OFFERING UNLISTED SHARES TO THE PUBLIC: SECTION 43 AND SECTION 44 OF THE COMPANIES ACT 2016

OFFERING UNLISTED SHARES TO THE PUBLIC: SECTION 43 AND SECTION 44 OF THE COMPANIES ACT 2016

In our previous write-up last March, we explored key considerations for investors regarding securities offerings by unlisted public companies. Building on that foundation, this article shifts the focus to private companies especially startups, which often navigate unique challenges when raising funds. A recurring question in this context is whether a private company limited by shares can legally offer its shares to the public. This article examines the critical provisions of the Companies Act 2016 (“CA 2016”) specifically Sections 43 and 44 of the CA 2016 to provide a comprehensive understanding of the legal framework governing such offerings and the practical implications for companies seeking to secure funding while adhering to regulatory requirements.

PROHIBITION OF PRIVATE COMPANIES TO OFFER SHARES TO THE PUBLIC

Late 2023, a company and its director were charged in the Kuala Lumpur sessions court for offering RM15 million worth of redeemable preference shares to the public between 2020 and 2021. The general rule in Malaysia according to Section 43(1) of the CA 2016 is that private companies limited by shares are not allowed to offer to the public any shares or debentures, allot or agree to allot any shares or debenture with the intention to offer them to the public or invite the public to deposit money with the company.[1]

If shares are offered to the public within six months after allotment or agreement to allot; or before the receipt by the company of the full payment of the shares or debenture, such act is presumed to breach the general prohibition unless proven otherwise.[2] Violations of this rule by the company or its officer is liable to an imprisonment term of up to 5 years or  fine not exceeding RM3 million, or both.[3]

Additionally, Section 596 of the CA 2016 prohibits individuals, whether acting independently or on behalf of others, from soliciting the public to offer shares for subscription or purchase to the public or any of its members, as well as seeking or accepting offers to subscribe for or purchase shares from the public. However, exceptions apply if such offers are governed by the Capital Markets and Services Act 2007 (“CMSA”).

In the case of Huang Sheng Chang & Ors v. Attorney General [4] the court imposed penalties for violating Section 393(1) under the previous Companies Act 1965, which mirrors the current Section 596 CA 2016. In this case, the individuals were disqualified from holding directorships and prohibited from participating in the management of any company for which they had been disqualified for. However, under Section 596 of the CA 2016, the repercussions for breaching this provision include the possibility of the court declaring any contract made as a result of the prohibited offer to be void. Additionally, the court may issue consequential orders, such as the repayment of any money involved or the retransfer of shares to the original holders.[5]

WHAT CONSTITUTES AN “OFFER TO THE PUBLIC”?

While the law restricts offers to the public, the CA 2016 has defined what does not fall under this prohibition. An offer is not considered an offer to the public if it meets one of the following criteria:-

  1. The offer is not intended to result in securities becoming available to persons beyond those receiving the offer; or
  2. It is a private concern between the offeror and the recipient.[6]

According to Section 44 (3) of the CA 2016, an offer is regarded as a private concern between the offeror and the recipient if such offers are extended to individuals connected with the company or if it is an offer to subscribe for securities under an employees’ share scheme. An individual mat be regarded as being “connected with the company” if they are:-

  1. an existing member or employee;
  2. family member of an employee/shareholder or former employee/shareholder;
  3. an existing debenture holder of the company; or
  4. trustee of a trust, where the principal beneficiary of the trust is a person within any category under the section.[7]

LEGAL AVENUES FOR PRIVATE COMPANIES

A private company limited by shares does not contravene the general restriction against private companies offering shares to the public under specific conditions outlined in Section 43(3) of the CA 2016. Offers can be made to the public if:-

  • the company acts in good faith under arrangements that facilitate its conversion into a public company before the allotment of shares or debentures;
  • the company may undertake to convert into a public company within a specified period and ensure compliance with this undertaking; or
  • the offers made in accordance with guidelines specified by the Securities Commission Malaysia (“SC”) to any person on a stock market, derivatives market, exempt stock market, or exempt derivatives market that is approved, registered, or regulated under CMSA.[8]

Notably, where a timeframe for conversion is specified, the period must conclude within six months from the date of the offer or the earliest of multiple offers. These provisions create a structured pathway for private companies to access public investment while adhering to legal safeguards.[9]

In essence, for companies to be able to raise funds from the public without infringing the law is either by converting the company status to a public company or utilise markets that are approved, registered or regulated under the CMSA. Among the more popular avenues by private companies are equity crowdfunding (ECF) and peer-to-peer (P2P) financing platforms, which provide accessible and regulated methods for companies to secure funding.

These platforms, which operate under the purview of guidelines set by the SC, enable private companies to raise funds from a broad pool of investors. Depending on the platform’s nature and the company’s specific corporate structure and fundraising objectives, the company or an issuer, may offer various financial instruments, including ordinary shares, preference shares, investment notes, or Islamic investment notes.

CONCLUSION

Although the CA 2016 imposes stringent restrictions on private companies offering shares to the public, the act has also allowed tailored exceptions that strike a balance between regulatory compliance and access to public funding. By utilizing legal mechanisms such as conversion of private company to a public company, leveraging on SC approved platforms like ECF and P2P platforms, or even exploring structures such as private placements or targeted offerings to qualified investors, private companies can effectively raise funds while maintaining compliance.

If you have any questions, please contact our Associate, Ms. Maryam Amilah (maryam@nzchambers.com).

Author: Maryam Amilah

References:

[1] Section 43 (1) of the Companies Act 2016

[2] Section 43 (2) of the Companies Act 2016

[3] Section 43 (5) of the Companies Act 2016

[4] [1984] 1 MLJ 5

[5] Section 596 (9) of the Companies Act 2016

[6] Section 44 (2)(a) and Section 44 (2)(b) of the Companies Act 2016

[7] Section 44 (4) of the Companies Act 2016

[8] Section 43 (3) of the Companies Act 2016

[9] Section 43 (4) of the Companies Act 2016

Published Date: 16 December 2024