Introduction
Equity fundraising is a vital tool for private limited companies (Sendirian Berhad or Sdn. Bhd.) in Malaysia to raise capital for expansion or to maintain business operations. By issuing new shares—whether ordinary or preference shares (redeemable or convertible)—a company can attract investors without the burden of monthly repayments or interest obligations associated with loans. Dividends, paid based on the company's profitability, represent the only financial return to investors. This method is especially useful for companies with credit issues, as it provides an alternative to borrowing from financial institutions.
Given the importance of clearly outlining the relationship between the company and its investors, it is essential to execute a Share Subscription Agreement (SSA) to formalize the terms of the equity fundraising.
Share Subscription Agreement (SSA)
The SSA serves as a contractual framework governing the terms and conditions agreed upon between the company and its investors. These terms typically include the class and number of shares to be issued, the subscription price, and the payment timeline. Additionally, the agreement will stipulate general obligations, warranties, indemnities, and any other mutually agreed-upon terms.
Investors subscribing to the company’s shares are called subscribers and receive a portion of the company’s shares, known as subscription shares. These may be either ordinary shares or preference shares. Importantly, the subscription funds flow directly into the company’s account, and not to existing shareholders.
Ordinary Shares
Ordinary shares, commonly owned by founders in a private limited company, provide subscribers with voting rights and entitlement to dividends. However, the company is not obliged to declare dividends if it is insolvent or not profitable. One downside of ordinary shares is that preference shares—if issued—take priority in dividend distribution.
Preference Shares
Preference shares offer priority in dividend payouts, often resembling fixed-income securities due to their fixed dividends and absence of voting rights. They typically provide dividends regardless of the company’s financial health.
Depending on the SSA, several types of preference shares may be offered, with the most common being:
1. Redeemable Preference Shares
These shares allow the company to repurchase them after a specific period, as outlined in the SSA. Upon redemption, subscribers are compensated and cease to be shareholders.
2. Convertible Preference Shares
Convertible preference shares grant subscribers the option to convert their shares into ordinary shares within a specified period. Once converted, subscribers gain voting rights.
Pre-SSA Considerations for the Company
Before proceeding with equity fundraising, a company must ensure that its existing agreements and obligations are reviewed to avoid conflicts. Two key considerations are:
1. Exhaustion of First Right of Refusal
The company must review its Shareholder Agreement and constitution to confirm whether existing shareholders have a first right of refusal over new share issuances. This provision ensures that existing shareholders are offered the new shares before they are sold to third-party investors. Details such as the offer timeline, price, and procedures for exercising the right of refusal are usually outlined in the Shareholder Agreement.
2. Loss of Ownership and Control
Issuing new shares to investors will dilute the original owners' control over the company. Future profits, when distributed as dividends, will have to be shared with all shareholders. Business owners must be prepared for the potential loss of operational control and sole ownership.
Post-SSA: Registration of Shares
Once the SSA is executed, the company must arrange for the agreement to be stamped and notify its company secretary to file the necessary resolutions and forms, such as Form 24 (Return of Allotment of Shares), with the Companies Commission of Malaysia (CCM). Once the registration is complete, the subscribers will be formally recognized as shareholders of the company.
Conclusion
Equity fundraising via an SSA is a viable alternative for companies in Malaysia seeking expansion capital. It provides access to funds while helping to avoid the debt burden associated with traditional loans. Careful drafting and negotiation of the SSA are crucial to ensure clarity on issues such as share classes, terms, warranties, indemnities, and the parties’ rights and obligations. Legal due diligence is recommended for both the company and investors to safeguard their respective interests. Appointing legal counsel is advisable to review the company’s documentation and protect shareholder rights during the fundraising process.
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