Compliance with food laws and regulations is essential for ensuring public health and safety in Malaysia. This article explores the criminal ramifications of selling prohibited and harmful foods, foods, such as poisonous pufferfish.
By examining key provisions of the Food Act 1983 and Food Regulations 1985, we shed light on the strict regulations governing food sales in Malaysia. Understanding the gravity of such violations and the potential penalties is vital for all individuals and businesses involved in the food industry. Emphasizing the importance of adhering to food safety standards helps protect consumers and upholds public health standards.
Malaysian Laws on Food Safety
At the core of Malaysia’s food safety framework lie the Food Act 1983 and its subsidiary laws, in particular, the Food Regulations 1985. These laws are designed to protect the public from health hazards and fraudulent practices in the production, sale, and consumption of food, as well as related matters. The primary objective, as stated in the preamble of the parent act, is to ensure the well-being of the people.
According to section 1(1) of the Food Act 1983, these regulations apply uniformly across Malaysia. All food items available for sale within the country, irrespective of their origin, must adhere to the provisions outlined in this Act.
Food Act 1983
The Food Act 1983 is an important piece of legislation that aims to ensure the safety and quality of food products consumed within the country. It was enacted to address public health concerns related to food safety, hygiene, and labelling.
The Food Act 1983 outlines the duties and responsibilities of food business operators, emphasizing the importance of registering their premises and adhering to strict food safety and hygiene standards. It also empowers regulatory authorities to conduct inspections, sampling, and testing of food products to verify compliance with the law. The Food Act 1983 also addresses issues related to food additives, contaminants, and labelling requirements to provide consumers with accurate and relevant information about the food they purchase. Violations of the Food Act 1983 may lead to penalties, fines, and potential imprisonment.
To ensure that the foods supplied in the market are safe for human consumption, the Food Act 1983 criminalises the sale of poisonous and unsafe foods, as well as the misrepresentation of the nature and quality of foods. A vendor will commit an offence if he or she does any of the following:
(a) Sells food containing substances injurious to health (as provided in section 13);
(b) Sells food unfit for human consumption (as provided in section 13A);
(c) Sells adulterated food (as provided in section 13B);
(d) Sells food not of the nature, substance or quality demanded (as provided in section 14);
(e) Sells food whose label does not comply with the prescribed standard (as provided in section 15); or
(f) Sells food which has a false label (as provided in section 16).
Food Regulations 1985
The Food Regulations 1985 is a crucial supporting regulation for ensuring food safety in Malaysia. These regulations were established under the authority of section 34 of the Food Act 1983, which grants the Ministry of Health the power to make regulations related to food safety.
The Food Regulations 1985 provide comprehensive and detailed rules and procedures covering various aspects of food safety, including sampling, labelling, food additives, nutrient supplements, food packaging, and incidental constituents.
For instance, section 11 of the Regulations mandates that every package containing food for sale must bear a label that states the description of the food, including the common name of its principal ingredients. This requirement ensures transparency and clarity for consumers about the contents of packaged food products.
The Regulations are further supplemented by twenty-seven schedules, each addressing specific aspects of food safety. For example, the First Schedule prescribes written warranties for certain food items like canned food and cereal-based products for infants and children. The Fifth Schedule outlines the requirement for date marking on products such as biscuits, bread, pasteurized fruit juice, and pasteurized vegetable juice.
Additionally, the Eighth Schedule of the Food Regulations 1985 strictly prohibits the use of certain flavouring substances, such as aloin, berberine, and cade oil, that are harmful or likely to be injurious to health in food products.
Under the Food Regulations 1985, a food vendor is also forbidden from:
(a) Importing, manufacturing, advertising for sale or selling or introducing into or on any food additive other than a permitted food additive (as provided in Regulation 19);
(b) Selling any food to which nutrient supplement other than a permitted nutrient supplement has been added (as provided in Regulation 26(4));
(c) Importing, preparing or advertising for sale or selling any food containing any incidental constituent, except as otherwise specified in regulations 38, 39, 40 and 41 (as provided in Regulation 37(3))
(d) Importing, preparing or advertising for sale or selling any food ready for consumption that is contaminated with pathogenic microorganisms (as provided in Regulation 39(2))
(e) Importing, selling, exposing or offering for sale or delivery, any food intended for human consumption which contains the drugs as set out in Table II to the Fifteenth A Schedule (as provided in Regulation 40(5));
(f) Importing, preparing or selling any food containing pesticide residue in a proportion greater than the proportion specified for that food in relation to that pesticide residue as set out in the Sixteenth Schedule (as provided in Regulation 41(3)); and
(g) Importing, preparing or advertising for sale or selling any food that has been accidentally exposed to ionizing radiation (as provided in Regulation 396(2)).
Regulatory Agencies In Malaysia
There are a number of regulatory agencies and departments that shoulder the mandate for food safety in Malaysia.
1. Ministry of Health
The Ministry of Health is empowered to make regulations for the better carrying into effect the purposes and provisions of the Food Act 1983 as provided in section 34. For instance, the Ministry of Health is vested with the power to promulgate regulations in relation to the prohibition of the sale, advertisement or importation or exportation of any food. The Ministry of Health is also armed with the authority to take legal action against individuals or businesses that are found to be in violation of food safety regulations, such as to order the closure of food premises due to unhygienic conditions.
2. Food Safety and Quality Division
The Food Safety and Quality Division under the Ministry of Health Malaysia plays a key role in the implementation of an active food safety program. This includes routine compliance, sampling, food premises inspection, food import control activity and licensing of specified food substances required under Food Act 1983 and Food Regulations 1985. The Food Safety and Quality Division operates a number of programs and initiatives to raise public awareness of food safety. One example would be the establishment of the International Food Safety Training Centre (IFSTC) Malaysia which provides a short-term training programme in the area of food safety and quality for the local and global public, specifically for the food industry.
3. Malaysian Quarantine and Inspection Services
The Department of Malaysian Quarantine Inspection Services is a regulatory body established under the Ministry of Agriculture and Agro-Based Industry Malaysia. It is tasked to inspect and monitor all imports and exports of food products such as fish, agricultural produce, animals and carcasses at entry points and quarantine stations to ensure compliance with food safety laws both on international and national levels. It is responsible for the issuance of permits for the importation and exportation of live animals and animal products under the legislation of the Malaysian Quarantine and Inspection Services Act 2011.
4. Department of Veterinary Services
The Department of Veterinary Services, a Federal Government agency under the Ministry of Agriculture Malaysia, is a regulatory agency that is in charge of regulating the use of veterinary drugs in food-producing animals. It aims to ensure that the resulting food products are safe for human consumption. The Department of Veterinary Services plays a crucial role in controlling, preventing and eradicating animal and zoonotic diseases. It conducts inspections of meat processing plants and other food production facilities to satisfy hygiene and safety requirements.
Penalties For Selling Prohibited Foods
A person who is found guilty of the sale of prohibited foods may be penalized with a fine, imprisonment or both. For instance, any person who sells food that contains substances injurious to health may upon conviction be liable to a fine not exceeding RM100,000 or to imprisonment for a term not exceeding 10 years, or both under section 13(1) of the Food Act 1983.
A person who sells food that is unfit for human consumption also commits a criminal offence and may be punished with a fine not exceeding RM50,000 or with imprisonment for a term not exceeding 8 years, or both. A person who prepares or sells adulterated food is in contravention of section 13B of the Food Act 1983 and may be punished with a fine not exceeding RM20,000 or to imprisonment for a term not exceeding 5 years, or both. Pursuant to section 14 of the Food Act 1983, any person who sells any food which is not of the nature, not of the substance, not of the quality demanded by the purchaser is said to have breached such provision and shall be liable for imprisonment for a term not exceeding 5 years or to fine or to both.
If a food vendor is found to have sold food whose label does not comply with the prescribed standard or that the food is falsely labelled, he may be liable to imprisonment for a term not exceeding three years or to fine or to both upon conviction under sections 15 and 16 of the Food Act 1983 respectively.
If the sale of prohibited food results in injury or death, the vendor may be slapped with criminal charges under the Penal Code. Section 337 of the Penal Code provides that any person who causes hurt to another person by doing any act so rashly or negligently as to endanger human life or the personal safety of others, may be punished with imprisonment for a term that can extend up to six months, or with a fine, or both. Section 337 of the Penal Code reads:
337. Whoever causes hurt to any person by doing any act so rashly or negligently as to endanger human life or the personal safety of others, shall be punished with imprisonment for a term which may extend to six months or with a fine which may extend to one thousand ringgit or with both.
In the event a food business operator negligently sells poisonous food which results in the death of its consumers, he or she may upon conviction be punished with imprisonment for a term that can extend up to two years, with a fine, or both under section 304A of the Penal Code. Section 304A states:
304A. Whoever causes the death of any person, by doing any rash or negligent act not amounting to culpable homicide, shall be punished with imprisonment for a term which may extend to two years or with a fine or with both.
Offence under Section 13 of the Food Act 1983
The sale of poisonous food is a violation of Section 13(1) of the Food Act 1983. Under this section, any person who prepares or sells any food that has in or upon it any substance which is poisonous, harmful or otherwise injurious to health, commits an offence.
To sustain a charge under section 13(1) of the Food Act 1983, the prosecution must prove the following elements:
(a) That the article sold falls within the definition of “food” under Section 2 of the Food Act 1983;
(b) That the food contains a substance which is poisonous, harmful or otherwise injurious to health; and
(c) That the accused was in charge of the preparation or the sale of the food.
On the first point, only articles that fall within the definition of “food” as provided in section 2 will be caught under the Food Act 1983:
“food” includes every article manufactured, sold or represented for use as food or drink for human consumption or which enters into or is used in the composition, preparation and preservation of any food or drink and includes confectionery, chewing substances and any ingredient of such food, drink, confectionery or chewing substances.
To illustrate, in the case of Chuang Hock Meng @ Chung Hock Meng v Pegawai Kesihatan Daerah Hulu Langat Kajang, Selangor Darul Ehsan & Anor [2002] 4 MLJ 27, the court held that although live pigs can be for human consumption, it could not be considered as an article that could be used in the composition, preparation or preservation of any food as defined in section 2.
Under section 13(2) of the Food Act 1983, an objective approach is taken when determining whether any food is injurious to health. Regard is given not only to the probable effect of that food on the health of a person consuming it, but also to the probable cumulative effect of that food on the health of a person consuming it in ordinary quantities.
Defence of Reasonability
A person who is charged under the Food Act 1983 cannot escape criminal liability simply by saying “I didn’t mean to”. However, section 23 does provide a valid defence of having taken “all reasonable steps” to ensure that the food sold is safe. Section 23 reads:
23. In a prosecution for selling any food contrary to the provisions of this Act or of any regulation made thereunder it shall be no defence that the defendant did not act wilfully unless he also proves that he took all reasonable steps to ascertain that the sale of the food would not constitute an offence against this Act or against any regulation made thereunder.
A case illustrative of this point is Public Prosecutor v Pengurus, Rich Food Products Sdn Bhd [1982] 1 MLJ 302 where the accused, the manager of Rich Food Products Sendirian Berhad, was charged under section 11(1)(b) of the Sale of Food and Drugs Ordinance 1952 (replaced with section 15 of the Food Act 1983) for selling fish floss with a label that its contents contained 1.7 parts per million of mercury.
The court accepted the chemist’s evidence that the high content of mercury found in the floss came from the fish, as the other ingredients were used in their natural state. The accused explained that the fish and the other ingredients were purchased from the open market.
The court found that it was not reasonable to impose on a small-scale industrialist as the accused to employ a chemist to analyse the food she produced before marketing them. Justice Mohd Yusoff Muhamed held that the accused had taken all reasonable steps in ascertaining that the manufacture of the fish floss did not contain mercury.
Cases in the News
Food poisoning is a perennial health problem in Malaysia. According to the Ministry of Health, the fatality rate of food poisoning in 2016 was approximately 0.041/per 100,000 population.
Some species of pufferfish flesh (known in Japanese as fugu) can be lethally poisonous to humans due to its tetrodotoxin. Fugu is a high-risk delicacy and must be carefully prepared to remove the pufferfish’s toxic parts and to avoid contaminating the meat. However, accidents happen and consumers in Malaysia have fallen ill or died from eating contaminated fugu.
On 25 March 2023, two elderly persons from Kampung Chamek in Paloh, Johor died after eating pufferfish. It was reported by CNA that Mdm Lim Siew Guan experienced shivers and shortness of breath shortly after eating the pufferfish. Mr Ng Chuan Sing displayed the same symptoms about an hour later. Mdm Lim died that same day while Mr Ng succumbed to the poisoning two weeks later. Following the tragedy, the health director-general Dr Noor Hisham Abdullah revealed that there had been 58 pufferfish poisoning incidents reported in Malaysia involving 18 deaths between 1985 and March 2023.
In Kedah, there was a food poisoning outbreak when nine people fell ill after eating Laksa Kebok on 4 October 2018, as reported by Food Safety News. Tragically, two people died. Public concerns led the health authorities to close the restaurant due to a possible Salmonella enterica serovar Weltevreden contamination. Investigations revealed that storing fish and laksa dough together might have caused harmful microorganisms to grow. Health facilities were alerted to watch for similar cases, and the premises’ owner received a notice that reopening would be permitted only upon meeting food and hygiene regulations.
In 2011 in Penang, as reported by the National Library of Medicine, a goat farm owner who drank and sold unpasteurized goat’s milk fell seriously ill with brucellosis, a fever-causing disease. From 2011 to 2012, 79 people who consumed the farmer’s goat milk fell sick with brucellosis. Unpasteurized milk may contain harmful microorganisms such as Brucella sp. and Coxiella burnetii, which can lead to health problems when consumed by humans. As a result, the farmer’s goats were culled to prevent further spread of the disease under the Brucellosis Eradication Program by the Department of Veterinary Services.
The above incidents demonstrate the importance of abiding by the food safety standards in the Food Act 1983 and its subsidiary regulations in order to avoid tragic consequences. Foodborne illnesses can be life-threatening if left untreated and may even result in death.
Tips for Compliance
In order to ensure adherence to food safety regulations, individuals and food business operators should only source safe and hygienic prepared food and ingredients from reputable suppliers who comply with all food safety regulations. The public is urged to check for certification or accreditation from relevant authorities such as the Ministry of Health, the Department of Agriculture, and the Malaysian Quarantine and Inspection Services.
Food business operators are encouraged to keep accurate records of all food products and ingredients, including their source, handling and distribution. This will help in traceability and to prove sources and preparation procedures in case of any issues with the food products.
Food manufacturers should ensure that all food products are properly labelled with information such as the ingredients, nutritional information, and allergen information. This would assist consumers in making informed choices and guarantee compliance with food labelling regulations.
Proper hygiene practices are essential in the handling of food products to prevent contamination. All surfaces and equipment such as cutting boards, knives, and utensils that come into contact with food products should be properly cleaned and sanitized in accordance with documented standard operating procedures. All waste, including food scraps and packaging materials, ought to be disposed of properly to prevent contamination and attraction of pests.
Last but not least, food business operators are advised to be prepared for inspections and investigations. Upon request, cooperation must be given to the relevant authorities by granting access to premises, records, and other information relating to the purchase, sale, or distribution of food products to show food safety and compliance with Malaysian food laws and regulations.
Conclusion
Adherence to food safety regulations is paramount to ensure that the food supply chain operates safely and that consumers are protected from the risks of foodborne illness. Criminal penalties such as fines and imprisonment are put in place as a deterrent for individuals and businesses who may consider engaging in negligent or unlawful activities that could compromise public health. All individuals and businesses involved in the food industry should abide by food safety legislation at all times to ensure that public health and food safety in Malaysia are kept in check.
By Raymond Mah and Chew Jie Xi
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.
Five years after the last amendments were made to the Solicitors’ Remuneration Order 2005 (“SRO 2005”) via the Solicitors’ Remuneration (Amendment) Order 2017, the Malaysian government recently repealed the SRO 2005 and replaced it with the Solicitors’ Remuneration Order 2023 (“SRO 2023”). In this article, we explain the changes brought by the SRO 2023 and discuss the recent stamp duty remission and exemption granted by the government.
Comparison between the SRO 2023 and SRO 2005
The SRO 2023 was gazetted on 12.7.2023 and came into effect on 15.7.2023. The SRO 2023 sees an increment in the rate of the scale fees on conveyancing transactions including but not limited to the sale and purchase of immovable property, financing facilities and tenancies in Peninsular Malaysia. The differences between the SRO 2005 and SRO 2023 are highlighted below:
First Schedule – Sale and Transfer
Not dissimilar to the SRO 2005, in transactions governed by the Housing Development (Control and Licensing) Act 1966 (“HDA 1966”) or any subsidiary legislation made under the HDA 1966, the scale fee under the SRO 2023 is capped based on the purchase price or adjudicated value of a property, as seen in the table below:
Second Schedule – Lease and Tenancy
Tenancy
Lease
Third Schedule – Charges, Debentures and other Security or Financing Documents
For transactions governed by the HDA 1966 or any subsidiary legislation made under the HDA 1966, the scale fee for loan transactions under the SRO 2023 is also capped. However, the scale fee depends on the amount secured or financed, as seen in the table below:
Fourth Schedule – Discharge of Charge and Deed of Reassignment
Discharge of Charge
Deed of Receipt and Reassignment
Fifth Schedule – Professional Fees for Preparing, Filing or Witnessing Miscellaneous Documents
Prior to the SRO 2005, a solicitor was not allowed to give any form of discount to any of their clients for any transaction. However, with the amendments in 2017, a solicitor is allowed to give a discount rate of up to twenty-five per cent (25 %) on the fee imposed on either Sale and Transfer transactions or Charges, Debentures and other Security or Financing Documents.
Latest Stamp Duty Updates
Although there is an increase in legal fees, the government has gazetted several remissions and exemptions to encourage first-time homeowners to purchase their first home. The new remissions and exemptions mainly apply to transactions for the purchase of properties from developers by first-time homeowners. Some of the previous remissions and exemptions are still applicable to the purchase of properties from developers as well as sub-sale transactions. The gazetted stamp duty remission and exemptions which were introduced are explained below.
Stamp Duty Remissions
For first-time home buyers, the government has introduced several stamp duty remissions to assist the buyers in their purchase, as further elucidated below:
1. Stamp Duty (Remission) (No. 2) Order 2023 [P.U.(A) 180/2023]
75% of the stamp duty chargeable on any instrument of transfer for the purchase of a residential property under the i-Miliki initiative by an individual is remitted, where the value of the property is more than RM500,000 but does not exceed RM1 million, provided that the sale and purchase agreement (“SPA”) is executed on or after 1.6.2022 and no later than 31.12.2023.
2. Stamp Duty (Remission) Order 2023 [P.U.(A) 179/2023]
75% of the stamp duty chargeable on any loan agreement to finance the purchase of a residential property under the i-Miliki Initiative by an individual is remitted, where the value of the property is more than RM500,000 but does not exceed RM1 million, provided that the loan agreement is executed between an individual named in the SPA and any of the financial institutions listed in sub-paragraphs (1)(a) to (1)(i) of Paragraph 2 of P.U.(A) 179/2023 and the SPA is executed on or after 1.6.2022 and no later than 31.12.2023.
Stamp Duty Exemptions
1. Stamp Duty (Exemption) Order 2021 [P.U.(A) 53/2021]
Stamp duty chargeable on any instrument of transfer for the purchase of a residential property by an individual is exempted, where the market value of the property is not more than RM500,000, provided that the SPA is executed on or after 1.1.2021 and no later than 31.12.2025. This exemption applies to both developer projects and sub-sale transactions.
2. Stamp Duty (Exemption) (No. 2) Order 2021 [P.U.(A) 54/2021]
Stamp duty chargeable on any loan agreement to finance the purchase of a residential property by an individual is exempted, where the value of the property is no more than RM500,000, provided that the loan agreement is executed between an individual named in the SPA and any of the financial institutions listed in sub-paragraphs (1)(a) to (1)(i) of Paragraph 2 of P.U.(A) 54/2021 and the SPA is executed on or after 1.1.2021 and no later than 31.12.2025. This exemption applies to both developer projects and sub-sale transactions.
3. Stamp Duty (Exemption) (No. 2) Order 2023 [P.U.(A) 177/2023]
Stamp duty chargeable on any instrument of transfer for the purchase of a residential property under the i-Miliki initiative by an individual is exempted, where the market value of the property is not more than RM500,000, provided that the SPA is executed on or after 1.6.2022 and no later than 31.12.2023.
4. Stamp Duty (Exemption) Order 2023 [P.U.(A) 176/2023]
Stamp duty chargeable on any loan agreement to finance the purchase of a residential property by an individual is exempted, where the value of the property is no more than RM500,000 provided that the loan agreement is executed between an individual named in the SPA and any of the financial institutions listed in sub-paragraphs (1)(a) to (1)(i) of Paragraph 2 of P.U.(A) 54/2021 and the SPA is executed on or after 1.6.2022 and no later than 31.12.2023.
5. Stamp Duty (Exemption) (No. 3) Order 2023 [P.U.(A) 178/2023]
For inter vivos (between living persons) transactions without any consideration, the government has announced that full stamp duty chargeable on any instrument of transfer will be waived provided that the transfer is made between the following parties:
It is important to note that while full exemption applies to the first RM1,000,000 of the value of the property, any sum in excess of RM1,000,000 is still subject to stamp duty but there will be a 50% waiver on such stamp duty.
On top of that, the transfer must be executed on or after 1.4.2023, and the recipient of the property must be a Malaysian citizen in order for the exemption to apply.
As for the transfer of property between spouses without any consideration, the previous P.U.(A) 420/2007 is still applicable where full waiver of stamp duty will be provided to spouses who intend to transfer their property to their spouse. Unlike the current P.U.(A) 178/2023, for P.U.(A) 420/2007, there is no cap fixed on the market value of the property.
Comparison between I-Miliki Stamp Duty Remission and Exemptions and HOC exemptions
The previous Home Ownership Campaign was introduced by the government back in 2019 with the intention of decreasing property overhang in the country and assisting purchasers in the purchase of property from developers. It was launched on 1 January 2019 and it was supposed to end on 30 June 2019. However, it was further extended till 31 December 2021. Under the Home Ownership Campaign, home buyers who purchased a residential property from a developer who participated in the campaign enjoyed the benefit of having the stamp duties either remitted or fully exempted depending on the purchase price of the property as per the table below:
All financing instruments for the purchase of property under the Home Ownership Campaign, up to the facility amount of RM2,500,000, would also be entitled to full exemption from the stamp duty imposed.
However, under the current i-Miliki initiative, a purchaser is only entitled to the stamp duty remission and/or exemption, if the purchaser is a first-time home buyer and there is a cap of RM1,000,000 imposed on the purchase price. For the purchase of any property from a developer where the purchase price exceeds RM1,000,000, full stamp duty will be imposed on the purchaser.
Conclusion
With the Solicitors’ Remuneration Order 2005, there is an increase in the legal fees to be paid to solicitors. However, the new remissions and/or exemptions introduced by the government will assist purchasers by relieving a portion of the overall costs incurred.
If you require an explanation or assistance in your conveyancing transaction, please feel free to reach out to us for a complimentary consultation and we will be pleased to assist you accordingly.
By Vinson Cheng and Marilyn Teh
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.
Wednesday, 11 October 2023
3:00 pm – 4:00 pm How to Close up Shop: Dissolution, Voluntary Winding Up and Striking Off a Company
About this talk
Success sometimes has its last chapter. When it’s time to wind down a business, it’s good to know your options. Understand the intricacies of dissolving a company, including member’s voluntary winding up, creditor’s winding up, and striking off applications. Our lawyers will guide you through the legal obligations and strategic considerations involved in these procedures.
The talk will be delivered over video conference using Zoom.us. You can either view the talk from your web browser or download the Zoom app.
Talk Points
- How to Dissolve a Company
- Member’s Voluntary Winding Up
- Creditor’s Voluntary Winding Up
- Striking Off Applications
Speaker
- Sebastian Liew, Senior Associate, Dispute Resolution Practice Group
- Aaron Liew, Associate, Dispute Resolution Practice Group
Wednesday, 18 October 2023
3:00 pm – 4:00 pm Contempt of Court: Forcing Compliance with Orders through Committal Proceedings
About this talk
When a court order is not obeyed, proceedings to enforce compliance become crucial. Committal proceedings may be an effective solution, as the party failing to comply with the order may be penalised with a fine or imprisonment. Understand the principles, procedures, and notable cases of using committal proceedings to compel court compliance. Join our webinar to unravel the mechanisms behind this enforcement method and gain insights into its practical applications.
The talk will be delivered over video conference using Zoom.us. You can either view the talk from your web browser or download the Zoom app.
Talk Points
- What is Contempt of Court?
- Civil Contempt as a Form of Enforcement
- Procedure of Committal Proceedings
- Case Studies and Tips
Speaker
- Gan Chong Chieh, Partner, Dispute Resolution Practice Group
- Joseph Khor, Associate, Dispute Resolution Practice Group
Wednesday, 25 October 2023
3:00 pm – 4:00 pm Understanding Damages for Medical Negligence: Types, Trends and Tactics
About this talk
Have you or your loved ones been affected by medical negligence? Unsure about the types of damages you can claim against healthcare professionals and institutions? Recent Malaysian court cases involving brain-damaged infants with multi-million ringgit compensation awards are raising questions about higher damages and novel awards for medical negligence.
Join our webinar on damages in medical negligence, where we will explore the types of compensation available to patients and their families. Discover how recent court decisions may impact your case and the factors influencing awards of damages. Get the knowledge you need to navigate medical negligence claims confidently.
The talk will be delivered over video conference using Zoom.us. You can either view the talk from your web browser or download the Zoom app.
Talk Points
- Types of damages awarded
- Damages for different injuries
- Evidence and aggravating factors
- Recent cases and trends
Speaker
- Jeremy Balang, Senior Associate, Dispute Resolution Practice Group
- Alicia Chin, Associate, Dispute Resolution Practice Group
We are excited and grateful to have been featured in an article title “The Good Guys: Asian Firms Prioritising the Greater Good” by Asia Business Law Journal.
MahWengKwai & Associates is among ten Malaysian law firms whose works have been higlighted in the report authored by Vandana Chatlani. Our efforts that are noted by the Journal include:
Diversity and Inclusion: Individuals of different races, religions and genders are hired, with team members representing diverse backgrounds and heritage
Improving work-life balance: Employees can select flexible work hours and working parents are supported by setting up a childcare centre at the firm’s premises
Pro bono works: NGOs receive legal support through TrustLaw co-ordinated by the Thomson Reuters Foundation. In 2022, the firm provided pro bono assistance to Fugee, a non-profit organisation that provides education to child refugees in Malaysia
Community services: In 2021, lawyers secured a landmark citizenship appeal for a child who was abandoned at birth and whose biological parents were unknown
Our managing partner, Raymond Mah, is also featured in the article. Raymond says, “Our team members come from varied backgrounds and heritages, including Chinese, Malay, Indian, Bidayuh, Iban, and more.” This inclusive approach is a cornerstone of our ethos, promoting the value of various perspectives in our legal practice.
One remarkable aspect of our diversity is the multitude of languages spoken within our team. As Raymond points out, “The number of different languages spoken – English, Malay, Mandarin, Tamil, Cantonese, Hindi, Hokkien, Hakka, and Punjabi – by our staff is a testament to the rich diversity at the firm’s workplace.” This linguistic diversity not only enhances communication but also underscores our global mindset.
At MWKA, we firmly believe that a diverse workforce is a powerful driver of innovation and success. As we continue this journey, our leadership remains dedicated to promoting equality and celebrating the uniqueness of each individual contributing to our vibrant legal family.
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.
It is common for employment contracts to contain a clause that prevents the employee from working for a competitor in the same industry for a predetermined period of time after the expiration or termination of the employee’s contract. Such a clause is commonly known as a “non-compete clause” and typically reads:
“The Employee shall not carry out any business activity or service that, or join another company or organisation whose nature of business, is similar to that of the Employer for a period of twelve months from the date of expiration or termination of this contract (as the case may be).”
This is essentially a form of restraint of trade. The question is: are non-compete clauses enforceable and valid? This article will discuss the enforceability of non-compete clauses and what else can be done to protect a business when an employee leaves for a competitor.
General Rule and Exceptions
Non-compete clauses are generally void and unenforceable in Malaysia. Non-compete clauses are a form of restraint of trade, and fall under Section 28 of the Contracts Act 1950 which renders void any agreement to restrain anyone from exercising a lawful profession, trade, or business:
28. Agreement in restraint of trade void
Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.
To balance the rights of the employer against those of the employee, Section 28 of the Contracts Act 1950 lays down three exceptions to the general rule:
Saving of agreement not to carry on business of which goodwill is sold
Exception 1— One who sells the goodwill of a business may agree with the buyer to refrain carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein:
Provided that such limits appear to the court reasonable, regard being had to the nature of the business
of agreement between partners prior to dissolution
Exception 2—Partners may, upon or in anticipation of a dissolution of the partnership, agree that some or all of them will not carry on a business similar to that of the partnership within such local limits as are referred to in exception 1.
or during continuance of partnership
Exception 3—Partners may agree that some one or all of them will not carry on any business, other than that of the partnership, during the continuance of the partnership.
Post-Contract Restraint of Trade
Section 28 of the Contracts Act 1950 will only render void a restraint of trade clause that applies to the employee’s post-contract period. It will not apply to a restraint of trade during the currency of the employment contract. In the High Court case of Polygram Records Sdn Bhd v Hillary Ang & Ors (collectively known as “The Search”) & Anor [1994] 3 CLJ 806, it was held that Section 28 of the Contracts Act 1950 was only applicable to cases where a person is restrained from carrying on his trade or profession after the expiry of the contract, not during the contract. In Polygram Records, the second contract between the plaintiff and The Search contained a clause that read:
“During the continuance of this agreement and in the case of the artiste being released from the artiste’s obligation to make sound recordings for the company … or in the case of the termination of this agreement … then for a period of two years after the date upon which the company shall have released the artiste … the artiste shall not without the written consent of the company … render the artiste’s services … in any part of the world as a singer or performer of musical works for the purposes of making records…”
This position was reiterated by the Court of Appeal in Vision Cast Sdn Bhd & Anor v Dynacast (Melaka) Sdn Bhd & Ors [2015] 1 MLJ 424, even if the restraint of trade is for a short period. In this case, the defendants had sought to restrain the second appellant (“Cheok”) from pursuing a lawful trade or business when Cheok had incorporated Vision Cast Sdn Bhd about 15 months after Cheok had left the Dynacast Group of Companies. The Court of Appeal stated that any such restraint against Cheok to pursue a trade or business was unsustainable and bound to be struck down.
In Nagadevan A/L Mahalingam v Millenium Medicare Services Sdn Bhd [2011] 3 CLJ 529, Nagadevan had resigned from the partnership with Millenium Medicare Services Sdn Bhd and commenced practice at another medical clinic situated within a 15 km radius from one of Millenium Medicare Services Sdn Bhd’s medical clinics. Millenium Medicare Services Sdn Bhd contended that its partnership agreement with Nagadevan had a clause that restrained Nagadevan from practising as a medical practitioner within a 15 km radius of any of its medical clinics. However, the Court of Appeal held that a clause restricting the liberty of a person to carry on his trade in the future with other parties, effectively giving rise to a restraint of trade, would fall within the scope of Section 28 of the Contracts Act 1950 unless the restraint of trade falls within any of the three exceptions.
Knowledge, Experience or Skill gained from Previous Employment
The law does not prevent a former employee from using any knowledge, experience or skill gained during his time with a former employer. In the case of Ace Capital Growth Sdn Bhd v Kua Kee Koon & Ors [2021] MLJU 2118, the letter of offer of employment issued by the plaintiff and accepted by the first defendant had restrictive clauses, which read:
“Section-III: Restraint of Trade Clauses:
a) Employee, in any business or enterprise or association of persons, both corporate and unincorporated which carries on a competing business.
b) The employee agrees and undertakes in favour of the employer that during the restraint period Eight (8 months) and in Malaysia he/she will not directly or indirectly work for a direct competitor of Ace Global Metal Sdn Bhd and Ace Capital Growth Sdn Bhd.
c) The Employee Must Not canvas, or solicit the business of, or maintain any personal records of any client of Ace Global Metal Sdn Bhd and Ace Capital Growth Sdn Bhd.”
The High Court held that a former employer cannot restrict a previous employee from using skills and knowledge in his trade and profession learnt during the course of his employment, as such skills and knowledge are different from secret and confidential information. The High Court also found that the terms and conditions of employment gave rise to a restraint of trade, which is rendered void by Section 28 of the Contracts Act 1950.
Protecting Confidential Information and Trade Secrets
In the realm of employment contracts and business relationships, it is essential to strike a balance between protecting a company’s confidential information and respecting the rights of employees. While restraint of trade clauses have traditionally been used for this purpose, there is an alternative approach that allows employees to rely on clauses governing the non-disclosure of confidential information.
The Duty of Good Faith and Protecting Confidential Information
Former employees are generally expected to act in good faith, adhering to a standard that a reasonable person would deem appropriate. One such permissible restraint is a clause that bars a former employee from disclosing, divulging, or misusing their former employer’s confidential information, proprietary know-how, and trade secrets. This approach not only safeguards a company’s valuable assets but also ensures that the employee’s obligations extend only to protecting confidential information, rather than overly restricting their future career opportunities.
Breach of Confidentiality and Conspiracy to Injure
In the case of Sundai (M) Sdn Bhd v Masato Saito & Ors [2013] 9 MLJ 729, the High Court established the importance of upholding the duty of good faith. Masato Saito was found to have breached his fiduciary duty by misusing confidential information and data without prior consent. This breach was proven through evidence of a conspiratorial agreement followed by overt acts aimed at causing harm. This case underscores the significance of respecting confidentiality obligations without necessarily imposing excessive restrictions on employees’ future endeavours.
Duration of Confidentiality Obligations
While the Federal Court’s ruling in Dynacast (Melaka) Sdn Bhd & Ors v Vision Cast Sdn Bhd & Anor [2016] 3 MLJ 417 indicated that confidentiality obligations could potentially have a perpetual effect, it left open the question of whether restrictions on divulging or breaching such obligations during or after employment fall under Section 28 of the Contracts Act 1950. To ensure legal clarity and enforceability, it is advisable to explicitly state the duration and scope of confidentiality obligations in employment contracts or separate non-disclosure agreements.
Conclusion
The Malaysian courts place significant emphasis on the strict provisions outlined in Section 28 of the Contracts Act 1950 when evaluating clauses that may impose a restraint of trade following the expiration or termination of an employment contract. While such clauses are commonly included, any agreement containing a clause that effectively results in a restraint of trade is generally considered void and unenforceable, unless it unequivocally falls within one of the three exceptions in Section 28 of the Contracts Act 1950.
Whether you are an employer seeking legal guidance on non-compete clauses and potential revisions to your employment contracts or an employee aiming to gain a better understanding of your post-employment rights, we invite you to reach out to us. Our team is well-equipped to provide you with expert advice tailored to your specific circumstances, ensuring that your legal interests are safeguarded in accordance with Malaysian law. A well-drafted employment contract effectively delineates the rights and obligations of all parties involved, with transparency and fairness.
By Tommy Wong and Jasmine Wee Xing Yi
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.
Company shares are a form of security that proves or represents the extent of ownership a shareholder has in a company. It is common for a company to issue different types of shares, and each type of shares provides different rights to its holders. The types of shares that can be issued by Malaysian companies are governed under Section 69 of the Companies Act 2016:
69. Types of shares
Subject to the constitution of the company, shares in a company may-
(a) be issued in different classes;
(b) be redeemable in accordance with section 72;
(c) confer preferential rights to distributions of capital or income;
(d) confer special, limited or conditional voting rights; or
(e) not confer voting rights.
In Malaysia, the types of shares in a company generally issued to shareholders are ordinary shares and preference shares. The rights and powers attached to ordinary shares are provided under Section 71 of the Companies Act 2016, whilst the issuance of preference shares falls under Section 72 of the Companies Act 2016.
Whether you are a founder, an investor or an acquirer of a company, it is essential to know and understand the difference between the two types of shares, as the type of shares you own will determine your rights in the company. This article explores the differences between ordinary shares and preference shares in a company.
Ordinary Shares vs Preference Shares
A company usually issues ordinary shares to founding shareholders and third-party investors who are actively involved in the company’s management to such extent exercised by ordinary shareholders. Meanwhile, a company issues preference shares to shareholders or third-party investors who are not actively involved in the company’s management but instead intend to reap the prioritised benefits arising from the growth and earnings of the company.
Under Section 71 of the Companies Act 2016, an ordinary share provides its holder with the following rights:
- The right to attend, participate and speak at a meeting;
- The right to vote on a show of hands on any resolution of the company;
- The right to an equal share in the distribution of the surplus assets of the company; and
- The right to an equal share in dividends authorised by the company’s board of directors (although this may be subject to the company constitution).
Meanwhile, preference shares can only be issued by a company if such shares are authorised by its constitution. Regarding the issuance of preference shares, Section 72 of the Companies Act 2016 reads as follows:
72. Preference shares
(1) Subject to its constitution, a company having a share capital may issue preference shares.
Section 72 of the Companies Act 2016 further sets out the provisions for the redemption of preference shares. However, the Companies Act 2016 does not expressly set out the rights of a preference shareholder. Thus, it is essential for a company to ensure that all rights of its preference shareholders are expressly defined and stipulated in its constitution.
Summary of Differences
The main differences between the two types of shares and the respective rights attached to them are set out below:
1. General Overview
Ordinary Share:
Most commonly issued by companies to shareholders upon incorporation.
Preference Shares:
Typically issued to non-founding shareholders, subscribers or investors that prefer specific rights and values of preference shares, which differ from those of ordinary shares.
2. Constitution
Ordinary Share:
Rights do not need to be set out in the company constitution unless the company intends to create different classes of ordinary shares (where there are Class A Shares and Class B Shares) that have different rights.
Preference Shares:
Rights and terms (including their issuance, conversion and redemption) must be expressly set out in the company constitution, as preference shareholders do not enjoy other additional rights.
3. Voting Rights
Ordinary Share:
Allow their holders to participate or vote in company matters requiring shareholders’ resolution. A voting right that is generally attached to ordinary shares is the concept of “one share, one vote”, but a different class of ordinary shares may be adopted by the company in its constitution to allow weighted voting rights that provide that class of ordinary shares additional votes over the other class of ordinary shares.
Preference Shares:
Generally do not confer voting rights to their holders unless the company constitution provides otherwise (if so, usually for certain matters only). However, preference shareholders have a sense of priority whereby dividends are distributed to preference shareholders before ordinary shareholders.
4. Dividends
Ordinary Share:
Dividends are distributed to ordinary shareholders only after preference shareholders receive their dividends. The company’s board of directors will determine the rate of dividends to be distributed to the shareholders depending on the available profits of the company and the company satisfying a solvency test
Preference Shares:
Preference shareholders receive their dividends with priority over ordinary shareholders. The company constitution will usually determine the rate of dividends to be distributed to the shareholders, depending on the availability of the profits of the company and the company satisfying a solvency test
5. Accumulation
Ordinary Share:
Ordinary shareholders cannot accumulate their dividends from previous years.
Preference Shares:
Preference shareholders may enjoy a cumulative right to dividends if the right is expressly provided under the company constitution.
6. Repayment of Capital upon Winding-up of Company
Ordinary Share:
Ordinary shareholders will receive repayment of capital after the company has paid its creditors, followed by preference shareholders
Preference Shares:
Preference shareholders will receive repayment of capital after creditors but before ordinary shareholders.
7. Participation in Surplus Assets and Profits upon Winding-up of Company
Ordinary Share:
Ordinary shareholders will receive repayment of capital after the company has paid its creditors, followed by preference shareholders
Preference Shares:
Preference shareholders cannot participate in the distribution of surplus assets and profits unless otherwise expressly set out in the company constitution.
8. Redemption
Ordinary Share:
Cannot be redeemed or repurchased by a private limited company. In the case of a public company, ordinary shares can be redeemed or repurchased if this is expressly set out in the company constitution.
Preference Shares:
May be redeemed if issued with such an option or right attached to them. These shares are commonly known as “redeemable preference shares”, and their issuance must be provided for under the company constitution. The redemption of redeemable preference shares must satisfy the requirements under Section 72 of the Companies Act 2016 (as mentioned above).
9. Convertibility
Ordinary Share:
Cannot be converted to a different type of shares.
Preference Shares:
Can be converted if they were issued with the option to convert to ordinary shares at such a time and rate that is usually pre-determined. These preference shares are commonly known as “convertible preference shares”.
Conclusion
A company may adopt different classes of ordinary shares (i.e. Class A Ordinary Shares and Class B Ordinary Shares) and different classes of preference shares (i.e. Class A Preference Shares and Class B Preference Shares), all of which come with different sets of rights and functionalities. The categorisation of different classes of shares (i.e. Class A Ordinary Shares and Class B Ordinary Shares) can come in the form of weighted voting rights, which we have written about in this article.
With these different types, classes and nature of shares, it is essential for persons interested in starting a company, investing in a company or acquiring shares in a company to recognise and understand the share structure of that company.
If you would like us to advise you on establishing a share structure for your company (and to adopt such share structure in your company constitution) or if you would like us to conduct due diligence on the share structure of the target company for a potential acquisition exercise, please feel free to contact us below for a free consultation.
By Tommy Wong and Aaron Liew
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.
Wednesday, 20 September 2023
3:00 pm – 4:00 pm Enforcing an Adjudication Decision: Direct Payment from Principal
About this talk
Winning a CIPAA adjudication and obtaining a favourable decision does not guarantee that the respondent will pay the adjudicated sum. One option is to make a demand and bring a claim for direct payment from the principal. Join our online talk in which our speaker will explain how to obtain direct payment from the principal under Section 30 of CIPAA, how to oppose a demand for direct payment and discuss recent cases.
The talk will be delivered over video conference using Zoom.us. You can either view the talk from your web browser or download the Zoom app.
Talk Points
- Overview of CIPAA Claims and Decisions
- Direct Payment from Principal under s. 30 CIPAA
- Opposing a Demand for Direct Payment
- Other ways to Enforce an Adjudication Decision
Speaker
- Michael Koh, Senior Associate, Dispute Resolution Practice Group
Wednesday, 30 August 2023
3:00 pm – 4:00 pm Landlocked by Compulsory Acquisition: Compensation for Loss of Access
About this talk
Have you lost access to your land as a result of compulsory acquisition by the government? This can happen when the frontage of the land is acquired or when the acquired portion cuts through the land, leaving the remaining portion inaccessible. Whether you’re a landowner or a registered valuer, join us for this talk to understand compensation for severance and injurious affection where acquisition results in the loss of access.
The talk will be delivered over video conference using Zoom.us. You can either view the talk from your web browser or download the Zoom app.
Talk Points
- Overview of Land Acquisition in Malaysia
- Severance and Injurious Affection
- Compensation for Loss of Access
- Case Studies and Recent Court Decisions
Speakers
- Denise Phang, Partner, Dispute Resolution Practice Group
- Joseph Khor, Associate, Dispute Resolution Practice Group
As companies worldwide seek external funding to fuel their growth and development, preserving founder control becomes a critical concern. From start-ups seeking private equity or venture capital to private limited companies embarking on initial public offerings (IPOs), attracting investors while safeguarding founder influence demands innovative corporate structures.
When investors become shareholders, their voting rights are determined by the class and rights attached to their shares. Consequently, founders may find their control diluted if substantial shares are allotted to investors. To address this challenge, entrepreneurs turn to dual-class shares with weighted voting rights—a mechanism that grants certain shareholders multiple votes per share.
In this article, we explore the strategic implementation of dual-class shares to empower founders with majority control while attracting vital funding for the company’s growth and development. By examining the advantages and regulatory considerations, we equip clients at MahWengKwai & Associates with valuable insights to make informed decisions in navigating the dynamic landscape of corporate governance.
Definition and Mechanics of Dual-Class Shares
Dual-class shares are a distinctive corporate structure that deviates from the conventional single-class share system. While single-class shares offer equal voting rights to all shareholders, dual-class shares introduce a tiered approach, allocating different voting powers to distinct classes of shares.
In essence, multiple classes of shares are issued, with Class A and Class B shares being the most common denominations. Class A shares are typically offered to the public and carry limited or no voting rights, ensuring widespread ownership but limited influence in corporate decision-making. On the other hand, Class B shares are held by company founders, executives, or early investors, endowing them with significantly higher voting power.
The typical structure of dual-class shares often bestows superior voting rights upon Class B shares, granting key stakeholders a more influential say in critical matters compared to Class A shareholders. This arrangement empowers company founders to retain substantial control over strategic decisions, even if they possess less than fifty per cent (50%) of the total issued share capital.
Through the implementation of dual-class shares, founders can safeguard their vision and long-term interests, despite seeking external funding to propel the company’s growth and development. This strategic mechanism not only provides entrepreneurs with stability and autonomy in steering their ventures but also allures investors seeking to align with visionary leadership.
Dual-Class Shares in Malaysia
Traditionally, the concept of “one share, one vote” has been the norm in Malaysia, as prescribed by Section 71(1)(c) and Section 293(1)(a)(iii) of the Companies Act 2016. However, the Companies Act 2016 also allows for special voting rights to be conferred to certain classes of shares under Section 69(d) and Section 90(1).
69. Types of Shares
Subject to the constitution of the company, shares in a company may –
(d) confer special, limited or conditional voting rights…
90. Description of shares of different classes
(1) A company that has different classes of shares shall, in its constitution, state prominently the following:
(a) that the company’s share capital is divided into different classes of shares; and
(b) the voting rights attached to shares in each class.
Dual-Class Shares for Private Limited Companies
Taking advantage of Section 69(d) and Section 90(1), private limited companies in Malaysia can establish a dual-class share structure that grants distinct voting rights to each class of shares. For instance, a company may have two classes of shares: Class A Shares with three (3) votes per share, typically held by the Founder or original shareholders, and Class B Shares with one (1) vote per share, offered to Investors, the public, or third parties.
For private limited companies, implementing a dual-class structure involves clearly describing the classes of shares and their corresponding voting rights in the company’s constitution. This strategic approach enables the Founder to retain significant decision-making control while attracting funding from external investors.
Potential for Dual-Class Shares in Public-Listed Companies
While dual-class shares are currently available for private limited companies, their implementation in public-listed companies is still pending further announcements from Bursa Malaysia and/or the Securities Commission Malaysia. Although the Malaysian government has proposed plans to allow the issuance of dual-class shares as part of the revised Budget 2023, public-listed companies must await regulatory developments for their adoption.
The Rationale Behind Dual-Class Share Structures
Dual-class share structures have gained popularity among companies seeking to strike a delicate balance between raising capital and retaining control. Several reasons drive the implementation of this corporate model:
- Preserving Founder Control: For many start-ups and established businesses alike, founders and early investors play a pivotal role in the company’s success. Dual-class shares offer a means for these key stakeholders to maintain significant decision-making power, even as the company expands and attracts external funding. By holding Class B shares with superior voting rights, founders can safeguard their vision and leadership influence.
- Long-Term Vision: Dual-class shares align with the long-term strategic vision of founders and management. With a focus on sustainable growth and innovation, these companies can steer clear of short-term pressures and demands from public investors. This approach empowers management to make strategic decisions that may take time to yield substantial returns, without the fear of facing immediate backlash from short-term shareholders.
- Protection Against Hostile Takeovers: The differential voting rights inherent in dual-class shares can serve as a defence mechanism against hostile takeovers. By concentrating voting power in the hands of committed insiders, companies can shield themselves from external forces that may seek to gain control for short-term gains, potentially compromising the company’s long-term objectives.
Advantages of Dual-Class Shares
Dual-class shares offer an array of advantages that can positively impact a company’s governance and operations:
- Stability and Autonomy: The weighted voting rights provided by dual-class shares offer stability and autonomy to the company’s leadership. This stability can foster an environment conducive to long-term planning and strategic decision-making, as founders and key insiders are not beholden to the immediate demands of external shareholders
- Protection for Visionary Leadership: For companies with founders or executives who possess a unique vision for the company’s future, dual-class shares provide a safeguard against challenges to that vision. By retaining control through Class B shares, these leaders can execute their plans without undue interference, cultivating a corporate culture focused on innovation and bold initiatives.
- Attracting Long-Term Investors: Dual-class shares may be particularly appealing to long-term investors who share the company’s vision and believe in the capabilities of its leadership. Such investors are often willing to make substantial commitments to support the company’s growth, recognizing the value of a strong and focused leadership team.
Disadvantages and Criticisms
While dual-class shares offer compelling benefits, they have drawn criticisms:
- Lack of Accountability: Critics argue that dual-class structures can lead to a lack of accountability, as certain shareholders with superior voting rights may exercise disproportionate control without adequate checks and balances. This concentration of power in the hands of a few can diminish the voice of other shareholders, raising concerns about corporate governance practices.
- Potential for Abuse of Power: The differential voting power granted to insiders through dual-class shares may create opportunities for abuse of power, allowing founders or management to prioritise their interests over those of minority shareholders. Such scenarios can stifle dissent and discourage active shareholder engagement.
- Entrenched Management: Some corporate governance experts contend that dual-class shares can contribute to the entrenchment of management. With concentrated voting power, management may resist external calls for changes or reforms, potentially hindering the company’s ability to adapt to evolving market conditions.
Investor Considerations
Investors need to assess how the weighted voting rights present in a company’s dual-class shares can influence their investment decisions. Understanding the implications of this unique corporate structure is essential for making informed choices that align with their financial goals and risk tolerance. Here are key considerations for potential investors:
- Corporate Governance Practices: Investors need to carefully analyse the company’s corporate governance practices before committing their funds. Scrutinise the board structure, composition, and independence, as well as any measures in place to protect minority shareholders’ interests. Transparent and accountable governance practices are vital for ensuring fair treatment of all shareholders.
- Balance of Power: It is crucial to evaluate the balance of power between different classes of shareholders, particularly the significant disparity between Class A and Class B shares. Understand how much control founders or insiders hold and how their decisions may impact the company’s direction. A skewed distribution of voting power may indicate a higher risk of management entrenchment or potential conflicts of interest.
- Influence on Decision-Making: Investors should analyse how the weighted voting rights might influence key decisions within the company. Gain insights into the specific matters in which Class B shareholders can exert their superior voting power. Evaluate if this concentration of control aligns with the company’s long-term goals and values, and whether it may lead to a lack of responsiveness to other shareholders’ concerns
- Risk Tolerance: Recognize that investing in companies with dual-class shares entails unique risks. With founders or insiders retaining significant control, minority shareholders might have limited avenues to influence the company’s direction. Consider your risk tolerance and whether you are comfortable with potentially reduced voting power and fewer protections compared to traditional single-class share companies.
- Long-Term Investment Goals: Dual-class share structures often emphasise long-term strategic vision. Investors need to align their investment goals with the company’s trajectory and growth prospects. Investing in such companies requires a commitment to ride out market fluctuations and support the company’s leadership in achieving its long-term objectives.
- Future Dilution: Take into account the potential for future share dilution. As the company continues to grow and attract more investors, additional classes of shares may be introduced, further diluting voting power. Understand the company’s plans for future fundraising and its potential impact on the balance of power.
- Regulatory Environment: Be aware of the regulatory environment and voting rights protections in the jurisdiction where the company is incorporated. Regulations may vary across countries and can influence the degree of control granted to certain shareholders.
Conclusion
In the modern corporate world, dual-class shares with weighted voting rights offer a way for companies to get funding while keeping control. We have seen how they empower founders and insiders to plan for the long term without worrying about short-term pressures. They provide stability, protect against takeovers, and attract long-term investors
Investors should be cautious. Dual-class shares come with potential risks like less accountability and entrenched management. Before investing, they should carefully check the company’s governance, power balance, and their own willingness to take risks. Seeking professional advice is vital to make smart choices in dealing with this unique structure.
Understanding dual-class shares is essential for companies and investors alike. By balancing the benefits and risks, they can navigate the corporate landscape successfully and ensure sustainable growth and success.
By Raymond Mah and Tommy Wong
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.
Wednesday, 9 August 2023
3:00 pm – 4:00 pm Defamation Allegations in Strata Management
About this talk
Are you involved in a strata community, perhaps as a owner, JMB/MC committee member or property manager? Have you made statements or shared views only to receive defamation allegations? It is important to know the line between issuing statements to carry out your duties and avoiding a defamation claim. In our upcoming webinar our speaker will explain the law of defamation and how to carry out your duties as a JMB/MC committee member or property managers without being liable for defamation.
The talk will be delivered over video conference using Zoom.us. You can either view the talk from your web browser or download the Zoom app.
Talk Points
- What is Defamation?
- Defences to Defamation
- Defamation in Strata Communities
- Tips for Avoiding Defamation
Speaker
- Edwin Raj, Senior Associate, Dispute Resolution Practice Group
From left to right : Jerry, Chin Yuen-Fong, Foo Joon Liang, Dr Colin Ong KC, Tan Sri David Wong, Dato’ Mah Weng Kwai, Josephine Hadikusumo, Mr Tan
MahWengKwai & Associates is delighted to announce that our Consultant, Dato’ Mah Weng Kwai, has been appointed a panel arbitrator for the Hainan International Arbitration Court (HIAC).
The Hainan International Arbitration Court (HIAC) is a distinguished arbitration institution dedicated to resolving international commercial disputes. As China’s only free trade zone with an international arbitration centre, HIAC plays a crucial role in facilitating fair and impartial dispute resolution for businesses and individuals both regionally and internationally.
Dato’ Mah Weng Kwai is also a panel arbitrator on the Asian International Arbitration Centre’s (AIAC) panel of arbitrators and is certified as a Mediator by the Malaysian Mediation Centre. Dato’ Mah has sat as an arbitrator in numerous cases, appointed on an ad-hoc basis or by AIAC and other centres in the Asian region such as the Singapore International Arbitration Centre (SIAC). The subject matter of the cases includes, among others, building and construction contracts, sale and purchase of shares, telecommunication contracts, marine dredging and many others.
This appointment is a testament to his exemplary dedication to the legal profession, legal acumen, and extensive arbitral experience. We extend our heartfelt congratulations to Dato’ Mah Weng Kwai on this remarkable achievement.
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.
