Classification of Companies

Learning Outcome

Understand the differences between limited and unlimited companies

Understand the differences between public and private companies

Understand the differences between holding and subsidiary companies

TYPES OF COMPANIES

Sec 14(2) – the classification of companies under the Companies Act

(a) Company limited by shares (limited company) – public and private companies

(b) Company limited by guarantee (c) An unlimited company

Types of Companies

Company Limited by Shares - Most companies are limited companies today

(a) Liability of the members to contribute to the assets of the company on winding up is limited in the memorandum to the amount unpaid (if any) on the share capital - S 4(1)

Types of Companies

Company Limited by Shares

Example - If shareholder A purchases shares for RM100,000 and has paid RM30,000.

In the event of winding up of company, he is only liable to contribute maximum RM70,000.

In general once the shares are fully paid up there is no further liability of the members.

Types of Companies

Company Limited by Shares

This means that if the company becomes insolvent, the members are not required to make any further contributions to discharge the company’s debts

(b) Limited companies may be either Public (Berhad) or Private (Sdn Bhd) – Sec 22(5)

Types of Companies

Companies Limited by Guarantee

Companies without share capital, there are no shares issued, usually non-profit organizations, charitable bodies

The liability of members is limited to such amount as they have undertaken to contribute to the assets in the event of its being wound up – Sec 4(1), 18(1)(e), 214(1)(e)

The guarantee amount is specified in the Memorandum of Association which is part of the company’s constitution.

Types of Companies

Foreign Companies - Sec 329 CA

For entities incorporated outside Malaysia wishing to establish a place of business in Malaysia; usually referred to as “Branch Office”

Must be registered with Part XI Division 2 of CA Sec 332(1) CA - Documents required - Certificate of incorporation and MAA - List of directors and Memorandum describing the

powers of the directors - Statutory declaration by an Agent of the Foreign

Company

Types of Companies

Unlimited companies (unusual today)

Liability of the members to contribute to the assets of the company on winding up is unlimited – Sec 4(1)

Every member is liable to contribute to the assets of the company to an amount sufficient for payment of its debts and liabilities – sec 214(1)

Type of Companies

Unlimited Companies

The name of a private unlimited company should end with “Sendirian” or “Sdn” while a public unlimited company’s name should not have the word “Berhad” or “Bhd”.

Type of Companies

A company having a share capital may be incorporated as either a private or public company

Company having a

Share Capital

Public Compa

ny

Private Compa

ny

Types of Companies

Private companies

Sec 15(1) – a company having a share capital may be incorporated as a private company if its memorandum or articles :

(a) Restrict the right to transfer its shares - S 4(1) (b) Limits the number of members to not more

than 50 (c) Prohibits any invitation to the public to

subscribe for any shares in or debenture of the company and

Types of Companies

(d) Prohibits any invitation to the public to deposit money with it either with or without interest.

A private company has the word “Sendirian” as part of its name, inserted immediately before the word “Berhad” as provided in Section 22(4)

Exempt Private Companies

An exempt private company is a private company in the shares of which no beneficial interest is held directly or indirectly by any corporation and which has not more than twenty members none of whom is a corporation – Sec 4(1)

Exempt private company = not more than 20 individual members

Types of Companies

Public Company

A company that is not a private company S. 4(1) Unlike a private company, a public company

cannot commence business upon incorporation, it needs to have the trading certificate - Sec 23

Companies names end with either the words “Berhad” or “Bhd”

Can be further classified as ‘listed’ or ‘unlisted’ public companies

Type of Companies

Public Company

The restrictions in Sec 15(1) do not apply to a public company – not contained in the M & A

A public company may offer shares and debentures to the public for subscription and such shares are freely transferable.

Group Companies – Holding and Subsidiary

The term “holding company” and “subsidiary” are defined in Section 5(1)

A corporation (“S”) is a subsidiary of another corporation (“H”), if :

1. H controls the composition of the board of directors of S ; or

2. H controls more than half of the voting power of S ; or

Group Companies – Holding and Subsidiary

3. H holds more than half of the issued share capital of S ; and

4. S is a subsidiary of any other corporation which is in turn a subsidiary of H. (H is ultimate holding company of S)

Consolidated accounts must be prepared – Sec 169(5) CA

Holding and Subsidiary Companies – Sec 5(1)

Co H

Co H controls

composition of

board

Co H controls

more than

50% of issued shares

Co H controls

more than 50% of voting

power

CO S1 CO

S 2

COS3

Holding and Subsidiary Companies – Sec 5(2)

Sec 5(2) the composition of a corporation’s board

of directors shall be deemed to be controlled by another corporation if that other corporation by the exercise of some power exercisable by it without the consent or concurrence of any other person can appoint or remove all or a majority of the directors

Ultimate Holding Company - Sec 5A

A corporation shall be deemed to be the ultimate holding company of another corporation if –

(a) the other corporation is a subsidiary of the first-mentioned corporation; and

(b) the first mentioned corporation is not itself a subsidiary of any corporation

Wholly-owned subsidiary – S. 5B –

Wholly–owned subsidiary – S. 5B

A D

Group of Companies

The holding and subsidiary companies within a group of companies are separate legal entities.

The acts of a subsidiary are not the acts of its holding company.

A holding company is not responsible for the acts of the subsidiary and cannot enforce the rights which belong to the subsidiary and vice versa.

Theory of independent legal entity in group enterprise

To summarize -

In the case of two companies, where the controlling shareholders and the directors of the two companies are the same, they are still regarded in law as two independent legal entities, in the absence of fraud or other exceptional circumstances.

Questions and Answers

Question What is the difference between public and private

companies Answer Private companies = (a) Restrict the right to transfer its shares - S 4(1) (b) Limits the number of members to not more

than 50 (c) Prohibits any invitation to the public to

subscribe for any shares in or debenture of the company

Public company – no such restriction on the transfer of shares. Transfer of shares subject to the Articles. Can be listed or unlisted company

Classification of Companies

Question Explain the meaning of subsidiary company Answer 1. H controls the composition of the board of

directors of S ; or 2. H controls more than half of the voting power

of S ; or 3. H holds more than half of the issued share

capital of S ; and 4. S is a subsidiary of any other corporation which

is in turn a subsidiary of H. (H is ultimate holding company of S)

End ofChapter 2

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