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30 September, 2019
Introduction
Universal succession is a legal concept in which a successor company assumes all rights and liabilities of the preceding company pursuant to a merger under foreign law. This concept is somewhat foreign in Malaysia as there is no legislation or regulation in Malaysia which provides for the merging of two entities resulting in one surviving entity.
Nonetheless, this concept has come to be recognised in Malaysia where there is a merger involving a foreign shareholder of a Malaysian company.
For example, Company A is a foreign shareholder of a Malaysian company which merges, under foreign law, with Company B resulting in a successor company at its place of incorporation. Are the shares held by Company A in the Malaysian company automatically transmitted by operation of law to the successor company? Or is Company A required to transfer its shares in the Malaysian company to the successor company by using an instrument of transfer?
The answer may be found in the recent Malaysian case of United Renewable Energy Co Ltd v TS Solartech Sdn Bhd[1] (“URE”) which is discussed below.
Distinction Between “Transfer of Shares” and “Transmission of Shares”
In Malaysia, the Companies Act 2016 (“CA 2016”) recognises the distinction between “transfer” and “transmission” of shares. A transfer of shares is prescribed under section 105(1) of CA 2016. The section states that, subject to other written laws, any shareholder may transfer all or any of his shares in the company by a duly executed and stamped instrument of transfer and shall lodge the transfer with the company.
Section 109 of CA 2016 applies if the right to shares is transmitted to a person by operation of law and the person notifies the company in writing that the person wishes to be registered as a shareholder of the company in respect of the shares. Section 109 of CA 2016 provides for the registration of a person as a shareholder in the event of a transmission of shares. Section 109 of CA 2016, however, does not provide for the circumstance in which shares held by a body corporate are transmitted by operation of law, as it envisages that shares are transmitted by operation of law only where an individual shareholder dies.
One differences between a transfer and transmission of shares under the CA 2016 is that a transfer of shares can only take effect when there is an executed and stamped instrument of transfer; whereas a written notice is sufficient to notify a company of a transmission of shares.
A distinction between the two concepts was addressed in the Malaysian case of Ng Chong Wee v Ng Chong Geng & Sons Sdn Bhd[2]. This case essentially involves a beneficiary of a deceased shareholder in a private limited company claiming his right to be registered as a shareholder by way of a transmission of shares which was not approved by the directors. The Court of Appeal referred to the English case of Moodie v W & J Shepherd (Bookbinders) Ltd[3] where the House of Lords explained the distinction as follows:
“… ‘Transfer’, if the word is used in the ordinary sense, means a transfer from one person to another and implies that there must be both a transferor and transferee. But where in respect of shares forming part of the deceased's estate, there is no transfer from one person to another … ”
As such, in a transfer of shares, there must be a transferor and a transferee, a voluntary disposition of legal title to the shares and a proper instrument of transfer must be delivered to the company.
Conversely, a transmission of shares is an automatic vesting or devolution of title which takes place by operation of law upon the occurrence of a legally significant event. For example, the death of a shareholder or when a shareholder is bankrupt. The question that remains is: can shares held by a body corporate be transmitted by operation of law as a result of universal succession?
Malaysian High Court recognises universal succession
In URE, the High Court recognised the concept of universal succession in the context of a transmission of shares and confirmed that a transmission of shares is not just limited to the death of a shareholder or when a shareholder becomes bankrupt.
In this case, Solartech Energy Corp (“Solartech”) is a foreign shareholder of a joint venture company, TS Solartech Sdn Bhd (“TS Solar”), in Malaysia. Solartech had merged with two other companies at its place of incorporation, Taiwan, which resulted in one single-merged company known as United Renewable Energy Co Ltd (“United Renewable Energy”).
Thereafter, United Renewable Energy wrote to TS Solar informing them of the merger and requesting them to effect the transmission of shares in TS Solar by operation of law from Solartech to United Renewable Energy as the successor company.
However, TS Solar refused to effect the transmission of shares on the basis that the passing of title requires a transfer of shares via an instrument of transfer. The High Court held that there had been an automatic devolution of title in the shares to United Renewable Energy by operation of law upon the occurrence of the merger.
As the concept of universal succession is foreign to Malaysian courts, the High Court relied on judgments from various Commonwealth Courts such as the English House of Lords decision in National Bank of Greece and Athens SA v Metliss[4] which laid down the principle that the succession of corporate personality is a matter which goes to the status of the foreign corporation and is therefore governed by the law of incorporation. As far as the law of the forum is concerned, once an entity is recognised as having the status of a universal successor, it will be clothed with both the assets and liabilities. Thus, the concept of universal succession is recognised.
URE also referred to the Singapore case of JX Holdings Inc v Singapore Airlines Ltd[5] which had facts that were substantially similar to that of URE and was decided in the context of a universal succession pursuant to a merger.
The Singapore High Court held that the transfer of assets and liabilities through the process of a universal succession was a transmission and not a transfer within the meaning of the Singapore Companies Act. As such, the shares in question were transmitted to the succeeding company by operation of law, and the succeeding company was entitled to be registered as a shareholder in place of the predecessor company without having to prepare and deliver a proper instrument of transfer.
Conclusion
URE paved the way for Malaysian companies to recognise the concept of universal succession as a legally significant event to effect a transmission of shares. A Malaysian company, when presented with a written notice from a succeeding company to be registered as a shareholder, may rely on URE to effect a transmission of the shares held by the succeeding company without the requirement for an instrument of transfer.
For further information, please contact:
Lim Chia Ann, Shearn Delamore & Co
chiaann.lim@shearndelamore.com
[1] [2019] 1 LNS 1118.
[2] [2018] MLJU 934.
[3] [1946] 2 All ER 1044.
[4] [1958] AC 509.
[5] [2016] SGHC 212.
