M&A in Malaysia: Lexology Navigator Q&A

Teo Wai Sum and Terrence Chong

Tay & Partners 

Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?

The Economic Transformation Programme continues to be a key driver of M&A, with the continuous introduction of business-friendly initiatives.

Malaysia was the chair of the Association of Southeast Asian Nations (ASEAN) for 2015. One of the main priorities of the Malaysian agenda was the economic integration of ASEAN through the ASEAN Economic Community, which aims to create a single market and production base. However, falling oil prices and the political situation in Malaysia has led to a decline in investor confidence.

Are any sectors experiencing significant M&A activity?

M&A is diverse across all sectors, particularly in the real estate and energy sector. The construction sector remains robust, fuelled by mega infrastructure projects, while technology companies continue to see particular interest from private equity investment.

Are there any proposals for legal reform in your jurisdiction?

The Companies Bill seeks to revamp the Companies Act 1965 in order to modernise the legal framework for companies. Major proposed amendments include:

• the abolishment of the concept of authorised share capital;
• the abolishment of shares with par value; and
• the simplification of the process for incorporation of a new company with only one shareholder and director.

Under the existing regime, a reduction of share capital requires leave from the court. The bill will introduce alternative methods for a share capital reduction whereby companies can, by a special resolution supported by a solvency statement from all directors, reduce their share capital. Existing provisions on financial assistance will also be relaxed.

Legal framework

Legislation
What legislation governs M&A in your jurisdiction?

The Companies Act 1965 governs the affairs of both private and public companies.

The Capital Markets and Services Act 2007, the Code on Takeovers and Mergers 2016 (including rulings issued by the Securities Commission) and Rules on Takeovers, Mergers and Compulsory Acquisitions govern M&A activity in public companies. The Bursa Malaysia Listing Requirements apply to all companies listed on Bursa Malaysia Securities Berhad, the Malaysia stock exchange. 

Regulation
How is the M&A market regulated?

The Companies Act 1965 is regulated by the Companies Commission of Malaysia. The Securities Commission administers the Code on Takeovers and Mergers. Bursa Malaysia Securities Berhad administers the Bursa Malaysia Listing Requirements.  

Are there specific rules for particular sectors?

Most industries in Malaysia are regulated by their respective regulatory and licensing authorities. Certain licences provide for local content requirements. The approval of the relevant licensing authority must usually be obtained before a merger or acquisition. For example, the Central Bank of Malaysia regulates takeovers of companies in the financial sector. 

Types of acquisition
What are the different ways to acquire a company in your jurisdiction?

Companies are commonly acquired through share purchases and asset purchases. It is also possible to acquire a company by auction, but this uncommon.

Preparation

Due diligence requirements
What due diligence is necessary for buyers?

Legal, financial and tax due diligence is carried out for most transactions. Business due diligence may be carried out to determine the viability and business prospects of the target.

Information
What information is available to buyers?

The following information is in the public domain and available to buyers:

• documents lodged with the Companies Commission of Malaysia, including:
  • memorandum and articles of association;
  • annual returns;
  • audited financial statements;
  • certificates of incorporation;
  • returns on allotment of shares;
  • returns giving particulars in register of directors, managers, secretaries and changes of particulars; and
  • notices of situation of registered offices and office hours and particulars of changes;
• where the target is listed on the Malaysia stock exchange, documents and information lodged pursuant to the Bursa Malaysia Listing Requirements, including:
  • announcements;
  • circulars;
  • audited accounts; and
  • prospectuses; and
• documents filed with the courts for purposes of litigation (eg, statements of claim and defence), provided that the suit number is known.

Information not in the public domain can be made available only by the target. 

What information can and cannot be disclosed when dealing with a public company?

The offer must be put forward to the board of the offeree before the offer is announced to the public.

If the offer or an approach with a view to an offer being made is not made by the ultimate offeror or potential offeror, as the case may be, the identity of the ultimate or potential offeror must be disclosed at the outset to the board of the offeree.

The board of the offeree is entitled, in good faith, to make enquiries to satisfy themselves that the offeror will be able to implement the offer.

Before the announcement of an offer or possible offer, all persons privy to any confidential information relating to a takeover offer or proposed takeover offer, particularly price-sensitive information, must treat the information as secret and may pass it to another person only if it is necessary to do so and if that person is made aware of the need to maintain the confidentiality of the information.

The contents of the offer document must comply with the Rules on Takeovers, Mergers and Compulsory Acquisitions.

Stakebuilding
How is stakebuilding regulated?

Stakebuilding for public companies is regulated by the Code on Takeovers and Mergers 2016, Rules on Takeovers, Mergers and Compulsory Acquisitions and the Companies Act.

A mandatory offer is triggered where the acquirer:

• has obtained control of the target; or
• holds more than more than 33% but no more than 50% of the voting shares or voting rights of the company and acquires more than 2% of the voting shares or voting rights of the target in any six-month period.

Documentation

Preliminary agreements
What preliminary agreements are commonly drafted?

Exclusivity agreements 
Exclusivity agreements prohibit undertakings from the seller or buyer from negotiating with a third party in order to sell or deal with the subject matter of the sale for a prescribed period. Remedies may be limited to damages only for breach of the agreement. An exclusivity agreement or arrangement can be part of a letter of intent or term sheet.

Letters of intent 
A letter of intent or term sheet is usually entered into before the signing of any formal contract. Letters of intent or term sheets are often described as not legally binding. They typically set out:

• the parties’ understanding, principal terms of the transaction and other provisions to allow the buyer to carry out due diligence and investigate the target’s assets and liabilities; and
• the relevant timeframe for completion and signing of the formal contract.

Non-disclosure agreements 
Under a non-disclosure agreement, a party agrees not to disclose any information received from the other party to an unauthorised third party. These agreements are typically entered into in order to protect the prospective seller from unauthorised use of information made available to the prospective buyer during the transaction. However, it may be necessary for the prospective seller or buyer to make disclosures and announcements to certain authorities, pursuant to requirements under the applicable securities law or the Bursa Malaysia Listing Requirements. Injunctive relief is usually sought for a breach of a non-disclosure agreement.

Principal documentation
What documents are required?

The main documents for a share sale include:

• the share sale agreement;
• tax indemnity; and
• a disclosure letter qualifying warranties (typically prepared by the seller).

The main documents for an asset sale include:

• the asset sale agreement;
• disclosure letter qualifying warranties (typically prepared by the seller);
• relevant deeds/agreements for the transfer of the identified contracts; and
• notices and letters in relation to the employment of employees. 

Which side normally prepares the first drafts?

The solicitors or the buyer or seller may prepare the first draft. 

What are the substantive clauses that comprise an acquisition agreement?

The substantive clauses in an acquisition agreement include:

• subject to any price adjustment, payment of the purchase consideration on completion. A price adjustment mechanism for a share acquisition usually involves preparation of completion accounts. A price adjustment for an asset acquisition may require verification of stock or fixed assets on completion, where the value of lost or damaged stock or assets will be taken into account for adjustment purposes;
• a requirement that the purchase of shares or assets be free from all encumbrances and with all rights attached to them;
• fulfilment of conditions precedent before completion, including satisfactory due diligence results and procurement of all necessary approvals and consents;
• covenants by the seller not to encumber, transfer or dispose of the shares or assets. Other common covenants include not to:
  • vary contracts (including terms of employment);
  • depart from the ordinary course of business;
  • borrow money;
  • incur capital expenditure exceeding a certain threshold; or
  • issue or grant any option in respect of shares (some of the covenants that apply to share acquisitions may not apply to asset acquisitions);
• for share sales, a requirement for indemnity by the seller to the buyer for undisclosed tax liabilities of the company, arising from any acts or omission occurring before completion of the share acquisition. This does not usually apply to asset sales;
• a non-competition agreement by the seller for a period of time after completion. Non-competition agreements may be void or unenforceable under Section 28 of the Contracts Act, which provides that agreements which restrain someone from exercising a lawful profession, trade or business are to that extent void. However, an agreement not to carry on business under which goodwill is sold is exempted under this section;
• retention of part of the consideration for an agreed period which may be used to set off claims arising from a breach of the seller’s warranties, indemnities or undertakings; and
• the governing law of the contract.

Further, the completion of share acquisitions typically involve:

• appointment of the buyer's nominees as directors;
• resignation of existing directors;
• delivery of share certificates; and
• transfer and delivery of statutory records.

Warranties are generally more extensive in a share sale. The warranties in an asset sale are generally specific to the assets being acquired.

Completion of asset acquisitions typically involve:

• delivery of assets, together with all title certificates and documents;
• assignment of contracts and IP rights; and
• offers of employment to employees, on terms no less favourable than those previously granted by the company.

Finally, if the assets include real property, the transfer must be stamped and presented at the relevant land office or registry. 

What provisions are made for deal protection?

The provisions made for deal protection include:

• exclusivity to ensure that the target does not solicit or accept competing bids; and
• break-up fees. 

Closing documentation
What documents are normally executed at signing and closing?

Signing 
Documents commonly produced and executed at signing include a share/asset sale agreement and a disclosure letter qualifying warranties (typically prepared by the seller).

Closing
Share purchase
Documents commonly produced and executed at closing for a share purchase include:

• a board of director resolution approving the share transfer;
• original share certificates;
• instrument of share transfer;
• duly signed letters of resignation from the existing directors;
• duly signed letters of resignation from the company secretary;
• a board of director resolution appointing the buyer's nominee(s) to the board;
• a board of director resolution approving the change of bank signatories; and
• tax indemnity (if this is not already provided in the share sale agreement).

Asset purchase
Documents commonly produced and executed at closing for an asset purchase include:

• assignment of contracts;
• assignment of IP rights;
• instruments of transfer for the assets (if relevant);
• title documents to the assets (if any);
• records of the company;
• the originals of the identified contracts; and
• notices and letters in relation to employment of employees.

Are there formalities for the execution of documents by foreign companies?

Typically, a foreign company can execute documents in accordance with the formalities laid down by its articles of association or constitution, unless otherwise required by the relevant statutes, regulations or guidelines in Malaysia. Certain statutes typically require the execution of documents by a foreign company or its authorised representatives to be attested or authenticated by certain designated persons (eg, a commissioner for oaths or notary public).

Are digital signatures binding and enforceable?

Digital signatures created in accordance with the Digital Signature Act 1997 are deemed to be legally binding. A document signed with a digital signature in accordance with the Digital Signature Act 1997 is as legally binding as a document signed with a thumbprint, handwritten signature or any other mark.

Legislation that requires a signature or provides for certain consequences in the absence of a signature can be satisfied by a digital signature if the following are met:

• The digital signature is verified by reference to the public key listed in a valid certificate issued by a licensed certification authority.
• The digital signature is affixed by the signatory with the intention of signing the message.
• The recipient has no knowledge or notice that the signatory either does not rightfully hold the private key used to affix the digital signature or has breached a duty as a subscriber.

The Electronic Commerce Act 2006 recognises “any letter, character, number, sound or symbol or any combination thereof created in electronic form adopted by a person as a signature” as an electronic signature. A document in the form of an electronic message can be executed by way of an electronic signature which is:

• attached to or is logically associated with the electronic message;
• adequately identifies the person and adequately indicates the person's approval of the information to which the signature relates; and
• appropriately reliable as given the purpose for which, and the circumstances in which, the signature is required. 

An electronic signature is reliable if:

• the means of creating the electronic signature is linked to and under the control of that person only;
• any alteration made to the electronic signature after the time of signing is detectable; and
• any alteration made to that document after the time of signing is detectable.

Foreign law and ownership

Foreign law
Can agreements provide for a foreign governing law?

Foreign law can be the governing law. However, Malaysian law will typically be the governing law, since the subject matter is in Malaysia.

Malaysian courts may apply foreign laws, although this may affect the enforceability of the agreements. Foreign law must be proved as a matter of fact by appropriate expert witnesses. Malaysian law will govern certain procedural matters and the measure of damages for breach of contract. Malaysian law will prevail if a question of public policy arises.

Foreign ownership
What provisions and/or restrictions are there for foreign ownership?

Generally, no restrictions apply to the acquisition of shares by foreign buyers, except that there may be a limit on foreign ownership of shares in certain industries (eg, financial services, oil and gas and telecoms).

There are generally no restrictions for foreign ownership for assets.

Valuation and consideration

Valuation
How are companies valued?

Common valuation methodologies include discounted cash-flow analysis and the comparable transaction method. Ultimately, the valuation methodology is determined by the buyers. 

Consideration
What types of consideration can be offered?

The common forms of consideration are cash, the issue of shares or a combination of both. Shares are commonly used as consideration in a restructuring or merger.

Strategy

General tips
What issues must be considered when preparing a company for sale?

When preparing a company for sale, it is essential to:

• ensure that company records (eg, contracts and minute books) are kept properly in order to facilitate the due diligence process. If need be, the seller may conduct compliance due diligence on the company before the sale.
• consider whether a share sale or asset sale may be more appropriate for the seller by considering the following pros and cons:
  • A share purchase can be complicated if there are too many shareholders or if the minority shareholders refuse to sell.
  • The buyer has discretion to pick the employees that it wishes to employ in an asset purchase, without any liability to the rest of the employees. The target may be liable for redundancy payments to employees if it stops carrying out business activities after the sale.
  • The timeline for completion of a share sale is usually shorter than that for an asset purchase. The latter will require:
    • transfer of ownership for land;
    • applying and obtaining new licences; and
    • novation or assignment of contracts.
  • An asset purchase will typically involve the assignment or novation of customer and supplier contracts, subject to the approval of the counterparty to such contracts; and
• consider whether approval from the regulatory authorities is needed.

What tips would you give when negotiating a deal?

Ensure that the key terms of the deal are provided in the letter of intent, terms sheet or any other preliminary document. This is to ensure that both parties are on the same page. 

Hostile takeovers
Are hostile takeovers permitted and what are the possible strategies for the target?

Hostile takeovers are permitted only for public companies and can compromise a voluntary or mandatory offer to the target’s shareholders. However, due diligence on the target will be limited to publicly available information and documents, as the target will usually not facilitate due diligence. 

Warranties and indemnities

Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?

Share acquisition
The seller’s warranties in a share acquisition typically include:

• ownership and rights to relevant shares;
• legal status of the target;
• completeness and accuracy of records and information;
• employees;
• intellectual property;
• accuracy of accounts and financial statements;
• ownership of assets and status of liabilities;
• licences and permits;
• customers and supplier;
• business operations;
• contracts;
• insurance;
• taxation; and
• litigation.

Asset acquisition
The seller’s warranties in an asset acquisition are generally specific to the assets being acquired.

Warranties and indemnities are usually negotiated based on findings of legal, financial, tax and business due diligence. 

Limitations and remedies
Are there limitations on warranties?

The main limitations include:

• limiting any claims on breach of warranties, unless the amount of each claim and the aggregate cumulative amount of all claims exceed a certain minimum threshold;
• restricting the seller’s maximum liability;
• imposing a time limit beyond which no claims can be made – typically six months to two years after completion of the acquisition; and
• exclusion of liability from particular warranties that are disclosed in writing. 

What are the remedies for a breach of warranty?

The acquisition agreement will typically provide for a timeframe for the defaulting party to remedy the breach, failing which the non-defaulting party can claim damages for breach of warranty.

Are there time limits or restrictions for bringing claims under warranties?

Under the Limitation Act 1953 the statutory limitation for any claim is six years from the date of breach, save for fraud or a mistake to which the statutory limitation would not apply. However, sellers typically impose a shorter timeframe (typically two years after completion) for any claim to be made.

Tax and fees

Considerations and rates
What are the tax considerations (including any applicable rates)?

Share sale 
Stamp duty is payable on a share transfer instrument and is calculated on the price or value from the date of transfer, whichever is greater. RM3 is payable for every RM1,000 or a fractional part of it.

Where the share sale requires Securities Commission approval, the price/value per share, as approved by the Securities Commission, may be accepted for the purpose of valuing the shares, although other valuation methods provided under the Guidelines on the Stamping of Share Transfers not Quoted on the Stock Exchange published by the Internal Revenue Board of Malaysia may apply.

Asset sale 
Ad valorem stamp duty will apply to the sale of goodwill, assignment of account receivables and transfer of real estate in an asset sale. Stamp duty is calculated as follows:

• first RM100,000 – RM1 per RM100 or part of it;
• any amount exceeding RM100,000 up to RM500,000 – RM2 per RM100 or part of it; and
• any amount exceeding RM500,000 – RM3 per RM100 or part of it. 

Exemptions and mitigation
Are any tax exemptions or reliefs available?

Stamp duty relief is available for the transfer of shares or assets between associated companies if the following conditions have been met and the Malaysian Inland Revenue Board has approved the application:

• the companies are associated, meaning that one is the beneficial owner of at least 90% of the issued share capital of the other, or a third company with limited liability is the beneficial owner of at least 90% of the issued share capital of both the transferor and the transferee;
• a company with limited liability transfers its property (shares or assets) to another company with limited liability; and
• other conditions. 

What are the common methods used to mitigate tax liability?

Mitigation of tax liability is ultimately shaped by the structure and objective of the M&A transaction. There is no one-size-fits-all approach to tax mitigation and independent advice should be sought from tax advisers.

Fees
What fees are likely to be involved?

Typically, fees vary depending on a number of factors affecting the value of professional services – for example:

• the complexity of the transaction;
• the extent of lawyers’ expertise in the matter;
• time limits or deadlines for completing the work; and
• the skills required to perform the work. 

Management and directors

Management buy-outs
What are the rules on management buy-outs?

Directors who have or may have a conflict of interest must abstain from voting or making recommendations with regard to a takeover offer.

Where the offeror’s board of directors is faced with a conflict of interest, it must appoint an independent adviser to provide comments, opinions, information and recommendation on the takeover offer or conflict of interest in an independent advice circular.

Directors’ duties
What duties do directors have in relation to M&A?

Directors owe a fiduciary duty to the company under common law and statute (the Companies Act 1965), including a duty to:

• act in good faith and for proper purpose;
• exercise reasonable care and skill when discharging their duty; and
• seek shareholders’ approval at a general meeting of the company before carrying out any arrangement or transaction of substantial value (25% of the company’s total assets, net profit or issued share capital).

It is imperative that directors ensure that any merger or acquisition is for the benefit of the company.

Employees

Consultation and transfer
How are employees involved in the process?

There are no obligations to inform or consult employees or their representatives or obtain employee consent for an asset sale or share sale unless employees will be transferred from the seller to the buyer. In this case, employee consent is required.

What rules govern the transfer of employees to a buyer?

Employees governed under the Employment Act 1955 are not automatically transferred in a business sale. Where the new owner of the business does not immediately offer to continue the employment of the employees on terms and conditions no less favourable than previously enjoyed by the employees before the acquisition, the employees' service contracts will be deemed terminated and the employer immediately preceding the change of ownership will be liable to pay termination benefits (Employment (Termination and Lay-Off Benefits) Regulations).

For employees not governed under the Employment Act, common law, their employment contracts and collective agreements (if applicable) will apply.

Pensions
What are the rules in relation to company pension rights in the event of an acquisition?

For employees governed under the Employment Act, if the new owner employs the employees of the acquired business it must continue to offer them employment on terms and conditions no less favourable than those previously enjoyed before the acquisition. This includes any entitlement to a pension, if such entitlement was provided in the employment contracts immediately preceding the acquisition.

For employees not governed under the Employment Act, common law, the employment contracts and collective agreements (if applicable) of the affected employees will apply.

Other relevant considerations

Competition
What legislation governs competition issues relating to M&A?

The Competition Act 2010 and the Competition Commission Act 2010.

Anti-bribery
Are any anti-bribery provisions in force?

Under the Malaysian Anti-corruption Commission Act 2009 it is an offence to solicit, receive or agree to receive corruptly; or to give, promise or offer to any person any gratification as an inducement or reward for any person doing or forbearing to do anything in respect of an actual, proposed or likely matter or transaction. This law applies regardless of the ultimate beneficiary or giver of any bribe. Extra provisions are made for bribes made to or from officers of public bodies.

Receivership/bankruptcy
What happens if the company being bought is in receivership or bankrupt?

Under Section 223 of the Companies Act 1965, any disposition of the company’s property or transfer of its shares after commencement of a winding-up by the court will be void. The risk of contracts being rendered void and unenforceable applies to:

contracts entered into after commencement of the winding-up of the company; and
contracts entered into before the commencement of the winding-up but that have not been completed on commencement of the winding-up. 

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