How Company generate Income Company Law II - MMU

1. TOPIC 1 - FINANCING A COMPANY
1. Introduction
1.1 A company may raise funds in various
ways to run its business.
Most common way: issue shares or
debe5ntures to the public.
s 15 - prohibits any invitation to the
public to subscribe for any shares in or
debentures of the private company;
- only public company may issue
shares and debenture to public
- shares and debentures referred to
as “securities”
1.2 Definition of “securities”: s 2 Capital
Markets and Services Act 2007 (CMSA).
s 2 CMSA defines securities as :
(a) debentures, stocks or bonds
issued or proposed to be issued by
any government;
(b) shares in or debentures of, a
body corporate or an
unincorporated body; or
(c) units in a unit trust scheme or
prescribed investments, and
includes any right, option or interest
in respect thereof
Confidence in capital market
- Accurate and material information
Therefore, potential investors may
make up their decision based on
accurate information as in what they
provide and what they will risk
- critical to investors to make
investments decisions
- information be set out in disclosure
document / prospectus
1.3 Regulation of securities offering in
Malaysia:
Merit based regulation → disclosure based
regulation.
MBR regulator takes the primary
responsibility of assessing the merits of
particular investments in securities
- parental/ regulator
- Eg – Father Sets all house rules and
decides with whom his daughter
will marry, investigates the man on
whether he suits her daughter
-
DBR Issuer discloses all relevant
information so that the investing public
have the information they would
reasonably require to evaluate the risks and
the benefits of the securities that are made
available to them.
- Made by person who issue it
(company)
- Eg – The daughter may choose her
own husband but the man must
disclose to the girl all relevant
information regarding him. Here
the daughter makes a decision.

2. 1.4 Transfer of the legal provisions
regulating prospectuses
2000: Companies Act 1965 (CA) to the
Securities Commission Act 1993 (SCA),
except prospectuses for the offer for
subscription or purchase of shares or
debentures of unlisted recreational club.
1.5 Transfer of provisions relating to fund
raising
2007: SCA → CMSA
2. Scheme of Regulation for Securities
Offering Under CMSA
2.1 Two-tiered system of approval.
(a) Whether the offer of securities requires
the Securities Commission (SC)’s approval
under s 212 CMSA
- Merit based regulations
- Exemption: Schedule 5 CMSA
(b) Whether a prospectus must be
registered under s 232 CMSA
- Disclosure based regulations
- Exemption: Schedule 6 and 7
2.2 Since 1/7/2000, SC has taken over the
functions of registration of prospectuses
from the Registrar of Companies for most
offers of securities.
 s 36A(2) CMSA – must state ground
of withdrawal
 s 36A (3) CMSA – commission may
permit to continue to protect
interest of public
 s 231 (2) CMSA - No chief executive,
officer responsible for preparing or
approving financial statements or
financial information, internal
auditor or a secretary of a listed
corporation shall be liable to be
sued in any court for any report
submitted by such person in good
faith and in the intended
performance of his duties.
3. Approval for Offers of Securities: s 212
CMSA
3.1 SC’s approval is required for offers of
securities: s 212(2) CMSA
- “…shall seek the approval of the
Commission under Division 1A.”

3. 3.2 List of transactions which do not require
SC’s approval under s 212 CMSA: see
Schedule 5 CMSA.
4. Due Diligence Requirements
4.1 Sections 215(1), (3) CMSA
(1) If any statement or information is
required to be submitted to the
Commission under this Division–
(a) an issuer or an applicant or any of its
officers or associates;
(b) financial adviser or an expert; or
(c) any other person,
shall not–
(A) submit or cause to be submitted any
statement or information that is false or
misleading;
(B) submit or cause to be submitted any
statement or information from which there
is a material omission; or
(C) engage in or aid or abet conduct that he
knows to be misleading or deceptive or is
likely to mislead or deceive the
Commission.
(3) If–
(a) a statement or information referred to
in subsection (1) has been submitted or
provided to the Commission, or a conduct
referred to in subsection (1) has been
engaged in; and
(b) a person referred to in that subsection
knows or becomes aware before the
proposal in the application has been fully
effected, carried out or implemented–
(i) that the statement or information may
be false or misleading or materially
incomplete; or
(ii) that the conduct may tend to mislead or
deceive, the person shall forthwith inform
the Commission of the facts referred to in
subparagraph (b) (i) or (ii), where
applicable, and shall take such action as the
Commission may require pursuant to
subsection 214A(2).
4.2 Contravention of s 215(1) or (3) CMSA =
offence: s 215(5) CMSA
(5) A person who contravenes subsection
(1) or (3) commits an offence and shall,on
conviction, be punished with imprisonment
for a term not exceeding ten years and shall
be liable to a fine not exceeding three
million ringgit.

4. 4.3 Defence: s 215(2) CMSA
(2) It shall be a defence to a prosecution or
any proceeding for a contravention of
subsection (1) if it is proved that the
defendant, after making enquiries as were
reasonable in the circumstances, had
reasonable grounds to believe, and did until
the time of the making of the statement or
provision of the information or engaging in
the conduct, was of the belief that–
(a) the statement or information was true
and not misleading;
(b) the omission was not material;
(c) there was no material omission; or
(d) the conduct in question was not
misleading or deceptive.
4.4 SC’s Guidelines on Due Diligence
Conduct for Corporate Proposals which set
out the due diligence duties of the relevant
parties involved in a securities offering
(issuers, advisers and experts).
See: http://www.sc.com.my/legislation-
guidelines/prospectus/
5. Prospectus
5.1 Definition of Prospectus under CMSA
5.1.1. Section 226 CMSA.
“prospectus” means a notice, circular,
advertisement or document inviting
applications or offers to subscribe for or
purchase securities, or offering any
securities for subscription or purchase and,
unless expressly specified, includes a
supplementary prospectus, replacement
prospectus, shelf prospectus, short form
prospectus, profile statement,
supplementary shelf prospectus and
abridged prospectus;
5.1.2 The definition is extended by s 242(1)
CMSA.
(1) Subject to subsection (3), where an
issuer allots or issues or agrees to allot or
issue to any person any securities with a
view to all or any of them being offered for
purchase–
(a) any document by which the offer for
purchase is made shall, for all purposes, be
deemed to be a prospectus issued by the
issuer; and
(b) all laws regulating the contents of
prospectuses and providing for liability in
respect of statements in and omissions
from prospectuses, or otherwise relating to
prospectuses, shall apply and have effect
accordingly as if persons accepting

5. 5.2 Objective/Purpose
5.2.1. Primary purpose of a prospectus
5.2.2. Division 3, Part VI of the CMSA
(Prospectus) is aimed at ensuring that
investors who are considering subscribing
for securities in a company have adequate
and accurate information about the
company and the securities to be issued.
5.3 Requirement to register prospectus
5.3.1 Sections 232(1), 232(2) CMSA.
(1) A person shall not issue, offer for
subscription or purchase, make an
invitation to subscribe for or purchase
securities or in the case of an initial listing
of securities, make an application for the
quotation of the securities on a stock
market of a stock exchange unless–
(a) a prospectus in relation to the securities
has been registered by the Commission
under section 233; and
(b) the prospectus complies with the
requirements or provisions of this Act.
(2) Unless authorized in writing by the
Commission, a person shall not issue,
circulate or distribute any form of
application for securities unless the form is
accompanied by a copy of a prospectus
which has been registered by the
Commission under section 233.
5.3.2 Consequence of contravening s 232
CMSA. See: s 232(7) CMSA.
(7) A person who contravenes
subsection (1), (2) or (3) commits an
offence and shall, on conviction, be liable to
a fi ne not exceeding ten million ringgit or
to imprisonment for a term not exceeding
ten years or to both.
5.3.3. Exemptions from registration
Excluded offer or excluded invitation:
Schedule 6, CMSA; or
Excluded issue: Schedule 7, CMSA; or
Minister of Finance makes a prescription
pursuant to s 229 or s 230 CMSA.
 S 229 – (1) An offer for subscription
or purchase of, or an invitation to
subscribe for or purchase, securities
is an excluded offer or an excluded
invitation if–
(a) the offer or invitation is specifi ed
in Schedule 6; or
(b) the offer or invitation is made to
a person or a class of persons, or
made in respect of securities or a
class of securities, as the Minister
may, on the recommendation of the
Commission, prescribe by order
published in the Gazette, to be an
excluded offer or an excluded
invitation.

6.  S 230 -
(1) An issue of securities is an
excluded issue if–
(a) the issue is so specified in
Schedule 7; or
(b) the issue is made to a person or a
class of persons, or made in respect
of securities or a class of securities,
as the Minister may, on the
recommendation of the
Commission, prescribe by order
published in the Gazette.
(2) Schedule 7 or a prescription
made under paragraph (1)(b) may
specify the provisions of this Act
that shall not apply to an excluded
issue
5.4 Contents of prospectus – s 235 and s
236 CMSA
5.4.1 The scheme for regulation of contents
of prospectuses envisages 2 parallel duties.
(a) Specific disclosure: s 235(1) CMSA
See also: Prospectus Guidelines issued by
SC
(b) General duty of disclosure: s 236 CMSA.
5.4.2. Expert: s 235(1)(d) CMSA.
- shall, if it contains any statement made by
an expert or contains what purports to be a
copy of or an extract from a report,
memorandum or valuation of an expert,
state the date on which the statement,
report, memorandum or valuation was
made and whether or not it was prepared
by the expert for incorporation in the
prospectus;
5.4.3. Application for waivers from
requirements relating to the form and
content of prospectuses:
s 235(3) CMSA. - Notwithstanding the
provisions of this Division, the Commission
may, either on the written application of
any person referred to in section 232 or of
its own accord, make an order relieving
such person from or approving any
variation of the requirements of this Act
relating to the form and content of a
prospectus.

7. 5.4.4. Pre-requisite for an order for relief
from the form and content of prospectuses:
s 235(5) CMSA. - The Commission shall not
make an order under subsection (3) unless
it is satisfied that–
(a) compliance with the requirements of
this Act is unnecessary for the protection of
persons who may normally be expected to
deal in those securities, being persons who
would reasonably be expected to
understand the risks involved; or
(b) compliance with the requirements of
this Act would impose an unreasonable
burden on the issuer.
5.5. Situations where SC shall refuse to
register prospectus
5.5.1 Reasons for SC to refuse to register a
prospectus: s 233 CMSA
5.6 Registrable Prospectus (Prospectus
Exposure)
5.6.1 CMSA allows the SC to publish a draft
prospectus which has not been registered
but which the public can comment upon.
See: s 232(4) CMSA.
- (4) The Commission may for public
information publish the registrable
prospectus submitted to the Commission
before the registration of the prospectus
under section 233.
(“Prospectus Exposure”)
5.6.2 Meaning of "registrable prospectus": s
232 (6) CMSA.
- (6) For the purposes of this section, a
“registrable prospectus” refers to a
prospectus that has been submitted under
section 233 and which has yet to be
registered by the Commission.
5.7 Lodgment of prospectus
5.7.1. From 1/7/2000, the SC is the
approving and registering authority for
prospectuses, except for prospectuses
issued by unlisted recreational club.
5.7.2. Unlisted recreational club - the
approving and registering authority is the
Companies Commission of Malaysia (CCM).
5.7.3. A prospectus registered with the SC
must still be lodged with the CCM.

8. 5.7.4. CCM - repository for prospectuses
other than prospectuses for unit trust and
prescribed investment schemes: s 234
CMSA.
- An issuer shall cause a copy of the
prospectus registered by the Commission
under this
Act and a copy of the form of application
accompanying such prospectus–
(a) in relation to securities other than a unit
trust scheme or prescribed investment
scheme, to be lodged with the Registrar;
(b) in relation to a unit trust scheme or
prescribed investment scheme, to be
lodged with the Commission, before the
date of issue of the prospectus.
SC - repository for unit trust prospectuses
5.8 Abridged Prospectus
5.8.1 Section 237 CMSA.
- 237. (1) A corporation or a unit trust
scheme shall not issue, offer for
subscription or purchase, or issue an
invitation to subscribe for or purchase,
securities by means of a rights issue which
is renounceable in favour of persons other
than existing members or debenture
holders of that corporation or unit holders
of the unit trust scheme and in respect of
which an application has been or will be
made for permission to deal with or quote
such securities on a stock market of a stock
exchange unless an abridged prospectus is
registered by the Commission.
5.9 Supplementary and Replacement
Prospectus
5.9.1 Section 238 CMSA.
- Supplementary or replacement prospectus
5.9.2 Securities other than unit trusts -
requirement to register supplementary or
replacement prospectus arises where a
prospectus has been registered but before
the securities are issued.
Unit trust scheme - requirement for
registration of the supplementary or
replacement prospectus applies as long as
the prospectus is registered.

9. 5.9.3 Comparison between supplementary
prospectus and replacement prospectus:
Supplementary prospectus, see: s 238(9), s
238(7) CMSA.
- (7) A supplementary prospectus
shall be regarded as being part of
the prospectus to which it relates
and the provisions of this Act and
any other law relating to liability in
respect of statements in and
omissions from prospectuses or
otherwise relating to prospectuses
shall apply to such supplementary
prospectus and shall have effect
accordingly.
.
- (9) Where a supplementary
prospectus has been registered by
the Commission, every copy of the
original prospectus issued after
registration of the supplementary
prospectus must be accompanied by
a copy of the supplementary
prospectus.
 Replacement prospectus, see: s
238(6), (8) CMSA
- (6) At the beginning of the
replacement prospectus, there shall
be a clear statement in bold type
that states the document is a
replacement prospectus, and
identifies the prospectus which it
replaces.
- (8) A replacement prospectus shall
be regarded as replacing the
prospectus previously registered
under section 233.
-
5.9.4 Consequence of registering a
supplementary or replacement prospectus:
s 239(3) CMSA.
- If the applicant withdraws his application
pursuant to subparagraph (2)(a)(ii), the
issuer shall immediately pay to the
applicant any monies that the applicant has
paid to the issuer on account of the
application.
5.10 Restrictions in advertising
5.10.1 The type of information which is
allowed to be disclosed prior to the
registration of the prospectus is limited to
that set out in s 241(4)(b)(i)-(ix) CMSA.
Q: Why there are such restrictions?
5.11 Consequences of Breach of s 235 and s
236 CMSA
5.11.1 Failure to comply with s 235 and 236
CMSA may result in:
(a) SC refusing to register the prospectus: s
233(1) CMSA

10. (b) SC issuing a stop order to the issuer
directing the issuer or any other person not
to allot, issue, offer, make an invitation to
subscribe for or purchase or sell, further
securities: s 245(1) CMSA.
• Consequences of issuing a stop order:
(i) where the securities have not been
issued to the applicants: s 245(7)(a) CMSA
(ii) where securities have been issued to the
applicant: s 245(7)(b) CMSA
• Once the securities are listed on a stock
market of a stock exchange and trading has
commenced, the stop order cannot be
issued: s 245(8) CMSA.
• Non-compliance with the stop order
issued by the SC is an offence against CMSA
:s 245(9) CMSA.
(c) Issuer and any other persons responsible
for causing the prospectus to contravene s
235 and 236 CMSA incurring criminal and
civil liabilities out of a statement or
information that is false or misleading in a
prospectus.
 Criminal liability
• Criminal liability for false or misleading
statement or material omission from
prospectus
See: s 246(3) CMSA.
• Criminal liability for non-compliance with
s 235 CMSA
See: s 235(7) CMSA.
• Criminal liability for non-compliance with
term/condition imposed by SC when
making an order relieving a person from or
approving any variation of the requirements
of CMSA relating to the form and content of
a prospectus
See: s 235(8) CMSA.
 Civil liability
• Civil liability for damage resulting from
false or misleading statement in prospectus
See: s 248 CMSA.
• Civil liability for misleading or deceptive
acts
See: s 249 CMSA.
Q: What are the main differences between
the scheme for liability for misleading
statements and omissions in prospectuses
and that of misleading or deceptive acts?
5.12 Defences to liability
5.12.1 Persons liable under s 246 and s 248
CMSA for defective prospectuses that
contain false or misleading statements, or
in which material omission occurs, may
avoid liability if they can establish one or
more of the defences set out in s 250, 251,
253 and 254 CMSA.
s 250 CMSA: Due diligence defence.

11. s 251 CMSA: Reliance on statement and
information in respect of false or misleading
statement.
s 253 CMSA: Reliance on public official
statement in respect of false and misleading
statement.
s 254 CMSA: Defence of withdrawal of
consent
5.12.2 Persons liable under s 249 CMSA for
misleading or defective acts, may avoid
liability if they can establish the defence set
out in s 252 CMSA.
s 252 CMSA: Reliance on statement and
information in respect of misleading or
deceptive act.