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Nominee shareholder structures and disclosure requirements in Malaysia

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published on 22 April 2021 | reading time approx. 5 minutes

   
Following the global trend on corporate transparency, Malaysia has launched the Reporting Framework for Beneficial Ownership of Legal Persons (“Guideline”) in 2020. These Guidelines intend to promote transparency of beneficial ownership of certain corporate entities with the ultimate aim to fight corruption and money laundering activities which have been known to mask themselves behind anonymous corporate ownership structures.

 

    

 

These new Guidelines, which are yet to be fully implemented, drag nominee shareholder structures, which are not uncommon in Malaysia, into the spotlight. Such nominee shareholder structures are sometimes used to meet ownership requirements under the Malaysian restrictions on foreign direct investments. Such restrictions are imposed on certain industries, such as telecommunication, oil and gas, education and health and, depending on the industry, are stipulated either in particular legislation, guidelines, a condition to a license or a combination of the above. These foreign direct investment restrictions generally intend to ensure a certain level of local shareholding or local directorships, also referred to as Bumiputera requirement.

 

Nominee shareholder structures and its legal risks

In the light of foreign investment restrictions, nominee shareholder structures commonly entail a joint venture between foreign investors and local shareholders where the foreign investor would ensure control over the Malaysian entity with side agreements whereby the economic interest and voting rights of the local shareholders are waived.

 
The validity of these side agreements have been seen to be unenforceable in the past by the Malaysian courts on the grounds that such agreements are intended to bypass the foreign direct investment restrictions, and enforcing such side agreement would be against public policy. The unenforceability as a legal risk may be low given the economic interest of the nominees who in return of their nominee services would receive a fee. However, the death of a nominee or their bankruptcy might impose severe risks, as heirs or creditors might enforce their rights as shareholders regardless of side agreements.

 
Furthermore, nominee arrangements might also constitute a risk for the continuous business operations in Malaysia. As mentioned above, certain sectors require a license and in the event that a structure with false, inaccurate or misleading information is discovered by the relevant regulatory body, the license issued can be revoked immediately, suspended or blacklisted in the future. The impact on the business is that operations are now required to cease until the issuance of a new license.

 
Finally, nominee directors or the officers of the foreign business may be involved in the submission of the license application. This might attract criminal liability and penalties. In December 2020, the Malaysian Anti-Corruption Commission had commenced investigation on a Norwegian oilfield service contractor for making false representations regarding the ownership of its Malaysian subsidiary in order to obtain a license from the national oil and gas company Petronas. If found guilty under the Malaysian Anti-Corruption Commission Act, penalties for making false statements could include imprisonment for a term not exceeding 10 years and/or a fine not exceeding MYR 100,000. Besides penalties under the Malaysian Anti-Corruption Commission Act, penalties under the Companies Act, which may impose fines and/or imprisonment to acting directors and officers for making false or misleading statements and reports might also apply.

 

The Guideline and its implementation

The Guideline requires a company to:

  • take reasonable steps to identify, obtain and verify the beneficial owners´ information;
  • enter the beneficial owners´ information into the register of beneficial owners;
  • keep the beneficial owners´ information accurate and up-to-date and accessible in a timely manner;
  • update the beneficial owners´ information whenever there is a change to the particulars of the beneficial owner and then notify the Companies Commission of Malaysia;
  • maintain the beneficial owners´ information and supporting documents at the registered office or where the register of members/register of partners is being kept; and
  • give access to competent authorities and law enforcement agencies, whose name has been entered in the register of beneficial owners and any other person authorised by the beneficial owner.

 
The Guideline further provides what would be considered as a reasonable measure for a company to take in identifying, obtaining and keeping the beneficial owners´ information accurate and up-to-date.
Most importantly, the Guideline defines the beneficial owner of companies limited by shares as an individual who meets one or more of the following criteria:

  • has an interest, directly or indirectly, in not less than 20 percent of the shares of the company;
  • holds, directly or indirectly, not less than 20 percent of the voting shares of the company;
  • has the right to exercise ultimate effective control whether formal or informal over the company or the directors or the management of the company;
  • has the right or power to directly or indirectly appoint or remove (a) director(s) holding a majority of the voting rights at the meeting of directors; or
  • is a member of the company and, under an agreement with another member of the company, controls alone a majority of the voting rights in the company.

 
The Guideline also applies to limited liability partnerships. The criteria for a beneficial owner of a company limited by guarantee or a limited liability partnership are similar to the aforementioned criteria.

 
The implementation of the Guideline is carried out in a transition period and in a post-transitional period. In the transition period, which was initially planned to last from 1 March to 31 December 2020, companies are required to obtain, keep and update the beneficial owners´ information at an entity level. In the post-transition period, which was initially scheduled to last from 1 January 2021 onwards, besides obtaining, keeping and updating the beneficial owner information, companies are as well required to notify the Companies Commission of Malaysia. However, on 17 December 2020, the Companies Commission of Malaysia announced that the transitional period to comply with the requirements of the Guideline has been extended until further notice. The transitional period extension would more likely be until the enforcement of the Companies (Amendment) Bill.

 

The Guideline in the context of nominee shareholder structures

The Guideline requires companies during the transition period to obtain information about beneficial owners on the entity level, which is usually administered by the company secretaries, and to notify the Companies Commission of Malaysia about the beneficial owner in the post-transition period. Thus, it might be questionable if the Guideline has any effect on nominee structures as the Companies Commission of Malaysia is not the authority which imposes foreign direct investment restrictions.

 
However, the Guideline requires companies to give access to competent authorities and law enforcement agencies, whose name has been entered in the register of beneficial owners and any other person authorised by the beneficial owner. Thus, the access to the beneficial owners´ information is not limited to the Companies Commission of Malaysia, and some licensing authorities have already addressed their interest in the information about beneficial owners.

 

Next steps

In general, companies as well as limited liability partnerships registered in Malaysia are encouraged to begin preparation to comply with the obligations under the Guideline without any further delay. Upon the lapse of the transitional period it would be compulsory to identify and report on the identity of the their beneficial owners. The Guideline recommends to have an internal policy on beneficial ownership reporting. It is further suggested to require shareholders to notify the company or partners to notify the limited liability partnership on the identity of the beneficial owner and where there are changes to the beneficial owners´ information. Such policy may be reflected in the constitution of the company which would ensure compliance of the internal policy.

 
Entities with a nominee shareholder structure in place might in theory consider one of the following options:

  • An entity could follow a wait and see approach. The final implementation of the Guideline and with it the obligation to notify the Companies Commission of Malaysia about the beneficial owner is currently on hold. Considering the extension and the current political situation, an entity could argue that it is better to wait and see if the German saying “Nothing is eaten as hot as it is cooked” applies. Such a fatalistic approach might, however, not be suitable for entities with business operations relying on the compliance with certain foreign direct investment restrictions.
  • An entity could consider to approach the requirements of the Guideline in a creative fashion. However, creative solutions to existing nominee structures might come with high compliance risks. The scope of the definition of beneficial owners is very wide and stipulates not only ownership but also control criteria as outlined previously. Thus, the definition will cover also indirect structures and various other arrangements. This wide scope in combination with a lack of practical experience about the enforcement of the Guideline makes “creative” solutions a risk factor for acting directors and officers of such entity as we have seen above. Moreover, an entity might put the licence approval or renewal at risk and, in turn, probably also a relevant part of its business in Malaysia.
  • Finally, entities with nominee structures could consider a compliant approach which would require an assessment of the existing business structures and potential alternatives, which are in line with the Guideline as well as with the existing foreign direct investment restrictions. Entities should weigh up the commercial and legal risk of nominee structures against the commercial costs of compliance.
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