Companies holding shares in each other? Let us explain cross-shareholding!
What Is Cross Shareholding?
- Cross shareholding occurs when two companies hold shares in each other, creating a mutual ownership relationship
Can a Parent Company and Subsidiary Own Each Other's Shares?
- Under the Malaysian Companies Act 2016, a subsidiary is generally prohibited from becoming a shareholder of its parent company
Why Is This Restricted by Law?
- Control and Decision-Making Can Become Unclear:
- Mutual share ownership may blur voting rights and control, making it difficult to identify the true decision-maker
- Capital May Be Counted More Than Once:
- A parent company may invest in a subsidiary, which then reinvests back into the parent company, creating the appearance of additional capital without introducing new funds
- Corporate Governance Independence May Be Affected:
- A subsidiary is expected to make decisions independently, but cross shareholding may compromise that independence
- Corporate Structures Become More Complex:
- Mutual ownership can complicate shareholding structures, audits, reporting requirements, and regulatory compliance
Risks Associated with Cross Shareholding
- Complicated Voting Rights:
- Determining voting power and shareholder control can become more difficult during corporate decisions
- Financial Statements May Become Misleading:
- If not properly managed, cross shareholding may overstate the company's actual capital position
- Unclear Management Responsibilities:
- The distinction between the roles, powers, and responsibilities of the parent company and subsidiary may become less clear
Why Does Company Law Discourage Cross Shareholding?
- Company law requires parent companies and subsidiaries to operate as separate legal entities
- The restriction helps protect shareholders, creditors, and other stakeholders from governance and control issues
Summary
- Cross shareholding refers to companies owning shares in each other
- Under the Malaysian Companies Act 2016, a subsidiary generally cannot be a shareholder of its parent company
- The restriction helps prevent control issues, duplicate capital recognition, and governance problems
- The objective is to maintain transparency, accountability, and independent decision-making within corporate groups.