This article provides a high level overview on key topics relevant to establishing business activity in Malaysia. It is intended to be a preliminary guide for transaction planning.
Business entities
There are many types of business entities in Malaysia. The most popular and common business entity is a private company. It is easily identified in the name of the company by its statutory abbreviation ‘Sdn. Bhd’.
It is usual for businesses to engage services provided by a company secretarial firm, an accounting firm, an audit firm, a tax agent and external legal counsel to support the various compliance obligations a business is required to adhere to. These are just some examples of the type of external support that is available.
Key legal and regulatory considerations
A private company is one of the most common business entities used to establish a business presence in Malaysia. It has its own identity, can enter into contracts, sue and be sued.
The nature of the business activity is relevant to identify the relevant regulatory body (there could be one or more) and the type of licence/approval to be obtained prior to commencement of such activity (if any).
Where non-citizens are involved in the business as shareholders, there may be additional licence/approval conditions to adhere to (eg equity conditions, minimum capital requirements, etc). These should be identified in advance prior to incorporation of the new business entity.
In the case of purchase of real property or registration of a lease over real property (eg to establish a manufacturing facility), before committing to a potential acquisition, it is important to conduct due diligence on the property and its registered owner. The purpose of the due diligence is to identify the type of land, ascertain the eligibility criteria, identify whether approval is required from other agencies such as the Economic Planning Unit, approved land use, status of registered proprietor and other information relevant to the exercise. External legal counsel can provide the relevant support at this initial phase.
Do note that it is a statutory requirement that non-citizens and foreign companies are required to obtain prior approval from the relevant state authority that has jurisdiction over the property for the purchase of the property or registration of a lease. Each state authority has its own policy and conditions for considering applications for its approval. These should be identified in advance before committing to a purchase (eg eligibility criteria, approved categories of land use, minimum purchase value, approved zones and fee payable for consent).
Types of contracts
There are a number of operational contracts that a company will usually have to enter into (eg tenancy agreements, lease agreements, employment agreements contracts for supply of goods and services, etc).
From a commercial perspective, non-disclosure agreements, letters of intent and MOUs are commonly used by parties to initiate preliminary discussions on prospective business ventures or commercial projects.
When key terms of a business venture or project have been agreed, parties will seek to finalise and sign a definitive agreement (eg shareholders’ agreement, sale and purchase agreement, share sale agreement, licensing agreement, joint venture agreement, etc).
Execution of contracts; formalities
Contracts entered into by a company may be executed under hand by an authorised individual or by way of common seal.
Prior to execution it would be necessary for resolutions to be signed by the directors’ and shareholders’ respectively.
Electronic signatures and digital signatures are also recognised in Malaysia.
There are certain contracts that must be signed in the presence of a witness and the witness must meet the prescribed criteria. One such example is a power of attorney.
Once a contract is signed, it is required to be stamped.
Public searches
Company searches, land searches, insolvency searches and intellectual property searches are common types of public searches that can be conducted.
Public searches are usually undertaken for due diligence purposes (eg, prior to undertaking a commercial transaction or as part of an anti-money laundering, anti-bribery and anti-corruption due diligence exercise required to be undertaken when establishing new business relationships).
The scope of the due diligence process can be limited to searches or expanded to include other review measures.
M&A transactions
M&A transactions are usually designed around the key features of the acquisition target and its operating circumstances. A share sale exercise or an asset purchase exercise (to acquire business assets) or a share issuance exercise are examples of common strategies employed in M&A transactions. Ancillary agreements may also be entered into to facilitate the transaction.
Prior to execution of transaction agreements, a due diligence review exercise is carried out. The results of the due diligence exercise will guide the course of the transaction (eg approvals, notifications, terms, etc).
Intellectual property
Malaysia is a member of the World Intellectual Property Organisation (WIPO). It is a signatory to the Paris Convention and Berne Convention as well as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) signed under the auspices of the World Trade Organisation (WTO).
The agency responsible for the management of the intellectual property system in Malaysia is the Intellectual Property Corporation of Malaysia (MyIPO). Application for registration of patents, trademarks, industrial designs, copyright, geographical indications and layout designs of integrated circuits are processed by MyIPO.
Exchange controls
Malaysia has a foreign exchange policy that is administered by the Central Bank, known as Bank Negara Malaysia or BNM. The policy applies to residents and non-residents of the country.
Non-residents may repatriate divestment proceeds, profits, dividends or any income arising from the investments in Malaysia. Repatriation shall be made in foreign currency.
The foreign exchange policy addresses transactions such as export of goods, investing in foreign currency assets, foreign currency borrowing, Ringgit borrowing from non-residents, financial guarantees, payments in foreign currency, buying and selling of foreign currency. For transactions that require approval from the Central Bank, such approval must be obtained prior to undertaking those transactions.