Does redeemable convertible cumulative preferred stock (RCCPS) impose personal liability on shareholders?
Based on Malaysian court cases, Section 72 of the Companies Act 2016 cannot automatically protect shareholders from personal liability.
1. RCCPS Does Not Automatically Create Personal Liability
- RCCPS does not automatically make shareholders personally liable.
- Personal liability depends on whether additional commitments were made.
2. A Letter of Undertaking May Create Personal Liability
- If a shareholder signs a Letter of Undertaking, promising to inject funds or ensure the company does not default or become insolvent,
- the shareholder may have to pay personally if the company cannot redeem the RCCPS.
3. A Letter of Undertaking Is More Than a Formality
- Many founders are required to sign a Letter of Undertaking during fundraising.
- It may appear to be a standard document, but it can impose personal obligations.
4. The Real Risk Is the Commitment
- The key issue is not only whether the company has sufficient funds.
- It is also what the founder agreed to when signing the undertaking.
Summary
- RCCPS itself is not the real risk.
- The real risk arises when founders sign a Letter of Undertaking without fully understanding its terms,
- which may expose them to personal liability.