Migration to No-Par Value Regime
When the new Companies Bill 2015 (the “Bill”) comes into effect, it will abolish the concept of par or nominal value of shares that currently applies under the Companies Act 1965. Par value represents the minimum price at which shares can be issued. The transition to a no-par value regime is in line with international trends and has been widely accepted in other countries such as Australia, New Zealand, Singapore and Hong Kong.
The departure from the traditional concept of par value is a welcomed development because:
- the par value of shares is not necessarily indicative of its real value and may be confusing and misleading to potential investors, creditors as well as shareholders of a company;
- removal of par value will simplify a company’s accounts and financial statements as concepts of share premium and capital redemption reserves will be removed; and
- under a no-par value regime, a company will have more flexibility in pricing its shares and raising capital as the restrictions on discounts to par value for new shares will no longer apply.
When the relevant provisions of the Bill (including Clause 74) come into effect, the abolition of par value will apply to all shares of Malaysian incorporated companies including those issued prior to that date.
Key implications of the migration to a no-par value regime
- No more restrictions on discounts to par value
There will be no more restrictions on discounts to par value once par value is abolished. Where companies previously could not issue shares below par value, they will have more flexibility in pricing their shares as there will no longer be a floor price for new shares. Note however that directors will still have a fiduciary duty to set the price of shares in good faith.
- Share premium account, capital redemption reserve and authorised share capital will be abolished
The following concepts tied to par value under the current Companies Act 1965 will be abolished:
- share premium account (representing the total premium over par value paid for shares);
- capital redemption reserve (a reserve into which amounts are transferred following the redemption or purchase of a company’s own shares); and
- authorised share capital (which represents the maximum number of shares a company can issue multiplied by its par value).
- Share premium and capital redemption reserves become part of share capital
Once the no-par value regime comes into effect, a company will no longer be required to maintain a share premium account and a capital redemption reserve.
Any amount standing to the credit of a company’s share premium account and capital redemption reserve shall become part of the company’s share capital (Clause 618(2) of the Bill). As this deeming provision applies automatically, companies do not need to pass any resolutions to convert the share premium and capital redemption reserve into share capital once the no-par regime is in effect.
- Transition and 24-month grace period
Share premium account
Under the Companies Act 1965, amounts in the share premium account can be used by a company for the following:
- issuing fully paid bonus shares;
- paying up the balance unpaid on shares previously issued;
- paying dividends through the issuance of shares (dividends in specie);
- writing off the preliminary expenses of the company or the expenses of any duty, fee or tax payable in connection with the issue of shares of the company; and
- providing for the premium payable on redemption of redeemable preference shares.
When the Bill comes into effect, companies will have a 24-month grace period to give effect to any of the above commitments of the company made before the effective date of Clause 74.
Capital redemption reserve
Under the Companies Act 1965, where preference shares of a company are redeemed (otherwise than out of the proceeds of a fresh issue of shares), a sum equal to the par value of the shares redeemed shall be transferred out of the profits of the company which would otherwise have been made available for dividends into a “capital redemption reserve”. The capital redemption reserve can be applied to pay for bonus shares to be issued to members.
When the Bill comes into effect, companies will similarly have a 24-month grace period to use the capital redemption reserve to pay for bonus shares which are unissued before the effective date of Clause 74.
Companies with significant amounts in their share premium account and capital redemption reserve should consider whether they wish to utilise such amounts and take legal advice.
- Shareholders remain liable for unpaid amounts on shares
Shareholders remain liable for calls in respect of money unpaid on shares issued before the commencement of the no-par value regime, whether on account of the par value of the shares or by way of premium, this liability is not affected by the shares ceasing to have a par value.
- Saving provisions for existing contracts
Existing contracts, constitutions, trust deeds or other documents entered into before the commencement date remain in effect, and the Bill provides deeming provisions for the transition to the no-par regime.
Despite this, companies should consider amending their constitution to reflect the abolition of par value and related concepts to avoid confusion and reviewing their existing contracts to determine whether other consequential amendments should be made.