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Introduction
Legally, an ownership can be classified into two; (1) legal and (2) beneficial ownership. A legal owner is a person who holds the legal title under his name, whereas a beneficial owner is a person who enjoys the benefits of ownership even though the title is in another name.
Generally, a legal owner of securities (which is defined under section 2 of the Capital Markets And Services Act 2007 as: (a) debentures, stocks or bonds issued or proposed to be issued by any government; (b) shares in or debentures of, a body corporate or an unincorporated body; or (c) units in a unit trust scheme or prescribed investments) is also the beneficial owner of such securities.
The legal owner is not necessary the beneficial owner
There are circumstances where the legal owner is not necessarily the beneficial owner of the securities. For example, Section 101(1) of the Companies Act 2016[1] (“CA 2016“) provides that the name of a person in the register of members as a shareholder is prima facie evidence that the legal title to the share is vested in that person.
However, although such person is considered as a legal owner of the shares, pursuant to Section 8(9)(a) of the CA 2019[2], such person will not be considered as the beneficial owner of such shares if he holds the shares as a trustee.
In other words, a registered shareholder is deemed as the legal owner of the shares registered under his/its name, but he/it may be holding such shares for the interest and benefit of a beneficial owner pursuant to a trust or nominee arrangement.
The separation of legal and beneficial ownership
The separation of legal and beneficial ownership of a security happened based on the arrangement of the parties. Below are some examples of circumstances where the beneficial ownership of securities is separated and transferred:
(1) Scenario 1
A, purchased shares in a company and made an arrangement with B, that the shares purchased by A will be registered under B’s name and B shall hold the shares as a trustee on behalf of A.
Whilst B will be the registered shareholder of the shares, A will retain and enjoy the rights and interest of the shares as the beneficial owner.
(2) Scenario 2
A, a legal and beneficial owner of stocks in a company entered into an arrangement with B, that A shall give the rights and interest attached to the stocks to B, making B the beneficial ownership of the stocks whilst A will retain his name as the registered owner of the stocks.
(3) Scenario 3
A, a legal and beneficial owner of scripless shares in a public or public listed company entered into a loan agreement with B, which A would create a Pledged Securities Account making B the beneficial owner of such shares.
(4) Scenario 4
A, a beneficial owner of scripless shares in a public or public listed company create a nominee Central Depository Account where his nominee company, B will hold the shares as his nominee.
How the beneficial ownership is transferred
In the circumstance where the legal owner who also assumes the beneficial ownership of securities transfers his ownership to another party, such beneficial ownership is deemed to be transferred together with the legal ownership.
For example, in the case of transfer of shares or debentures, the transfer can be done by way of executing an instrument of transfer[3] provided under the CA 2016 and the transfer will be affected when the name of the transferee is recorded in the register of members or register of debenture holders[4].
In other circumstances, such as Scenarios 1 and 2, the transfer of the beneficial ownership is usually will be done by way of a trust deed.
The trust deed will record such arrangement including the rights of the beneficial owner, the benefits of the securities that will be enjoyed by the beneficial owner, restrictions, limitations and powers granted to the legal owner. The beneficial owner may also enter into a power of attorney giving certain rights to the legal owner to deal with the securities.
In Scenario 3 and Scenario 4, when the beneficial owner of deposited securities wishes to transfer his beneficial ownership, he is required to complete a prescribed form and expressly indicate in a particular section of the form as to the reason for the transfer, by indicating whether the proposed transfer will result in change or in no change in beneficial ownership of the shares.
The transfer must falls within approved reasons for transfer such as take-over offer, transfer between family member, transfer involving government authorities, pledge/ charge or reasons with prior approval of Bursa Depository[5].
Conclusion
The legal owner of securities is not necessary an actual owner. There may be another person or entity that may hold such securities as a beneficial owner. Distinction must be made between legal owner and beneficial owner of securities, especially shares in a company. Although under the CA 2016 the company may require the legal owner to disclose the identity and particulars of the beneficial owner[6], such requirement is subject to the discretion of the company to enquire for such information or any direction from the registrar of companies, stock exchange or securities commission for the company to obtain such information[7].
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1 Section 101(1) of CA2016 “in absence of evidence to the contrary, the entry of the name of a person in the register of members as shareholder is prima facie evidence that legal title to the share is vested in that person”
2 Section 8(9)(a) of the CA 2019 “For the purposes of this section, an interest in a share shall be disregarded as an interest if it is- (a) an interest of a person who holds the share as bare trustee;”
3 Section 105(1) of CA 2016 “subject to any other written laws, any shareholder or debenture holder may transfer all or any of his shares or debentures in the company by a duly executed and stamped instrument of transfer and shall lodge the transfer with the company.”
4 Section 105(3) of CA 2016 “For the purpose of effecting the transfer of shares or debentures, the company shall enter the name of transferee in the register of members or register of debenture holders in accordance with this section.
5 FAQ on CDS, Bursa Malaysia “Effective 1st September 1998, any transfer requests must be within the approved reasons of transfer prescribed by Bursa Malaysia Depository.”
6 Section 56 of CA 2016 “(1) Any company may, by notice in writing, require any member of the company within such reasonable time as is specified in the notice-
(a) to inform the company whether the member holds any voting shares in the company as beneficial owner or as trustee; and
(b) if the member holds the voting shares as trustee, so far as it is possible to do so, to indicate the persons for whom the member holds the voting shares by name and by other particulars sufficient to enable those persons to be identified and the nature of their interest.”
7 Section 56(6) of CA 2016 “the Registrar, a stock exchange or the Securities Commission may, by notice in writing, direct a company to invoke its powers under subsection (1) and (2) to immediately provide it with the information so obtained.”
Prepared by: Farahin Abd Manaf & Liana Lim Xi Ci