by Lim Jo Yan and Teoh Huei Wen
The Passing of Companies Bill 2015
On 4 April 2016, the Malaysian Parliament passed the Companies Bill 2015.The Bill was formulated with an aim to revamp the existing corporate landscape in Malaysia under the Companies Act 1965 (“Act”), of which some provisions were deemed to be obsolete due to economic development, corporate sector expansion, and globalisation. Amongst the objectives of the Bill were: to increase the ease of doing business in Malaysia, to reduce the cost of compliance, and to improve corporate governance and internal control of companies.
In this article, we share our views on the implications of the Bill from the real estate perspective, ie. how the Bill affects owning of property via a private limited company in Malaysia.
The Advantages of Holding Real Property by a Private Limited Company
A company is a separate legal entity from its shareholders. This means that, generally, the liabilities of the company are separate from its shareholders. In the event the private limited company is liable for any matter (whether related or not related to real property), the liability of the shareholders is limited to the amount of capital that each has contributed to the company.
Secondly, the process of disposal of shares is easier and faster than the process of disposal of real property. Instead of disposing the real property outright, the shareholders may dispose of their shares in the company that owns the real property. In addition, the stamp duty rate for the disposal of shares may be lower than the stamp duty rate for the disposal of real property.
Another essential consideration is that, if there will be several parties owning a piece of real property, it may be useful if all parties incorporate a company to hold the real property. Those parties will become shareholders of the company, and appoint directors to manage it. Decision making at the company level is less burdensome, as only a simple majority or 75% majority approval from shareholders is required depending on the nature of the transaction (instead of the approval of all parties in the case of a direct disposal of the real property).
Further, in the event of disposal of the real property, it may be easier for a purchaser to deal with a single company (which is represented by its authorised representative) than a group of vendors (who may each have differing opinions) during the negotiation of the sale and purchase transaction.
It is Easier to Incorporate a Company Under the Bill
Under the Bill, a company may be incorporated by a single shareholder and a single resident director (instead of two subscribers and two resident directors under the current regime).This means that a single person may have full control over the company, and indirectly own real property through a company. The person may dispose of the shares in the company as a whole in the event he wishes to sell the real property.
Besides that, the Bill has removed the requirement for a private company to conduct an annual general meeting. This saves the company maintenance cost to hold an annual general meeting of its shareholders every year. The risk of dilution pursuant to subsequent fundraising may be mitigated.
Another important development under the Bill is the introduction of a no par value regime where the share capital of a company has no par value. One important implication from this reform is that a company may be able to issue shares at a value of its choice, without being restricted by the rules on issuing shares at a premium or at a discount. Following the abolishment of the par value regime, the risk of dilution pursuant to a subsequent fundraising may be mitigated, as the company is free to determine the issue price per share and the number of shares to be issued. That said, in practice, the company may have to assess the value of its shares so that it is issued at an acceptable valuation to parties.
Decision-making Process in the Company is Simplified
The Bill makes it easier to pass a written resolution. Under the Act, a written ordinary resolution may only be passed by the shareholders if it is signed by all shareholders of the company. The Bill diminishes the difficulty of passing a written ordinary resolution; it only requires a simple majority of more than half of the shareholders of the company to sign on the written resolution in order to pass it as a written ordinary resolution.
Under the Bill, written resolutions to acquire or dispose of substantial undertaking (ie. an undertaking which value exceeds 25% of the total assets of the company) may now be passed by a simple majority (instead of unanimous consent under the Act).
The Process of Capital Repayment to Shareholders is Simplified
In the event the company has excess of capital (eg. following the disposal of assets or as a result of collection of rental income), it may return the capital to its shareholders by way of capital reduction. The process of capital reduction under the Act is cumbersome as it requires a court order to do so. With the passing of the Bill, capital reduction is now possible without the need to obtain a court order. The Bill allows for reduction of share capital by a special resolution supported by a solvency statement made by all directors that the company is able to pay its debt when it becomes due, and the asset of the company is more than its liability.
The Pitfalls of Holding Real Property by a Private Company
The company will incur costs (such as corporate secretarial fees, auditor fees, tax agent fees) to maintain the existence and operation of the company. Depending on the income level of the company as compared to the individual, there may be income tax efficiencies through a company. Separately, the company disposing real estate is required to pay real property gains tax regardless of the number of years of acquisition of the real estate. The rate of real property gains tax depends on the number of years the property is held by the owner. Note also that shareholders disposing shares in the company may be required to pay real property gains tax in the event the company is a real property company. Under the current real property gains tax regime, no real property gains tax is payable in the event the shareholder (being an individual) has held shares in the company for more than five years.
There is no hard and fast rule on which is the best way to own real property, either in the name of the individua lowner or by a company. That said, we foresee that the Companies Bill 2015 when it comes into effect will bring great advantage to investors when deciding on the method to own real property.
Last but not least, in the event two or more persons incorporate a company to acquire real property, it is highly advisable that these persons enter into a shareholders agreement to regulate their relationship as a shareholder of the company. The shareholders agreement sets out the rights and obligations of each shareholder, and it may include provisions on the terms of exit of a shareholder (either through the sale of shares or property owned by the company).
(This article was published in the September 2016 issue of Home & Decor magazine.)
Download a PDF version – Companies Bill 2015: The Real Estate Perspective