This article first appeared in Corporate, The Edge Malaysia Weekly, on April 18 - 24, 2016.

THE Companies Bill 2015, which will replace the Companies Act 1965 and expected to come into force by the end of this year, is going to lead to some interesting changes in the Malaysian corporate scene.

One of the changes relates to the resignation of auditors — a hot topic given some controversial resignations from private and public-listed companies (PLCs) in recent years.

Currently, an auditor’s resignation from a company is only effective once a replacement has been appointed. This gives rise to some issues. For example, if an auditor wants to resign on professional ethical grounds, it has little choice but to continue acting until the company has convened a general meeting and appointed a new auditor.

However, under the bill, this issue will no longer arise. The resignation of an auditor will be allowed to take effect 21 days after a written notice has been deposited at the company’s office, regardless of whether a new auditor has been appointed.

Additionally, the bill now grants the auditor the right to require directors of a PLC to convene a general meeting so that it can explain the circumstances of its resignation. The auditor can also require the company’s directors to circulate a written statement setting out those circumstances to the shareholders prior to that general meeting.

This change is a positive one and addresses an important gap in the current Companies Act, says legal firm Wong & Partners. “It will serve to strengthen the independence of auditors ... (they) will not be prevented from resigning and continuing to act against their will. While one can argue that the change is to the detriment of public shareholders, it actually also introduces more accountability from the board and management of the PLC to ensure that they conduct their business with appropriate responsibility and mindfulness,” Stephanie Phua, a partner in the firm’s corporate and securities practice group, tells The Edge in an email interview.

While there are various reasons why an auditor may want to resign — these can range from conflict of interest, price and service to a change of company ownership — sometimes, it is the company that may want to change its external auditor if it is hiding something, experts say. A frequently cited example is that of the high-profile accounting scandal at Transmile Group Bhd some years ago.

Another interesting feature in the bill is the introduction of financial assistance whitewash procedures. Under the Companies Act, there is a close-to-absolute prohibition against a company giving financial assistance for the purchase of its shares or the shares of its holding company.

According to Phua, this restricts debt pushdowns and prohibits acquirers from obtaining credit lines secured by the target company’s assets.

However, the bill’s financial assistance whitewash procedures allow a company, either private or public, to give financial assistance for the acquisition of its shares if it is able to fulfil certain conditions. For instance, the financial assistance must be approved by at least 75% of the company’s shareholders and a majority of the directors. Also, the company must receive fair value in connection with the giving of the assistance.

A whitewash is, however, only possible if the aggregate amount of the assistance, and any other previous financial assistance that has not been repaid, does not exceed 10% of the company’s shareholders’ fund.

“This new financial assistance regime is long overdue and will provide much greater flexibility in the implementation of corporate exercises,” Phua says.

“The whitewash will be attractive to private equity (PE) firms, in particular. In the past, PE firms have been unable to undertake leverage buy-outs (LBOs) in Malaysia due to the strict prohibition against financial assistance. That being said, given the cap of 10% of shareholders’ funds on assistance by a target company, it remains to be seen if the whitewash will have a significant impact in spurring LBOs in Malaysia,” she adds. 

The bill, which was passed by the Dewan Rakyat on April 4, is to be submitted to the Dewan Negara for approval at its next sitting. Once it is approved, new regulations, rules and guidelines for the new Act will need to be drawn up.

“The bill aims to increase the ease of doing business in Malaysia, facilitate the management and restructuring of share capital, strengthen corporate governance, modernise insolvency laws as well as simplify and refine existing laws,” says Zaid Ibrahim & Co in a client alert on the new bill on April 6.

Phua notes that, generally, the changes under the bill are positive and are aimed at better fitting today’s business realities. Most of the changes introduced were drawn from experiences and changes in jurisdictions that share a similar company law framework — such as the UK, Australia and Singapore — and as such, are tried and tested concepts.

“For example, the par value requirement for shares has already been abolished in many jurisdictions, including Hong Kong and Australia. Similarly, the abolishment of the requirement to hold annual general meetings for private companies mirrors the current practice in Australia and the UK,” she points out.

The adoption of a no par value regime under the bill will simplify a company’s accounts, in that the concept of share premium accounts and reserves will no longer be required. It will also enable a company to raise capital with greater flexibility, Phua says. Apart from that, it also helps to erase the misleading perception that because of the par value, a company will have reserves and be able to pay its debts, she adds.

Under the bill, private companies will be allowed to have a single director and a single shareholder and do not need to hold annual general meetings. While this is expected to reduce the companies’ costs and administrative burden, critics worry about lack of accountability and transparency issues.

“(But) the reality is that in practice, notwithstanding the current minimum ‘two individual shareholders’ requirement, small owner-operated companies are already being structured such that in substance, the entire economic interest and control is vested in one person,” Phua comments.

“The bill therefore does nothing more than recognise existing practice and reduce compliance costs. This is, in fact, the case in many other jurisdictions such as the UK, Australia and Singapore and we consider this a welcome development for entrepreneurs and small and medium enterprises,” she adds.

She also points out that changes introduced by the bill will have a knock-on effect on other legislations. “We think that a key challenge would be in ensuring that these other legislations are also updated to avoid inconsistencies.”

For PLCs specifically, the bill also require amendments to the Bursa Malaysia listing requirements. For example, under the bill, shareholders will have to approve the remuneration of directors of PLCs and their subsidiaries, and any benefits payable. “This is a change that will need to be reflected in the listing requirements,” Phua notes.

Brian Chia, who heads Wong & Partners’ corporate and securities practice group, notes that there are some provisions that are unique to the bill. “An example is the financial assistance whitewash provision where the company must receive fair value in connection with the giving of the assistance. While intuitively correct, the standards and evidence required to meet this criterion is unclear. For instance, ‘fair value’ can be objectively or subjectively determined.”

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.