Wong Chin Chin and Tracy Ng Tsu Ynn of Adnan Sundra & Low assess the regulatory landscape for mergers and acquisitions in Malaysia
1. REGULATORY FRAMEWORK
1.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
Public M&A activity is governed by the Capital Markets and Services Act 2007 (CMSA), the Malaysian Code on Takeovers and Mergers 2010 (Code) and the Practice Notes on the Code issued by the Securities Commission Malaysia (SC), and is regulated by the SC.
1.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
The SC administers the Code and issues rulings in the interpretation of the Code and on the practice and conduct of persons involved in a takeover offer, merger or compulsory acquisition, including an acquirer, offeror, target and their officers and associates.
The Code applies to a public company (whether or not listed on any stock exchange) and includes a company that is incorporated outside of Malaysia but listed on any stock exchange in Malaysia, and to a real estate investment trust (Reit) listed on any stock exchange in Malaysia.
Compliance with the Code and any rulings made by the SC is mandatory, failing which it is an offence and on conviction, is liable to a fine and/or imprisonment.
2. STRUCTURAL CONSIDERATIONS
2.1 What are the basic structures for friendly and hostile acquisitions?
A hostile acquisition will usually take the form of a tender offer (mandatory or voluntary) made directly by the offeror to all the target's shareholders at the same price. In a mandatory offer, the offer becomes unconditional upon the acceptance level reaching 50% plus one share. However, in a voluntary offer, the SC may allow a higher acceptance condition to be fixed.
A friendly acquisition may also take the form of a tender offer or by way of a scheme of arrangement, compromise, amalgamation or selective capital reduction, all of which come within the purview of the Code. The voting threshold for a scheme is at least 50% in number and 75% in value, and not more than 10% dissenting votes.
2.2 What determines the choice of structure, including in the case of a cross-border deal?
The choice is usually determined by the business of the target, the controlling shareholders' stake and other major shareholders' stake, the critical path and time constraints as well as tax structuring.
2.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
The Code governs the timetable of a takeover. An offer will be open for a minimum period of 21 days but if a compulsory acquisition is carried out, it will take longer. A scheme requiring court sanction will usually take between three to six months (or longer) to complete.
2.4 Are there restrictions on the price offered or its form (cash or shares)?
A mandatory offer must be in cash (or with a cash alternative of at least equal value). A voluntary offer may be in cash or in the form of securities. In a scheme, consideration may be in cash or securities and is paid directly to the shareholders of the target in exchange for them agreeing to a cancellation of their shares.
2.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
In a tender offer, a compulsory acquisition may only be proceeded with if the offeror and parties acting in concert with it have acquired at least 90% of the shares not owned by them within four months of the posting of the initial offer document.
Squeeze-out is not necessary in a successful scheme as it automatically delivers 100% of the shares.
2.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
Generally, the Code ensures that a minority shareholder can exit his investment in a target if there is a change in control (more than 33%) or consolidated control (more than two percent in six months for a holder, and persons acting in concert with him, who already holds between 33% to 50%). Further, the Code is designed to accord equal treatment to shareholders of the same class. Control premiums and other preferential pricing arrangements are therefore prohibited. The Code also provides for the best price rule in that, in certain circumstances, the offer price must not be less than the highest price paid or agreed to be paid by the offeror (or person acting in concert with the offeror) for the shares in the target within six months prior to the beginning of the offer period. There is also a general prohibition against an offeror entering into more favourable deals if such deals are not being extended to all target's shareholders.
2.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
In a mandatory offer, the only condition allowed is a 50% plus one share acceptance condition.
In a voluntary offer, SC may permit a higher level of acceptance and may include any other conditions except for a self-defeating condition.
In addition, the Code requires, in the case of a cash offer or an offer with an element of cash, that the offeror should ensure and his financial adviser should be reasonably satisfied that the takeover offer will not fail due to the insufficient financial capability of the offeror.
3. TAX CONSIDERATIONS
3.1 What are the basic tax considerations and trade-offs?
In Malaysia, there is no capital gains tax for gains made on disposal of shares, save for gains made on disposal of shares in a real property company (RPC) (which means a controlled company having 75% or more of its assets in real property or in another RPC). There is stamp duty chargeable on transfers of unlisted shares of Malaysian companies, calculated at 0.3% of the higher of purchase consideration and market value.
For a takeover effected by a scheme whereby existing shares in the target are cancelled and new shares in the target are issued, no stamp duty is chargeable on cancellation and issuance of new shares.
3.2 Are there special considerations in cross-border deals?
Yes, because the shares of the target or the target's assets may be subject to different tax regimes with different tax benefits and burdens.
4. ANTI-TAKEOVER DEFENCES
4.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
While the general forms of defence are available, these are subject to the non-frustration principle contained in the Code, which essentially prohibits the board of a target from doing anything to frustrate an offer or deny the shareholders of the target an opportunity to decide on the merits of an offer after a bona fide offer is made or believed to be imminent. Examples of such action or decision are the issuance of new shares by the target, the issuance or granting options in respect of any unissued shares of the target and the sale, disposal of or acquisition or agreement to sell, dispose of or acquire assets of the target of a material amount. However, do note that certain frustrating actions are permitted if approved by its shareholders at a general meeting or if approved by the SC.
4.2 How do targets use anti-takeover defences?
Upon its receipt of a takeover notice, the board of the target can seek an alternative offer. It can also recommend that a takeover offer be rejected (or accepted).
4.3 Is a target required to provide due diligence information to a potential bidder?
No, but if information has been provided to a potential bidder, the Code requires that the same information must be given to another bona fide potential bidder upon request.
4.4 How do bidders overcome anti-takeover defences?
The non-frustration principle outlined in section 4.1 and directors' fiduciary duties provide some protection to a bidder to curb the targets from engaging in unlawful anti-takeover defences. In addition, a bidder may improve the terms of the offer to make the offer more attractive.
4.5 Are there many examples of successful hostile acquisitions?
5. DEAL PROTECTIONS
5.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
In a friendly takeover, a bidder may, before making the takeover offer public, seek irrevocable commitments to accept an offer from major shareholders. However, the target's board of directors should not be involved in this process, since the board of the target must not bind itself to a friendly bidder to the exclusion of other potential bids, as doing so may not be in the best interest of the shareholders.
5.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
A shareholder is free to agree with the bidder so long as such an agreement does not bind the target, and provided that the bidder abides by the no favourable deals principle.
The target's board of directors should not be involved in deal protection such as no-shop or lock-up agreements, since the board of the target must not bind itself to a friendly bidder to the exclusion of other potential bids, as doing so may not be in the best interest of the shareholders.
6. ANTITRUST/REGULATORY REVIEW
6.1 What are the antitrust notification thresholds in your jurisdiction?
The Malaysian Competition Act 2010 (Act) does not have any merger control provisions. As such, the Act does not require any notification or pre-merger clearance to be filed or obtained for any mergers and acquisitions. Despite the lack of merger control provisions, businesses must ensure that the outcome of post-mergers or acquisitions does not breach any prohibitions under the Act. The Act comprises two main areas of prohibitions, namely: (i) the prohibition on anti-competitive agreements; and, (ii) the prohibition on the abuse of a dominant market position. The Malaysian Competition Commission has the power of enforcement over any contravention of the Act.
6.2 When will transactions falling below those thresholds be investigated?
Please see section 6.1.
6.3 Is an antitrust notification filing mandatory or voluntary?
Please see section 6.1.
6.4 What are the deadlines for filing, and what are the penalties for not filing?
Please see section 6.1.
6.5 How long are the anti-trust review periods?
Please see section 6.1.
6.6 At what level does your anti-trust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
Please see section 6.1.
6.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
Restrictions on foreign ownership have been imposed by the regulators in certain sectors such as financial services, energy, oil and gas, defence and wholesale and retail trade to safeguard the national interest and interest of local businesses and to promote local capabilities.
7. ANTI-CORRUPTION REGIMES
7.1 What is the applicable anti-corruption legislation in your jurisdiction?
The primary legislation is the Malaysian Anti-Corruption Commission Act 2009 (MACCA) which addresses corruption involving officers of a public body and agents (which means any person employed by or acting for another). This is echoed in the Penal Code in relation to corruption involving public servants. In addition, the Customs Act 1967 legislates against the offering and receiving of bribes by officers of customs or other persons duly employed for the prevention of smuggling. The Anti-Money Laundering and Anti-Terrorism Financing Act 2001 (AMLA) is the present money laundering legislation which legislates against money laundering.
7.2 What are the potential sanctions and how stringently have they been enforced?
The maximum penalties in the event of conviction under the relevant legislations are as follows: (i) MACCA – seven to 20 years imprisonment and/or a fine of RM10,000 ($2,700) to the higher of RM50,000 or five times the sum or value of the gratification; (ii) the Penal Code – up to three years imprisonment and/or a fine of unlimited amount; (iii) the Customs Act – not exceeding five years imprisonment and/or a fine not exceeding RM10,000; and (iv) AMLA – not exceeding five years imprisonment and/or a fine not exceeding RM5 million.
Several prosecutions have been undertaken by the relevant authorities under the MCCA, AMLA and the Penal Code.
8. OTHER MATTERS
8.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
There is a general disclosure obligation for every shareholder who holds substantial shareholding (a person who has an interest in shares of not less than five percent of voting shares in a public company in Malaysia) to disclose its interest within a prescribed time period of its first acquisition, or of any subsequent changes and upon ceasing to be a substantial shareholder. Interest in shares is defined very broadly to extend to indirect shareholding, and there are penalties for non-compliance.
8.2 What are the key recent M&A developments in your jurisdiction?
In 2013 to 2014, Malaysian companies have made substantial investment overseas, primarily in the oil and gas and real estate sectors. It is likely that government-linked companies may scale back on foreign investments to contain capital outflows, which may weigh on the ringgit.
In inward-bound investments, the weakening of the ringgit should attract more foreign investments. The construction sector will remain buoyant, fuelled by demand from mega projects, including the seven infrastructure projects involving highways, railways and public transport that have been announced in the recent budget as being on track for implementation in 2015. Private equity investments will likely garner more interest, particularly in the retail, technology and consumer sector.
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Wong Chin Chin
Adnan Sundra & Low
About the author
Wong Chin Chin graduated from the University of Sydney, Australia and was admitted to the Malaysian Bar in 1991. She heads the corporate and M&A practice at Adnan Sundra & Low. She has advised financial institutions, insurance companies, manufacturers, wholesalers, retailers, speciality traders and renewable energies companies on their mergers and acquisitions. She has also advised on privatisation of companies via selective capital reduction, takeover, acquisition of assets and transfer of listing status and in the restructuring of debt via schemes of arrangements, and has acted for both issuers and underwriters in initial public offerings and rights issue of shares and warrants. This includes the initial public listing of a special purpose acquisition company in the oil and gas sector and in the listing of stapled securities on the main market of Bursa Malaysia.
Wong Chin Chin is recognised for her M&A work in Malaysia by Asialaw Profiles and IFLR1000.
Tracy Ng Tsu Ynn
Adnan Sundra & Low
About the author
Tracy Ng Tsu Ynn graduated from University College London with an LLB (Hons) degree in 2001 and was admitted to the Bar of England and Wales in 2002 and the Malaysian Bar in July 2003. She began her career as a legal assistant with Lee Perara & Tan in July 2003 before joining the firm as a legal assistant in June 2005 and a partner in January 2011.
Ng Tsu Ynn is primarily involved in equity fundraising, mergers and acquisitions, corporate advisory, international and domestic joint ventures and general corporate and commercial matters. She has advised on: IPOs and listing of companies and real estate investment trusts on Bursa Malaysia, including special purpose acquisition companies and Malaysia's only stapled securities; schemes of arrangements; M&A; selective capital reduction and repayment exercises; privatisation of listed companies; dividend reinvestment schemes; rights issues; and, employee share schemes.