The Companies Act 2016 of Malaysia introduced significant changes to Malaysian company law, including the ability to issue different classes of shares with varying rights and privileges1. This has paved the way for structures like Share A and Share B, enabling founders and key stakeholders to retain control of a company even with minimal shareholding. This report delves into the characteristics of Share A and Share B, explores strategies for controlling a company with minimal shareholding, and examines the potential risks and drawbacks associated with such structures.
Different Types of Shares in the Companies Act 2016
The Companies Act 2016 recognizes various types of companies, including private companies (Sdn Bhd), public companies (Berhad), companies limited by shares or guarantee, and unlimited companies1. A notable change introduced by this act is the simplification of company categories, particularly for private companies, which now have fewer restrictions and requirements 1.
Ordinary Shares and Preference Shares
The Act allows companies to issue different classes of shares, each with different rights2. This flexibility allows for the creation of Share A and Share B structures, where each class may have distinct voting rights, dividend priorities, and other privileges. While the concept of “one share, one vote” generally applies to ordinary shares, the company’s constitution may be structured to allow weighted voting rights, providing one class of ordinary shares with more votes than another3. This is explicitly allowed under Section 69(d) of the Companies Act 2016, which states that shares in a company may “confer special, limited, or conditional voting rights”3.
Ordinary shares may be converted to preference shares if such terms are prescribed at the time of share issuance and stipulated in the company’s constitution2. However, a company cannot convert all issued ordinary shares to preference shares, as it must have at least one (1) issued ordinary share 2.
No-Par Value Regime
Another significant change introduced by the Companies Act 2016 is the no-par value regime for shares1. This regime simplifies share issuance and provides companies with more flexibility in managing their share capital. Under this system, the monetary value of a share is determined by the paid-in capital at the time of issuance1.
Authority to Issue Shares
The general power to allot shares, grant rights to subscribe to shares, convert any security into shares, and allot shares under an agreement, option, or offer is vested in the members by passing a resolution 4. However, the authority to issue shares generally lies with the company’s directors, who must follow proper procedures and ensure compliance with any restrictions in the company’s constitution 1.
Characteristics and Voting Rights of Share A and Share B
Although Malaysian company law doesn’t explicitly define “Share A” and “Share B,” these terms are commonly used to represent different classes of shares with varying rights3. Typically, Share A is associated with greater voting power and may be held by founders or key executives to maintain control over the company5. Share B, on the other hand, may have fewer voting rights and be offered to investors or the public5.
The specific characteristics of Share A and Share B, including the number of votes per share, dividend priority, redemption rights, and other relevant terms, are determined by the company’s constitution3. Section 90(1) of the Companies Act 2016 mandates that a company with different classes of shares must “state prominently the voting rights attached to shares in each class” in its constitution3. For example, a company might issue Share A with 10 votes per share and Share B with 1 vote per share, allowing those holding Share A to exert greater influence on company decisions6.
This structure allows founders and key stakeholders to retain control over the company even with a smaller percentage of overall shareholding. By holding shares with greater voting power, they can influence key decisions, such as electing board members, approving mergers and acquisitions, and determining the company’s strategic direction.
Strategies and Legal Structures for Control with Minimal Shareholding
Besides utilizing Share A and Share B structures with differential voting rights, several other strategies and legal mechanisms allow for control of a company with minimal shareholding under Malaysian company law:
● Shareholder Agreements: These agreements can outline specific control mechanisms and decision-making processes, granting certain shareholders greater influence regardless of their shareholding percentage7. For example, a shareholder agreement may require unanimous consent for certain decisions, giving minority shareholders with special expertise or knowledge effective veto power7. They can also include provisions related to:
a. Tag-Along Rights: These rights allow minority shareholders to sell their shares alongside majority shareholders in the event of a sale to a third party, ensuring they benefit from the same terms7.
b. Drag-Along Rights: These rights allow majority shareholders to compel minority shareholders to sell their shares in the event of a sale to a third party, facilitating a complete sale of the company7.
● Voting Agreements: Shareholders can enter into agreements that dictate how they will vote on specific matters, effectively pooling their voting power to achieve a desired outcome 8. This can be particularly useful for minority shareholders who want to exert greater influence on company decisions.
● Board Representation: Even with minimal shareholding, securing a seat on the company’s board of directors can provide significant influence over decision-making 9. This allows for direct involvement in setting the company’s strategy and overseeing its operations.
● Control Agreements: These agreements can grant a shareholder the right to determine the financial and business policies of a company, even without majority ownership8. This can be achieved through contractual arrangements that give the controlling shareholder specific decision-making powers.
● Acting in Concert: Shareholders can act in concert to exert greater influence on company decisions8. This involves coordinating their actions and voting strategies to achieve a common goal, even if they individually hold small shareholdings.
● Special Purpose Vehicles: A special purpose vehicle (SPV) can be used to retain control of a company’s financial risks and rewards8. An SPV is a separate legal entity created for a specific purpose, such as holding shares in another company. By structuring ownership through an SPV, a shareholder can exert control with minimal direct shareholding.
In addition to these strategies, it’s important to consider the following factors when setting up a company and aiming to control it with minimal shareholding:
● MSIC Code: When setting up a company, it’s important to consider the Malaysian Standard Industrial Classification (MSIC) code10. This code classifies the company’s business activities and is required by the SSM for statistical purposes.
● Shareholding Structure: When deciding on the shareholding structure of a company, consider the amount of capital invested by each person, their relative efforts and commitment to the business, and their speciality and expertise10.
● Company Charges: Certain charges on company assets must be registered with the SSM11. These include charges over debentures, uncalled share capital, shares of a subsidiary company, land, book debts, floating charges, and other assets. This information can be relevant to understanding the control structure of a company.
● Annual Return and Financial Statements: Companies are required to lodge an annual return and financial statements with the SSM11. The annual return includes information about the company’s directors, shareholders, and business activities, while financial statements can be used to evaluate a company’s financial health. This information can be useful for understanding control mechanisms.
Business Structures in Malaysia
When establishing a business in Malaysia, entrepreneurs can choose from various business structures, each with its own implications for control and ownership:
| Business Structure | Description | Pro | Cons |
| Sole Proprietorship | A single person owns and operates the business 12. | Easy and inexpensive to set up; owner has complete control. | Owner has unlimited liability. |
| General Partnership | Two or more individuals share ownership and management responsibilities 12. | Shared liability and resources; combined expertise. | Potential for disagreements among partners. |
| Private Limited Company (Sdn Bhd) | A separate legal entity with limited liability for shareholders 12. | Limited liability; easier to raise capital. | More complex compliance requirements. |
| Public Limited Company (Berhad) | A company whose shares are publicly traded on a stock exchange 12. | Access to public funding; greater growth potential. | More stringent regulatory requirements. |
Foreign companies also have options for establishing a presence in Malaysia, such as incorporating a local subsidiary in the form of a Sdn Bhd or registering a foreign branch 12.
Examples of Companies Utilizing Dual-Class Share Structures
While dual-class share structures are more common in other markets, they are gaining traction in Malaysia13. Grab Holdings Inc., a Southeast Asian company co-founded by Malaysians, is an example of a company that utilizes a dual-class share structure 13. Although primarily listed on NASDAQ, Grab’s structure provides insights into how differential voting rights can be used to maintain founder control.
The Companies Act 2016 allows for dual-class shares in both private and public companies 3. While currently utilized by private limited companies in Malaysia, their implementation in public-listed companies is still pending further announcements from Bursa Malaysia and/or the Securities Commission Malaysia 3.
Potential Risks and Drawbacks
While controlling a company with minimal shareholding offers advantages, it also presents potential risks and drawbacks:
● Reduced Accountability: When a small group of shareholders holds disproportionate voting power, it can reduce accountability to other investors14. This may lead to decisions that benefit the controlling shareholders at the expense of the minority shareholders, potentially creating conflicts of interest15.
● Increased Risk of Mismanagement: Concentrated control can increase the risk of mismanagement if the controlling shareholders lack the necessary expertise or experience14. This can negatively impact the company’s performance and harm the interests of all shareholders.
● Limited Exit Strategies: Minority shareholders in companies with dual-class share structures may have limited options for exiting their investment, as the controlling shareholders may have restrictions on the transfer of shares16. This can reduce liquidity and make it difficult for minority shareholders to realize the value of their investment.
● Potential for Undervaluation: Investors may discount the value of companies with dual-class shares due to concerns about reduced accountability and potential for conflicts of interest14. This can make it more challenging for companies to raise capital and achieve their full growth potential.
● Negative Perception: Investors may perceive dual-class share structures negatively, as they can be seen as a way for founders to entrench themselves and avoid accountability14. This can damage the company’s reputation and make it less attractive to potential investors.
Conclusion
The Companies Act 2016 in Malaysia provides a framework for companies to issue different classes of shares with varying rights, enabling structures like Share A and Share B. These structures, along with other legal mechanisms such as shareholder agreements, voting agreements, and control agreements, allow for control of a company with minimal shareholding. This can be advantageous for founders and key stakeholders who want to maintain control over the company’s strategic direction. However, it’s crucial to be aware of the potential risks associated with such structures, including reduced accountability, increased risk of mismanagement, limited exit strategies for minority shareholders, potential for undervaluation, and negative perception from investors.
The use of dual-class share structures in Malaysia is still evolving, particularly for public-listed companies. As the landscape changes, it is crucial for investors and stakeholders to understand the implications of these structures and their potential impact on corporate governance and shareholder rights.
Works cited
1. Complete Guide to the Companies Act 2016 in Malaysia – Datatracks, accessed February 16, 2025, https://www.datatracks.com/my/blog/companies-act-2016-malaysia/
2. Page 1 PART N SHARES (i) SHARES AND NO PAR VALUE REGIME 1. What is the rationale for migration to the new par value reg, accessed February 16, 2025, https://www.ssm.com.my/Documents/PART%20N%20r1%20updated%20111021.pdf
3. Dual-Class Shares in Malaysia: Empowering Founders and Attracting Investors – MahWengKwai & Associates, accessed February 16, 2025, https://mahwengkwai.com/dual-class-shares-malaysia-founders-investors/
4. Malaysian Companies Act 2016: an overview | ACCA Qualification …, accessed February 16, 2025, https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f4/technical-articles/mys-comp-act.html
5. Class A vs Class B vs Class C Shares, Explained – SoFi, accessed February 16, 2025, https://www.sofi.com/learn/content/classes-of-stock-shares/
6. Dual-Class Stock – Council of Institutional Investors, accessed February 16, 2025, https://www.cii.org/dualclass_stock
7. Shareholder Agreement Malaysia: Everything You Should Know – WenJie & Co., accessed February 16, 2025, https://www.wenjieco.com/articles/shareholder-agreement-malaysia
8. Attribution of voting rights under section 34 of the WpHG – Issuer Guidelines – BaFin, accessed February 16, 2025, https://www.bafin.de/EN/Aufsicht/BoersenMaerkte/Emittentenleitfaden/Modul2/Kapitel1/Kapitel1_2/Kapitel1_2_5/kapitel1_2_5_artikel_en.html
9. Interests in shares., accessed February 16, 2025, https://www.ssm.com.my/acts/fscommand/act125s0006A.htm
10. Things to Think About When Setting Up a Company – Altomate, accessed February 16, 2025, https://altomate.io/sg/starting_business/things-to-think-about-when-setting-up-a-company/
11. What You Need to Know About SSM Reports – CTOS – Malaysia’s Leading Credit Reporting Agency, accessed February 16, 2025, https://ctoscredit.com.my/learn-business/what-you-need-to-know-about-ssm-reports/
12. which-type-of-business-structure-is-best-for-you – OCBC Malaysia, accessed February 16, 2025, https://www.ocbc.com.my/business-banking/articles/which-type-of-business-structure-is-best-for-you
13. Understanding Dual Class Shares: A Malaysian Perspective – Amir Khusyairi & Associates, accessed February 16, 2025, https://law-aka.com/understanding-dual-class-shares-a-malaysian-perspective/
14. Controlled Companies in the S&P 1500: Performance and Risk Review, accessed February 16, 2025, https://corpgov.law.harvard.edu/2012/10/25/controlled-companies-in-the-sp-1500-performance-and-risk-review/
15. Types of Company Shares in Malaysia | Acclime Malaysia, accessed February 16, 2025, https://malaysia.acclime.com/guides/company-shares-types/
16. Controlling Interest Transactions: Advantages, Disadvantages And Complexities Of Selling Less Than 100 Percent Of A Company – Corporate Counsel Business Journal, accessed February 16, 2025, https://ccbjournal.com/articles/controlling-interest-transactions-advantages-disadvantages-and-complexities-selling-le