Introduction
Picture yourself as an investor ready to seize opportunities in Malaysia’s thriving market. What legal measures safeguard your investment? Enter the realm of investment contracts—critical legal documents that define the rights and responsibilities of all parties involved. These agreements establish a secure framework to protect interests and ensure compliance with the law.
Significance of Investment Agreements
Investment agreements form the cornerstone of a successful investment journey. These enforceable contracts define the deal's terms and conditions, detailing the rights, obligations, and expectations of all parties involved. In Malaysia, investment agreements play a vital role. Amid the nation's expanding economy and diverse investment prospects, these agreements are essential for ensuring clarity and protection. They address key elements like ownership, profit distribution, and decision-making authority, creating a secure and stable framework for investors.
Legal Framework for Investment Agreements in Malaysia
The legal foundation for these agreements is established under pivotal Malaysian laws, including the Companies Act 2016, Capital Markets and Services Act 2007 and Financial Services Act 2013. These laws uphold transparency, security, and the enforceability of investment agreements.
Protecting Interests using an Investment Agreement
The main purpose of an investment agreement is to create a structured framework that protects the interests of all involved parties. Key elements often include:
Investment Amount: The capital contributed by the investor.
Ownership Stakes: The percentage of ownership allocated to the investor.
Profit-Sharing: How profits are distributed among the parties.
Decision-Making Authority: The investor’s role and influence in company decisions.
Agreement Duration: The length of time the agreement remains valid.
Risk Management: Provisions for risk allocation, dispute resolution, and exit strategies.
Understanding these components helps investors ensure their ventures are secure and comply with legal standards.
Differentiating Investment Agreements from Shareholders’ Agreement
There are principally 2 forms of investment contracts, namely investment agreements and shareholders' agreements:
Investment Agreement
An investment agreement specifies the terms of an investor’s financial contribution to a company, typically documenting a one-time transaction. Key aspects include:
Investment Amount: The capital the investor contributes.
Form of Investment: Specifies whether the investment is equity, debt, or convertible instruments.
Rights and Obligations: Defines the investor’s rights, such as access to information, voting, and decision-making, as well as the company’s obligations to the investor.
Shareholders' Agreement
A shareholders' agreement is a contract between a company’s shareholders that governs their relationship by defining their rights, duties, and obligations. Key elements include:
Ownership and Control: Details the distribution of shares and the allocation of control over the company.
Share Transfers: Provisions related to the sale, transfer, or pledge of shares.
Decision-Making: Outlines rules for voting and the required majority for various decisions.
Dispute Resolution: Establishes methods for resolving conflicts among shareholders.
Practical scenario:
Picture a tech startup looking for investment. The startup agrees to an equity investment with a venture capitalist, who receives shares in exchange for their financial backing. After the investment, the startup’s founders and the new investor sign a shareholders’ agreement to manage their ongoing relationship, outlining how decisions will be made and the conditions under which shares can be transferred in the future.
Agreement for the Sale and Purchase of Shares
The Sale and Purchase Agreement (SPA) is another essential investment contract in Malaysia. This agreement is used when one party (the seller) agrees to sell shares to another party (the buyer). Key components include:
Purchase Price: The agreed-upon price for the shares being sold.
Representations and Warranties: Statements made by the seller regarding the condition and value of the shares and the company.
Conditions Precedent: Requirements that must be fulfilled before the sale can proceed.
Completion and Settlement: Terms for transferring the shares and paying the purchase price.
An SPA ensures both parties have a clear understanding of the terms of the share transfer, minimizing the potential for future disputes.
Other forms of Investment Contracts
As established above, in a broader context, an investment contract refers to any agreement where funds are allocated in exchange for a potential financial return. Hence these contracts can also take different forms, including:
Debt Investment Contracts: Agreements where investors lend money to a company, with the expectation of repayment along with interest.
Convertible Securities Contracts: Hybrid agreements where debt instruments can be converted into equity under specified conditions.
Key legal Considerations when structuring an Investment Agreement
Improper structuring and/or categorisation of an investment agreement can lead to serious legal implications. For instance,
(a) if you’re not a licensed moneylender, entering into an agreement for the repayment of capital with interest may be deemed unlawful pursuant to the Moneylenders Act 1950 (MLA), subjecting you to fines up to RM1,000,000.00 with the prospect of imprisonment.
(b) If you have not been granted a license pursuant to section 10 of the Financial Services Act 2013, carrying out any deposit-taking activities (namely the taking of monies on terms under which it will be repaid or returned in full (or with interests)) would be considered unlawful, subjecting you to imprisonment for a term not exceeding 10 years or to a fine not exceeding RM50,000,00.00 or both. To avoid this, it is imperative to show that the proposed transaction falls under any one of the exemptions covered in Schedule 2 of the FSA.
Schedule 2’s exemptions are as follows:
· Monies paid by any person to (inter alia) (i) Government/State Governments; (ii) Central Bank of Malaysia; (iii) statutory body or local authority which is authorized to accept, receive or take the same under any written law; (iv) a co-op that has been authorised to receive deposits; (v) another person, in relation to any issue of, offer for subscription or purchase of, or invitation to subscribe for or purchase, securities as defined in subsection 2(1) of the Capital Markets and Services Act 2007; (vi) another person who issues or offers to the public for subscription or purchase, or invites the public to subscribe for or purchase, any interest under an approved deed in accordance with Division 5 of Part IV of the Companies Act 1965; (vii) another person, where both persons are individuals, in the course of customary, social, friendly or family relationship and the total number of such individuals who make the payments to the other person does not at any time exceed ten
In view of the above and in order to avoid the aforementioned penalties, it is pertinent to bear the following points in mind when structuring or drawing out an investment agreement:
(a) When structuring an investment that does not involve the purchase of equity in the investee, but rather focuses on the repayment of capital with interests, it is important to state the purpose of such investment expressly in the investment agreement (i.e. investment to meet or bridge IPO expenses, etc) so as to avoid triggering the applicability of the MLA. It may also be helpful to include express provisions requiring the investee to provide quarterly (or monthly) reports evidencing the utilisation of the funding disbursed.
(b) The interest imposed on any repayment should not be exorbitant as to avoid triggering the MLA. A straightforward interest rate similar to what banks typically charge is generally deemed acceptable by the Court. In Menta Construction Sdn Bhd v SPM Property & Management Sdn Bhd & Anor [2017] MLJU 526, the Court declined to enforce the agreed-upon interest rate of 8.8% per annum and instead applied a simple interest rate of 5% per annum;
(c) From the investee point of view, when carrying out a funding arrangement similar to (a) above, it may be pertinent to state the following disclaimer so as to avoid being caught under the Financial Service Act 2013:
“For the avoidance of doubt, the funding arrangement under this Agreement does not constitute a deposit as defined in the Financial Services Act 2013 and is excluded under Schedule 2 as a commercial arrangement in relation to the offer for the subscription (or purchase) of ordinary shares in the [Target Company]”
Conclusion
Navigating the world of investment contracts in Malaysia requires a clear understanding of the different types and their specific uses. Whether it’s an investment agreement, a shareholders agreement, or a sale and purchase agreement for shares, each plays a crucial role in the investment process. By carefully drafting and understanding these contracts, both investors and companies can protect their interests and ensure seamless, legally compliant transactions. For tailored advice on your investment contracts, reach out to a corporate and commercial law expert today. Taking this proactive step will help secure your investments and ensure compliance with Malaysian regulations.
The above content presented in this article is meant solely for offering general information and should not be considered as legal opinion or professional advice. For assistance on structuring your investment arrangement or advise on protecting your next investment venture, please feel free to contact us for a complementary consultation.
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