Introduction
Recently, on 10 October 2024, the Malay Mail reported that the family of the late Tan Sri Teh Hong Piow announced, they would sell down their shareholding in Public Bank from 23.4% to 10%, over a period of 5 years.
This 23.4% shareholding is a mix of shares held personally by the late Tan Sri Teh Hong Piow, and his company, Consolidated Teh Holdings Sdn. Bhd.
The sale of shares would take place through a restricted offer for sale (ROFS), which has already been approved by Bank Negara Malaysia (the central bank) and the Ministry of Finance.
The shares would be distributed at a discount to eligible investors, directors, and employees of the bank, as a way to show the Teh family’s appreciation.
There are some reasons behind the family’s public announcement of the move, which could yield lessons for the readers of this article.
Compliance with Maximum Shareholding Allowed under FSA
Under section 92 of the Financial Services Act (FSA), the maximum amount of shares that an individual can hold in a bank, is 10%.
According to a 2022 article from the Edge, the 10% maximum shareholding in banks by individuals, became law when the FSA came into effect in 2013. Before that, the BAFIA (Banking and Financial Services Institutions Act) allowed individuals to hold more than 10% of shares in a bank.
According to the same article, the late Tan Sri Teh Hong Piow held 23.41% of the shares in Public Bank, but 22.77% of that was held indirectly. According to the Edge, that refers to Consolidated Teh Holdings Sdn. Bhd., a fact confirmed by the bank’s recent annual report.
Therefore, the trimming of the shareholding could be seen as a way to comply with the FSA requirements on maximum shareholding.
So why does shareholding by a family-owned company, attribute to the shareholder?
Which is another way of asking, why is the shareholding by his family’s investment holding company, also attributed to the late Tan Sri Teh Hong Piow?
That is because that company is a “family corporation” for the purposes of the FSA. (There was also a concept like that under the BAFIA.)
A family corporation is a corporation where,
(a) The person;
(b) That person’s spouse; or
(c) That person’s child;
Holds, either alone or in combination (e.g. (a) in combination with (b), etc), more than half the shares of the corporation.
So the shares held by a company which is more than half-owned by a person, his spouse, and children, is also considered part of the shareholding of that person.
How to calculate the shares of a person owned in a financial institution?
Under the FSA, the shares of a shareholder, also include the shares held by his spouse, his children, their family corporation, and persons “acting in concert” with him. (See item 5, Schedule Three of FSA)
The aggregate interest of a shareholder in a financial institution includes the legal, beneficial, direct, and effective interest held by that person. (Item 4, Schedule Three of FSA).
Let’s try to break it down further. Here’s what they mean:
Legal interest refers to the formal, registered ownership of shares. A person with legal interest is the named shareholder on the company’s register, and has the rights to vote, receive dividends, and sell those shares. The shareholder has the authority to exercise all shareholder rights under the law.
Beneficial interest refers to who enjoys the benefits of the shares, such as receiving dividends and economic gains from the shares. A beneficial owner may not be the same as the legal owner if the shares are held in trust or by a nominee. The legal owner holds the shares in name, but the beneficial owner retains the right to them.
Direct interest involves shares owned directly by an individual or entity. The direct owner’s name appears on the share register, and they directly exercise the rights associated with those shares.
Effective interest is a broader term that reflects the total interest a person or entity has in a company, combining direct and indirect ownership. Indirect ownership might involve holding shares through another company, trust, or similar structure. Effective interest is used to assess the overall influence or control a person or entity has over a company.
As an example, let’s say that Jane owns 10% in company A, but also owns and controls company B. Additionally, company B owns 50% in company A. Jane has:
10% legal ownership in company A;
65% beneficial ownership in company A;
10% direct interest in company A; and
65% effective interest in company A.
Coming back to the reasons for the trimming their shareholding in the company.
Market Stabilization
Announcing the shareholding and the timeline, was a way to give assurance to the market. If they had proceeded with the sale quietly, without having said anything, it might have caused investors, and the market, to be spooked.
Having the timeline also would give the family time to spread out the sale of the shares, so that it is gradual and does not impact the share price.
Sometimes shareholders would quickly dispose of the shares they purchased, effectively tanking the price. Perhaps the sale of the stocks in the ROFS could also be accompanied by lock ups and moratoriums, with a schedule for transferring the shares.
The announcement on the ROFS plan would reduce market speculation, which leads to selldowns.
By controlling the narrative, the estate manages its investors’ expectations, and reduces volatility of the stock’s price.
Maintaining Morale of the Troops
By engaging in the ROFS to employees, directors, and qualified investors, the family of the late founder is signalling that the employees are going to be rewarded, and that they are appreciated.
But there’s an added benefit to this. Perhaps employees who might have jumped to a different bank, would continue to stay on at Public Bank, so that they could qualify for the ROFS.
Sometimes, you hear people say that the most valuable asset that a business can have, is its people.
Rewarding the employees of the bank would be a way to retain them and their services.
And since they would be invested in the shares of the bank, they would continue to perform their best to ensure that their shares continue to appreciate.
This is a good move that could be emulated by other large family-owned businesses.
Is ROFS better than transferring to the founder’s children?
I don’t know much about the Teh family, so, I might be mistaken.
Consider two possible scenarios.
One, the shares remain registered in the family corporation’s name, but there is a reduction of the family corporation’s shareholding through ROFS.
Two, the 22.77% held by the family corporation is transferred to the children of the founder.
In scenario one, even though their shareholding is lessened to 10%, it remains a sizable block, and can still influence the company’s decision-making. There is room for the family to exert their influence.
In scenario two, the family members may become rich in their own name, but the shares become dispersed. There is also the chance that the family members may have different ideas about the company, and vote against each other.
In the second scenario, small quibbles between the family members may become intensified, and lead to a split within the family. Outsiders may also take advantage of that.
In the first scenario, with the ROFS, the family of the late founder will enjoy some revenue from the sale of their shares. This revenue could be reinvested for the benefit of the family, outside of the business. The 10% bloc would remain as their family asset. It would continue to grow their influence over the coming years.
Also, when the founder’s family remains a sizeable block within the company’s shareholders, it also sends a message of confidence and continued involvement and support to the market.
Estate Planning Considerations
Keeping the shares of the founder within the family corporation, is a simpler way to manage the shares.
In the long run, only the shareholding of the family corporation would need to be a concern to the family members.
A long time ago, someone told me that he would prefer to franchise a petrol station through his company, rather than in his personal name.
The reason is that he could transfer his shares in the company to his children, without them needing to sign a new agreement, with new terms, with the petrol station company.
Compared to if he had signed the franchise in his own name, the franchise owner might impose new terms if he tried to transfer the franchise to his children.
Having a family corporation might be an alternative to setting up a family trust. After all, the family’s money-making assets could be conveniently gathered under the family corporation, and administered by a professional team — provided that the money generated by the assets is sufficient to employ professional advisors.
The Importance of Transparency
Making a public announcement can be considered an effort to adhere to the duty of transparency.
Transparency means, letting your most important stakeholders know, what you plan to do, how you plan to do it, and why.
This reduces any room for misconceived ideas, which can only cause pain and heartache when people get the wrong ideas.
It also sets the tone for the family, so that family members who were on the fence are now more committed.
After all, it is an official announcement.
The fact that there is also a 5-year timeline for the matter means that they can do the ROFS in tranches.
Also important to remember, is the fact that the ROFS has already received approval from Bank Negara and Ministry of Finance (MOF). This means that this has been well-thought out and the family has engaged with the relevant regulators.
So what does this mean for you – as a family business founder?
If you are the founder of a family business, you would want your children to argue less over the business.
You might want them to be like the three brothers who, in search of their father’s hidden treasure, dug and dug in their late father’s vineyard — only to realize later that the vineyard was the treasure that their father was talking about, when the vines became laden with grapes.
You would prefer that they do not squabble over the family wealth, suing each other in court, and dragging the family business into mud.
If they ever go down that path, it means that the business would eventually implode, and the siblings might become enemies.
But avoiding that means that you need to take action while you are still alive.
You could come up with your plans for the long term, and plan for a transition.
You would also need to have conversations with your children, who presumably have an interest in continuing the business.
What if my children have no interest in continuing the family business?
Then you could consider planning for the eventual takeover of the business by its strongest champions — your employees.
Your children could retain a small share in the business, so that they could continue to shape it in the years to come.
Their presence would also lend an air of validation and support for the management team, who, it’s presumed, they would be familiar with.
Your children would continue to enjoy dividends from the growth of the company.
And your employees, who have long worked for the company without any complaints, would be able to enjoy some modicum of ownership in the company that you have built together.
Who knows? There could be an opportunity for one of your children to return to the company as a fresh employee, and climb up the ranks.
In any case, studies have shown that entrusting a business to your first-born son isn’t always as good as entrusting it to a professional manager.
After all, you can sack your manager, but you would find it difficult to sack your first-born son. (Not that you cannot, but you know what we mean.)
So it might be better for the family members to remain as shareholders, while allowing trustworthy professionals to manage the company.
But beware: There’s also a chance that outsiders would, if given too much freedom and authority, harvest the crops and leave you only the stalks. So you need to set up mechanisms for oversight and anti-corruption.
But that’s a story for another day.
Thanks for reading !
Disclaimer
This article was not prepared as free legal advice. So please consult with a qualified lawyer before taking any advice on its contents. In case you like this article and wish to seek our views for your personal matters, please contact us.