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Tutorial Question: Share Capital
Companies Act 2016
QUESTION 3
XY Biz Sdn Bhd’s share capital consist of RM40,000 ordinary shares issued at RM5.00 each, 5000 preference
shares issued at RM3.00 each. The preference shareholders rights as stated in the constitution are:
entitlement to 10% dividends per annum in priority to other classes of shares;
the rights to share in surplus assets upon winding up equally with ordinary shareholders.
The company plans to raise additional capital by the following transactions:
i. to issue 10,000 new preference shares with the same rights as existing preference shares.
ii. to cancel the preference shareholders right to share in surplus assets upon winding up equally with ordinary shareholders.
iii. to introduce a provision in the constitution:
“Any variation of class rights must be voted on at a separate class meeting of preference shareholders and the variation
must be approved by an ordinary resolution of members of that class”.
iv. to issue new “Class B” ordinary shares with two votes each on each shares in voting by poll.
The company is of the view that proposals (iii) and (iv) can be affected without the approval of the preference
shareholders. Din and Man who hold 15% of the preference shares disagree with the company’s view.
Advice the company as to the legal requirements that the company must comply with to carry out the above
proposals.
i. Whether the issuance of 10,000 new preference shares with the same rights as
existing preference shares amounts to a variation of class rights?
• Section 91(5) of the Companies Act 2016 states that:
The issuance of new preference shares ranking equally with existing preference shares
issued by the company amounts to a variation of existing preference shareholders’
rights, unless the company’s constitution or the terms of issue of the existing preference
shares authorises the company to do so.
• Applying the above provision to our present question, since there is no mention in the
facts of the case of the terms of issue of the existing preference shares nor the
constitution which authorises the company to do so, thus, the issuance of 10,000 new
preference shares with the same rights as existing preference shares amounts to a
variation of class rights.
1st Issue: Determination of variation of class rights
ii. Whether the cancellation of the preference shareholders’ rights to
share in surplus assets upon winding up equally with ordinary shares
amounts to a variation of class rights?
• Section 96(1) of the Companies Act 2016 states that abrogation of existing rights
which are incorporated in the company’s constitution amounts to a variation of
class rights.
• In addition, section 339(6)(b) of the said Act also states that any
abrogation/deletion of existing provision amounts to a variation of class rights.
• Applying the above provisions to our present question, since in XY Biz Sdn Bhd’s
constitution clearly states that the existing preference shareholders have the right
to share in surplus assets upon winding up equally with ordinary shareholders,
thus the proposal to cancel such rights amounts to a variation of class rights.
iii. Whether the introduction of a provision in the XY Biz Sdn Bhd’s
constitution which is relating to how class rights are to be varied
amounts to a variation of class rights?
• Section 339(6)(a) of the Companies Act 2016 states that any amendment of a
provision contained in the constitution which relates to how class rights are to be
varied, is itself to be treated as a variation of class rights.
• Applying the above provision to our present case, since the introduction of the
provision is relating to changing the method to vary class rights, thus, such a
provision is to be treated as a variation of class rights.
iv. Whether the issuance of new “Class B” ordinary shares with two votes
each on shares in voting by poll, is to be treated as a variation of class
rights?
• Section 91(5) of the Companies Act 2016 mentions regarding the situation
whereby variation happens which only involves preference shares. The section is
silent on the issuance of new shares other than preference shares.
• Article 5 of Table A of the previous Companies Act 1965 provides that the issue
of any shares (which includes ordinary shares) could be considered as a variation
provided that this is expressly provided in the constitution. Since Table A has
already been repealed, there exists a lacunae in this situation, and thus common
law applies.
• Refer: Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512.
• Based on the above case, the issue of new shares of whatever class is not
considered as a variation of the rights of existing class of shares.
• This is because, although the voting power may be diminished, the existing
shareholders still enjoy the same voting rights.
• Hence, applying this common law principle to our present case, the issuance of
new Class B ordinary shares with two votes each on shares in voting by poll is not
a variation as it will not affect the existing ordinary shareholders’ rights, legally
speaking.
2nd Issue: Whether XY Biz Sdn Bhd can issue new ordinary
shares and what are the procedures involved?
• The power to issue shares is exercisable by the directors but the prior approval of
the shareholders by way of resolution of the company.
• The approval must be obtained before the directors can allot shares.
• Section 75 of the Companies Act 2016 also requires the approval of the
shareholders be obtained before the directors can exercise the following powers:
(a) To allot shares in the company;
(b) To grant rights to subscribe for shares in the company;
(c) To convert any security into shares in the company;
(d) To allot shares under an agreement or option or offer.
• The approval may be given with or without condition and may be confined to a
specific exercise of power or may apply to the exercise of that power generally.
• Section 76(4) of the Companies Act 2016 – the general meeting
reserves the power to revoke or vary any approval previously given.
• For a public company, this approval expires at the earlier of:
(a) the conclusion of the next annual general meeting after the approval
was given, or
(b) the expiration of the period within the next annual general meeting is
required by law to be held.
• For a private company, the approval is valid for not more than 12
months after the approval is given.
• Section 75(4) of the Companies Act 2016 – any issue of shares by a
company in contravention of S.75 shall be void.
Section 85 of the Companies Act 2016 – Pre-emptive rights to new
shares
• Subject to the company’s constitution, a company may issue shares
which rank equally to existing shares.
• Any new shares to be issued by a company must first be offered to
existing shareholders in a manner that will maintain the relative
voting and distribution rights of those shareholders.
• If the offer was declined within the specific period, the directors may
dispose those shares in such manner the directors think most
beneficial to the company.
Application
• Based on the present case, XY Biz Sdn Bhd is a private limited
company.
• The director of this company must get prior approval from the
shareholders by way of resolution of the company.
• Only after the approval is obtained, the director can allot the new
shares.
• According to S.85 of CA 2016, the pre-emptive rights to new shares
was provided to protect the existing shareholders’ voting power by
entitling them to participate in the issuance of new shares.
3rd Issue: What are the procedures for variation of class rights that need
to be complied in order for the proposals to be effected?
• Preliminary:
• S. 90(4): No company shall allot any preference shares or convert any issued
shares into preference shares unless provided by the constitution.
• Assuming the provision for allotment of new preference shares
(which, as settled, is a type of variation) is provided in the
company’s constitution, the legal procedures are as follow:
Procedures for variation of class rights cont…
Variation can be done through:
• S. 91(1):
i. In accordance with the company’s constitution; or
ii. In the case where there is no provision in the
constitution, with the consent of shareholders in that
class given in accordance with this section.
Procedures for variation of class rights cont…
When method two (2) is to be followed, such consent must comply
with S. 91(2):
S. 91(2) Consent of shareholders required shall be:
i) a written consent representing not less than seventy five per centum of the
total voting rights of the shareholders in the class; or
ii) a special resolution passed by shareholders in the class sanctioning the
variation.
Procedures for variation of class rights cont…
When does a variation of class rights takes effect? Refer S. 91(3):
• (a) if no application is made under section 93 for it to be disallowed,
at the expiration of the period in which applications may be made
under that section; or
• (b) if an application is made within that period, at the time the
application is finally determined, unless the variation is disallowed.
Procedures for variation of class rights cont…
Notice of the variation must be given to the shareholder. Refer S. 92(1):
• If there is variation of class rights, the company shall give written
notice of the variation to each shareholder in that class within
fourteen days form the date on which variation is made.
• If this is not complied with, it will amount to criminal offence
punishable with fine not exceeding RM 500,000 – Refer S. 92(2)
Application
• XY Biz Sdn Bhd (hereinafter referred to as ‘the Company’) in order to make the
variation must first check in the company’s constitution for provision on such
variation.
• Supposed the constitution is silent on the procedure or regulations on such
variation, the Company must comply with the second method i.e., acquiring the
consent of the shareholders in that class which is either in a written form
representing 75%, or through special resolution.
• Assuming no challenge in pursuant of S. 93 is made as to the variation, the
Company must next serve a written notice on the variation to each of the
shareholder within 14 days.
4th Issue: Whether the approval of preference shareholder is required for proposal
(iii) and (iv) to be effected?
• Definition in S. 2: “a share by whatever name called, which does not entitle the holder to the right to vote
on a resolution or to any right to participate beyond a specified amount in in any distribution whether by
way of dividend, or on redemption, in a winding up, or otherwise.”
• Provision in S. 90(4): Preference shareholders’ right must be expressly provided in the constitution in
relation to:
-repayment of capital;
-participation in surplus assets and profits;
-cumulative or non-cumulative dividends;
-voting;
-priority of payment of capital and dividend.
• Provision in S. 91(1), the method of variation:
i. In accordance with the company’s constitution; or
ii. In the case where there is no provision in the constitution, with the consent of shareholders in that
class given in accordance with this section.
Consent of preferential shareholders cont…
• Consider: Omission of S. 148(2) of the 1965’s Company Act.
• This provision previously provides that preference shareholders will carry the
right to attend any general meeting and to vote in these three situations:
1. During the period of arrears of preferential dividend;
2. Upon resolution which varies the right attached to the shares;
3. Upon any resolution for winding up of the company.
• With the omission of this provision in the newest Company Act 2016, it leaves the
room for uncertainty as to whether preferential shareholders still carry the voting
right in these situations.
• And thus, it must be spelt out clearly in the constitution, or the issue document
of the preference shares and terms and conditions are spelt out clearly.
Application
Through careful perusal of S. 91(1)(b),
• For proposal (i), (ii), and (iii) which are all a form of variation of class rights
respectively and involve the preference share class, unless provided otherwise in
the constitution, consent of preferential shareholders must be obtained.
• For proposal (iv), irrespective of whether or not it is a form of variation, assuming
such voting right is not provided in the constitution, preferential shareholder’s
consent need not be obtained.
The Challenge by Preferential Shareholder
• In the problem, it is stated that Din and Man who hold 15% of the preference
shares disagree and assert that the proposals cannot be effected unless with their
approval.
• The law provides a remedy for this through S. 93 of Companies Act 2016, where
shareholders representing at least 10% of the class may apply to the Court to
have the variation disallowed within 30 days from the date on which the variation
is made.

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Capital Shares - Companies Act 2016

  • 1. Tutorial Question: Share Capital Companies Act 2016
  • 2. QUESTION 3 XY Biz Sdn Bhd’s share capital consist of RM40,000 ordinary shares issued at RM5.00 each, 5000 preference shares issued at RM3.00 each. The preference shareholders rights as stated in the constitution are: entitlement to 10% dividends per annum in priority to other classes of shares; the rights to share in surplus assets upon winding up equally with ordinary shareholders. The company plans to raise additional capital by the following transactions: i. to issue 10,000 new preference shares with the same rights as existing preference shares. ii. to cancel the preference shareholders right to share in surplus assets upon winding up equally with ordinary shareholders. iii. to introduce a provision in the constitution: “Any variation of class rights must be voted on at a separate class meeting of preference shareholders and the variation must be approved by an ordinary resolution of members of that class”. iv. to issue new “Class B” ordinary shares with two votes each on each shares in voting by poll. The company is of the view that proposals (iii) and (iv) can be affected without the approval of the preference shareholders. Din and Man who hold 15% of the preference shares disagree with the company’s view. Advice the company as to the legal requirements that the company must comply with to carry out the above proposals.
  • 3. i. Whether the issuance of 10,000 new preference shares with the same rights as existing preference shares amounts to a variation of class rights? • Section 91(5) of the Companies Act 2016 states that: The issuance of new preference shares ranking equally with existing preference shares issued by the company amounts to a variation of existing preference shareholders’ rights, unless the company’s constitution or the terms of issue of the existing preference shares authorises the company to do so. • Applying the above provision to our present question, since there is no mention in the facts of the case of the terms of issue of the existing preference shares nor the constitution which authorises the company to do so, thus, the issuance of 10,000 new preference shares with the same rights as existing preference shares amounts to a variation of class rights. 1st Issue: Determination of variation of class rights
  • 4. ii. Whether the cancellation of the preference shareholders’ rights to share in surplus assets upon winding up equally with ordinary shares amounts to a variation of class rights? • Section 96(1) of the Companies Act 2016 states that abrogation of existing rights which are incorporated in the company’s constitution amounts to a variation of class rights. • In addition, section 339(6)(b) of the said Act also states that any abrogation/deletion of existing provision amounts to a variation of class rights. • Applying the above provisions to our present question, since in XY Biz Sdn Bhd’s constitution clearly states that the existing preference shareholders have the right to share in surplus assets upon winding up equally with ordinary shareholders, thus the proposal to cancel such rights amounts to a variation of class rights.
  • 5. iii. Whether the introduction of a provision in the XY Biz Sdn Bhd’s constitution which is relating to how class rights are to be varied amounts to a variation of class rights? • Section 339(6)(a) of the Companies Act 2016 states that any amendment of a provision contained in the constitution which relates to how class rights are to be varied, is itself to be treated as a variation of class rights. • Applying the above provision to our present case, since the introduction of the provision is relating to changing the method to vary class rights, thus, such a provision is to be treated as a variation of class rights.
  • 6. iv. Whether the issuance of new “Class B” ordinary shares with two votes each on shares in voting by poll, is to be treated as a variation of class rights? • Section 91(5) of the Companies Act 2016 mentions regarding the situation whereby variation happens which only involves preference shares. The section is silent on the issuance of new shares other than preference shares. • Article 5 of Table A of the previous Companies Act 1965 provides that the issue of any shares (which includes ordinary shares) could be considered as a variation provided that this is expressly provided in the constitution. Since Table A has already been repealed, there exists a lacunae in this situation, and thus common law applies.
  • 7. • Refer: Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512. • Based on the above case, the issue of new shares of whatever class is not considered as a variation of the rights of existing class of shares. • This is because, although the voting power may be diminished, the existing shareholders still enjoy the same voting rights. • Hence, applying this common law principle to our present case, the issuance of new Class B ordinary shares with two votes each on shares in voting by poll is not a variation as it will not affect the existing ordinary shareholders’ rights, legally speaking.
  • 8. 2nd Issue: Whether XY Biz Sdn Bhd can issue new ordinary shares and what are the procedures involved? • The power to issue shares is exercisable by the directors but the prior approval of the shareholders by way of resolution of the company. • The approval must be obtained before the directors can allot shares. • Section 75 of the Companies Act 2016 also requires the approval of the shareholders be obtained before the directors can exercise the following powers: (a) To allot shares in the company; (b) To grant rights to subscribe for shares in the company; (c) To convert any security into shares in the company; (d) To allot shares under an agreement or option or offer. • The approval may be given with or without condition and may be confined to a specific exercise of power or may apply to the exercise of that power generally.
  • 9. • Section 76(4) of the Companies Act 2016 – the general meeting reserves the power to revoke or vary any approval previously given. • For a public company, this approval expires at the earlier of: (a) the conclusion of the next annual general meeting after the approval was given, or (b) the expiration of the period within the next annual general meeting is required by law to be held. • For a private company, the approval is valid for not more than 12 months after the approval is given. • Section 75(4) of the Companies Act 2016 – any issue of shares by a company in contravention of S.75 shall be void.
  • 10. Section 85 of the Companies Act 2016 – Pre-emptive rights to new shares • Subject to the company’s constitution, a company may issue shares which rank equally to existing shares. • Any new shares to be issued by a company must first be offered to existing shareholders in a manner that will maintain the relative voting and distribution rights of those shareholders. • If the offer was declined within the specific period, the directors may dispose those shares in such manner the directors think most beneficial to the company.
  • 11. Application • Based on the present case, XY Biz Sdn Bhd is a private limited company. • The director of this company must get prior approval from the shareholders by way of resolution of the company. • Only after the approval is obtained, the director can allot the new shares. • According to S.85 of CA 2016, the pre-emptive rights to new shares was provided to protect the existing shareholders’ voting power by entitling them to participate in the issuance of new shares.
  • 12. 3rd Issue: What are the procedures for variation of class rights that need to be complied in order for the proposals to be effected? • Preliminary: • S. 90(4): No company shall allot any preference shares or convert any issued shares into preference shares unless provided by the constitution. • Assuming the provision for allotment of new preference shares (which, as settled, is a type of variation) is provided in the company’s constitution, the legal procedures are as follow:
  • 13. Procedures for variation of class rights cont… Variation can be done through: • S. 91(1): i. In accordance with the company’s constitution; or ii. In the case where there is no provision in the constitution, with the consent of shareholders in that class given in accordance with this section.
  • 14. Procedures for variation of class rights cont… When method two (2) is to be followed, such consent must comply with S. 91(2): S. 91(2) Consent of shareholders required shall be: i) a written consent representing not less than seventy five per centum of the total voting rights of the shareholders in the class; or ii) a special resolution passed by shareholders in the class sanctioning the variation.
  • 15. Procedures for variation of class rights cont… When does a variation of class rights takes effect? Refer S. 91(3): • (a) if no application is made under section 93 for it to be disallowed, at the expiration of the period in which applications may be made under that section; or • (b) if an application is made within that period, at the time the application is finally determined, unless the variation is disallowed.
  • 16. Procedures for variation of class rights cont… Notice of the variation must be given to the shareholder. Refer S. 92(1): • If there is variation of class rights, the company shall give written notice of the variation to each shareholder in that class within fourteen days form the date on which variation is made. • If this is not complied with, it will amount to criminal offence punishable with fine not exceeding RM 500,000 – Refer S. 92(2)
  • 17. Application • XY Biz Sdn Bhd (hereinafter referred to as ‘the Company’) in order to make the variation must first check in the company’s constitution for provision on such variation. • Supposed the constitution is silent on the procedure or regulations on such variation, the Company must comply with the second method i.e., acquiring the consent of the shareholders in that class which is either in a written form representing 75%, or through special resolution. • Assuming no challenge in pursuant of S. 93 is made as to the variation, the Company must next serve a written notice on the variation to each of the shareholder within 14 days.
  • 18. 4th Issue: Whether the approval of preference shareholder is required for proposal (iii) and (iv) to be effected? • Definition in S. 2: “a share by whatever name called, which does not entitle the holder to the right to vote on a resolution or to any right to participate beyond a specified amount in in any distribution whether by way of dividend, or on redemption, in a winding up, or otherwise.” • Provision in S. 90(4): Preference shareholders’ right must be expressly provided in the constitution in relation to: -repayment of capital; -participation in surplus assets and profits; -cumulative or non-cumulative dividends; -voting; -priority of payment of capital and dividend. • Provision in S. 91(1), the method of variation: i. In accordance with the company’s constitution; or ii. In the case where there is no provision in the constitution, with the consent of shareholders in that class given in accordance with this section.
  • 19. Consent of preferential shareholders cont… • Consider: Omission of S. 148(2) of the 1965’s Company Act. • This provision previously provides that preference shareholders will carry the right to attend any general meeting and to vote in these three situations: 1. During the period of arrears of preferential dividend; 2. Upon resolution which varies the right attached to the shares; 3. Upon any resolution for winding up of the company. • With the omission of this provision in the newest Company Act 2016, it leaves the room for uncertainty as to whether preferential shareholders still carry the voting right in these situations. • And thus, it must be spelt out clearly in the constitution, or the issue document of the preference shares and terms and conditions are spelt out clearly.
  • 20. Application Through careful perusal of S. 91(1)(b), • For proposal (i), (ii), and (iii) which are all a form of variation of class rights respectively and involve the preference share class, unless provided otherwise in the constitution, consent of preferential shareholders must be obtained. • For proposal (iv), irrespective of whether or not it is a form of variation, assuming such voting right is not provided in the constitution, preferential shareholder’s consent need not be obtained.
  • 21. The Challenge by Preferential Shareholder • In the problem, it is stated that Din and Man who hold 15% of the preference shares disagree and assert that the proposals cannot be effected unless with their approval. • The law provides a remedy for this through S. 93 of Companies Act 2016, where shareholders representing at least 10% of the class may apply to the Court to have the variation disallowed within 30 days from the date on which the variation is made.