CHAP 14: CAPITAL FINANCING

ANIE SANGGUMJOYNER JOYCELIN G.JOHNGIAVINNIE JENOS

FINANCING THE COMPANYWays to finance company

i. Capital financing (CF) - issue shares to shareholders ii. Debt financing (DF) - borrowings

Basic rules governing CF & DF i. Bursa Securities Main Market Listing Requirements – BI, RI ii. Prospectus Guidelines - Securities Commission (SC) - iii. Guidelines on the Offering of Private Debt Securities, Guidelines on the Offering of Islamic Securities, Guidelines on the Offering of Asset-backed Securities,

(issued separately by the SC).

Definition Of MemberMembers of a company, if1. Subscribers to the M&A OA2. Names are entered in

company’s Register of Members3. Persons who have to acquire

shares before qualifying to act as directors

Legal Jargons In Capital Structure

1. Authorized capital – max of share capital to issue

2. Issued capital – share capital that has been issued

3. Paid up capital - part of issued capital; called and

paid up

Classes Of Shares That May Be Issued

1. Ordinary shares - equity capital - main risk bearers - have voting right in GM

2. Preference shares - refer to the M&A of the co.

- exception S148(2) - Cumulative pre. s/h vs Non-cumulative

pre. s/h

Raising Of Share Capital In Private Companies

Section 15 - private cannot offer any shares to

public

Section 132D - vests the power to issue shares

Raising Of Share Capital In Private Companies (Cont.)

Application and Allotment of Shares i) to become a member, persons shall complete an application form & submit it to the co. together with the application monies

ii) meeting will be held to approve the allotment. Once approved, a resolution passed. (resolution must be authorized the director to issue share cert. and affix common seal)

Raising Of Share Capital In Private Companies (cont.)

Application and Allotment of Shares iii) co. need to prepare share cert. (within 2months after incorp. iv) Comsec – update the Register of Members v) Comsec - lodge to CCM, Form 24 & Form 11 ,if applicable, within 1 month after date of allotment.

Allotment of Shares for a Consideration Otherwise than for cash

- Co. may issue shares to vendor of asset or to a

person in consideration of his services rendered to the co. - Procedures for allotment of shares: similar like allotment of shares for cash, except the agreement to take up the shares will be evidenced by a contract between a co. & the allottee. (if no written contract, FORM 24 & 25 need to be submitted to CCM)

• Types of Shares CapitalOffer for

Sale

Right Issue

Public Issue

Raising Of Share Capital In Public Companies

Public IssueCompa

nyNew

Shares

Prospectus

Public

Application Form +

Application Monies

Underwriters

Create

Co publishes offer

Interested investors may subscribe and submit their forms

Balloting if oversubscribed

Issue underwritten by issuing house/merchant bank

Offer For SaleCompany

Existing shares

Issuing House

Public

Application Forms +

Application Monies

UnderwritersOffered for sale to the public

Stockbrokers/merchant bank

Offers prospectus to the public for the subscriptions

Interested shareholders may subscribe and complete the forms

Balloting if oversubscribe

Comparisons Public Issue Offer for Sale

Issue directly from the company to the new shareholders

Company issue prospectus to the public

Issuing house will be remunerated by a fee of commissions

Shares are allotted to the issuing house which will offer to the public for subscription.

The issuing house will issue prospectus to the public

Issuing house will be remunerated by the profit of the difference between the price at which they will subscribe and the offer price.

Shares issue

Right Issue

• Issue new shares to the existing shareholders for cash.

Special Issue

•Listed company would give special issue of shares at a min lower price than market price to achieve the min 30% of Bumiputra equity Participation. (NDP)•Only Bumiputra and individuals are eligible for this issue.

Bonus Issue

• Referred as a script issue or capitalisation issue

Underwriting Agreement for a firm ( the managing

underwriter) to subscribe or procure subscription for the shares to be issued in consideration for a commission to be paid by the company.

Managing underwriter is a merchant bank and responsible to arrange sub-underwriting agreement

Not a statutory requirement for underwritten issue of shares unless it is listed company in B.M and seeking quotation on the B.M.

Prospectus Section 212 of Capital Market and Services Act

2007 : all companies seeking listing on BM will require Securities Commissions (SC) approval.

Prospectus issued must be registered with SC unless all other equity based corporate proposals (acquisition, disposals, & placement of securities )

SC will continue to vet and register prospectuses (to ensure adequate and meaningful disclosures to investors )

Issuance of listing prospectus or introductory document must comply with Prospectus Guidelines.

Company raises funds from the public it is required to issue prospectus when :

- a form of application is issued, circulated and distributed to the public

- an offer is made to the public for purchase.

- an invitation is made to the public to deposit money/lend money to corporation.

Section 4 : any prospectus advertisement, notice, invitation or circular inviting application or offers from public to subscribe or purchase any shares of a company.

The prospectus must be registered with the CCM and later issue Form 21A (Certificate of Registration of prospectus )

Situations Of No Prospectus Is Required

Application form which is issued in connection with shares are not offered to the public.

Application form issued in connection with a take over scheme.

Reduction Of CapitalCompany may reduce its share capital subject

to the confirmation of court and authorized by its Articles by special resolution.

Reduced by:1. Extinguishing or reducing the liability on any

of its shares in respect of share capital not paid up

2. By cancelling any paid up capital which is loss or unrepresented by available asset.

3. By paying off any paid up share capital which is in excess of the needs of the company.

Procedures To Reduce The Capital Of Company

The board must convene a general meeting by giving 21 days notice to pass special resolution

File Form 11(notice of resolution) with CCM within 14days after passing the resolution

Submit petition to the High Court for confirmation of reduction of capital.

The court may then take the necessary steps to safeguards creditor and to ensure that the rights between different class of shareholders are maintained.

Shares Buy BackOnly for listed companiesCompliance for company proposes to

purchase its own shares pursuant by Section 64A are:

1. Declaration by Directors2. Advertisement3. Adjustment to register of Substantial

Shareholders4. Lodgment of forms5. Restriction on Purchase6. Restriction on Selling Treasury Shares.

Declaration by DirectorsThe majority shall make declaration to the

effect that they made an enquiry into the affairs of the company in case that the company have more than two directors.

In a meeting of directors ( opinion ) : Necessary to buy back its own shares The shares buy back is made in good faith

and in the interest of the company. As the date of declaration, company is

solvent and the shares buy back would not result in the company being insolvent or its capital being impaired. The company will remain solvent after each buy back during the period of 6months after the date of declaration.

Cont.The declaration shall have no effect unless it is made

at meeting of directors within 7 days immediately preceding the first shares buy back and lodged with CCM & BM.

The copy shall be extended to the SC within 7 days after it is made.

The declaration should be valid for shares buyback for a period of 6months after the date was made.

A director who makes declaration without having reasonable ground for his opinion shall be guilty of an offense.

A company shall lodge FORM 28A (Notice of Shares Buy Back by a Company) with CCM and BM within 14days after the shares are purchased.

AdvertisementNotices of general meetings are

required to be advertised in daily press (under paragraph 7.15 of the Main Listing Requirements)

Adjustments to Register of Substantial ShareholdersThe company shall within 3days of the buyback,

sale, cancellation or distribution make appropriate adjustments to its Registrar of Substantial Shareholders of the resultant percentage shareholdings of each of the substantial shareholders and insert the details of every person who became a substantial shareholders as a result of the share buyback, sale, cancellation or distribution .

The company shall within 14days of the buyback of its share or any sale of its treasury shares, send a notice to each of the substantial shareholders to notify them of the entry or adjustment made In the register in respect of their shareholdings.

Lodgment of FormsSale and cancellation of Treasury

Shares: Shall within 14days Lodge FORM28B (Notice of Sale or Cancellation of Treasury Shares) with CCM , BM & SC.

Restriction on PurchasesParagraph 12.09 of the Main

Listing Requirements :A company must not purchase its

own shares or hold any of its own shares as treasury shares if it exceeds 10% of its issued and paid up capital. (aggregate of the shares purchased or held)

Restriction on Selling Treasury SharesMay only sell its treasury shares

at discount if the discount not more than 5% of the 5 days weighted average market price.

Share Certificates Issued to each shareholder (SH) – as evidence that he is a member of the company & the amount of his holding

Shall be under the company’s common seal• Number of shares held by a member• A prima facie evidence of the title of the member to the shares

S. 107 of the Act - share certificates must be issued to the SH • within 2 months after allotment• Within 1 month after the date of a lodged & approved transfer

Loss or destruction of share certificates• A SH may request for a duplicate share certificate for

replacement provided the correct procedure is followed (textbook page 248)

Transfer & transmission of shares S. 98 – a share shall be a movable property, and as such a SH may sell his shares, or give them away, or pledge them as security for a loan May be transferred and once transferred, the transferor hands over

the whole package of rights that the shares represent to the transferee Transfer of shares Transferred when ownership of the share changes by voluntary act of

the former owner Transmission of shares A change of ownership not by agreement and voluntary action of the

parties involved, but by operation of law and death, insanity, liquidation or bankruptcy of the former owner

S. 103 – a transfer shall not be registered unless Form 32A has been delivered to the company except those transmitted by operation of law

Transfer of Shares – Private CompanyProcedures:-

1. The transferor will execute Form 32A by signing it and deliver the transfer form together with the share certificate to the transferee in exchange for the payment of the transfer

2. The transferee (after signing) will present the transfer form for stamping based on the price or value of the shares

3. After Form 32A is duly stamped, it shall be presented to the company for the transfer to be registered

4. A board meeting will be convened & a resolution will be made to that effect

5. If the transfer was approved – a new share certificate will be prepared and sent to the transferee within 1 month after date of lodgment. However, S. 105 - if the transfer was not approved, a notice of refusal shall be sent to the transferor & transferee within 1 month after the transfer was lodged

Transfer of Shares – public listed Company

AGENT (Remisier)SHAREHOLDER CENTRAL BUYER

(Stockbroking Co)

SCORE(System On

Computer Used Order Routing &

Execution

BURSA MALAYSIA’S

Trading System)

Matching buy order (4)

Selling order (1) Sell slip (2)

Trade confirmation (5)Confirm shares sold (6)Matching buy order (4)

Member’s Death Various considerations will determine the courses of action available to a personal representative:- whether the deceased was a sole holder or joint holder whether he died testate or intestate whether he (if died testate) has appointed an executor who is willing to act as his executor

Held the shares solely & with a Will

Without a Will

No executor – a personal representative will act as an administrator, produce Letter of Administration with the Will as evidence of his appointment

Has executor – the executor must produce a Letter of Probate of the Will

Held the shares solely - the next of kin may apply to the court for Letter of Administration as evidence of his appointment

Held the shares jointly – the shares is vested in the survivor(s) of the joint holding requiring evidence of death

Member’s Bankruptcy A member’s shares are vested in his trustee/assignee

upon bankruptcy

The trustee/assignee must produce an office copy of the Court’s order of his appointment to be entitled to deal with the bankrupt’s shares

The trustee/assignee may elect to deal with the shares in any of the following ways when he is in the course of realizing the bankrupt’s properties:-

He may have the shares registered in his own nameHe may nominate & elect some other person registered as

holder of the shares

Lunacy of a Member The Court may appoint a Receiver in

Lunacy to administer the affairs of a SH who is of unsound mind

The receiver must produce to the company the Court Order confirming his appointment

For joint holding, the lunatic member’s interest does not pass to the surviving joint holder(s) but to the Receiver of Lunacy instead

Liquidation of a Corporate Member The liquidator is required to produce an

evidence of his appointment to the company

For a compulsory winding up – the liquidator shall produce the Court Order to the company

For a voluntary winding up – a certified copy of the resolution for winding up & authorizing his appointment shall be the evidence of his appointment

Malaysian Central Depository Sdn. Bhd. (MCD) A subsidiary of the Bursa Malaysia, established in 1990 To provide efficient central clearing & settlement of securities The Securities Industry Act 1991 authorized the establishment of a Central Depository provided the legal framework & safeguards for users (participants) in the CDS

Principal activity of MCD – the operation & maintenance of a CDS in respect of shares, bonds, debentures or other securities

CDS functionalities:-i. Account managementii. Public issuesiii. Depositsiv. Transfersv. Corporate actions

The Articles set out the power to declare a dividend & other provisions relating to declaration & payment of dividends. the power to declare dividend lies with the company in general meeting but the amount

of dividend to be declared cannot exceed that the directors recommend the directors have the power to declare & pay interim dividends justified by profits dividend must be paid out of profits only the directors decide how much dividend to be declared

Profits available for the payment of dividend paid out of profits only cannot be paid if it would result in assets being insufficient to pay debts can be paid out of the revenue profits of the year may be declared out of profits in a reserve fund may be declared out of a realized capital profit

Procedure for payment of dividend for Private Company & Non-Listed Public Company Interim dividend Final dividend Payment of dividend in a Public Company

Dividends

Must be submitted to the Registrar of Unclaimed Moneys – if remained unpaid for more than 12 months after becoming payable.

Must be advertised by the company in the gazette annually during the month of March.

12 months after the advertisement in the gazette, all unclaimed dividends will be paid within 14 days to the Consolidated Trust Account (CTA).

Owners of the unclaimed dividends may recover them before those moneys are paid to the CTA.

Unclaimed moneys will remain in the CTA for a period of 6 years and if it exceeds, they will be paid into the Consolidated Revenue Account.

Unclaimed Dividends

Provides opportunity for employees to own shares in the company.

To be submitted to CCM for approval before SH’s approval at general meeting.

Open for participation to all employees who have been confirmed for employment & rest on 2 main factors – length of service & gross annual salary.

Price offered – usually below the market price of the shares.

Company may make arrangements for employees to apply for loan facilities from banks to finance the purchase of shares.

The rejected shares are not available for renunciation to any other employees – they will be allotted as deemed fit by the BOD.

Employee Share Scheme

Past Year Question June 2013 Part B, Q1Jan 2013 Part A, Q4June 2012 Part A, Q10

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