We have acted as Malaysian legal counsel on numerous cross-border mergers and acquisitions (“M&A”) transactions with Malaysian elements. In such transactions, compliance issues often surface during legal due diligence, particularly when founders or business owners intend to sell their business. Although these issues are frequently regarded as procedural, they can materially affect deal timelines, completion mechanics, and risk allocation. The following outlines common non-compliance issues that Malaysian companies often overlook, together with their potential consequences.
1. Non-compliance Relating to Allotment of Shares
From a transactional perspective, proper title to shares is fundamental in any M&A transaction. In our experience, defects in historical share allotments are among the most common issues identified during legal due diligence, particularly in founder-led or closely held companies.
Such non-compliance typically arises where shares have been issued without prior shareholders’ approval or where statutory filings were not made within the prescribed timelines. While these issues are procedural in nature, they can have substantive implications for title to shares and deal certainty.
Allotment Requirements
Under section 75 of the Companies Act 2016 (“Companies Act”), directors of a company are prohibited from exercising their powers to allot shares without obtaining prior approval from shareholders by way of resolution. Shareholders’ approval must be lodged with the Registrar of Companies within 14 days from the date of the approval (section 76(2) of the Companies Act). Thereafter, the company must lodge a return of allotment with the Registrar of Companies within 14 days from the date of allotment (section 78 of the Companies Act).
Consequences
An issuance of shares without the requisite prior shareholders’ approval is void, which directly impacts the validity of share ownership. Any consideration given for the shares shall be recoverable accordingly.
The recent Federal Court case of WTK Realty Sdn Bhd v Kathryn Ma Wai Fong & Anor and Other Appeals) [2025] 8 CLJ 988 confirms that, where there are statutory mechanisms available under the relevant statute to cure a breach relating to the issuance of shares, validation of the issuance must be obtained through a court order and not by reference to the informal shareholder assent. Accordingly, if the allotment of shares in a company was made without prior shareholders’ approval and its validity is later challenged, the allotment would have to be validated through the court. This may result in delayed completion timelines and enhanced contractual protections such as warranties or indemnities.
Directors may also face personal liability under section 75(5) of the Companies Act if they knowingly contravene, permit the contravention of, or fail to take all reasonable steps to prevent a breach of section 75 with respect to any issue of shares. The directors shall be liable to compensate the company and the person to whom the shares were issued for any loss, damages or costs which the company or that person may have sustained or incurred.
Further, failure to lodge shareholders’ approval or returns of allotment within the prescribed periods constitutes an offence, exposing the company and its officers to significant fines, including daily penalties for the period during which the offence continues after conviction.
2. Failure to disclose directors’ interests
Failures to disclose directors’ interests are a recurring compliance issue in Malaysian companies. These issues most commonly arise where related-party arrangements are entered into informally and without contemporaneous board-level disclosure.
Disclosure requirement
Under section 221(1) of the Companies Act, every director of a company who is, whether directly or indirectly, interested in a contract with the company shall, as soon as practicable after the relevant facts have come to the director's knowledge, declare the nature of his interest at a meeting of the board of directors.
The disclosure obligation may arise, for example, in a situation where a director of Company A is also a shareholder of Company B, and a contract is entered into between Company A and Company B.
It should be noted that the scope of a director’s interest under section 221 is wider than it may initially appear. Section 221 also provides that an interest in the shares or debenture of a company held by:
- the spouse of a director who is not a director of the company; or
- a child of a director, including an adopted child or stepchild, who is not a director of the company,
shall be treated as the director’s interest in the contract and proposed contract.
This statutory attribution can capture family-held interests and is a common area of oversight during structuring and documentation.
Consequences
A director who fails to comply with the disclosure requirement commits an offence and on conviction, shall be liable to imprisonment for up to five years, or a fine of up to RM3,000,000, or both.
If a contract is made without proper disclosure of director’s interest as required under section 221, the company has the right to void the contract, except if it is in favour of any person dealing with the company for any valuable consideration and without actual notice of the contravention.
In practice, such issues often result in:
- termination or amendments to related-party arrangements;
- additional conditions precedent; and
- specific indemnities or risk allocation mechanisms.
Early involvement of Malaysian counsel is critical to assess enforceability risk and determine whether remediation is required prior to signing or completion.
3. Failure to Pay Stamp Duty
Under section 4 and First Schedule of the Stamp Act 1949 (“Stamp Act”), various instruments including contracts are subject to stamp duty unless exempted under the Stamp Act or other written laws.
Agreements should be presented for stamping:
- if executed within Malaysia, within 30 days from the date of execution; or
- if executed outside Malaysia, within 30 days after it is first received in Malaysia.
Consequences
Failure to pay stamp duty within the prescribed period would result in a late stamping penalty as follows:
- if stamped within 3 months after the time for stamping: RM50 or 10% of the unpaid duty, whichever is greater.
- if stamped after 3 months after the time for stamping: RM100 or 20% of the unpaid duty, whichever is greater (section 47A of the Stamp Act).
While failure to stamp an agreement does not affect its validity, an unstamped agreement cannot be admitted as evidence in Malaysian courts until the stamp duty, including any late stamping penalty, has been paid (section 52 of the Stamp Act).
In M&A transaction, the buyer would likely require the seller to ensure stamp duty has been paid for all contracts chargeable with stamp duty in particular if the contracts are material to the business of the target companies. Submitting agreements for stamping to the Inland Revenue Board of Malaysia takes time and penalty for late stamping will be imposed. The buyer would typically require the seller to take on this liability before completion of the transaction.
4. Business Licence
When conducting due diligence, it is often found that a company has been operating its business without a valid business licence issued by the relevant local authority or the business licence does not cover all the relevant activities undertaken by the company in contravention of the relevant by-laws of local authorities. Different by-laws apply depending on the localities of the business.
Consequences
Typically, any person who contravenes such provision commits an offence and, upon conviction, may be fined up to RM2,000, imprisoned for up to 1 year, or both.
In M&A transaction, potential acquirer would typically require the target company to rectify the non-compliance by obtaining the necessary business licence before completion of the transaction.
Takeaway
With proactive compliance and early identification of issues, the common non-compliance issues highlighted above can be avoided or, at the very least, identified and rectified at an early stage of a corporate transaction. For business owners and founders, particularly those contemplating a sale or fundraising exercise, ensuring that their companies comply with laws is a legal obligation as well as a practical means of preserving deal value. For foreign counsels advising on transactions with Malaysian elements, early engagement of Malaysian counsel can materially impact timelines by addressing local regulatory and corporate requirements upfront.
This article is authored by our Partner, Ms Wong Mei Ying and Associate, Ms Vong Sin Hui. The information in this article is intended only to provide general information and does not constitute any legal opinion or professional advice.