Malaysia: Common Compliance Issues Identified in M&A Legal Due Diligence

We have acted as Malaysian legal counsel on numerous cross-border mergers and acquisitions (“M&A”) transactions involving Malaysian elements. In such transactions, compliance issues often surface during legal due diligence, particularly where founders or business owners are preparing to sell their businesses. Although these issues are frequently regarded as procedural, they can materially affect deal timelines, completion mechanics, and risk allocation.

The following outlines common compliance issues that Malaysian companies often overlook, together with their potential consequences.

1. Non-compliance relating to allotment of shares

From a transactional perspective, proper title to shares is fundamental in any M&A transaction. In our experience, defects in historical share allotments are among the most common issues identified during legal due diligence, particularly in founder-led or closely held companies.

Such non-compliance typically arises where shares have been issued without prior shareholder approval or where statutory filings were not made within the prescribed timelines. While these issues are procedural in nature, they can have substantive implications for title to shares and deal certainty.

Allotment requirements

Under section 75 of the Companies Act 2016 (“Companies Act”), directors of a company are prohibited from exercising their powers to allot shares without obtaining prior approval from shareholders by way of resolution. Shareholder approval must be lodged with the Registrar of Companies within 14 days from the date of approval (section 76(2) of the Companies Act). Thereafter, the company must lodge a return of allotment with the Registrar of Companies within 14 days from the date of allotment (section 78 of the Companies Act).

Consequences

An issuance of shares without the requisite prior shareholder approval is void, which directly impacts the validity of share ownership. Any consideration given for the shares may therefore be recoverable.

The recent Federal Court decision in WTK Realty Sdn Bhd v Kathryn Ma Wai Fong & Anor and Other Appeals [2025] 8 CLJ 988 confirms that, where statutory mechanisms exist under the relevant legislation to remedy a breach relating to the issuance of shares, validation must be obtained through a court order rather than by reference to informal shareholder assent. Accordingly, if shares are allotted without prior shareholder approval and their validity is subsequently challenged, the allotment may need to be validated through the courts. This can result in delayed completion timelines and the need for enhanced contractual protections such as warranties or indemnities.

Directors may also face personal liability under section 75(5) of the Companies Act if they knowingly contravene, permit a contravention of, or fail to take reasonable steps to prevent a breach of section 75 in relation to any issue of shares. Directors may be liable to compensate the company and the allottee for any loss, damage, or costs sustained or incurred.

Failure to lodge shareholder approvals or returns of allotment within the prescribed periods also constitutes an offence, exposing the company and its officers to financial penalties, including continuing daily penalties after conviction.

2. Failure to disclose directors’ interests

Failures to disclose directors’ interests are another recurring compliance issue in Malaysian companies. These issues commonly arise where related-party arrangements are entered into informally without contemporaneous board-level disclosure.

Disclosure requirement

Under section 221(1) of the Companies Act, a director who is directly or indirectly interested in a contract with the company must, as soon as practicable after becoming aware of the relevant facts, declare the nature of the interest at a meeting of the board of directors.

For example, a disclosure obligation may arise where a director of Company A is also a shareholder of Company B and a contract is entered into between Company A and Company B.

The scope of a director’s interest under section 221 is broader than may initially appear. Section 221 also provides that an interest in shares or debentures held by:

the spouse of a director who is not also a director of the company; or
a child of a director, including an adopted child or stepchild, who is not a director of the company

will be treated as the director’s interest in the contract or proposed contract.

This statutory attribution can capture family-held interests and is a common area of oversight during structuring and documentation.

Consequences

A director who fails to comply with the disclosure requirement commits an offence and, upon conviction, may be liable to imprisonment for up to five years, a fine of up to RM3,000,000, or both.

Where a contract is entered into without the required disclosure under section 221, the company may be entitled to void the contract, except where the counterparty has provided valuable consideration and did not have actual notice of the contravention.

In practice, such issues frequently result in:

termination or amendment of related-party arrangements
additional conditions precedent
specific indemnities or contractual risk allocation mechanisms

Early involvement of Malaysian counsel is therefore critical to assess enforceability risks and determine whether remediation is required prior to signing or completion.

3. Failure to pay stamp duty

Under section 4 and the First Schedule of the Stamp Act 1949 (“Stamp Act”), various instruments, including contracts, are subject to stamp duty unless exempted under the Stamp Act or other applicable legislation.

Agreements must generally be presented for stamping:

if executed within Malaysia, within 30 days from the date of execution; or
if executed outside Malaysia, within 30 days after the document is first received in Malaysia.
Consequences

Failure to pay stamp duty within the prescribed period may result in late stamping penalties as follows:

if stamped within 3 months after the deadline: RM50 or 10% of the unpaid duty, whichever is greater
if stamped more than 3 months after the deadline: RM100 or 20% of the unpaid duty, whichever is greater (section 47A of the Stamp Act)

Although failure to stamp an agreement does not affect its validity, an unstamped instrument is generally not admissible as evidence in Malaysian courts until the stamp duty and any applicable penalties have been paid (section 52 of the Stamp Act).

In an M&A transaction, a buyer will typically require confirmation that stamp duty has been paid on all material agreements that are chargeable with duty. Submission of documents for stamping to the Inland Revenue Board of Malaysia can take time, and penalties for late stamping may apply. Buyers will therefore often require sellers to regularize any outstanding stamping obligations prior to completion.

4. Business licenses

During legal due diligence, it is often identified that a company has been operating without a valid business license issued by the relevant local authority, or that the license held does not cover all activities carried on by the company, in breach of applicable local by-laws. Licensing requirements vary depending on the location and nature of the business.

Consequences

Typically, a person who contravenes applicable licensing requirements commits an offence and, upon conviction, may be subject to a fine of up to RM2,000, imprisonment for up to one year, or both.

In an M&A transaction, a potential acquirer will usually require the target company to rectify such non-compliance by obtaining the necessary business licenses prior to completion.

Takeaway

With proactive compliance and early identification of issues, the common deficiencies highlighted above can often be avoided or, at a minimum, identified and rectified at an early stage of a corporate transaction.

For founders and business owners contemplating a sale or fundraising exercise, ensuring compliance with applicable laws is not only a legal obligation but also a practical means of preserving transaction value and avoiding delays.

For foreign counsel advising on transactions involving Malaysian elements, early engagement of Malaysian counsel can materially improve transaction timelines by addressing local regulatory and corporate requirements at the outset.

By Tay & Partners, Malaysia, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact malaysia@transatlanticlaw.com

Disclaimer: Transatlantic Law International Limited is a UK registered limited liability company providing international business and legal solutions through its own resources and the expertise of over 105 affiliated independent law firms in over 95 countries worldwide. This article is for background information only and provided in the context of the applicable law when published and does not constitute legal advice and cannot be relied on as such for any matter. Legal advice may be provided subject to the retention of Transatlantic Law International Limited’s services and its governing terms and conditions of service. Transatlantic Law International Limited, based at 84 Brook Street, London W1K 5EH, United Kingdom, is registered with Companies House, Reg Nr. 361484, with its registered address at 83 Cambridge Street, London SW1V 4PS, United Kingdom.