Lecture 3- PROMOTERS,

CAPITAL & FINANCING OF

COMPANIES
by
Darmar Pathmanathan
LLB(hons) London, LLM(London)(with merit),
Grad ICSA, Dip Arb., CLP

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 Promoters & Pre-incorporated
Contracts
1. A promoter is one who undertakes to form a co. and who takes to
the necessary steps to accomplish that purpose- Twycross v
Grant.(active promoter)

2. He is the one who registers the company .

3. A passive promoter is a person who is not involved in the
formation of the company but contributed to the initial working
capital of the company.(Tracy v Mandalay)

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 Duties of Promoters
Duties of a Promoter

1. Promoter has fiduciary relationship with company. and he must act bona
fide (good faith) in the best interest of the company as a whole.

2. He must make a full & frank disclosure of any personal benefits he obtain
as a promoter either to an independent board of directors. Partial
disclosure is not sufficient- Erlanger v New SombreroPhosphate

3. He must not act in conflict of interest whereby his personal interest must
not conflict with that of his company. He must not grab any corporate
opportunity that belongs to the company.

4. A promoter cannot be allowed to make any secret profit at the expense of

the company he promotes.
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 REMEDIES FOR BREACH OF DUTIES BY
PROMOTERS
1.Rescission- A rescission is the cancellation of a contract.
Company can rescind the contract entered by the promoter. This is possible if
❖ company has not affirmed the contract after discovering the breach by the
promoter
❖ Third parties have not acquired rights under the contract
❖ Company does not delay in taking an action in court for breach of duties

2.Recovery of secret profit from the promoter

3.Damages
Claim compensation for damages due to the breach of duty by the promoters

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 Pre-incorporated Contracts
➢ Definition : contracts entered before incorporation

➢ At common law, PIC are void and cannot be ratified-

Kelner v Bexter

MALAYSIAN POSITION
• Section 65 (1)CA 2016
Prior to ratification, the person entering on behalf of the soon to be
incorporated company will be personally liable for the contract.
• Section 65(2) PIC can be ratified by the company after its incorporation
and the company shall be bound by the contract or transaction

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 PROVISIONAL CONTRACT
• Section 190(5) CA 2016
Any contract made by a company before the date on which it is entitled to commence
business shall be provisional only and shall only be binding on the company to
commence business

The date when a public company having a share capital can commence its business is
referred to in S.190(3) CA 2016 as the date when a statutory declaration is lodged by
the secretary or one of the directors of the company to the Registrar verifying that
S.190(1) or S.190(2) have been complied with.

NOTE:
S.190 CA 2016 is not applicable to a private company and a public company limited by
guarantee. These types of company can commence business i.e. enter into contracts
immediately upon incorporation.

• A statutory declaration is a formal statement made affirming that something is

true to the best knowledge of the person making the declaration. It has to be
signed in the presence of a solicitor, commissioner for oaths or notary public.

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 Capital & Financing of Cos
➢ A co may raise capital either by issuing shares or debentures.

➢ Methods of raising capital are:-

✓ Direct invitation to the public through a prospectus;

✓ Indirect invitation through an offer for sale-a company may allot shares
to an issuing house which is then offered to the public.

✓ Private invitation through placing-an agreement where a financial

institution to agree to find a number of its clients to whom the shares
maybe issued.

✓ Restricted invitation through a rights issue-the co offer shares to its

existing members. 7
 SHARTE CAPITAL V LOAN CAPITAL

SHARE CAPITAL LOAN CAPITAL

Co issue shares to shareholder. This is Co. acquires capital from debt financing.
called share capital. This is called loan capital.

Shareholder will obtain dividend and it is Interest is fixed

not fixed and depends on profits.

Shareholders can attend meetings Creditors cannot attend company

meetings
Shareholders have voting rights Creditors do not have voting rights

If the company is wound up, ordinary If the company is wound up, creditors
shareholders are the last to be considered. appear near the top of the list for
consideration

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 What is share capital?
➢ The company’s share capital is the amount of money contributed to
the co by its members when they subscribe for its shares.

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ORDINARY/EQUITY SHARES
TYPES OF SHARES
• Equity shares are the ordinary shares of • Preference shares are the shares that
the company representing the part
ownership of the shareholder in the
company.
• The dividend is paid after the payment
of all liabilities
• Cannot be converted
• can participate in the distribution of the
surplus assets
• Ordinary shares carry voting rights
• Not entitled to cumulative dividend
PREFERENCE SHARES
carry preferential rights on the matters
of payment of dividend and repayment
of capital.
• Priority in payment of dividend over
equity shareholders
• Can be converted to ordinary shares
• Cannot participate in the distribution of
the surplus assets of the company
• Preference shares have very limited
voting rights
• Entitled to cumulative dividend
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 CLASS RIGHTS
What are class rights?
• Class rights are special rights that are given to
members of a certain class.
Example
• right to fixed dividend, voting rights, priority of
repayment of capital etc.
What amounts to a variation of class rights?
• A variation of class rights occurs when there is a
change or cancellation to the legal rights
attached to the class of shares.

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 Variation of class rights
(Procedure)
• Section 91(1)CA 2016
the rights attached to shares in a class of shares in a
company may be varied only—
– in accordance with the constitution for the variation
of those rights; or
– if there are no such provisions, with the consent of
shareholders in that class given in accordance with
this section.

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 Variation of class rights
(Procedure)
• Under S91(2), the consent of the shareholders
required for the purposes of this section shall
be—
– a written consent representing not less than 75% of
the total voting rights of the shareholders in the class;
or
– a special resolution passed by shareholders in the
class sanctioning the variation.

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 Variation of class rights
(Procedure)
S 92(1) If the rights attached to shares in any class
of shares in a company are varied, the company
shall give written notice of the variation to each
shareholder in that class within 14 days from the
date on which the variation is made.

S 92(2) The company and every officer who

contravene this section commit an offence and
shall, on conviction, be liable to a fine not
exceeding five hundred thousand ringgit.
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 Variation of class rights
(Procedure)

S. 93. (1) If the rights attached to shares in any

class of shares in a company are varied, the
shareholders representing at least ten percent
of the total voting rights in the class may apply
to the Court to have the variation disallowed.

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 Prospectus
➢ A prospectus is a disclosure-based document.
➢ It commonly provides investors with material information about mutual funds,
stocks, bonds and other investments, such as a description of the company's
business, financial statements, biographies of officers and directors, detailed
information about their compensation, any litigation that is taking place, a list of
material properties and any other material information.

➢ The purpose of the prospectus is to help would be investors decide whether or

not to invest in the co.

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 Registration
➢ Before a co can seek public funding it must first register a
prospectus with the Securities Commission (SC) .

➢ A co must also ensure that a copy of the registered prospectus

accompanies any form of application for shares in the co. S232(1)
Capital Market and Services Act 2007(CMSA)

➢ Failure to comply with S232(1) Capital Market and Services Act

2007(CMSA) can lead to a maximum fine of RM 10million or
imprisonment up to 10 years or both.

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 PROSPECTUS GUIDELINES ON PUBLIC OFFERINGS OF
SECURITIES BY SECURITIES COMMISSION IN MAY 2003

AMONG THE INFORMATION REQUIRED BY THE

PROSPECTUS GUIDELINES :
• Purpose of the public offering
• Terms and conditions of the public offering
• Details of pricing of the public securuities
• Information in relation to assets and liabilities
• Financial position, profit and losses and
prospects of the issuers
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 Criminal Liability
➢ S246(3) CMSA 2007 deals with criminal liability.

➢ It will be a criminal offence to make untrue statement or omit

material information in the prospectus.

➢ Maximum fine RM 3milion, up to 10 years of imprisonment or

both.

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 Civil Liability
➢ S249 CMSA 2007 deals with civil liability.

➢ Civil liability is being responsible for actions and practices that

could damage others
➢ A person who make the untrue statement/omit material
information in the prospectus can be order to pay compensation
to an investor who suffered loss as a result of having relied on that
incorrect statement/information.

➢ These remedies are available whether or not criminal prosecution

has been instituted against the alleged wrongdoer for the offence
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committed.
Criminal actions are pursued when the breach of laws significantly
affects the market and where the alleged wrongdoer exhibited a
significant degree of deliberateness or gross misconduct.

Civil actions are pursued mainly to deprive the wrongdoers of illegally

earned gains and to compensate investors.
 Allotment of shares
➢ Allotment of shares is from the company.
➢ How a person acquires shares from the co?
i. Co will invite a particular person to subscribe for new shares in
the co.
ii. The person will make an offer & pay all or part of the amount.
iii. After the application is received the company’s board of directors
meets to decide whether or not to accept.
iv. If the application is accepted new shares are allotted to the
applicant and his name will be entered on the register of
members
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