Malta: Developments in a Time of Change

Over the past decade, Malta has emerged as one of Europe’s most reputable financial services centres. Many factors contribute to this success, including the historical influence of several European dominions in Malta, its multi-lingual culture and its Mediterranean character.

One of our main advantages lies in our geographic location. Due to the fact that Malta falls neatly between southern Italy and northern Africa, it is the ideal jurisdiction for business transactions between European countries and countries in Northern Africa and the Middle East.

Along with these natural advantages, Malta has maintained its status through innovation and a desire to create an optimum environment for doing business. Malta takes pride in its quick response to fluctuating economic policies, made possible by the high concentration of financial service professionals who reside in this relatively small jurisdiction.

Capital Maintenance – Companies Act

A recent amendment affected to the Companies Act[i] (hereafter, “the Act”) was a relaxation of the absolute prohibition on the granting by a private company of financial assistance for the purchase of, or subscription for, its own shares, or shares in its parent company. This prohibition was considered too severe since it prevented certain transactions that did not necessarily adversely affect the rights of those whom the prohibition is intended to protect , the creditors and shareholders, from taking place.

Financial assistance may now be granted by a private company if a majority of the company’s directors authorise the assistance for a specific transaction after taking into account the financial position of the company. The amendment also protects the company’s shareholders by requiring their approval of the directors’ decision by extraordinary resolution. Furthermore, a declaration signed by two directors, confirming that the previous requirements have been satisfied, is to be registered with the Registry of Companies before the grant of financial assistance. Nevertheless, the prohibition still applies in the case of public companies.

Also incorporated into the Act, was a procedure offering more protection to creditors where companies reduce issued share capital. In this scenario, a reduction would not take effect until three months from the date that the Registrar publishes the resolution to undergo such alteration in the Malta Government Gazette[ii], or on a website maintained by the Registrar, and also in a daily newspaper.

Where a creditor, whose credit existed prior to the publication of the reduction, objects to the alteration within this three month period, an additional measure against dissatisfaction of his claim has now been embedded in our Companies Act. Where the creditor convinces the Court that, due to the proposed reduction in the issued share capital, the settlement of his claims would be prejudiced and that no adequate safeguards have been obtained from the company, the Court may now either uphold the objection or allow the reduction on sufficient security being given.

This measure seeks to ensure that all creditors’ claims are protected, and if the company must reduce its issued share capital, the creditor may now resort to this procedure either to halt the reduction, or to obtain sufficient security.

It is thus evident that our Maltese legislature has engaged in an active role to prevent any companies from curbing their debts and has sustained a watchful eye over the protection of creditors’ claims. Such an approach should help to maintain creditor confidence in the Maltese finance sector, and encourage continued finance in companies and other undertakings.

Other amendments were also effected to a specific corporate structure, the SICAV,[iii] rendering certain obligations less onerous. The Companies Act (Investment Companies with Variable Share Capital) (Amendment) Regulations, 2008 (Legal Notice 361 of 2008) removes the obligation to notify the Registrar of Companies about the pledge of securities issued by a SICAV, as well as the termination of the pledge. This procedure was considered superfluous as the Registrar is at no point aware of who the shareholders of the SICAV are.

As amended, any third party who may have an interest in a particular security may now request the SICAV in writing to provide them with information as to whether a pledge of securities has been recorded in the register of the holders of the respective securities.

The new regulations also envisage further amendments in the regulation of the SICAV; one with the aim of protecting the pledgee’s rights, the other to permit issuance of shares at a discount. In the event of default under a pledge agreement, the pledgee may now, upon giving notice to the pledgor and the SICAV, request the SICAV to purchase the pledged securities in settlement of the debt, or part thereof, which is due them. The value of the securities pledged in this case will be their current net asset value.

Additionally, the latter amendment allows a SICAV licensed as a Professional Investor Fund (PIF), the units of which are held solely by qualifying investors[iv] or extraordinary investors[v], to make a discount to an existing member. The member must, however, have agreed with the SICAV to subscribe for any shares in the SICAV, and the discount shall be granted and shall apply exclusively, in consideration of any outstanding commitment for subscription.

In order to prevent abuses, the legislator has imposed certain requirements to be satisfied prior to which discounted shares may be issued. These conditions comprise of the following:

• the memorandum and articles must authorise the issue; and
• in no event may the value of such shares issued at discount be reduced to below the net asset value at the time the member to whom the discount is being granted first subscribed for the shares in their agreement with the SICAV.

One of the principal reasons the SICAV has been placed under the spotlight is the recent increase in the re-domiciliation of foreign investment funds, ranging from public retail funds to more professionally tailored funds. This boost has been due to the SICAV structure, which is uniquely tailored for collective investment schemes.

Indeed, the combined net asset value of investment funds has been estimated at a high €9.3 billion in November 2008, up from €8.1 billion in July 2008.[vi] Naturally, this is evidence of Malta’s endeavour to maintain and develop its flexible regulatory structure in tandem with ensuring high levels of investor protection.

Taxation

Malta’s fiscal regime has been one of its strengths in its development as a financial centre in Europe. Since accession to the European Union (EU), Malta has become an ideal jurisdiction for tax planning and corporate structuring purposes, due in no small part to its full-imputation system and its implementation of all EU non-discrimination principles.

The existence of an extensive international tax treaty network further enhances Malta’s reputation as a financial centre, given that it is party to 53 double tax treaties. This includes the most recent bilateral double tax treaty signed with Serbia on September 9, 2009, with the aim of increasing trade and tourism between the two nations.

Corporate Governance

The corporate governance debate is central to company law reform in Malta, as it is to the majority of jurisdictions. Although the importance of the subject is ever growing, a number of significant milestones have been achieved in order to remain in line with developments in the area. Malta’s adoption of the Code of Principles of Good Corporate Governance[vii] (Appendix 8.1 of the Listing Rules) and the publication of the Corporate Governance Guidelines for Public Interest Companies[viii] stands as testament to this.

The Code of Principles was introduced in 2001 and completely revised in 2006 in order to take into account the guidelines laid down by the Organisation for Economic Cooperation and Development (OECD),[ix] and to enhance the framework for good corporate governance in Malta. These Principles target companies whose securities are admitted to listing on a Recognised Investment Exchange, but do not apply to Collective Investment Schemes. In order to supplement these Principles, the Malta Financial Services Authority (MFSA) proposed a number of further amendments to the Listing Rules in order to transpose Article 1(7) of the Company Reporting Directive, [x] in effect adopting a “comply or explain” approach.

Accordingly, whilst the Principles are not mandatory, these Listing Rules state that a listed company’s directors must include a “Statement of Compliance” in their annual report, providing an explanation of the extent to which they have adopted the Principles, as well as the effective measures they have taken to ensure compliance with the Principles.[xi] The company’s auditors are also required to include a report on the Statement of Compliance.[xii]

As a result, these Principles are observed on the basis that they are believed to constitute practices which are in the best interests of a company and its shareholders. Moreover, compliance is expected by investors as it evidences a company’s commitment to a high standard of governance.

The Guidelines, on the other hand, apply to companies which have an impact on the public in general, i.e., companies whose operations affect a substantial sector of society. The Guidelines state that these companies should not only act in the interests of their shareholders but also in the communal interest. Even though the Guidelines are modelled on the Code and are likewise not mandatory, they establish principles of best practice.

Clearly, Malta’s regulator of corporate and financial services has recognised that good corporate governance principles are important, since they affect the manner in which companies are perceived both domestically and on an international level.

Proposals for new laws and amendments to existing laws

There are more proposals being discussed in order to update Malta’s current legislative framework.

For one, the MFSA is proposing to extend exemption on the requirement of a license for investment services to EU/European Economic Area (EEA)-based custodians of closed-ended retail collective investment schemes which are based in Malta, upon satisfaction of certain conditions. This exemption would hope to encourage a closed-ended retail collective investment scheme to be set up in Malta even though the custodian may carry out his duties in another EU or EEA jurisdiction.

The MFSA has delineated its reasons for not introducing the same exemption to open-ended retail schemes. In this case, it was deemed unsuitable to overturn the requirement of a local custodian in an open-ended retail scheme as the custodial role acquires more importance as a safeguard for investors, due especially to their duties verifying the accuracy of the fund’s net asset value calculation and ensuring that redemption and subscription requests are satisfied by the fund. .[xiii]

Further amendments have been mooted. Consultation proceedings initiated on May 21, 2009, have drawn up a report relating to changes in Investment Services Rules applicable to PIFs targeting Experienced Investors.[xiv] The consultation document proposes two significant changes:

• to reduce the entry bar from €15,000 to €10,000; and
• to impose more rigorous regulations to ensure a minimum level of risk diversification.

The latter proposal aims to avoid financial difficulty due to the fact that there are no current rules on the need to spread the risk. This consequently poses the threat of having a single issuer or counterparty with failed investments^xv. 

Conclusion

Despite the toll on the global market, the MFSA recently reported[xvi] that operations have not degenerated, and that the financial services industry has continued to grow, with banks, collective investment schemes, insurance companies and other finance related companies setting up operations here. Malta’s resilience in the face of the ‘crisis’ has been due to legislation attempting to overcome lacunae or doing away with obsolete provisions. Other factors include our strong regulatory regime, the personalised contact the Authority maintains with financial institutions, and the fact that Maltese banks do not borrow for the purpose of lending.

All these efforts combine to enhance Malta’s growth in its financial services and enhance its reputation as a business location.  

i Cap.386 of the Laws of Malta.

ii Or any other official journal published by the Government.

iii An investment company with variable share capital.

iv According to the Investment Services Rules for Professional Investor Funds, published by the MFSA (Part B II: Professional Investor Funds Targeting Qualifying Investors, a threshold is imposed in order to enter a scheme. In the case of qualifying investors, the minimum investment which the scheme would accept is €75, 000 (or its equivalent expressed in other currencies). Moreover, the investor needs to sign a disclaimer stating that he is aware of the risks involved in participating in the scheme.

v In the case of extraordinary investors, as the name implies, the bar is raised to an even higher level than that of a PIF targeting qualifying investors. Part III of the Investment Services Rules for PIFs, Professional Investor Funds Targeting Extraordinary Investors, provides that the minimum investment which the scheme may accept is of €750,000. Similar to the qualifying investors scheme, investors must also sign a declaration stating that they aware of the risks.

vi Investment Guide & Business Directory, Finance Malta (2009 Ed.) 95.

vii Introduced in 2001 and completely revised in 2006, taking into account the guidelines laid down by the Organisation for Economic Cooperation and Development.

viii Published by the Malta Financial Services Authority, 2006.

A ‘public interest company’ means any one of the following three types of companies:

(a) a regulated company; or

(b) a company that has issued debt securities to the public and whose securities are not admitted to listing on a Recognized Investment Exchange; or

(c) a government-owned entity established as a limited liability company.

xi As explained in the OECD Principles of Corporate Governance 2004, these Principles were endorsed by OECD Ministers in 1999 and have since become an international benchmark for policy makers, investors, corporations and other stakeholders worldwide. They have advanced the corporate governance agenda and provided specific guidance for legislative and regulatory initiatives in both OECD and non OECD countries. The Financial Stability Forum has designated the Principles as one of the 12 key stansards for sound financial systems.

x Directive 2006/43/EC.

xi Listing Rule 8.37 and 8.38.

xii Listing Rule 8.39.

xiii Consultation Procedure – Amendment Investment Services Act (Exemption Regulations) (10^th August 2009).

xiv A PIF targeting Experienced Investors is the least stringent scheme out of the three classes targeting different target markets: the PIF targeting Experienced Investors; the PIF targeting qualified investors; the PIF targeting extraordinary investors. Indeed, the entry bar is not set very high and an investor may enter the experienced investors’ scheme with a minimum of €15,000.

xv MFSA September 2009 Newsletter.

xvi Profs. Joe Bannister, Bright Future for Malta’s Financial Sector (The Malta Business Weekly, 21-27 May 2009).