I read in the news about the proposed selective capital reduction exercise for the listed company Selangor Properties Berhad. The major 68.2% shareholder of Selangor Properties proposes to privatise the company and allow the remaining 31.8% shareholders to exit the company with a pay-out of RM5.70 per share.
I read the announcement dated 25 October 2018. I was interested to see that the proposed mechanism for the selective capital reduction will be by way of a court order under section 116 of the Companies Act 2016. This is instead of the alternative route of using the solvency statement.
What is a Selective Capital Reduction?
A selective capital reduction is a process of cancelling only certain shares out of the entire shareholding. It is useful mechanism to allow certain shareholders to exit. The remaining shareholder will waive any right to a return of capital so capital, or money, will only be paid to the exiting shareholders.
Capital Reduction by Court Order or Solvency Statement
For any capital reduction, the starting point is the requirement to have a special resolution by the shareholders. After that, the Companies Act 2016 allows for a capital reduction by way of court order (section 116) or by way of the faster solvency statement route (section 117). In the past, the Companies Act 1965 only allowed for a court order for capital reduction. The Companies Act 2016 introduced an alternative, and simpler, procedure through the solvency statement.
After procuring the special resolution, the solvency statement route could be theoretically completed within 6 – 8 weeks. For the court order route, from filing to obtaining the eventual court order, could take 2 – 3 months, if not longer.
Trend Among Public Listed Companies
I have tracked the public listed companies that have embarked on capital reduction exercises. Out of around 20 companies, 18 will still stick to the court order for capital reduction while the remaining 2 will go for the solvency statement. I believe the reason for this is that the court order for capital reduction is tried and tested. Lawyers and the company’s advisers are used to this process. Importantly as well, the solvency statement may attract additional risks of personal liability on the part of all the directors who have to sign off on the solvency statement.