Can a company provide financial assistance to purchase shares ?

Section 123(1) of the Companies Act (CA) 2016 prohibited a company to give financial assistance, regardless directly or indirectly to any person or its shareholder to acquire its own shares or shares of its holding company.

In the context of financial assistance, it was not defined in CA 2016, however, as stated in the section itself, it could be in the form of a loan, guarantee or provision of security or otherwise connected to such purchase.

The rationale of Section 123(1):

• acquisition of shares should be using his/ her own resources;

• to prevent depletion and reduction of the company’s capital because such action might compromise the benefits and interests of the creditors of that particular company;

• to protect the shareholder’s right to expect, and by extension to protect them from the abuse of the company’s capital;

• to prevent manipulation of the market because when a company gives financial assistance to buy its shares, the outstanding shares will go down;

• increase Earning Per Share (EPS) of the company and simultaneously it can artificially increase the market price per share of the company and that’s how manipulation is done.

Exemption

However, there are exemptions made available under Section 125 and 126 of CA2016 :

a) where the lending of money is part of the company’s ordinary business such as bank or money lender;

b) where it is for a trust scheme for employees;

c) where the financial assistance is given to employees for their own benefit;

d) where the company is regulated by written laws relating to a bank, insurance or takaful or which are subject to the supervision of the Securities Commission;

e) where the company is not a public listed company and it has complied with the conditions listed in s126 where shareholders approved by passing a special resolution at a general meeting to give financial assistance not exceeding 10% of shareholders’ funds if the “whitewash” procedures are satisfied.

Penalties and Offences

Under Section 123(3) of CA2016 will impose a fine not exceeding RM3,000,000 or imprisonment for a term not exceeding five years or both upon conviction. Additionally, as per Subsection 4, the Court may order the convicted person to pay compensation to the company or another person who has suffered loss or damage as a result of the contravention that constituted the offence.

In conclusion, this provision restricts the company from using funds to assist a person to acquire shares. This provision catches some business owners off their guard and is surprised to learn that they are restricted to use the funds of the company to acquire shares as they like.

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