7 Uncertainties on Ultimate Effective Control of a Beneficial Owner

There is currently uncertainty on determining ultimate effective control in the context of a beneficial owner of a company.

Companies, directors and the beneficial owners of companies have until the extended deadline of 30 September 2024 to lodge accurate beneficial ownership information with the Companies Commission of Malaysia. I examine these uncertainties ahead of the lodgment deadline.

The New Provisions on Beneficial Ownership of Companies

The Companies (Amendment) Act 2024 came into force on 1 April 2024 and introduced new provisions on the beneficial ownership of companies.

Under section 60A(1) of the Companies Act 2016 (CA 2016), a beneficial owner of a company is “a natural person who ultimately owns or controls over a company and includes a person who exercises ultimate effective control over a company.”

Section 60A(2) of the CA 2016 provides that the Registrar of Companies may issue guidelines for the purposes of identifying a beneficial owner of a company.

The Registrar of Companies has issued the Guidelines for the Reporting Framework for Beneficial Ownership of Companies dated 1 April 2024 (BO Guidelines) and a document entitled Case Studies and Illustrations of the Guidelines for the Reporting Framework for Beneficial Ownership of Companies dated 1 April 2024 (Case Studies Document).

The Beneficial Ownership Guidelines Criteria

For companies limited by shares, a beneficial owner shall be determined based on the following six criteria. An individual is a beneficial owner if the individual meets one or more of the following criteria:

For companies limited by guarantee, only Criteria C, D and E are applicable.

Any individual who meets any of the criteria would be classified as a beneficial owner. Hence, a company may have more than one beneficial owner. The declaration of beneficial ownership must also state which criteria apply.

In examining the six different criteria, applying Criteria A and Criteria B is an easier exercise. We analyse the direct and indirect shareholding through the corporate structure.

For Criteria D, it is also an easier determination of whether the constitution, any shareholders’ agreement, any other instrument or arrangement provides the power to appoint or remove a majority of the directors.

However, I have seen issues and uncertainties arise from determining “ultimate effective control” set out in Criteria C and “significant control or influence” set out in Criteria F.

I examine the uncertainties below.

Uncertainty #1: What are the Factors for Determining Criteria C’s Ultimate Effective Control?

Reading the BO Guidelines alone (see paragraph 27), the factors for determining “ultimate effective control” for Criteria C are:

1. The individual’s recommendation is always followed by the majority of the voting members.
2. The individual’s proposal has a dominant influence or control over the decision-making process.
3. The individual is regularly consulted for the decision of the board of directors.

Yet, we have to read a separate document, being the Case Studies Document, to also consider additional factors (see page 16 of the Case Studies Document).

1. An individual with absolute decision making and/or veto rights over decisions relating to the running of the business,
2. Such rights can be through appointing or removing the directors.
3. Amending the company’s business plan.
4. Changing the nature of the company’s business.
5. Making any borrowing from the lenders.
6. Appointing or removing the chief executive officer
7. Regularly or constantly directs or influences the majority of the board of directors or chief executive officer of the company
8. Is regularly consulted on board decisions and such direction or influence affects the decision made by the board of directors or chief executive officer.

It would be ideal to have the BO Guidelines as the single document setting out a list of all the considerations and factors for assessing “ultimate effective control”. This also relates to the next point.

Uncertainty #2: What is the Legal Effect of the Case Studies Document versus the BO Guidelines?

The language of section 60A(2) of the CA 2016 appears to only recognise the formal guidelines issued by the Registrar of Companies.

In turn, the BO Guidelines also state that they are issued pursuant to section 20C of the Companies Commission of Malaysia Act 2001 and section 60A of the CA 2016.

In contrast, the Case Studies Document does not appear to be a formal document for identifying a beneficial owner under the language of section 60A(2) of the CA 2016.

Instead, the Case Studies Document contains a disclaimer that the case studies and illustrations are intended for illustrative purposes only. However, as seen above and below, the Case Studies Document expands beyond the BO Guidelines in setting out some of the identification criteria.

Uncertainty #3: What is the difference between Criteria C’s “ultimate effective control” and Criteria F’s “significant control or influence”?

The first issue I see in practice is whether Criteria F is meant to only apply to an individual who is actually holding shares in a company. That seems implicit in Criteria F pointing out an individual who has less than 20% of shares or voting shares. But another reading may be that even a person with zero shares would be holding less than 20% of the shares and can fall within Criteria F.

The second issue is then what is the difference between Criteria C’s reference to “ultimate effective control” and Criteria F’s reference to “significant influence or control”?

Paragraph 25 of the BO Guidelines appears to use these terms interchangeably when it explains that the phrase “ultimate effective control” is where an individual still exercises significant control or influence over the directors or the management of the company.

In the Case Studies Document, Illustration 5 at pages 14 and 15 attempts to show the example of exercising “significant control or influence”. But I see no real difference between the exercise of “significant control of influence” in Criteria F and with that of “ultimate effective control” described in Criteria C.

Uncertainty #4: Why was there the introduction of Criteria F?

When we look at the previous Guideline for the Reporting Framework for Beneficial Ownership for Legal Persons as revised on 17 December 2020, those guidelines also had criteria for establishing the ultimate owner of shares from the perspective of ownership and effective control.

In those past guidelines, we saw almost identical language for the five criteria mirroring Criteria A, B, C, D and E of the current BO Guidelines. But in the past, there was no such Criteria F or the phrase “significant control or influence”.

When determining the lodgment of beneficial ownership information, it appears difficult to distinguish between the different control criteria in Criteria C and Criteria F.

Uncertainty #5: The Case Study Showing Ultimate Effective Control – All Directors are Beneficial Owners?

Returning to Criteria C’s ultimate effective control, the language in the BO Guidelines for Criteria C gives the impression of these essential factors for a beneficial owner under this criteria:

1. The beneficial owner is an individual with such controlling powers.
2. These controlling powers are control over the directors and over the voting members.

The uncertainty then comes when reading Illustration B(a)(i) in the Case Studies Document as a case study for ultimate effective control for both a company limited by shares and company limited by guarantee. An extract of the Illustration B(a)(i) is below:

Essentially, the above is an extremely standard company management structure. The company has a CEO. The Council here (i.e. akin to the board of directors) with four members shall be responsible for all affairs and management of the company.

This Illustration B(a)(i) goes on to conclude that the Council has the ultimate effective control over the company. The Council cannot be named collectively as the beneficial owner. So each and every individual who exercises significant control over the company must be named as the beneficial owner. Therefore, each of the 4 Council members is listed as beneficial owners for the company.

I have several issues with the above analysis and where we can substitute the term Council member with that of a director:

1. In the case of the usual case of 4 directors sitting on the Board, no single director has ultimate effective control. Ordinarily, each director exercises their decision-making power independently and in the best interest of the company, each of the 4 directors play only a part to eventually arrive at the collective decision of the Board.
2. Practically,  Illustration B(a)(i) would mean all companies must list each of its directors as a beneficial owner under Criteria C for ultimate effective control. But this application becomes circular since the BO Guidelines suggest that the ultimate effective control is being wielded by an individual over the board of directors.

Uncertainty #6: The Senior Management

Factually and legally, once the identification process to ascertain a beneficial owner has been completed, there may simply not be a beneficial owner. There may be no one who meets the ownership or control requirement under section 60A(1) of the CA 2016,

Yet, paragraph 43 of the BO Guidelines states that even if there is no beneficial owner identified, the company must provide the name and particulars of a natural person who holds the position of senior management who is primarily in charge of the management of the company.

There has to be a careful application of this de facto approach mandated in the BO Guidelines.  This is since section 60A(1) has a statutory definition of a beneficial owner being a person who ultimately owns a company or who exercises ultimate effective control over a company. Further, which criteria is to apply for a senior management who is thrown into the beneficial owner category? Would it be a Criteria C classification?

Uncertainty #7: Shadow Director and Beneficial Owner with Ultimate Effective Control

Finally, there is one potential legal repercussion of Criteria C’s ultimate effective control identification and its interaction with possible classification as a shadow director.

The BO Guidelines’ language of ultimate effective control refers to an individual who “is not necessarily a member or director of the company but consistently exercises dominant influence or control over the company or is regularly consulted for the decision of the board of directors.”

The Case Studies Document points to an individual who “regularly or constantly directs or influences the majority of the Board” and “is regularly consulted on board decisions and such direction or influence affects the decision made by the board of directors”.

The above phrases seem very close to that of the meaning of a shadow director being “a person in accordance with whose directions or instructions the majority of directors of a corporation are accustomed to act” (see section 2 of the CA 2016).

Where individuals are being declared under Criteria C for ultimate effective control and their influence over the majority of directors, this brings into question whether these individuals are also shadow directors of the company.

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