Private Equity 2024 Comparisons

Malaysia’s diverse economy, robust policy framework, status as a significant commodity exporter and recently improved political stability have provided a strong foundation for a promising and steady economic recovery. This is partly reflected in a resilient M&A and private equity deal environment.

Private equity funds that are active in Malaysia generally adopt the following strategies.

• Focus on sectors that have the most exposure to growth trends in the broader economy, particularly the consumer retail industry. Specific examples of this trend include the acquisition of a significant minority stake by Creador, a Malaysia-based private equity firm, in Custom Food Ingredients, a local food industry supplier, in 2022. More recently, in 2023, Creador acquired a 40% stake in Pet World International, a Malaysia-based pet food manufacturer. Consumer spending accounts for a material percentage of Malaysia’s gross domestic product (GDP) and is forecast to continue to grow as a result of the government’s aim to increase labour’s share of GDP to 45% under its overarching economic plan known as the Madani Economy framework.
• Focus on opportunities to unlock hidden value in listed and privately held conglomerates. Malaysia has historically had many conglomerates, both publicly and privately held as many businesses are founded and run by families. In recent times, Malaysian conglomerates have adopted a more proactive approach in portfolio management to realise greater value or to deleverage; a number of demergers, carve-outs or divestitures of non-core assets and businesses have followed. The Berjaya Corp group embarked on a three-year transformation plan in 2021 to streamline its businesses and reduce debt through the disposal of non-core assets. One of the group’s listed entities, 7 Eleven Holdings, recently disposed of its interests in the Caring Pharmacy group to BIG Pharmacy Healthcare, a private group that includes Creador as one of its investors. Separately, IHH Healthcare monetised its investment in the International Medical University by disposing it to TPG’s The Rise Fund, in order to redeploy its capital on its core hospital-related operations.
• Seek opportunities to create further value in target businesses that have been invested in by other private equity firms. Malaysia has also seen an increasing number of transactions between private equity firms. A recent example would be the acquisition by TPG’s The Rise Fund along with co-investors Employees Provident Fund and Kumpulan Wang Persaraan (Diperbadankan) of a controlling stake in Asia Pacific University of Technology and Innovation (APU) from KV Asia Capital, a leading private equity fund focused on mid-market investments across Southeast Asia. KV Asia Capital had in turn acquired APU from Ekuinas, the Malaysian government-linked private equity firm. Each private equity investor in APU has created value in APU, and both Ekuinas and KV Asia have exited with enhanced valuations.
• Pursue consumer goods and retail opportunities in secondary cities and towns in Malaysia. Malaysia’s continuing overall steady economic growth combined with a relatively young population with increasing amounts of disposable income has fuelled expansion in the consumer goods and retail sector, including in secondary cities and towns in Malaysia. A number of private equity firms have been targeting businesses with a strong record of growth in outlets in Malaysia’s secondary cities and towns. Good examples of these would be the household appliance retailer Mr DIY (in which Creador invested prior to its listing), Caring Pharmacy Group (acquired by Big Pharmacy, in which Creador is an investor), retail tea business Tealive (also invested in by Creador) and Al-Ikhsan Sports (in which Ekuinas is an investor).
• Seek to unlock value in digital transformation and leverage its close proximity to Singapore, a major regional data hub. Singapore’s emergence as a major data hub and the scarcity of land and power in the city state, as well as the open investment policies of the Malaysian government, have sparked tremendous recent growth in the data centre industry, which in turn is fuelled by rapid global trends in digital transformation, including generative artificial intelligence and cloud computing. Data flows are critical to modern global business and Malaysia has an extremely strategic geographical location, which has also helped to make it a strong link in the global supply and service chain. One of the largest private equity transactions to have closed in 2023 was the acquisition from listed TMT group Time dotCom Bhd of AIMS Data Centre by the US infrastructure investor DigitalBridge Group, which has plans to develop it into the leading data centre in Asia. Private equity firms have also shown strong interest in acquiring stakes in data centres located in Malaysia, and the pattern is expected to grow further following the recent surge in data centre projects in Malaysia.
• Recently, private equity firms have been increasingly drawn to Malaysian infrastructure assets due to their stable revenue streams, scalability and growth prospects. Infrastructure assets and public service concessions are particularly attractive, offering opportunities for long-term returns. A prime example of a substantial private equity transaction in this space in 2024 involves Global Infrastructure Partners’ involvement in a consortium alongside Malaysia’s sovereign wealth fund Khazanah Nasional Berhad, Malaysian statutory pension fund Employees Provident Fund and Abu Dhabi’s sovereign wealth fund ADIA to take private Malaysia Airports Holdings Berhad (MAHB). The proposed takeover is based on a total equity value of MYR18.4 billion (approximately USD3.93 billion).
• A likely future trend will be investments in the companies that provide services to facilitate the roll-out of the current administration’s ambitious energy transition plan: the National Energy Transition Roadmap, which aims to increase the proportion of renewable energy supply to 70% of Malaysia’s total capacity by 2050. Malaysia also recently lifted the ban on exports of renewable energy to capitalise on strong energy demand from neighbouring Singapore. UEM Group (wholly owned by Malaysian sovereign fund Khazanah Nasional Bhd) recently announced its collaboration with local and foreign investors to develop a 1 GW hybrid solar photovoltaic power plant that will be integrated with a renewable energy industrial park in Malaysia. There are also investment opportunities in connection with large-scale solar projects, third-party access to the national grid operated by Tenaga Nasional Berhad and corporate power purchase agreements.

Key sectors of interest for private equity investment in Malaysia include the consumer goods and retail sector, a broad sector that encompasses food and beverages, pharmacy and more specialised segments such as the pets retail market. This sector is favoured by private equity investors for a number of reasons, including favourable long-term prospects, driven by demographic trends, a growing middle class and rising incomes. These deals are also largely immune to commodity cycles and do not rely on government concessions. A number of deals in this sector were cited in 1.1 Private Equity Transactions and M&A Deals in General.

Other sectors attracting strong interest from private equity firms include private education, healthcare, medical devices, producers of active ingredients in supplements and advanced manufacturing. There has also been increasing interest and investment in greenfield data centre development, specifically in the state of Johor.

The Johor-Singapore Special Economic Zone (JSSEZ) is expected to be a catalyst for private equity investment. By stimulating economic growth, attracting foreign investment, and creating new business opportunities, the JSSEZ is poised to expand deal flow, enhance exit options, and provide lucrative investment avenues in infrastructure, real estate, and human capital for private equity firms. Additionally, supportive government policies are likely to create a favourable investment climate in the region.

Geopolitical instability in the form of the global economic and political contest between the United States and China, the Russia–Ukraine war and conflict in the Middle East, has led to supply chain fragmentation worldwide, causing disruptions and escalating inflation. As a small and open trading nation with a population of 32 million, Malaysia is significantly exposed to these effects. Nonetheless, the broader macroeconomic outlook in South-East Asia has exhibited resilience, evidenced by the continued strong growth in the region’s GDP.

Malaysia has benefitted from the “de-risking” strategy of many global multinationals that have sought to diversify their supply chains away from reliance on China by adopting a “China Plus One” strategy. Many elements of the supply chain of global multinationals have shifted to South-East Asia, including Malaysia. The Malaysian economy also rebounded relatively quickly after the COVID-19 pandemic, with strong fiscal support from the government resulting in strong trade and investment growth in 2022. It also has a relatively low rate of inflation, owing in part to extensive subsidies for essential goods.

While broader economic indicators provide grounds for optimism, the private equity landscape has not been immune to the dip in global deal activity seen in the first half of 2024. High interest rates, volatility in global economic conditions, a fraught geo-political environment and continuing uncertainty about the time scales over which returns from the digital and energy transitions may be realised have buffeted private equity sponsors. In Malaysia, additional risks have flowed from the susceptibility to adverse political or public reactions of certain investments made by foreign parties in industries considered to be of a sensitive nature. The impact of the war in Gaza has also significantly affected the performance of retail and consumer brands perceived to be sympathetic to Israel in Muslim-majority Malaysia.

Higher Labour Standards

Private equity firms looking to acquire interests in Malaysian companies should be mindful of the following significant changes in labour laws.

• The national minimum wage has been increased by 25% from MYR1,200 to MYR1,500 per month following the Minimum Wages Order 2022, effective from 1 May 2022.
• Under the Employment (Amendment) Act 2022, which came into effect on 1 January 2023, statutory protection is granted to all individuals entering into contracts of service, irrespective of wages. Examples of enhanced statutory rights of employees include the reduction of maximum working hours to 45 hours per week, increased paid maternity leave to 98 days and the introduction of seven days of paid paternity leave.
• However, employees earning more than MYR4,000 a month are exempted from certain protections, including the entitlement to overtime pay, termination benefits and retirement benefits.

Developments in Regulations Affecting Transactions

Reforms in listing rules will be made to improve the efficiency and speed of execution of the initial public offering (IPO) process. This will help facilitate exits by private equity firms from their investee companies.

A reduction of stamp duty rates from 0.15% to 0.1% of contract value, subject to a maximum cap of MYR1,000 per contract, for listed shares traded on Bursa Malaysia Securities took effect in July 2023. This will help reduce transaction costs and will be of benefit to private equity firms with significant investments in companies that seek to list, which are often required to hold a proportion of their shares in the listed company for a certain period under contractual lock-ups required by underwriters.

Further, a new capital gains tax (CGT) regime was introduced with effect from 1 January 2024. The CGT is imposed on gains or profits from the disposal of capital assets. The ambit of the disposal is wide ranging, and it will capture a variety of transactions involving the disposal of capital assets (including unlisted shares). The CGT rate applicable (i) for capital assets acquired before 1 January 2024, and disposed of on or after 1 January will be 10% on the chargeable income or 2% of gross on the disposal price; and (ii) for capital assets acquired on or after 1 January 2024, and disposed of thereafter will be 10% on the chargeable income.

ESG Disclosures

The Enhanced Sustainability Reporting Framework (ESRF) will come into force after 31 December 2023 through the Main Market Listing Requirements issued by Bursa Malaysia. The ESRF will require specific disclosure on sustainability matters, including areas such as total energy consumption and emissions management.

Of potentially greater interest to private equity firms is the recent publication of the Simplified ESG Disclosure Guide for small and medium scale enterprises, covering 15 topics across ESG matters. This may help facilitate investments in private Malaysian companies by private equity firms with an ESG focus.

The government has said that it intends to promulgate a national carbon policy, which will provide guidance on carbon trading at the state level.

Enabling Economic Policies by the Government

The government has released a wide-ranging economic policy document with multiple aims, including to:

• undertake structural reform of the Malaysian economy;
• transform the Malaysian economy by facilitating higher value and more complex economic activities;
• lift labour’s share of GDP;
• enhance foreign direct investment; and
• foster a favourable environment for capital investment.

The Madani Economy framework sets out ambitious medium-term targets, such as for Malaysia to be ranked among the 30 largest economies in the world and to be ranked in the top 12 globally in the Global Competitiveness Index ranking within ten years. The framework aligns with the aims of the New Industrial Master Plan 2030, which is anticipated to envision a comprehensive strategy for the Malaysian economy to pivot towards high-value activities that enhance economic complexity.

There is a notable trend towards a more liberal outlook in relation to foreign direct investment policy. Recent major announcements of foreign direct investment are not linked to domestic equity participation. Tesla will be allowed full ownership of its proposed regional operations in Malaysia, and it has already started selling its vehicles online at competitive prices based on what appears to be favourable tax or duty treatment. Elon Musk’s Starlink, which provides satellite communication services, has also been granted a ten-year Network Facility and Service Provider licence without being subject to the usual 49% foreign ownership limit.

The government is also trying to establish Malaysia as a data centre hub, and efforts have been made to lure Microsoft and Google to establish significant operations in the country. Amazon Web Services (AWS) has already announced its plan to open a cloud computing infrastructure facility and to invest MYR25.5 billion by 2037 to establish an AWS regional hub in Malaysia.

Malaysia has recently been achieving its highest levels of foreign direct investment in years, attracting MYR71.4 billion (approximately USD15.5 billion) in approved investments in the first quarter of 2023, representing an increase of 67% from the same period in the previous year.

Key Regulators Relevant to Private Equity Funds and Transactions

Fund management activities are regulated by the Securities Commission, and they require a capital markets service licence. For private transactions in the private equity space, the customary regulatory issues relevant to conventional/strategic acquisition will apply (please see further discussion below). As for public M&A or take-private transactions, private equity funds will need to comply with the takeover regime under the Malaysian Code on Take-Overs and Mergers 2016 (the “TO Code”) and the Rules on Take-Overs, Mergers and Compulsory Acquisitions (the “TO Rules”), as administered by the Securities Commission; where the target is to be delisted, they must comply with the delisting procedures and rules under the listing requirements administered by Bursa Malaysia.

Foreign Investment Restriction/Regime

There is no single overriding legislation or regulation, nor any single regulatory body that oversees or imposes foreign investment screening procedures or restrictions in Malaysia. The investment landscape in Malaysia is generally open to foreign investment, except in certain sectors and/or industries. Accordingly, foreign investment restrictions and/or requirements are generally sector-specific and are regulated through regulatory licences, registrations, approvals and/or permits issued or administered by the relevant sectoral regulators or governmental agencies.

Regulatory oversight over M&A activities in sectors where foreign investment restrictions apply is typically triggered by the following circumstances with respect to the M&A target holding the licence(s)/approval(s) issued by the regulators:

• direct and/or indirect majority share transfer;
• direct and/or indirect minority share transfer;
• asset/business transfer; or
• change of composition/control of the board of directors of the target.

Merger Control/Antitrust Filing

At present, there is no merger control regime for general M&A activities in Malaysia, except in specific industries (ie, the aviation service industry and the telecommunications industry). The regulator, the Malaysian Competition Commission (MyCC), is in the process of undertaking and completing public consultation on proposed amendments to the Malaysian Competition Act, to introduce and include a merger control regime, and to increase its own investigation and enforcement powers. The proposed amendments will need to be finalised and proposed to the Parliament (with MyCC indicating this is scheduled for some time in 2024); subject to the Parliament passing the proposed amendments, the merger control regime will come into effect, with a one-year transition period.

Approach to ESG Concerns

Whilst there is no statutory or regulatory requirement with respect to ESG from an M&A perspective, the constantly evolving and growing ESG issues and the exposure to regulatory, financial and reputational risks associated with ESG issues have an impact on the approach towards M&A activity (including the private equity space). ESG issues that might traditionally have been considered as transactional issues (from the compliance perspective, and given their financial impact on value) are now also considered for the reputational risks they pose in the near to long term. There has been increasing focus on the identification of ESG issues in due diligence, to enable private equity funds to assess the sustainability risks of their current portfolio and future investments.

Generally, in-depth due diligence is carried out by private equity buyers/bidders. Depending on the sector in which the target operates, the typical due diligence areas that will be covered include financial, tax, legal, commercial, technical and compliance. The scope and materiality of the due diligence will be based on the buyer/investor’s commercial assessment, financing requirements and risk appetite, taking into account the nature and complexity of the transaction (as well as the target).

The key areas of focus for legal due diligence are typically:

• corporate information and ownership;
• regulatory approvals, licences and permits;
• material contracts;
• related party transactions;
• real property and/or assets;
• intellectual property rights;
• employment and labour disputes;
• material litigation; and
• financing and/or borrowings.

Although there has been a growing trend for vendor due diligence in recent years, reliance on vendor due diligence reports is not common. Vendor due diligence has become increasingly common for auction processes implemented by private equity sellers to maintain a high level of competitiveness, with the goal of ensuring an organised and speedy process.

Notwithstanding the increasing trend towards vendor due diligence, bidders/investors typically still conduct their own due diligence and do not always accept vendor due diligence reports made available in the process. Typically, the vendor due diligence report will be provided on a non-reliance basis to the bidder/investor.

The acquisition structure is ultimately determined by the considerations and assessments of the private equity investor, which differ from case to case, having regard to the nature of the target and/or assets. As in other jurisdictions, the acquisition in Malaysia is largely structured as either a sale of shares or a sale of assets (or a combination of both).

For private target companies/assets, the acquisition is typically structured as a private treaty sale and purchase agreement. The process could be a bilateral transaction or an auction process. The terms of the acquisition do not deviate significantly by virtue of the transaction being negotiated through bilateral negotiation or through an auction process.

For public listed company/assets, the acquisition will typically be structured by way of general offers implemented pursuant to the TO Rules. In recent years, there has also been an increasing trend of adopting court-approved schemes within the scope allowed under the TO Rules.

It is not uncommon for the private equity fund to establish a holding company, which will in turn establish a special purpose vehicle/company as the acquisition entity. Depending on the mandate and strategy of the private equity fund, it is common for representatives of the private equity fund to be appointed as board members of the acquisition entity, who will in turn make key investment/operational decisions. Through this structure, the acquisition entity will be the contracting entity to the transaction document. The private equity fund is not the contracting entity whilst it is involved in the acquisition, but it may provide commitment to the seller (see 5.3 Funding Structure of Private Equity Transactions).

It is common for private equity funds to seek out conventional bank financing to support their private equity deals. Depending on the structure and nature of the assets, the banks will work with the private equity investor to structure the leveraged finance transactions (and address financial assistance and/or debt push-down restrictions/limitations), and have generally shown willingness to support private equity deals on the basis that the banks passed their internal assessment of the target assets and also the sponsors and/or the private equity fund.

Equity commitment letters are common in Malaysia. In competitive auction processes in particular, the seller will also often request evidence of the availability of financing or debt financing.

It is common for a consortium to include and involve existing shareholders or management of the target/assets (see 7.1 Public-to-Private) to further harness the value of the key operational know-how and experience of the owner/senior management of the target.

There are private equity deals involving a consortium of private equity sponsors (including such sponsors investing alongside other investors), but these are subject to the size and nature of the transaction where the transaction in question is of high value or complexity.

The involvement of a private equity fund (whether as a seller or buyer) typically results in slightly more complex consideration mechanisms, such as purchase price adjustments (instead of a fixed price acquisition), and given that some acquisitions are financed through debt, which may be collateralised by the target’s operations and assets, which are in turn subject to financial assistance restrictions in Malaysia.

The pricing structures of private equity transactions in Malaysia are typically based on locked-box or completion accounts. It is also not uncommon to see earn-outs used in transactions, to help retain and incentivise seller-managers who remain in the business for a fixed period of time post-completion.

To the extent that the parties have agreed to a fixed price locked-box consideration structure, interest is generally not charged on the fixed price. It is also not typical to charge interest on any leakage that may have occurred during the period between the locked-box date and the completion date.

It is common to have a dedicated expert or bespoke dispute resolution mechanism to address any potential disagreement or uncertainties related to valuation, adjustments or performance metrics associated with the consideration structures, given the more complex valuation structures that are typically applied in private equity transactions.

The dedicated expert or dispute resolution mechanism applied will vary based on the type of consideration or valuation mechanics applied in the transaction, the specific terms of the transactions, the parties involved and the complexities that may be associated with the particular industry of the target.

As the regulatory framework in Malaysia imposes foreign equity restrictions and/or Bumiputera (generally refers to native or indigenous people of Malaysia) and local participation requirements, it is very common for conditions precedent to include the receipt of the necessary regulatory approval for the transfer of shares or change of control of a licensed target company. It is also not uncommon to see third-party consents of key customers/suppliers and shareholder approvals (due to the relevant thresholds set out in the Companies Act/Bursa Malaysia Listing Requirements being triggered) featured as conditions to completion in definitive transaction documents.

In addition, it is becoming increasingly common to have material adverse effect conditions in transactions in Malaysia, particularly where the buyer is a private equity fund.

It is not common for private equity-backed buyers to accept “hell or high water” undertakings where they relate to regulatory conditions in Malaysia, given the prevalence of equity restrictions/requirements across various industries in Malaysia. Commitments to completing the acquisition and fulfilling regulatory conditions (if any) will need to be carefully negotiated in light of such challenges.

The specific carve-outs to “hell or high water” undertakings will vary based on the industry and the individual deal dynamics. To the extent that there is certainty regarding the lack of any equity restrictions or requirements, it is then not uncommon for buyers to demonstrate their commitment to completing the transaction by accepting such undertakings.

Where applicable, merger control and the new EU Foreign Subsidies Regulation regime may also feature in negotiations in respect of such undertakings. The inclusion or carve-out of such issues from the undertakings will require the necessary multi-jurisdictional merger control analysis to be carried out and an understanding of the type of subsidies or financial support that may have been received by the parties in question.

The concept of break fees is not common in Malaysia. Occasionally, a seller may request a break fee as part of an auction sale process letter, but it is typically dropped during the negotiation process.

The circumstances under which a private equity party (whether as buyer or seller) can terminate an agreement will vary based on negotiation, legal requirements and individual deal dynamics.

Common termination events include:

• material adverse change events pegged to financials or the performance of the target company that have occurred prior to completion; and
• failure to fulfil the relevant conditions precedent, such as the receipt of the necessary regulatory approvals or completion of financing arrangements required by the purchaser within a specified timeframe.

The long-stop date for transactions varies based on the complexity of the transaction, the regulatory requirements involved and the types of conditions precedent agreed between the parties. Long-stop dates must be tailored to suit the specific circumstances of each deal.

Where the transaction is complex and requires multiple third-party approvals, including regulatory approvals, the long-stop date might be as long as six months (if not more) from the date of signing of the agreement. Where the conditions precedent agreed between the parties are relatively limited and straightforward in nature, the long-stop date can be as short as one month.

The allocation of risks in transactions differs when there is a private equity-backed buyer/seller involved compared to transactions without any private equity involvement. Deals involving a private equity buyer/seller will typically entail a more heavily negotiated set of transaction documents to address a robust set of deal terms, with more complex consideration structures with adjustments and earn-out features and risk allocation measures put in place.

In contrast, corporate buyers/sellers tend to focus on strategic synergies and operational integration, and they rely heavily on their industry knowledge and expertise. They may also be more familiar with the regulatory framework and dealing with the regulators in question, which will affect how the regulatory-related issues are dealt with during negotiations and the drafting of the definitive transaction documents.

W&I Insurance

Where there is a private equity-backed seller involved, a “sell-side flip” warranty and indemnity insurance process is often applied. The private equity-backed seller’s W&I insurance broker will provide indicative terms for the policy at the commencement of the sale process, with the intention for the insurance policy to be ultimately purchased in the name of the buyer.

To the extent that the management team is also exiting and is involved as part of the sale process, they will not typically be made to provide additional or separate warranties or indemnities to a buyer. The sale of their shares is typically stapled to the exit of the private equity-backed seller, and they will provide the same set of warranties and indemnities, which shall in turn be insured by the same warranty and indemnity insurance package.

The limits on liability will depend on the W&I policy ultimately purchased. The common limit for title and capacity warranties is 100% of the purchase price, and the business and operational-related warranties are capped in the range of 20% to 50% of the purchase price.

Limitations on liability are typically applicable only to warranties, but sellers with a strong bargaining position (such as in auction processes) will ask for the cap to apply to the whole sale agreement. It is also common to carve out fraud from the limitations on the seller’s liability in Malaysian M&A deals.

The time limit of the seller’s liability (other than tax) is generally 18–24 months after completion, which is tied to one or two audit cycles of the target company. The seller’s tax liability typically lasts for up to seven years post-completion, which ties to the tax audit statutory limitation period in Malaysia.

Deposits, escrows, retention and the holding back of the purchase price are not common features in Malaysia. They may be requested by local counterparts but are typically pushed back.

The use of warranty and indemnity insurance is common in private equity deals, especially where the private equity fund is the seller.

Litigation in private equity-backed transactions can occur, but it is not common in Malaysia. The following terms may potentially lead to litigation:

• purchase price adjustments – disagreements on adjustment mechanisms such as how performance is measured or whether targets have been met for purposes of the earnout-related calculation or net asset value or working capital related adjustments;
• breach of warranties – discovery of inaccurate, misleading or breached warranties;
• indemnification claims – disputes as to whether the claims are valid and the extent of the coverage of the indemnification; and
• fraud or misrepresentation claims – allegations of fraud or intentional misrepresentation.

Public-to-private transactions involving private equity-backed bidders are common and are often undertaken through a combination of private equity investors and existing shareholder(s) and/or management. The target company (and its board) will be subject to announcement obligations in the takeover process. The legal regime also imposes rigorous rules against insider trading and market abuse, and the relationship and/or communication between the bidder and target (and/or the management) must be carefully managed. Therefore, thorough and rigorous planning for such transaction and the takeover process is fundamental to address the regulatory hurdles and restrictions.

The material shareholding disclosure obligation rests on a substantial shareholder holding 5% or more interest in shares in the public listed entities. The substantial shareholder is required to give notice to the listed entity of:

• its interest in shares in the listed entity;
• any change in the percentage/level of such interest; or
• where it ceases to be a substantial shareholder.

Pursuant to the Malaysian Capital Markets and Services Act 2007 and the TO Rules, the applicable thresholds for triggering a mandatory general offer are as follows:

• where the offeror, including persons acting in concert (PAC) with the offeror, acquires, holds or exercises control of more than 33% of the target company’s voting shares; or
• where the offeror (together with PAC) already hold between 33% and 50% of the target company’s voting shares and subsequently acquires more than 2% of the target company’s voting shares in any six-month period.

As the concept of PAC is very broad under the TO Rules, private equity-backed bidders will need to consider the arrangements between the funds/portfolio companies; and determine whether any entity/persons will be considered PAC for the purpose of the transaction in question.

For a mandatory general offer (ie, where the obligation to make the general offer by the acquirer is triggered as the acquirer is entitled to exercise control or meets the takeover threshold), the offeror must provide a wholly cash consideration, or another consideration accompanied by a wholly cash alternative.

For a voluntary general offer (where an offer is made voluntarily and simultaneously to all the shareholders of the target to acquire the shares of the target), an offeror is required to provide a wholly cash consideration as an alternative in the following circumstances:

• where 10% or more of the voting shares of the target have been purchased for cash by the offeror and PAC during the offer period and within the six-month period before the beginning of the offer period; or
• where the Securities Commission determines that it is necessary to give effect to the requirement under the TO Code.

For a mandatory general offer, no conditions can be attached, other than the condition that the offer is subject to the offeror having received acceptances that would result in the offeror (and its PAC) holding in aggregate more than 50% of the target’s voting shares.

For a voluntary general offer, an offeror is required to make the offer conditional upon the offeror receiving acceptances that result in the offeror holding an aggregate of more than 50% of the target’s voting shares. No condition can be imposed that is dependent on either an event that is within the control or is a direct result of the offeror’s action, or the subjective interpretation or judgement of the offeror. For instance, financing conditions would not be permitted, as the offeror must have adequate financial resources to fulfil the offer obligation and offer the fully cash option.

Other deal security measures such as exclusivity arrangements are not uncommon and can be included subject to the TO Rules. Break fees are not commonly included, as they give rise to risks of providing financial assistance in connection with the purchase of the target’s shares.

After a takeover offer has been made, the offeror can seek to compulsorily purchase the shares from the remaining minority shareholders of the target if the offeror acquires 90% of the nominal value of the shares in the target company. A minority shareholder can also require the offeror to acquire its shares under the terms of the takeover if the offer has been accepted by the holders of at least 90% in value of the shares in the target company, and the offer period has not expired.

Seeking arrangements with the existing shareholders/principal shareholders by way of an irrevocable undertaking to sell the shares in the target is not uncommon in Malaysia. The offeror will seek irrevocable undertakings from principal shareholders to accept the offer or to vote in favour of accepting the offer.

Such irrevocable undertakings are typically sought during negotiation and given prior to the launch/issue of the offer by the offeror. The nature or scope of the commitment in these undertakings varies, depending on the offer terms. Where the offer terms are favourable, it is not uncommon for the offeror to not allow any “out” for the principal shareholder if a better offer is made.

The offeror (and the principal shareholders) will need to be cautious of the arrangements amongst them with respect to the giving of irrevocable commitments and the terms contained therein, in view of the TO Rules and the restrictions (for instance, to not give rise to a “favourable deal”).

Generally, incentive plans for management are structured on a long-term basis. However, short-term incentives based on annual results are also sometimes implemented.

The level of equity ownership granted to a management team in a private equity transaction will vary based on the size of the portfolio company, the industry, the role of the management team, the private equity fund’s strategy and negotiation between the parties. In general, the management team will typically receive a minority equity stake in the range of 5–10%. The stake might increase depending on the achievement of specific financial or performance targets of the portfolio company over time.

In private equity transactions, management participation can be structured using various mechanisms, including “sweet equity” and “institutional/equity strip”.

Sweet Equity and Institutional Strip

Sweet equity often involves the granting of a portion of equity ownership to key managers as a form of incentive or reward: the granting of equity ownership in the portfolio company is typically done in the form of shares, options or units of ownership at a favourable price. This will align the interest of the individual key managers with the success and financial performance of the company.

Institutional/equity strip involves the selling of a portion of the equity ownership in the portfolio company to external investors while still retaining control. This allows the key managers to participate in the equity ownership alongside the private equity fund. The amount of equity ownership sold to external investors is typically a minority stake that would not affect the private equity fund’s control of the company.

Leaver provisions relate to the treatment of the equity incentive plans granted to key executives or management personnel if they leave the company.

The leaver provisions will typically deal with the following issues and concepts, amongst others.

• Good leaver/bad leaver – good leavers are individuals who leave the company on good terms, such as through resignation, retirement, death or disability. In contrast, bad leavers will be individuals who are terminated for cause.
• Vesting – unvested shares are typically forfeited by management shareholders upon their departure from the company, especially if they are bad leavers. Vesting schedules might also be accelerated for certain types of good leavers, allowing them to retain more shares to the extent that they have helped the company to hit or surpass the relevant targets set prior to a pre-determined deadline.
• Forfeiture – the forfeiture of vested shares is typically done at a discounted price for bad leavers, whilst good leavers will be entitled to receive the full fair market value of their shares.

Restrictive Covenants

Restrictive covenants such as non-compete and non-solicitation of employee provisions are fairly common and are typically imposed on management shareholders. Such provisions are usually featured in shareholders’ agreements and/or employment agreements. However, post-termination non-compete provisions (ie, after the management shareholder has exited the portfolio company via the sale of their shares in the company and resignation from their executive role in the company) are generally not enforceable in Malaysia.

Minority protection for manager shareholders involves implementing mechanisms to safeguard their rights and interests.

Given that the equity stake typically granted to management shareholders is relatively minimal, the minority protection rights granted are typically relatively limited and will vary depending on the company’s structure, the agreements already in place, the importance of the role of these managers in the company and the amount of equity held by these individuals.

Terms such as the following will be built into the shareholder’s agreement entered into between the parties:

• board representation or executive role in the portfolio company;
• a short list of reserved matters and veto rights;
• anti-dilution protections;
• information rights; and
• exit rights such as drag-along/tag-along rights.

The private equity fund shareholder usually has representation on the board of the company if it wishes to have a say in the management and direction of the company. Representation on the board may also include a presence on the audit and compensation committees.

A shareholders’ agreement or the constitution of a target company will entrench the private equity fund’s right to appoint a majority of members to the board for private limited companies.

The private equity fund may also create particular corporate governance and approval authority workflows to impose restrictions on management undertaking any fundamental matters (such as a major acquisition or disposal) or large projects without board approval.

A key principle of the common law system is that the liability of a shareholder in a limited company is restricted to the value of the shareholder’s investment. As such, the private equity fund will not be held liable for the actions of its portfolio, except under very limited circumstances.

The courts’ ability to override that principle and pierce the corporate veil to impose liability on a private equity fund shareholder is limited to where there is an element of fraud involved.

Exits

The common forms of exit for private equity funds in Malaysia are via IPOs or trade sales to strategic investors or to another private equity firm.

Dual-track exits are not common in Malaysia. The Malaysian securities regulator would raise queries and be likely to refuse to process the IPO application if there is also an intention or an ongoing process for an outright sale of the same company.

Rollover/Reinvest

Whether private equity sellers would choose to do the following upon exit would depend on several factors, including the private equity fund’s objectives, the investment opportunities available and market conditions.

• Rollover – private equity sellers reinvest a portion of the proceeds from the sale of the portfolio company into the acquiring entity or new structure that emerges after the exit. This will align the private equity seller’s interests with those of the new buyer, which may be a strategic buyer or another private equity fund.
• Reinvest – private equity sellers invest their proceeds from the sale in other opportunities as part of the diversification of their investment portfolio, and reduce concentration risk by investing in different industries and asset classes.

The private equity fund seller may choose a combination of both, reinvesting a portion while diversifying and investing elsewhere.

Drag and tag rights are fairly common in transactions involving private equity funds. The inclusion and specific terms of these rights will vary from one private equity deal to another, depending on negotiations and the unique circumstances of the investment, such as the equity restrictions applicable, the shareholding held by the relevant joint venture partners and the bargaining power of the parties involved.

Lock-up arrangements are common to restrict shareholders – including private equity sellers (who may be majority stakeholders) – from selling their shares for a specified period after the IPO. The typical lock-up period for private equity sellers varies but it is often approximately 180 days from the IPO date.

Lock-up arrangements are typically set out in the underwriting agreement entered into between the portfolio company and the underwriters managing the IPO process. The specific terms relating to the lock-up arrangements will depend on the terms negotiated between the private equity seller, the company and the underwriters.