Part 1
The Companies Commission of Malaysia (CCM) has recently begun investigations over a number of landbanking companies in Malaysia. It alleges that these companies were offering certain prescribed interests to the public, contravening the provisions of the Malaysian Companies Act. Under the Companies Act, offerings of such interests are subject to the provisions of Division 5 of Part IV and accordingly may only be carried out by a Malaysian public company and must be accompanied by a registered prospectus.
The nature of “interests”
“Interests” that attract the prospectus registration requirements under the Companies Act are defined broadly to mean any right or interest in any (a) profits, assets or realisation of any financial or business undertaking or scheme, (b) common enterprise in which the holder of the right or interest is led to expect profits, rent or interest from the efforts of the promoter of the enterprise or third party, (c) time-sharing scheme or (d) investment contract. The terms “time sharing scheme” and “investment contract” have, in turn, their own definitions, the specifics of which need not be examined for the present purposes. It is important to note, however, that the scope of what is meant by interest is broad, and that it is necessarily so, given that the category has evolved out of a need to regulate instruments that were neither shares nor debentures within the scheme of regulation of companies. It is, in other words, a category that is intended to capture all other types of instruments – a “dustbin” category, perhaps.
Landbanking
The business model of a typical landbanking company involves the identification and acquisition of strategically locally land banks, after careful analysis and research into the development potential of such land. The landbanking company then sells undivided shares in the land to its customers. The value of the land should – if the landbanking has done its homework – appreciate over time, allowing the customers to sell their share in the land for a profit. In the meantime, the landbanking company would typically attend to matters such as re-zoning the land for development or submitting development plans for the land (where the landbanking company carries out the development itself). The shares in the land may be sold back to the landbanking company or to a third party developer, depending on the particular business model adopted.
The Regulatory regime
The CCM action comes some months after the UK’s Financial Services Authority took regulatory action to wind up UK Land International for operating an illegal collective investment scheme. The investigations by the CCM, which are still pending, indicate an admirable seriousness in addressing investor and consumer protection issues, but also raise key conceptual issues in the scheme of regulation of interests and collective investment schemes in Malaysia.
The breadth of the definition of interests raises the possibility that certain types of transactions, which are not appropriate to be regulated as interests, would be caught by the regulatory regime under the Companies Act. For example, the CCM appears to have indicated that direct purchases of land are not subject to Division 5 of Part IV of the Act. However, a reading of the definition in section 84 of the Act does not afford a conceptual basis for distinguishing the purchase of a service apartment unit on the one hand from the acquisition of an undivided interest in land in a landbanking scheme, in particular where the investor or customer acquires a registered interest in such land.
The breadth of the definition is underscored in the recent decision by the Malaysian Court of Appeal in the case of Suruhanjaya Syarikat Malaysia v NV Multi Corp Bhd & Ors [2008]. The court held that the sale of burial plots and urn compartments in memorial parks to purchasers amounted to offering or issuing interests to the public within the meaning of section 84 of the Companies Act. This decision is significant because it indicates that the courts are prepared to extend the scheme of regulation under Division 5 of Part IV to transactions that are not in the nature of investments. The decision is, however, pending appeal in the Federal Court, the apex court in Malaysia.
To be continued in next month’s issue…
Azizul Azmi Adnan
Wong & Partners
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Wong & Partners
Tel: (603) 2298 7886
Fax: (603) 2282 2669
Email: azizul.azmi.adnan@wongpartners.com
Website: www.wongpartners.com |