid on any shares he/she holds. Once the shares are fully paid, a shareholder has no further liability to the company or to anyone dealing with the company.
Answer: COMPANY LIMITED BY SHARES
Company B:
For B, the liability of member is limited to the amount the member has guaranteed to contribute if the company has unsufficient assets to pay it debts when it is wound-up.
A member cannot be called on to contribute any capital while the company is a going concern.
Answer: COMPANY LIMITED BY GUARANTEE
Company C:
For company C, the shareholders are jointly and individually liable without limit for the debts of the company if the company is wound up.
Such companies are rare and are to be used to hold properties and investments passively where liabilities are unlikely to be incurred.
Answer: UNLIMITED COMPANY
Question 2:
The following are type of Collective Investment Schemes EXCEPT?
I. Unit Trust
II. Bonds
III. Exchange Traded Funds (ETF)
IV. Real Estate Investment (REITS)
A. II only
B. III only
C. I and II only
D. II and III only
Question 3:
Identify whether the following statements in relation to margin, credit facilities and the Capital Adequacy Ratio of a Participating Organisation are TRUE:
I. At any time, the equity in a client’s margin account should not fall below 130% of the outstanding balance.
II. A Participating Organisation may request to additional margin and impose haircuts on any collateral and securities purchased and carried in a margin account on the occurrence of usual rapid or volatile change invalue of the securities.
III. A Participating Organisation may extend credit facilities to a single client up to a maximum of 20% of its Effective Shareholders’s Funds.
IV. Participating Organisation must ensure that its Capital Adequacy Ratio is greater than 1.
A. I and only
B. I and III only
C. II and III only
D. All of the above