Unless otherwise indicated, the company stated in this article refers to the private company incorporated in Malaysia in accordance with the Malaysian Companies Act 2016 (CA 2016).

Having an effective and reliable method of obtaining adequate capital for operations and expansion is a core business requirement for all companies. Whenever the company requires funds for a certain purpose, the allotment of shares is the most common strategy for obtaining a capital injection.

Having a thorough understanding of the allotment and issuance of shares is essential for companies seeking to raise capital and attract new investors by demonstrating the company’s financial stability and growth potential for expansion, which we will discuss in greater depth later in this article.

1. General Prohibition and Regulatory Compliance
   
   In Malaysia, the CA 2016 governs the procedures and rules pertaining to the allotment of shares. Infractions of these regulations may result in penalties, fines, or legal action.
   
   In accordance with Section 43(1) of the CA 2016, a private company is prohibited from offering shares or debentures to the public, allotting such securities with the intention of offering them to the public, or urging the public to deposit money with the company.
   
   An offer of shares or debentures of a company is not considered an offer to the public if it is not targeted at the general public but rather a private deal between the parties involved, pursuant to Section 44(2) of the CA 2016.
   
   Therefore, the issuance and allotment of shares in a private company is often done through the private issue of shares to relatives, friends, and business associates.
   
   
2. Definition of Issuance and Allotment of Shares
   
   Historically, the meanings of issue and allotment of shares have often been interchangeably used in most legal texts. From a legal point of view, the terms “issue” and “allotment” of shares are not synonymous. It is important to understand the difference between share issuance and share allotment.
   
   Typically, the issue of shares precedes the allotment of shares in the process of raising capital through the sale of shares. To better comprehend, we describe the distinction between the issuance and allotment of shares in more vivid ways:
   
   

   (1)	Issuance of shares The issuance or issue of shares refers to the act of making shares available for subscription or purchase by potential investors at a predetermined rate. The authority to issue new shares is typically granted to the directors by the shareholders in a general meeting pursuant to Section 75 of the CA 2016.
   (2)	Allotment of shares Allotment refers to the formal assignment of shares to particular individuals or entities who have either applied for or subscribed to the shares during the issuance process. The directors have the authority to decide how to allocate the available shares based on the applications received.

   
   
3. Common Reasons for Issuing and Allotting Shares
   
   Unlike borrowing money, issuing and allotting shares does not require a company to make regular interest payments or repay the principal amount. Some of the primary reasons for issuing new shares are as follows:
   

   (1)	funding for business operations
   (2)	funding expansion for future development plans such as acquiring assets or other businesses
   (3)	diversify sources of funding
   (4)	engage shareholders
   (5)	capitalising on profits to avoid unwanted hostile takeovers
   (6)	invest in new projects
   (7)	invest in research and development
   (8)	paying off debts to repair financial crises

   
   
4. General Formalities for the Issuance and Allotment of Shares
   
   The following are the general formalities of an issuance and an allotment that a company should first take into consideration in order to comply with the relevant rules and regulations established by regulatory authorities:
   
   

   (1)	To determine the types of shares to issue and the consideration Each type of share carries different rights, redemption rules, and benefits, subject to the terms as set forth in the company’s constitution. There are various classes of shares, but the most common ones are ordinary shares and preference shares. The purpose of having different classes of shares is to attract different types of investors. Make sure you understand each share type and select the one that best fits the objectives, needs, and preferences of your company. An allotment of shares may be allotted for cash or for a consideration otherwise than in cash. (a)  Allotment of shares for cash Allotment for cash is very commonly used for general share issuances. It refers to the process of issuing shares to investors who pay the company in cash for the newly allocated shares. There must be valid consideration in respect of shares allotted by the company. A company cannot give fully paid-up shares to its members as a gift without receiving consideration. Hence, investors will inject cash into the company’s bank account and providing the company with the proof of remittance together with the shares application form or letter for taking up shares. (b)  Allotment of shares for consideration otherwise than in cash Shares do not necessarily have to be allotted for cash. Allotment otherwise than in cash refers to the allotment of shares where the consideration is something other than cash. This could include non-monetary consideration such as assets, services, or any other form of value. When shares are issued for non-cash payment, the concern is whether the consideration received for the shares is adequate. A company may allot shares as fully or partly paid up otherwise than in cash, as long as the consideration is in real value in terms of money’s worth and not illusory. It is common for a company to issue shares to a vendor of property or other fixed assets in satisfaction of the cost thereof, or to a person in exchange for services rendered to the company or for goodwill.
   (2)	To obtain shareholders’ prior approval for the issuance and allotment of shares In principle, the directors of a company are prohibited under Section 75(1) of the CA 2016 from exercising their power to allot shares in the company unless shareholders’ prior approval by way of resolution has been obtained. Therefore, it is understood that the shareholders have the ultimate say over the issuing of shares. The consequence of failing to get shareholders’ prior consent for allotment of shares (if required by the CA 2016) could be severe, rendering any issue of shares made or about to be made void. The issue or subscription price per share and the terms of the allotment shall be established by the board of directors in the best interests of the company. The notification of shareholders’ approval for the allotment of shares must be lodged with the Registrar within 14 days of the shareholders’ approval date pursuant to Section 76 of the CA 2016.
   (3)	Notify shareholders about pre-emptive rights To protect existing shareholders’ rights from being diluted by a new issue of shares, Section 85(1) of the CA 2016 provides as a default that, subject to the constitution, shares that rank equally to existing shares in terms of voting or distribution rights shall first be offered to the existing shareholders based on the shareholding ratio. A company must notify the existing shareholders of the offer for the allotment of shares with the time frame, and if the existing shareholders fail to accept the allotment or fail to respond within the time frame, the directors may dispose of or allocate those shares to a third party or in such a manner as the directors think is most beneficial to the company in accordance with Section 85(2) and (3) of the CA 2016. Section 75(2)(a) of the CA 2016 also states that, if a company offers an allotment of shares to an existing shareholder in accordance with the shareholding ratio, approval at the shareholders' meeting is not required. It is advisable that directors or founders of the company prudently confer with their company secretary or legal advisor before initiating any share issuance.

   
   
5. Conclusion
   
   The allotment of shares is a crucial step for companies looking to raise capital and diversify their funding sources. However, it is also a legal process that carries several risks, including diluting shareholders’ ownership, lowering the value of their investment, and increase the company’s vulnerability to takeover attempts by other companies or investors, all of which must be carefully assessed.
   
   Companies that adhere to relevant regulatory procedures, such as ensuring pre-emptive rights, obtaining shareholders’ approval, and filing a return of share allotment, might benefit from the share allotment. While minimising the risks and uncertainties connected with this process, it also enables companies to make informed decisions, safeguard shareholder interests, and promote development and strategic goals.
   

Kaizen, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professionals in Kaizen for further clarification.

See also：
Transmission of Shares in Malaysia
Transfer of Shares of a Malaysia Company