Does your Malaysian company have the right capital structure?

Does your company have the right capital structure?

In considering which business vehicle to use in Malaysia, the feature of a limited liability in a private limited company (Sendirian Berhad or ‘Sdn. Bhd.’) appeals to many. It allows the founder/shareholder to sleep better at night knowing that his personal wealth is not at stake if the company is, for whatever reason, sued or liquidated.  However, the rules and restrictions applicable to a company’s authorized share capital, issued share capital, par value, share premiums, discounting, share buy backs, financial assistance etc., as set out in the Malaysia Companies Act 1965 (‘MCA’) may be confusing. In this article, we explore various ways to structure a company’s share capital.

On a side note, the MCA is due for a major reform. The move towards a ‘no par value’ regime will mean that concepts of ‘authorized share capital’, ‘par value’, ‘share premium’, ‘issuing at a discount’ will no longer be relevant. As such, some parts of this article will need to be revisited upon such reforms being introduced.

Frequently Asked Questions

Will a shareholder be financially liable if his company gets sued?

No, the company is a separate legal entity. A shareholder will not be personally liable for the company’s debts or obligations. However, there are instances where a shareholder may be held financially accountable for debts of the company:

  • If the shareholder owns shares which are unpaid or partly paid up, the shareholder will be liable to the company for the unpaid portion.
  • The courts have ‘pierced the corporate veil’ of separate legal liability and held shareholders liable for the company’s debt (eg: where the shareholders were found to circumvent or evade the law, to frustrate its enforcement or to abuse the limited liability feature resulting in injustice).
  • Where the company borrows from a bank and the shareholder gives a personal guarantee, the bank may enforce the debt against the shareholder personally.
  • In many startups / SMEs, the shareholders will also hold office as directors. Directors, including ‘sleeping directors’, may be personally liable for the wrongdoings of the company and for breaching the numerous directors’ duties set out in the MCA and other legislation.

Why would anyone want to capitalize the company beyond RM2?

There could be several reasons:

  • Credibility – a higher paid up capital may give the first impression of establishment and security (although not necessarily true) to customers, suppliers and third parties.
  • Specific licences – certain industry specific licences (import / export / warehousing) require minimum capitalization.
  • Government policy – Ministry of Domestic Trade Co-operatives & Consumerism requirements for foreign ownership of companies that are in the business of distributive trade in Malaysia.
  • Raising debt – Banks/lenders may require a minimum paid up capital before granting loans to the company.

 What are the disadvantages of having a high issued and paid up capital?

  • Extra costs – The Companies’ Commission of Malaysia charges fees for increasing the company’s authorised share capital (https://www.ssm.com.my/en/company/incorporation-of-local-company), being sunken costs to the company.
  • Difficulty in reducing share capital / capital return – requires among others, court confirmation to reduce share capital to protect interest of creditors (capital maintenance rule). Once shares have issued and paid up, the shareholders of a solvent company will only be able to get their returns through dividends (out of profits) or upon sale of the shares to third parties.
  • No buy-back – The MCA prohibits the buy-back of its shares by a private limited company from its shareholders which results in a depletion of capital to the detriment of creditors.
  • Higher corporate tax rate – companies with paid up share capital of RM2.5 million or more cannot enjoy the lower rate of 20% for the first RM500,000 taxable profit. Instead, they will be subject to the flat 25% tax rate on all profits.
Your company's capital will have an impact on both you and your business.

Your company’s capital will have an impact on both you and your business.

Can the company have an issued share capital of RM100,000 (say of 100,000 shares of RM1.00 par value each) but only have RM2 cash paid into the company?

Yes, it is possible to partly pay for shares. However, the shareholder will be liable to pay up the balance RM99,998 cash to the company upon a capital call. This is different from issuing shares at a discount (prohibited under the par value regime), where the company regards a payment of RM2 for an issuance of RM100,000 share capital as fully satisfied (ie, the difference being that the shareholder is not liable to pay the balance RM99,998, unlike in the first example).

With cash of RM100,000 for the business, what are the different share capital structures available?

Before incorporating, a founder should always ask “Does the company really need a large issued and paid up capital?” There are various options in structuring their company’s share capital, depending on the founder’s needs. Here are 4 different structures:

  • All issued and paid up shares: The most common way would be to incorporate with RM100,000 issued and paid up shares to the founder (ie, 100,000 shares at RM1 par value per share). Any further share issuances will require payment of the SSM fee to increase the authorized share capital. Restrictions against capital reduction apply if the RM100,000 share capital is no longer needed.
  • Low paid up capital + shareholders’ loan: Incorporate with RM2 issued and paid up shares, and record the balance RM99,998 as a shareholders’ cash loan to the company. The company owes the shareholder a debt of RM99,998 which will be reflected in its books. The founder can stipulate terms of repayment of the loan by the company (such as repayment date and interest rate). However, repayment of shareholders’ loan is not treated as a reduction of capital by the company. There are tax implications from a shareholder’s loan and interest payable if any that should be considered. Another option similar to this can be for the company to issue ‘redeemable preference shares’ which has both debt and equity features.
  • Low paid up capital + share premium: Incorporate with RM2 issued and paid up shares at RM1 par value per share, and the company issues/sells shares at a premium (ie, above the share’s par value). This is common method for founders to raise funds from investors who want equity participation. For example, a company with RM75 issued share capital belonging to the founder issues 25 new shares to the investor for a cash consideration of RM25,000. The investor pays RM25 to the par value and a premium of RM24,975 on the 25 shares it subscribes. The investor owns 25% of the company (ie, 25 out of a total 100 shares).
  • Low paid up capital + low par value + shareholders’ loan: This is an interesting option that may offer some advantages. Incorporate with RM100 cash injection to issue 10,000 shares at RM0.01 par value per share, with the balance RM99,900 as founder’s loan to the company. The low par value of RM0.01 per share gives the founder a larger number of shares (10,000) to offer to key management and employees, without actually having to inject significant cash for these shares. The market value of the RM0.01 shares may appreciate significantly as the company grows or when funding is obtained. This may be a cash flow effective option for founders/employees considering employee stock option schemes (ESOS) as employees will need to fork out much less of their own cash to exercise the ESOS upon vesting.

In summary, there are many ways to skin a cat. Which is the most suitable way for the founder and his business needs will require deeper consideration and professional advice.

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About the Author: Shawn Ho is a partner of Donovan & Ho.  He is experienced in corporate matters such as acquisitions, cross-border transactions, restructuring exercises, sale of businesses, joint venture arrangements, shareholder agreements, and franchise businesses. His background in tax advisory has enabled him to assist several multi-national companies achieve considerable tax-savings through cross-border tax planning, implementing tax-efficient structures using Labuan companies, and incorporate tax advice into commercial transactions.

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