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Issuance of Preference Shares by Malaysia Companies

2024-06-24
Unless otherwise indicated, the company stated in this article refers to the private company incorporated in Malaysia in accordance with the Malaysian Companies Act 2016 (CA 2016).

Company shares are a type of security that symbolizes the level of a shareholder’s ownership in a company. It is common for a company to issue various types of shares, each of which grants its holders certain types of rights.

In Malaysian companies, the two most prevalent forms of shares issued to shareholders are ordinary shares and preference shares. Each type has its own set of features and privileges for the holders.

As a shareholder of a company, you must grasp the difference between the two types of shares, as the type of shares you own determines your rights in the company.

  1. Ordinary Shares vs Preference Shares

    First and foremost, let’s vent in greater depth about the key differences between the two classes of shares and their respective rights:

    Overview in General

    Ordinary Shares

    ·     most common type of shares issued and widely regarded as equity investments with risk.

    ·     usually issued to active shareholders.

    Preference Shares

    ·     it is more akin to loan capital and functions like a debt-like instrument.

    ·     can have a hybrid of characteristics of equity and debt.

    ·     commonly issued to non-active shareholders.

    Constitution

    Ordinary Shares

    ·     The Constitution can be silent on the issuance of ordinary shares, unless different “classes” of ordinary shares are to be issued.

    Preference Shares

    ·     Issuance of preference shares must be allowed in the Constitution. The rights and terms of preference shares, such as their issuance, conversion, and redemption, need to be specifically set out in the Constitution.

    Rights of Investors

    Ordinary Shares

    Has the rights:

    ·     to attend, participate, and vote at meetings;

    ·     to vote on any resolution of the company;

    ·     to an equal share in the company’s surplus assets distribution and dividends authorised by the company’s board of directors.

    Preference Shares

    Holders of preference shares have limited voting rights, particularly on matters that may affect their interests (e.g. variation to the rights, division or bonus issuance of shares, or winding up).

    Voting Rights

    Ordinary Shares

    Shareholders are granted full voting rights, allowing them to participate in the company’s decision-making process.

    Preference Shares

    Preference shareholders are often not granted voting rights, unless in matters that affect them, as otherwise stated in the Constitution of the company.

    Dividends

    Ordinary Shares

    Ordinary shareholders receive dividends after the payment to preference shareholders is made. The rate of dividend is to be determined by the board of directors.

    Preference Shares

    Preference shareholders receive dividends in priority to ordinary shareholders. The company’s Constitution may grant them a fixed amount or rate of dividend, subject to the availability of profit and the solvency of the company.

    Accumulation

    Ordinary Shares

    Ordinary shares dividend cannot be accumulated from previous years.

    Preference Shares

    Preference shareholders may have a cumulative right to dividends if it is clearly stated in the company’s Constitution. Arrears of dividend will be paid in the subsequent year when profit is sufficient.

    Repayment of Capital upon Winding-up of the Company

    Ordinary Shares

    Any remaining capital following the payment to creditors and preference shareholders is given to ordinary shareholders.

    Preference Shares

    Preference shareholders have the right to receive repayment of capital before ordinary shareholders but after the payment made to the company’s creditors.


  2. Types of Preference Shares

    Preference shares can only be issued by a company if they are permitted under its Constitution. As an issuer, the Company has the option to select from a variety of preference shares, including combinations of two or more of the following:  

    (1)
    		 Cumulative or Non-Cumulative Preference Shares

    All preference shares are presumed to have a cumulative dividend unless otherwise described. If a dividend is not declared in a particular year, preference shareholders with cumulative rights are entitled to cumulate the dividend payouts for that year at some point in the future. Whereas for non-cumulative preference shares, it does not entitle the subscriber to redeem dividends from the previous year(s) if dividends are not declared for any particular year.
    (2)
    		 Redeemable or Irredeemable Preference Shares

    Redemption of preference shares is a statutory right that can only occur at a predetermined price and date by satisfying the requirements under Section 72 of CA 2016 specified in the company’s Constitution. Redemption can be paid out of profits, a fresh issue of shares or capital. However, there is an additional requirement under CA 2016 for a company that wants to redeem its preference shares out of capital, which is to pass the solvency test. Unless the Constitution specifically states otherwise, the preference shares issued are deemed irredeemable.  
    (3)
    		 Convertible or Non-convertible Preference Shares

    Convertible preference shares can be changed to ordinary shares, at the holder’s discretion during a predetermined conversion period or method. If the Constitution makes no provision for conversion, then the preference shares are presumed to be issued without conversion rights.

    (4)
    		 Participating or Non-Participating Preference Shares
             
    Preference shareholders are entitled to partake in any surplus assets (on winding up) and further distributions with the ordinary shareholder if there remains of any surplus of profits after the dividend at a defined rate has been paid to preference shareholders. Preference shares are considered non-participating unless the Constitution states otherwise. If shares are given a preferential dividend, they are presumed to be non-participating in surplus assets.

  3. Advantages for Issuing Preference Shares

    The advantages of issuing preference shares for the company and the investors largely depend on the terms of the preference shares.

    Advantages for Company

    (1)
    		 Fixed return on dividend payable.
    (2)
    		 Flexibility in tax structure in which the preference share capital falls outside the calculation for determining a company’s eligibility for the SME preferential tax rate based on the share capital limits.
    (3)
    		 Widens capital market.
    (4)
    		 Company can raise funds without affecting or diluting the voting powers of the existing ordinary shareholders and consequently eroding their control over the company.
    (5)
    		 Unlike bank loans with interest payment, dividends are only paid out of profits.
    (6)
    		 Non-payment of dividends does not create a charge on the assets of the company like bank loans.

    Advantages for Investors

    (1)
    		 Regular fixed dividends and priority in dividend payments.
    (2)
    		 Provide preferential rights for dividend payments and capital returns during winding up.
    (3)
    		 Voting rights on matters that directly impact their interests.
    (4)
    		 Avoidance of tax on deemed interest income as dividends received are not taxable in the hand of shareholders.
    (5)
    		 Attractive and flexible features or rights of preference shares for investors, such as redeemable, cumulative and convertible etc.

  4. Conclusion

    In a nutshell, given the vast difference between the two types of shares, it is essential for all parties to fully understand the purpose of such issuance and their respective rights attached to those preference shares prior to any corporate exercise. Preference shares can be the right investment instrument for risk-takers or risk-averse investors but this very much depends on the terms of the preference shares. The terms will determine the return on investment and will have a significant impact on the company, the founders, and existing shareholders. Therefore, it is important to understand all terms of preference shares to mitigate the risks of potential disputes that may arise after the issuance.

Kaizen, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professionals in Kaizen for further clarification.

Disclaimer

All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage.

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