On 8 November 2019, the Companies Commission of Malaysia (or SSM, being its abbreviation in Malay) issued its Consultation Document for the Guidelines for the Reporting Framework for Beneficial Ownership of Legal Persons. SSM has invited any comments by 4 December 2019.
I had written earlier about the global trends for the need for transparency in beneficial ownership details and also the existing Malaysian position in the Companies Act 2016.
Once these proposed guidelines on beneficial ownership are brought into force, they will bring much certainty in terms of the disclosure obligations on the part of companies, limited liability partnerships and businesses in general. This is a good step in strengthening the need for disclosure on beneficial ownership.
In the first part of this post, I highlight some of the salient changes being proposed for companies specifically. In the second part, I then set out 8 of my observations on the proposed guidelines in relation to companies.
Part A. The Proposed Elements of the Beneficial Ownership Reporting for Companies
The existing provision in the Companies Act 2016 (CA 2016) defines beneficial owner as the ultimate owner of the shares and does not include a nominee of any description. The proposed guidelines aim to provide a clarification of the phrase “ultimate owner of the shares”.
I set out 6 of the more important points on the beneficial ownership reporting guidelines for companies.
#1: Identifying criteria for a company limited by shares
For a company limited by shares, the ultimate owner of the shares would be a natural person who meets one or more of the following criteria:
- Has interest, directly or indirectly, in at least 20% of the shares. It would appear that this would mean that even preference share holders may satisfy this requirement, despite the preference share holder generally not having the ability to vote on the preference shares.
- Holds, directly or indirectly, at least 20% of the voting shares of the company.
- Has the right to exercise significant influence or dominate control, whether formal or informal, over the company or over the directors or the management of the company.
- Has the right or power to directly or indirectly appoint or remove a director(s) who hold a majority of the voting rights at meetings of directors.
- Is a member of the entity and, under an agreement with another member of the entity, controls alone a majority of the voting rights in the company.
#2: Identifying criteria for a company limited by guarantee
For a company without share capital i.e. a company limited by guarantee, beneficial ownership will be established by control. A natural person will be deemed to be a beneficial owner of a company limited by guarantee if that person meets any one or more of the following criteria:
- Has the right to exercise significant influence or control, whether formal or informal, over the company, or over the directors or the management of the company.
- Has the right or power to directly or indirectly appoint or remove a director.
- Has the right to exercise, or actually exercises dominant influence or control over the company.
#3: Steps That Must Be Taken by Companies, both Malaysian and Foreign
Under paragraph 25 of the proposed guidelines, companies must take reasonable measures to identify its beneficial owners. The guidelines lists some of the steps, which are not exhaustive. The steps including reviewing all documents and information available at the company’s level, and to consider interests in the company held by individuals, corporate entities and/or trusts.
#4: Company to Obtain and Maintain Up to Date Beneficial Ownership Information
Under paragraph 26 of the proposed guidelines, companies will need to obtain the beneficial ownership information by sending out the required notices under section 56 of the CA 2016 (section 56 notice) at least once in a calendar year for the purposes of submission of the annual return. Annexure C of the proposed guidelines sets out the suggested form of notice.
Further, companies must have a policy to require shareholders to notify the company when there are changes to the beneficial ownership information.
#5: Twin Responsibilities of the Company (via the Board of Directors) and the Company Secretary / Agent
The proposed guidelines make it clear that the duty to obtain the beneficial ownership information, and to keep the information together with supporting documents, will rest with the company (see paragraph 36 and 37 of the proposed guidelines). This duty also includes keeping the beneficial ownership up to date, accurate and accessible in a timely manner (see paragraph 29).This means that the Board must ensure that the company complies with this duty.
However, the duty to lodge the beneficial ownership information with SSM lies with the company secretary. For a foreign company, this duty lies with the agent appointed by the company.
#6: Entry Point and Trigger Point for Beneficial Ownership Information
For newly incorporated companies, the entry point for beneficial ownership information is where the information is obtained within 30 days after the appointment of a company secretary.
For existing companies, the beneficial ownership information will be when the annual return is lodged.
In addition, paragraph 6 of the proposed guidelines sets out that for companies are required to obtain and keep the beneficial ownership information within 6 months from the commencement date of the guidelines and to notify SSM upon the expiry of the time frame, or such further extended time frame as SSM may determine. This will effectively mean a big bang approach to trigger all existing companies to obtain the beneficial ownership information and to have the 6-month period to flesh out the information.
I next set out eight of my observations on the proposed beneficial ownership guidelines.
Part B. Eight Observations on the Beneficial Ownership Guidelines
#1: Need for Compliance with the Guidelines
Once these guidelines are issued, there is legal force behind them. Section 20C of the Companies Commission of Malaysia Act 2001 allows SSM to issue such guidelines and the person to whom the guidelines applies shall comply and give effect to such guidelines.
If there is a failure to comply with these guidelines, section 20E of the Companies Commission of Malaysia Act 2001 will apply. SSM can direct a person in breach to comply or to remedy the breach, impose an administrative penalty, or reprimand the person. SSM can also take further legal proceedings to apply to the Court for orders of compliance or to recover the administrative penalty.
#2: Potential Issue with Companies Limited By Guarantee
My view is that the beneficial ownership guidelines and the present definition of beneficial owner in the CA 2016 may not apply so clearly to companies limited by guarantee.
The starting point is that the primary legislation is the CA 2016. It provides the definition for beneficial owner being the “ultimate owner of the shares”. Companies limited by guarantee will not have shares so the primary legislation definition for beneficial owner cannot apply.
Subsidiary legislation or here, guidelines, cannot be inconsistent with the primary legislation. It is quite likely that these guidelines would fall within the meaning of subsidiary legislation under the Interpretation Act. Section 23 of the Interpretation Act essentially sets out that any subsidiary legislation that is inconsistent with an Act shall be void to the extent of the inconsistency.
With the CA 2016 referring to beneficial owner being the ultimate owner of shares, and with the proposed guidelines paragraphs 18 to 21 referring to essentially indicators of control over a company limited by guarantee, the two definitions may not sit comfortably with one another.
It may therefore be necessary to eventually amend and further expand the definition of beneficial owner under the CA 2016. This is especially where paragraph 11 of the proposed guidelines intends to, in a way, define beneficial ownership through indicators of ownership of shares as well as effective control of a company.
#3: Proposed Clarification on Agreement Between Members
At paragraph 12(d) of the proposed guidelines, one of the criteria for a person being the ultimate owner of the shares is where that person is a member of the entity and, under an agreement with another member, controls a majority of the voting rights in the company.
Perhaps it would be good to expand this criteria to cover the situation where the agreement is with one or more members of the company and where this agreement with one or more members leads to the control of the majority of the voting rights in the company.
#4: Companies Must Take Reasonable Measures to Identify
Paragraph 25 of the proposed guidelines imposes obligations on companies where the companies must take reasonable measures to identify its beneficial owners. There are four proposed measures that are set out but they are not meant to be exhaustive.
The measures includes reviewing documents and information, consider interests in the company held by individuals, consider any evidence that can show interests or rights, and the catch-all any other actions that may have to be taken depending on the circumstances of each companies.
These are wide obligations and necessary in order for all companies to take the reporting framework seriously.
#5: Triggering of the Section 56 Notice and Annual Issuance of the Section 56 Notice
Paragraph 26(a) of the proposed guidelines sets out that companies will now be required to send out the section 56 notice of the CA 2016 at least once in a calendar year for the purposes of the submission of the annual return. This ensures at least an annual mechanism to ensure up to date information.
#6: Company Policy for Shareholders to Notify
In turn, paragraph 26(d) of the proposed guidelines requires companies to now have a policy to require shareholders to notify the company when there are changes in the beneficial ownership information.
It is not clear how companies are to codify such a policy for its shareholders to comply. Would it involve incorporating a provision within the company’s constitution? How else would a company impose such a policy on existing and future shareholders?
Further, it is not clear what will be the penalties on a shareholder if a shareholder is in breach of such a policy to comply. It is not clear whether section 20E of the Companies Commission of Malaysia Act 2001 would apply in this scenario. By comparison, a shareholder can commit an offence under section 56(7) of the CA 2016 if the shareholder did not comply with a section 56 notice for provision of information.
#7: The Section 56 Mechanism and Possible Limitations
The section 56 mechanism under the CA 2016 on disclosure of information may have certain limitations.
First, the company can issue a section 56(1)(a) notice to get confirmation from its shareholder whether the shareholder essentially holds any voting shares as beneficial owner or as trustee. This can lead to a “yes” or “no” confirmation. Based on a plain reading of this provision, it would not necessarily lead to the shareholder further disclosing any information further up the beneficial ownership chain to trace up to the ultimate controller.
Second, the company can issue a section 56(2) notice to any other person and to require for disclosure whether the person holds an interest as beneficial owner or as trustee. Again, this can lead to a “yes” or “no” confirmation. But this does not necessarily lead to this person having to disclose further information to allow for tracing of control further up the chain.
Third, the company can issue a section 56(3) notice to its shareholder to disclose any agreement or arrangement under which another person is entitled to control that shareholder’s voting rights. This will allow for disclosure of such a control by way of this agreement or arrangement, and with the details.
#8: The Need for Verification of the Beneficial Ownership Information
Paragraph 39 of the proposed guidelines sets out the obligations on a company, company secretary and agent of a foreign company to conduct verification on the beneficial ownership information.
Paragraph 40 then explains that when identifying and verifying a beneficial owner, a company must rely on “sufficient information or documentation” as a basis upon which the beneficial owner is identified and verified.
Paragraph 41 then provides some guidance on what amounts to “sufficient information or documentation” as it includes, but is not limited to, certified copies of a national identification card, passport or other similar documents, founding documents and agreements regulating the power to bind the company.
I think as the Malaysian corporate environment moves into this beneficial ownership reporting framework, industry practice and best practices will also continue to guide the practice of what amounts to sufficient information or documentation to allow for the identification and verification of the beneficial ownership information.