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By: Nadia Aimi Binti Abdul Wahab

+603-2118 5131

Section 64 of the Companies Act (CA) 1965 deals with the reduction of share capital. A reduction of
capital is a reduction of the issued capital where the interest of creditors and members will be affected. Therefore,
in the event a company goes into liquidation, any return of capital to the members would reduce the assets that
are available for distribution to the creditors.

A fundamental principle of company law is that once the share capital of the company is raised, it cannot
be returned by the company to its members unless the reduction of capital is sanctioned by the Courts. The
protection of creditors and ensuring that there is enough capital left in the company when it is liquidated to satisfy
their debts is the primary consideration behind this principle.

Since capital may be reduced under Section 64(1) of CA 1965, any method of reducing capital is legal so
long it is made in accordance with Section 64(1). Thus, it is for the members to decide how to carry out a
reduction capital. In other word, the manner or method of reducing capital set out in Section 64(1) is not
exhaustive. Even though confirmation or consent of the court is required, normally the court does not concerned
with the motives of the company to reduce the capital and also does not have to be satisfied that the reduction is
commercially practicable, provided that the procedures is correct.

One of the sanctioned methods that will result in the reduction of share capital is a Selective Capital
Repayment (SCR) exercise pursuant to Section 64 of CA 1965. This SCR exercise is basically a transaction
between two companies whereby one company will make an offer to another company to take an equity interest
in the target company by way of a Selective Capital Repayment exercise. The effect of this exercise to the
company that accepts the offer is that it will result in the reduction of its share capital and after that this company
will become a wholly-owned subsidiary of the company who made the offer.

In Malaysia, the first ever SCR exercise undertaken pursuant to Section 64 of CA 1965 was by UDA
Holdings in 2006. However, UDA Holdings wasn’t being proposed to be taken over by another company. In fact, it
was driven and funded by their very own shareholder of 50.01%, the government’s investment arm Khazanah
Nasional, as the UDA Board of Directors wanted to make UDA Holding a private company.

The rationale of the SCR exercise is basically to facilitate the merger of the company who made the offer
with another company in order to complements each other, or in the case of UDA Holdings, the exercise is meant
to offer the rest of the shareholders the best price possible, according to the market value. At RM3.00 per share,
at that time, the shareholders appear to have received a very good bargain. This is to encourage the other
shareholders to part with their stake in UDA Holdings. As per the agreement, Khazanah Holdings will become the
100% owner of UDA Holdings once the exercise was completed. Nevertheless, the exercise gave a windfall to
other shareholders when Khazanah forked out an astonishing RM529 million to pay all the shareholders in cash.

Before proposing an SCR exercise, it is a must for the company who wants to accept the offer to make
sure whether the articles of the company authorize the reduction of capital. Authority given by the memorandum
alone is not effective. In the event where the articles do not authorize the reduction of capital, then the procedure
for amending the articles must first be carried out.

© 2008 Azmi & Associates – Selective Capital Repayment - 00111503 \ @azmilaw #12 Page 1 of 2
In order to propose an SCR exercise, the company needs the approval from the shareholders of the company,
any regulatory authorities, creditors or related parties and also requires the consent of the Court and the passing
of a special resolution to reduce its capital. The proposed SCR will become effective once an official copy of the
Order is filed with the Companies Commission of Malaysia.

The application to confirm a reduction of the share capital of a company should proceed by way of a
petition and this is mentioned under Order 88 rule 5 of the Rules of High Court 1980 whereby this Order sets out
that the applications under the Companies Act 1965 must be made by way of petition.

Furthermore, the Court’s roles in a capital reduction are as follows:

i. To ensure that the interests of creditors must be safeguarded;

ii. The interests of the members are considered, and the proposed exercise will result in just and equitable
treatment of shareholders; and
iii. The interest of the public is considered.

The Court would generally exercise its discretion to confirm a reduction of capital if:

i. The shareholders are treated equitably;

ii. The proposal has been fully and fairly explained and is proper;
iii. The creditors are not prejudiced; and
iv. The reduction is for a discernible purpose.

It should be noted that a reduction of capital is always carried out under the supervision of the company’s
legal advisers or independent advisers. Normally, they will draft the necessary documents, the resolution of the
board convening an EGM and the special resolution of the company approving the reduction. The Board will give
their recommendation after having considering all aspects of the proposed SCR and with the advice of these
advisers. Moreover, as far as reduction is concerned, the company may so far as is necessary alter its
memorandum by reducing the amount of its share capital and of its share accordingly.

The Court may make an order confirming the reduction of such terms and conditions as it thinks fit if the
Court is satisfied that the reduction is proper and the interests of the creditors are protected. Then, a copy of the
Court order shall be lodged with the Registrar of Companies within 14 days from the date of the Court order with a
filing fee of RM 50, and the reduction will take effect from the date of the registration of the Court order.

In conclusion, a SCR exercise pursuant to Section 64 of the Companies Act 1965 has shown that it can
be a win-win solution for a company that would like to take over another company, or in some cases, the majority
shareholder that would like to own 100% of a listed company, thus making it a private company. Minority
shareholders are offered a reasonable price for their shares compared to the market rate and will be paid in cash
to part with their stake in the company. While the majority shareholders/company will have to part with a
substantial amount of money for the offered shares, they will end up owning a 100% stake in the company. Thus,
the SCR exercises undertaken by Khazanah and UDA Holdings can be a benchmark for other companies to
pursue their privatization and ownership plans.

© 2008 Azmi & Associates – Selective Capital Repayment - 00111503 \ @azmilaw #12 Page 2 of 2