The Securities Litigation Review: Malaysia
i Sources of law
- Capital Markets and Services Act 2007 (CMSA);
- Securities Commission of Malaysia Act 1993 (SCMA);
- Securities Industry (Central Depositories) Act 1991 (SICDA); and
- Companies Act 2016 (CA).
Securities Commission codes and guidelines
- Equity Guidelines;
- Malaysian Code on Take-Overs and Mergers 2016;
- Rules on Take-Overs, Mergers and Compulsory Acquisitions (together with (b) above, the Take-Overs Code);
- Guidelines on Listed Real Estate Investment Trusts;
- Guidelines on Real Estate Investment Trusts;
- Guidelines on Exchange-Traded Funds;
- Guidelines on Unit Trust Funds;
- Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework; and
- Guidelines on Disclosure Documents, among others.
Listing requirements and business rules
- Main Market Listing Requirements (MMLR);
- ACE Market Listing Requirements (AMLR);
- LEAP Market Listing Requirements (LMLR, together with MMLR and AMLR, Listing Requirements); and
- Rules of Bursa Malaysia Securities Berhad (Business Rules).
Additionally, the respective regulatory authorities issue various practice notes, technical notes and rulings. Case law based on reported court judgments is also applicable.
Malaysia also has an offshore regime at Labuan, which has its own legislative and regulatory framework.
ii Regulatory authorities
- The Securities Commission of Malaysia (SC) is the main regulator in respect of securities laws in Malaysia.
- Bursa Malaysia Securities Berhad (Bursa Securities) is the approved stock exchange in Malaysia and regulates listed companies and other stakeholders.
- The Companies Commission of Malaysia (CCM) is the main regulator in respect of company laws in Malaysia. Local companies incorporated, and foreign companies registered, under the CA are subject to regulation by the CCM.
There may be certain matters related to securities that involve Bank Negara Malaysia, the central bank of Malaysia.
In relation to the offshore regime at Labuan, the main regulator is the Labuan Financial Services Authority.
iii Common securities claims
Common securities claims in Malaysia include:
- insider trading;
- submitting false or misleading statements to the SC or Bursa Securities;
- making false or misleading statements in a disclosure document or prospectus;
- stock market manipulation;
- causing wrongful loss to the listed corporation or any of its related corporations; and
- carrying on regulated activities without a capital markets and services licence.
The CMSA imposes onerous statutory liability on various parties, including the issuer, the bank or principal adviser, the reporting accountant and the lawyers involved in an offering of securities.
Under Section 248(1)(d) of the CMSA, a person who has suffered loss or damage resulting from a false or misleading statement in any disclosure document or prospectus may recover the amount of loss or damage from a person, other than the issuer, who was responsible for preparing the disclosure document or prospectus, or responsible for conducting the due diligence on the information or statement contained in the disclosure document or prospectus. This applies to the responsible person by whatever name called and may include the principal adviser or lead arranger. While there is a carveout in this provision for the issuer, there is a separate provision applicable to the issuer as well as various other specific parties.
Essentially, this provides direct recourse to investors against persons who are successfully established to be responsible for the loss or damage. The direct liability is subject to a due diligence defence. The context in which this arises is any case where a disclosure document or prospectus is issued (or is deemed to be), and these are mandatory in many cases.
i Forms of action
Under the CMSA, an aggrieved investor may seek his or her own remedies against an alleged wrongdoer for market misconduct. Sections 199, 201, 210, 248, 249 and 357 of the CMSA provide that persons who have suffered loss or damage by reason of market misconduct under securities laws may recover the amount of loss or damage by civil proceedings. These private remedies are available whether or not criminal prosecution has been instituted against the alleged wrongdoer for the offence committed.
In addition to statutory civil liability under the CMSA, Malaysian law continues to recognise common law duties and claims. Depending on the relevant circumstances, claims for negligence or misrepresentation may be available to investors. This means that in cases where it is unclear that investors have recourse against the alleged wrongdoer under the CMSA (which if available, may be a more straightforward claim), recourse under the common law may still be available.
In relation to market misconduct in respect of offer documents, due diligence is a statutory defence available to statutory civil and criminal liability under the CMSA. Under Section 250 of the CMSA, it is a defence against claims from persons to recover for loss or damage resulting from a false or misleading statement in a disclosure document or prospectus under Section 248 of the CMSA if the person shows that he or she had made all enquiries as were reasonable in the circumstances, and after making such enquiries the person had reasonable grounds to believe and did believe until the time of making the statement or provision of information that the statement or information was true and not misleading, or there was no material omission.
In relation to market misconduct in respect of listed securities, statutory defences that are available under the CMSA include the Chinese wall defence.
Class action is possible by way of representative action in Malaysia. Order 15, Rule 12 of the Rules of Court 2012 (ROC) provides for procedural requirements that apply to representative actions. Generally, three conditions must be met to initiate a representative action under Order 15, Rule 12 of the ROC:
- the claimants are members of a class;
- they have a common grievance or interest; and
- the relief sought must be beneficial to all.
Representative action, however, is not a common choice of vehicle to facilitate securities claims in Malaysia, considering the high litigation costs involved and the rule against contingency legal fees.2
In cases where market misconduct is committed against a company and the alleged wrongdoer has control over the board of directors of the company such that the company itself is unwilling to institute proceedings, the shareholders of the company may, with the leave of the court, institute a statutory derivative action under Section 347 of the CA on behalf of the company against the alleged wrongdoer. The test for leave under Section 347 of the CA is that the complainant is acting in good faith and it appears prima facie to be in the best interest of the company.3 The Malaysian courts, however, have applied a narrow interpretation for statutory derivative action. The leading authority in Malaysia is the Court of Appeal decision in Celcom (M) Bhd v. Mohd Suhaib Ishak  3 MLJ 636 (Celcom). In Celcom, the Court of Appeal held that leave to bring a derivative action must not be given lightly and a low threshold of merely determining if there existed a prima facie case is a wrong basis for granting leave. There is a lack of reported cases involving statutory derivative action in Malaysia and this could be attributable to the high threshold for leave applied by the Malaysian courts and the fact that the company is the party that directly benefits from any remedy or award granted from the statutory derivative action.
A civil proceeding may be commenced by the filing and service of a writ of summons (if there are substantial dispute of facts) or an originating summons (if there is unlikely to be any substantial dispute of facts). The claimant must state the material facts relied on, and the remedies claimed, in his or her pleadings. After pleadings are closed, the parties are subject to pretrial case management where the court will issue directions to prepare the matter for trial. Trial of the matter is then fixed, and after conclusion of the trial, the lawyers will prepare their submissions and reply submissions before a post-trial submission hearing is fixed. A judgment will then be delivered by the court.
The court can order discovery of documents that the party relies on or will rely on, or documents that could adversely affect the party's or the other party's case. In an application for discovery of documents, the application must specify or describe the documents sought for and show that the documents are relevant to the issue of the claim and the person against whom the order is sought is likely to have or have had them in his or her possession, custody or power.
Generally, parties in civil actions may agree to settle based on their own terms. Order 22B of the ROC encourages parties to settle, as it imposes costs and interests penalties on a party for not accepting a settlement offer if the judgment is not more favourable than the terms of offer to settle.
In relation to claims against a licensed capital markets intermediary, the Securities Industry Dispute Resolution Centre (SIDREC) provides an avenue for an aggrieved investor who has a monetary claim not exceeding 250,000 ringgit. The SIDREC is a specialised dispute resolution body that facilitates prompt settlement of claims against certain licensed capital market intermediaries in relation to a dealing or transaction involving capital market products or services. The process generally involves mediation and, where necessary, adjudication. The mediator's decision is binding on the licensed market intermediary. The claimant, however, may pursue his or her claim by civil proceedings if he or she is dissatisfied with the mediator's decision.
iv Damages and remedies
Generally, damages for breach of contract and breach of statutory obligations under the CMSA are governed by the Contracts Act 1950 and the CMSA respectively. The basis of awarding damages for an action based on tort is to put the claimant in the position as if the wrong had not been done. In addition to payment of damages, the court may grant equitable remedies such as specific performance and injunction.
i Forms of action
The SC may take any of the following enforcement actions:
- institute criminal prosecutions;
- institute civil proceedings; and
- issue administrative sanctions.
Criminal actions are pursued when the breach of securities laws significantly affects the market and where the alleged wrongdoer exhibited a significant degree of deliberateness or gross misconduct.4 Civil actions are pursued mainly to deprive the wrongdoers of illegally earned gains and to compensate investors.5 In certain circumstances, the SC initiates civil actions to obtain civil injunctions to prevent the dissipation of public listed companies' assets resulting from market misconduct.6 Administrative sanctions are imposed for breaches that require immediate action and remedy.7 This includes the revocation and suspension of capital markets licence, reprimands and imposition of fines.
Bursa Securities may take enforcement action against a listed company and its directors and key officers, and an adviser for breach of the Listing Requirements. Bursa Securities may also take enforcement against a broker or other registered persons for breach of the Business Rules.
Before the SC takes any enforcement action, it will carry out an investigation into the relevant act or omission that is contrary to the provisions under the securities laws. The investigation process generally involves gathering of documentary and oral evidence, including interviewing witnesses. The SC has wide investigative powers under the SCMA. For example, under Section 128 of the SCMA, the SC may search any person whom it has reason to believe has on his or her any object, article, material, thing, property, book, minute book, account, register or other document, including travel or other document, necessary, in the SC's opinion, for the purpose of investigating any offence under any securities law. The SC may also require the surrender of any travel documents of the alleged wrongdoer pursuant to Section 132 of the SCMA.
Failure to cooperate with or obstructing an investigation officer of the SC in carrying out an investigation of a securities offence is a criminal offence.8
If the SC is satisfied that a case is made out against the wrongdoer, it will issue a show cause letter containing details of the SC's findings to the wrongdoer. The show cause letter effectively gives the wrongdoer an opportunity to be heard before any enforcement action is taken by the SC. In practice, the wrongdoer is given 14 days (which may be extended at the SC's discretion) to prepare his or her response, and the wrongdoer has the right to seek legal representation in preparing his or her response.9
Before Bursa Securities takes any enforcement action, it will conduct its own investigation into the possible breach of Listing Requirements or Business Rules. In the course of their investigation, where possible breaches of the CMSA or CA are found, Bursa Securities will refer the matter to the SC or the CCM, where applicable.
Under Article 145(3) of the Federal Constitution of Malaysia, the Attorney General as the public prosecutor has the power, exercisable at his or her discretion, to institute, conduct or discontinue any proceedings for an offence. The SC, however, is empowered to institute criminal prosecution for offences under the CMSA, SCMA and SICDA with the written consent of the Attorney General.10 The SC's prosecuting officers may conduct the prosecutions for such offences. In addition, the Attorney General has appointed some of the SC's prosecuting officers as deputy public prosecutors to prosecute certain securities cases.11
In a criminal prosecution, the defendant will be brought to court and asked whether he or she pleads guilty or not. If the defendant pleads guilty, there will be no trial and the court will pass sentence on the defendant. If the defendant pleads not guilty, the matter will proceed to trial.
Before commencement of the trial, the following information and documents must be delivered to the defendant:12
- a copy of the information made under Section 107 of the Criminal Procedure Code relating to the commission of the offence to which the accused is charge, if any;
- a copy of any document that would be tendered as part of the evidence for prosecution; and
- a written statement of facts favourable to the defence of the accused signed under the hand of the person conducting the prosecution.
The SC may commence civil proceedings against the alleged wrongdoer, whether or not criminal prosecution has been instituted against the wrongdoer.13
SC administrative sanctions
In determining the type of administrative sanction, the SC assesses the nature and severity of the breach, the conduct of the wrongdoer after the breach, and any previous regulatory record.14
Bursa Securities enforcement actions
Where Bursa Securities proposes to take an enforcement action against a person under the Listing Requirements or Business Rules, it will serve the person a written notice specifying the nature and particulars of the breach the person is alleged to have committed. The person may submit a written response to Bursa Securities' notice within the time stipulated in the notice. After conclusion of an enforcement proceeding, Bursa Securities will notify the person in writing of the decision.
Notwithstanding the above, Bursa Securities may initiate expedited enforcement proceedings against a person against whom enforcement action is proposed to be taken for prescribed breaches.
The SC may, with the consent of the Attorney General, reach an agreement with the person who has committed a criminal offence. If the person pays the amount offered in the compound, no criminal prosecution will take place.15 The SC's website lists the various criminal prosecution cases that it has compounded.
The SC may enter into legally binding settlements with the person who has contravened securities laws. The SC's website lists the various regulatory settlements it has entered into with individuals and companies, in which civil claims are settled without admission or denial of liability.16
Bursa Securities enforcement actions
In a full enforcement proceeding, a person in breach of the relevant provisions under the Listing Requirements or Business Rules may propose to enter into a settlement agreement with Bursa Securities, in which the parties will agree on certain facts, liability or penalty in respect of the breach.17
iv Sentencing and liability
Breach of statutory obligations under the CMSA may attract the following criminal liability, among others:
- under Section 188 of the CMSA, if a person is guilty of an offence relating to insider trading, imprisonment for a term not exceeding 10 years and a fine of not less than 1 million ringgit;
- under Section 215 of the CMSA, if a person is guilty of an offence relating to submission to the SC of false or misleading statements, imprisonment for a term not exceeding 10 years and a fine not exceeding 3 million ringgit;
- under Section 246 of the CMSA, if a person is guilty of an offence relating to issuance of prospectus containing false or misleading statements or material omission, a fine not exceeding 3 million ringgit or imprisonment for a term not exceeding 10 years or both; and
- under Section 317A of the CMSA, if a person is guilty of an offence relating to causing wrongful loss to the listed corporation or any of its related corporations, imprisonment for a term that shall not be less than two years but not exceeding 10 years and a fine not exceeding 10 million ringgit.
Under the CMSA, the SC is empowered to institute civil proceedings for any of the following court orders, among others, to:
- recover an amount not exceeding three times the gross amount of pecuniary gain made or loss avoided and claim civil penalty up to 1 million ringgit;18
- recover an amount equal to three times the difference between the price at which the securities were acquired or disposed of, or agreed to be acquired or disposed of, by the insider or the other person, and the price at which they would have been likely to have been acquired or disposed of at the time of the acquisition or disposal or agreement, as the case may be, if the information had been generally available, and claim civil penalty up to 1 million ringgit;19
- recover the amount of loss or damage on behalf of persons who suffered loss or damage by reason of the conduct of another person who has contravened any provision of Part VI of the CMSA or any regulations made under the CMSA;20
- direct the person in breach to comply with the provisions under the Take-Overs Code;21 and
- remove or bar a chief executive or director from being a chief executive or director of any public company for a period of time.22
SC administrative sanctions
Under the CMSA, the SC may impose any of the following administrative sanctions, among others:
- direct the person in breach to comply with the relevant securities laws;23
- penalty in proportion to the severity or gravity of the breach up to 1 million ringgit;24
- require the person in breach to take such steps as the SC may direct to remedy the breach or to mitigate the effect of such breach, including making restitution to any other person aggrieved by such breach;26
- in the case of a breach of Part VI of the CMSA or guidelines issued pursuant to Part VI of the CMSA, refuse to accept or consider any submission under Part VI of the CMSA;27
- in the case of promoters or directors of a corporation, in addition to the actions that may be taken under paragraphs (a) to (e) above, impose a moratorium or prohibition against trading and dealing in securities, or issuing a public statement that the retention of office by the director is prejudicial to the public interest;28 or
- in the case of licensed capital markets intermediaries, refuse renewal of their licence,29 or revoke or suspend their licence.30
Bursa Securities enforcement actions
Under the Listing Requirements, the enforcement actions that Bursa Securities may take include:
- reprimanding privately or publicly;
- imposing a fine of up to 1 million ringgit;
- suspending the trading of listed securities; and
- delisting a listed corporation.
Under the Business Rules, the enforcement actions that Bursa Securities may take include:
- reprimanding privately or publicly;
- imposing a fine of up to 1 million ringgit;
- suspending the right to trade; and
- removing a person from the register.
Under the MMLR and AMLR, a foreign corporation seeking or having a primary or secondary listing on Bursa Securities is required to establish, among other things, a share transfer or share registration office in Malaysia, and appoint an agent or representative in Malaysia to be responsible for communication with Bursa Securities, on behalf of the foreign corporation. Under the CA, a foreign corporation that has established a share transfer or share registration office in Malaysia is required, among other things, to register as a foreign company with the CCM, have a registered office within Malaysia and file certain prescribed information with the CCM. The satisfaction of the requirements for a foreign corporation to be listed in Malaysia would facilitate the service of a writ or an originating summons to the listed foreign corporation.
The SC is a signatory to the IOSCO Multilateral Memorandum of Understanding (the IOSCO Multilateral MOU)31 and to many bilateral memoranda of understanding with its counterparts in other countries.32 The SC has continuously sought investigative assistance from foreign supervisory authorities under the IOSCO Multilateral MOU. In 2019, the SC made 28 requests to 12 foreign supervisory authorities, mostly to seek assistance to record witness statements and obtain documents related to banking and securities transactions.33 Conversely, during the same year, in response to 10 requests for investigative assistance, the SC rendered assistance to five foreign supervisory authorities.34
In addition, under Section 150 of the SCMA, the SC may, upon receiving a written request from a foreign supervisory authority for assistance into an alleged breach of a legal or regulatory requirement, offer assistance to the foreign supervisory authority by carrying out investigation of the alleged breach or providing such other assistance as it sees fit. The SC's authority under Section 150 of SCMA extends to the conduct in question constituting a breach of Malaysian or foreign securities laws.
Year in review
i Significant decisions
Maybank Trustees Berhad v. AmTrustee Bhd & Others & Other Cases  MLRAU 310
On 18 September 2019, the Court of Appeal upheld the High Court decision in AmTrustee Bhd & Others v. Aldwich Bhd (in receivership) & Others  7 MLJ 152 (Aldwich).
On 24 July 2017, the High Court found in favour of a group of bondholders in their various claims based on statutory liability and common law against the issuer (Aldwich Bhd), the issuer's holding company, a substantial shareholder of the issuer and its holding company, the bank acting as among others, the adviser and lead arranger, facility agent and security agent, the trustee and the reporting accountant.
In the Aldwich case, the issuer's holding company transferred its business, assets and operations related to catalyst recovery and waste oil refinery (WOR) to the issuer to raise funds through the issuance of bonds to finance the construction of a WOR. Under the bond structure, the bonds were secured over the issuer's assets and subject to a ring-fencing mechanism to mitigate the bondholders' risk of non-repayment of the bonds. Under the ring-fencing mechanism, among others, business contracts of the issuer were supposed to be assigned to the bank and cash flow proceeds generated from the issuer's business were supposed to be credited into the revenue account controlled by the bank. Instead, most of the business contracts of the issuer's holding company were not novated or assigned to the issuer nor subsequently assigned to the bank, and the issuer's holding company received the proceeds under such contracts.
This, among other things, caused the disclosures relating to the bond structure in the offer document, to be incorrect.
In the course of arguments for the case, the High Court had to consider whether the bank could rely on the disclaimer for liability contained in the offer document, in light of the statutory restriction that strikes down any disclaimers against statutory liability under the former Section 65 of the SCMA (which has since been replaced with Section 256 of the CMSA) and the Federal Court decision in CIMB Bank Bhd v. Maybank Trustee Bhd & Other Appeals  3 CLJ 1 (Pesaka Astana).
The High Court held that while the statutory restriction under the current Section 256 of the CMSA has no retrospective effect, the Federal Court judgment in the Pesaka Astana case on the effect of the disclaimer was not relevant and was distinguishable. Among the statements made were the following:
. . . the Federal Court however did not go on to state how the parties were bound by the disclaimer in the important notice if the IM was not an agreement/contract and that the reasoning of the Federal Court disregarded or omitted two fundamental principles relating to exclusion clauses:
(i) an exclusion clause can only be effective if it is incorporated into a contract. Absent a contract, it is not binding: such clauses do not exist in a vacuum but they are consensual in nature; and
(ii) an exclusion clause is to be construed strictly against the party which is relying on it. It cannot exclude liability unless it is expressed in clear terms by reason of the 'contra proferentum' rule . . .
. . . applying these settled principles of contractual exclusion clauses it would mean that if, on the one hand, the IM, which is the only document that contains the disclaimer of liability, is not an 'agreement' to which it was a party, [the bank] cannot rely on it because it is not consensual between [the bank] and the plaintiffs. If, on the other hand, the IM containing the said important notice is an “agreement”, then by virtue of s 65 of the SC Act and/or s 256 of the CMSA it is void. In either situation, the Pesaka (FC) judgment is with respect not relevant.
The Court of Appeal distinguished the Pesaka Astana case from the Aldwich case on the basis that the bondholders' cause of action in the present case was founded not on the disclaimer [or a cause of action relevant to it] or that the offer document was a contractual document. Instead, it was based on the statutory claim that the offer document contained false or misleading statements or failed to disclose information that amounted to material omissions. The Court of Appeal held that giving effect to the disclaimer 'would have the effect of rendering the statutory provisions of the [SCMA] nugatory and impotent'. The Court of Appeal made the following statements, among others:
It cannot have been the intention of the Parliament that the protection of these provisions of the [SCMA] could be circumvented by the insertion of a mere disclaimer, no matter how widely worded it might be… It is both untenable or inconceivable that a disclaimer such as the important statement in the IM can be construed or utilised to protect or absolve: (a) a deliberate act or misrepresentation; or (b) a deliberate misleading or false statement, occasioned by the wilful non-disclosure of material information.
SC v. Chan Soon Huat  9 MLJ 782
On 24 January 2018, the High Court found that the SC had successfully proven its claim against Chan Soon Huat (Chan SH), a former founder and director of WCT Berhad (WCT), for insider trading. The High Court found that Chan SH had disposed of his shares in WCT while in possession of inside information. Chan SH was ordered to pay the claimed sum of 3,238,760.55 ringgit, which is equivalent to three times the difference between the price at which the securities had been disposed of and the price at which the securities would have been likely to have been disposed of at the time of the disposal, if the material non-public information had been generally available; and a civil penalty of 500,000 ringgit.
ii SC enforcement actions
Based on the SC Annual Report 2019, the SC took the following enforcement actions in 2019:
|Criminal charges laid||1|
|Administrative sanctions imposed||99|
|Infringement notices issued||99|
As at 31 December 2019, there were 48 active investigations and 34 ongoing cases comprising 12 criminal prosecutions and 22 civil proceedings.
Infringement notices are issued where breaches of securities laws do not warrant any formal enforcement action or administrative sanction. These include supervisory letters, warning letters, non-compliance letters and cease-and-desist letters.
Outlook and conclusions
As a result of the global covid-19 outbreak that has disrupted global economic activity, companies in various industries have been impacted. It is expected that many borrowers could default under debt securities or other borrowings, and recovery litigation will increase in the near future.
1 Wan Kai Chee is a partner and Tan Yan Yan is a principal at Rahmat Lim & Partners.
2 Section 112 of the Legal Profession Act 1976.
3 Section 348(4) of the CMSA.
4 International Monetary Fund Report 2013, 'Malaysia: Publication of Financial Sector Assessment Program Documentation – Detailed Assessment of Implementation of IOSCO Objectives and Principles of Securities Regulation'.
5 See footnote 4.
6 Section 317A of the CMSA.
7 See footnote 4.
8 Sections 128(7) and 134(5) of the SCMA.
9 See footnote 4.
10 Section 375 of the CMSA, Section 136 of the SCMA and Section 61 of the SICDA.
11 See footnote 4.
12 Section 51A of the Criminal Procedure Code.
13 Sections 200(1), 211(1), 358(1), 360 and 361 of the CMSA.
14 See footnote 4.
15 Section 373 of the CMSA.
17 Bursa Securities Annual Report 2013.
18 Sections 200(2) and 211(1) of the CMSA.
19 Sections 201(5) and (6) of the CMSA.
20 Section 358(1) of the CMSA.
21 Section 220(3) of the CMSA.
22 Sections 318 and 360 of the CMSA.
23 Sections 354(3)(a) and 356(2)(a) of the CMSA.
24 Sections 354(3)(b) and 356(2)(b) of the CMSA.
25 Sections 354(3)(c) and 356(2)(c) of the CMSA.
26 Sections 354(3)(d) and 356(2)(d) of the CMSA.
27 Section 354(3)(e) of the CMSA.
28 Section 354(3)(f) of the CMSA.
29 Sections 64 and 65 of the CMSA.
30 Section 72 of the CMSA.
33 SC Annual Report 2019.
34 SC Annual Report 2019.