Corporate M&A 2020

Last Updated April 20, 2020

Malaysia

Law and Practice

Authors



Lim Jo Yan & Co is a recognised boutique corporate and commercial firm. It has an energetic team which is passionate about its work and clients’ interests, with a clear focus on giving perspective to legal issues and creating a framework that is commercially workable. The firm is often engaged as local counsel for cross-border work with international law firms, primarily related to inbound acquisitions and advising on regulatory compliance. It also has a thriving Japan desk and acts for Japanese clients on a varied range of advisory and inbound transactional deals. Its corporate practice is known for being very responsive, cognisant of commercial realities and focused on providing practical solutions, and often punching far above its weight for its class. The firm is adept in handling acquisitions, disposals, joint ventures, private equity deals and fund formation in a range of sectors, including healthcare, education, manufacturing, fintech and TMT.

While M&A activity in Malaysia rose by 16.4% year-on-year in the first half of 2019 (according to Mergermarket Ltd), the Duff & Phelps Transaction Trail Report 2019 indicated a 21.9% reduction in M&A total deal value in 2019 as compared to 2018. The M&A deal volume and total deal value for Malaysia in 2019 was 253 deals for a total of USD8.9 billion.

However, based on the Malaysian Budget 2020, interest is anticipated in the digital economy, energy, infrastructure and healthcare sectors.

Privatisation trends have continued largely due to lower privatisation costs from lower market capitalisation and motivation from good dividend yields compared to acquisition borrowing costs. It was not uncommon for initial public offerings to be deferred due to undesired pricing and valuations. 

M&A activities in Malaysia spread across various sectors in the past 12 months, particularly in the energy, industrial and material sectors, which in aggregate accounted for more than 70% of the M&A activities in 2019 (according to the Duff & Phelps Transaction Trail Report 2019).

The energy sector recorded the highest M&A activities in 2019, with the largest M&A transaction in Malaysia for 2019 being the 100% acquisition of Murphy Sabah Oil Company Ltd and Murphy Sarawak Oil Company Ltd by PTT Exploration and Production PCL at USD2.135 billion.

The industrial sector recorded the second highest M&A activities in 2019. The acquisition by the Federation of Malaysia (Ministry of Finance of Malaysia) of four toll highways from Lingkaran Trans Kota Holdings Berhad at USD1.497 billion was the second highest deal value for 2019.

There were also active acquisitions in the healthcare sector, with Khazanah Nasional Berhad divesting its 100% stake in Prince Court Medical Centre Sdn. Bhd. to IHH Healthcare Berhad for MYR1.02 billion and Hong Leong Group acquiring hospitals and clinics under Columbia Asia Healthcare in South East Asia for USD1.2 billion.

Generally, acquisition of companies in Malaysia may be carried out through the acquisition of shares in the company from its existing shareholders or acquisition of the business or assets of the company.

The primary options for the acquisition of a company’s shares or assets are as follows.

Firstly, by entering into a share sale and purchase agreement or an asset sale and purchase agreement (as the case may be) between the vendor and the purchaser. Prior to entry of the sale and purchase agreement, it is common for parties to enter into a non-binding term sheet or memorandum of understanding to set out the broad terms of the transaction (which may include deposit payments and an exclusivity period).

Secondly, in respect of a public company (ie, a listed public company or unlisted public company with more than 50 shareholders and net assets of MYR15 million or more), by initiating a takeover offer in respect of the shares of the company. There are two types of takeover offer: (i) a mandatory offer (in which it is compulsory for the acquirer to make a takeover offer for the remaining voting shares of the company); and (ii) a voluntary offer. A mandatory offer will be triggered if the acquirer obtains control in the company or has triggered the creeping threshold; please see 6.2 Mandatory Offer Threshold. In contrast, a voluntary offer is a takeover offer made voluntarily by the offeror. Instead of acquiring 100% of the voting shares or voting rights in a company, an offeror may (with the consent of the Securities Commission) initiate a partial offer – ie, a voluntary offer to acquire less than 100% of the voting shares or voting rights of the company.

Thirdly, by undertaking a scheme of arrangement pursuant to Section 366 of the Companies Act 2016 (CA). Under a scheme of arrangement, the target company may collaborate with the potential acquirer to take over the assets or shares of the company. The proposal to take over the assets or shares of the target company needs to be approved by 75% of the shareholders of the target company and subsequently by the court. Note that a mandatory takeover offer will be triggered if, as a result of the scheme, an acquirer obtains control of a listed target.

The primary regulators for an M&A transaction in Malaysia are as follows:

  • the Companies Commission of Malaysia (CCM), which primarily administers, enforces and oversees compliance with the CA – in particular, the CA prescribes the requirements to be observed in respect of the sale or transfer of the assets or shares of a company;
  • the Securities Commission of Malaysia (SC), which regulates all matters relating to the capital market, takeovers and mergers of listed corporations and ensures compliance with securities laws;
  • Bursa Malaysia Securities Berhad (Exchange), which is the main stock exchange in Malaysia approved by the SC; and
  • sectoral regulators. Different industries/sectors in Malaysia are regulated by different regulators who may prescribe guidelines or policies in respect of M&A transactions to be undertaken by companies under its purview – for example, the Central Bank of Malaysia (BNM) regulates financial services institutions in Malaysia; the Ministry of International Trade and Industry regulates manufacturing companies in Malaysia; the Ministry of Domestic Trade and Consumer Affairs (MDTCA) regulates foreign participation in the distributive trade services in Malaysia; and the Director of Lands and Mines of the respective state is in charge of land matters in the state and all dealings in lands will have to be effected through the office of the Director of Lands and Mines. M&A transactions involving companies in the relevant sector may require prior approval or consent of, or notification to, the respective sectoral regulators.

Subject to the discussion of distributive trade services and foreign equity restrictions/minimum local equity requirements below, there are generally no foreign equity restrictions, unless the sectoral regulator imposes foreign equity restrictions or minimum local equity participation requirements.

Liberalisation of Services Sector

On 22 April 2009, the Malaysian government liberalised some of the services sector abolishing the minimum local or Bumiputra requirements and allowing 100% foreign equity participation. (By way of background, Bumiputras are the Malay and indigenous people of Malaysia. To protect the economic interest of Bumiputras, the government imposed minimum Bumiputra participation requirements in certain sectors. This requirement has since been liberalised.) The sub-sectors liberalised include: health and social services (eg, veterinary services, welfare services, child day care services and vocational rehabilitation services for handicapped); tourism services (eg, theme parks, convention and exhibition centres with seating capacity above 5,000 seats, travel agencies and tour operator services for inbound travel, hotel and restaurant services for four and five-star hotels); business services (eg, regional distribution centres, international procurement centres, technical testing and analysis services, management consulting services); rental/leasing services without operators (eg, bareboat charter); maritime agency services; vessel salvage and refloating services; and Class C freight transportation services (ie, private carrier licence to transport own goods)

Distributive Trade Services

However, foreign business operators engaged in distributive trade services in Malaysia are required to obtain an approval from MDTCA. MDTCA has defined “distributive trade services” very broadly to include all linkage activities that channel goods and services down the supply chain to intermediaries for resale or to final buyers. Particularly, the operation of a hypermarket, departmental store, superstore and specialty store, and franchise business all fall within distributive trade services under the purview of the MDTCA.

The MDTCA's guidelines restrict foreign involvement in the following sectors: supermarket or mini market with less than 3,000 square metre sales floor area; convenience store that opens for business for 24 hours; newsagent and miscellaneous goods store; medical hall; fuel station with convenience store; fuel station without convenience store; permanent wet market store; and permanent pavement store.

Foreign Equity Restrictions/Minimum Local Equity Requirements

Specifically, there are foreign equity participation restrictions or minimum local equity requirements in the following sectors.

Oil and gas sector

An entity that wishes to provide goods or services to the upstream sector in the oil and gas industry in Malaysia is required to hold a valid licence issued by Petroliam Nasional Berhad (PETRONAS). Apart from that, an entity that wishes to supply goods or services to the downstream sector to PETRONAS group of companies is required to register with PETRONAS. PETRONAS imposes minimum Bumiputra requirement at four levels – ie, shareholders, board of directors, management and/or employees – before granting any licences or approving any registrations. The threshold of minimum Bumiputra participation ranges from 0%, 30%, 51% and 100% depending on the nature of goods or services provided.

Healthcare sector

Up to 70% foreign equity is allowed for the operation of an ambulatory care centre and a nursing home, and up to 49% foreign equity is allowed for the operation of a haemodialysis centre, hospice, psychiatric nursing home and community mental health centre. No foreign equity is allowed for a medical clinic or dental clinic.

Warehousing sector

The Royal Malaysian Customs Department imposes a minimum 30% Bumiputra equity requirement for the operation of a public bonded warehouse (ie, a central storage for the distribution of clients’ goods on which customs duties and taxes have not been paid) in Malaysia for international trade.

Transportation sector

No foreign equity is allowed for the operation of buses (including stage bus, charter bus, express bus, mini bus, feeder bus, employees bus, school bus) and taxi cabs, and at least 51% Malaysian equity (including 30% Bumiputra equity) is imposed on the operator of a goods vehicle service for the carriage of goods for hire (ie, carrier licence A).

Tourism sector

No foreign equity is allowed for an outbound tour operator. Up to 30% foreign equity is allowed for a company undertaking travel agency business and inbound tour services; where the shareholder is a Singaporean or Cambodian company, up to 70% foreign equity is allowed, while up to 51% foreign equity is allowed for other Southeast Asian corporate shareholder.

Land matters

Where the transaction includes an acquisition of real estate, the consent of the state authority in which the land is located may need to be obtained. Different states impose different minimum threshold allowing foreign acquisition of property in the state.

In addition to equity restrictions, some regulators also impose minimum paid-up capital requirements and other conditions to be fulfilled before the relevant licence may be issued.

The Competition Act 2010 (Competition Act), administered by the Malaysian Competition Commission (MyCC), generally governs anti-competitive conduct in Malaysia. Besides the Competition Act, there are sector-specific legislations which govern competition issues in the relevant sector such as the Malaysian Aviation Commission Act 2015 (MAVCOM Act) and the Communications and Multimedia Act 1998 (CMA).

The Competition Act does not contain provisions for merger control. However, MyCC is in the middle of drafting amendments to the Competition Act to regulate anti-competitive conduct arising from M&A activities.

While the CMA does not expressly regulate merger control, Section 133 of the CMA prohibits any conduct which has the purpose of substantially lessening competition in a communications market. The CMA does not define “conduct”. That said, the Malaysian Communications and Multimedia Commission (MCMC) which administers the CMA, in its Guideline on Substantial Lessening of Competition, regards M&A as constituting a form of conduct under Section 133 of the CMA. Note, however, that not all M&A activities in the telecommunication sector are prohibited. Only an M&A that results in a CMA licensee obtaining a dominant position, or where one of the parties to the M&A is in a dominant position, will be closely monitored by MCMC to determine if it has the purpose or effect of substantially lessening competition.

The MAVCOM Act specifically regulates merger affecting the aviation service market in Malaysia by prohibiting mergers that have resulted or may be expected to result in a substantial lessening of competition in any aviation service market. MAVCOM has issued a Guidelines on Substantive Assessment of Mergers setting out MAVCOM’s consideration in determining whether an anticipated M&A has anti-competitive effects. An M&A is prohibited if it results in or may be expected to result in a substantial lessening of competition.

Acquirers should consider the implications of the following labour legislations when undertaking an M&A involving a Malaysian company:

  • Employment Act 1955 (EA), which governs employment matters, prescribing the termination notice period, maximum hours of work, overtime pay, holiday pay, number of annual leave and sick leave, termination and lay-off benefits and maternity protection – the EA only applies to employees whose wages do not exceed MYR2,000 a month and manual labourers; the employment of employees falling outside the EA will follow the provisions of their respective employment contract;
  • Industrial Relations Act 1967, which provides for the entry of collective bargaining and collective agreement and the right of employees to make representations for unfair dismissal;
  • Employees Provident Fund Act 1991, Employees’ Social Security Act 1969 and Employment Insurance System Act 2017, which provide for the payment of statutory contributions by employers and employees;
  • Pembangunan Sumber Manusia Berhad Act 2001, which provides for the payment of human resources levy by prescribed employers;
  • Minimum Wages Order 2020, which prescribes the minimum wages in Malaysia, the minimum wages for Peninsular Malaysia having just been increased to MYR1,200 per month – acquirers will need to ensure that the target company complies with the Minimum Wages Order 2020;
  • Minimum Retirement Age Act 2012, which prescribes the minimum retirement age at 60;
  • Employment (Restriction) Act 1968, which restricts the employment of foreigners in Malaysia unless the foreigners have been issued with valid working permit by the relevant authority; and
  • Occupational Safety and Health Act 1994, which provides for the safety, health and welfare of persons at work (including the employers’ obligation to formulate safety and health policy, establish a safety and health committee and notify any accidents or dangerous occurrence).

Separately, where the M&A is structured as a share acquisition, the existing employees of the target company will continue to be employed by the target company. From a post-merger integration perspective, care must be observed to avoid varying the terms of employment that results in them being less favourable than those prior to the M&A, to mitigate the risk of constructive dismissal.

In contrast, where the M&A is structured as an asset/business acquisition, there is no automatic transfer of employees from the target company to the acquirer. If the acquirer wishes to employ the employees of the target company, the target company and the relevant employees are required to terminate the existing employment contracts and thereafter the acquirer may enter into fresh employment contracts with the relevant employees. If the employees involved are foreign employees, the existing employment pass of such foreign employees will need to be cancelled and the acquirer is required to apply for a new employment pass for such employees.

There is no national security review of acquisitions under Malaysian laws. However, regulatory approvals may be required for change of control of companies in regulated sectors.

CCM has issued a ​Guideline for the Reporting Framework for Beneficial Ownership of Legal Persons, providing a general guidance on beneficial ownership reporting framework for all business entities registered with CCM. Under the CA, companies have an obligation to notify CCM the information of beneficial owners of its shares through the submission of annual return. The guidelines seek to provide guidance to companies on its disclosure obligations (as part of its steps to improve transparency and governance in companies). The use of nominee structures in an M&A may be impacted by the enforcement of this guideline, as businesses are required to disclose the information of its beneficial owners (ie, natural persons who ultimately own or control a legal entity).

There were no changes to takeover laws in Malaysia in the past 12 months and there is no indication from the regulators of any proposed amendments to the takeover laws in Malaysia.

The Malaysian takeover laws (including the Capital Markets and Services Act 2007, Malaysian Code on Take-overs and Mergers 2016 and the SC’s Rules on Take-overs, Mergers and Compulsory Acquisitions) apply to a listed company and an unlisted public company with more than 50 shareholders and net assets of MYR15 million or more. Unless otherwise specified in this article, references to takeover herein refer to a takeover in relation to the aforementioned companies.

It is not uncommon for a bidder to build a stake in the target prior to launching an offer. Instead of launching a voluntary offer (which may be challenging and time-consuming) from the onset, some bidders would acquire available shares of the target (either through the public market or private sale) to strengthen their position against other bidders. Some bidders might collaborate with others – collectively with the bidder, they are then known as “persons acting in concert (PACs)” – to build its stake to increase the chances of success of the bid. An indirect acquisition strategy may also be employed, where the bidder acquires the shares of the target’s upstream entity (thereby indirectly owning shares in the target). The stakebuilding may be carried out through an outright acquisition, conditional agreement, call option or through derivatives. 

However, if discretion is paramount, the bidder should hold its stake at less than 5% interest to avoid the disclosure requirements. A bidder is required to comply with the disclosure requirements if it holds 5% or more interest in shares in the target (please see 4.2 Material Shareholding Disclosure Threshold) and launch a mandatory offer if it and its PACs hold more than 33% of the voting shares or voting rights in the target.

A person holding at least 5% interest in shares in a listed target (ie, a substantial shareholder) is required to notify the target in writing of his or her interest within three days after he or she becomes a substantial shareholder. The substantial shareholder shall also notify the target in writing of any changes (including disposition or further acquisition) of his interest and if he or she ceases to be a substantial shareholder.

The disclosure requirement above also applies when a person enters into a share purchase agreement or has an option to purchase shares or is entitled to exercise or control the exercise of a right attached to a share (for instance, through the holding company of the substantial shareholder), in respect of at least 5% shares in the listed target.

Thereafter the target is required to make an announcement to the Exchange of any notice relating to substantial shareholding it received. The listed target is also required to maintain a register of substantial shareholders.

A company may introduce a more stringent reporting threshold (than that imposed under applicable laws) in its constitution, but not a lower reporting threshold.

Under the takeovers regulatory regime in Malaysia, a person who has acquired any derivative which causes him or her to have a long economic exposure, whether absolute or conditional, to changes in the price of securities, will be treated as having acquired those securities. Such person is required to consult the SC on whether a mandatory offer is required if, as a result of acquiring the derivatives, it triggers the 33% control threshold or the 2% creeping threshold.

A trading participant (ie, a company that carries on the business of dealing in derivatives) must send each client a statement of account on a monthly basis on all transactions in the client’s account, unless there is no change from the last statement.

The trading participant must submit to the Exchange its cash and bank balances and banking facilities position on a weekly basis, statement of financial condition and statement of income/loss on a monthly basis, and its annual audited accounts within three months after the close of its financial year. The trading participant must maintain a record that sufficiently explains the off-balance sheet transactions it entered and lodge with the Exchange a monthly report on off-balance sheet transactions.

There are no filing/reporting obligations for derivatives under Malaysian competition laws.

Where a takeover offer is launched, the offeror is required to prepare an offer document to enable the offeree shareholders to reach a properly informed decision. The offer document shall state:

  • the offeror’s intention with regard to the continuation of the target’s business and any proposed major changes to the target’s business;
  • the offeror’s objective and rationale for the takeover offer, including the long-term commercial justification for the proposed takeover offer; and
  • the offeror’s intention on whether to maintain the listing status of the target and its plans and expected timeframe to effect such intention.

With respect to the acquisition of shares in a private company and acquisition of shares of a listed company in the open market (without triggering a takeover obligation), there is no legal requirement for an acquirer to disclose its acquisition purpose and its intention regarding control.

Depending on the circumstances, the offeror or the offeree’s board bears the responsibility of making an announcement as follows:

  • where the offeror has yet to approach the offeree’s board, the offeror must make an announcement where the offeror’s action has contributed to speculation of a possible offer or (with prior consultation with the SC) undue movement in the offeree’s share price, or where negotiations or discussions are to be extended to more than a very restricted number of people upon consultation with the SC, or upon the signing of the sale and purchase agreement which will trigger a mandatory offer;
  • where the offeror has approached the offeree’s board, the offeree’s board must make an announcement when the offeree’s board receives the offeror’s notification of a firm intention to make an offer, the offeree is the subject of speculation about a possible offer or (with prior consultation with the SC) there is undue movement in its share price, or negotiations or discussions with the offeror are to be extended to include more than a very restricted number of people upon consultation with the SC.

Once the offeror has a firm intention to make a takeover offer, the offeror must make an immediate announcement of the takeover offer. Upon receipt of the offer, the offeree’s board shall make an immediate announcement of the receipt of the offer to the Exchange and dispatch a copy of the offer to all offeree shareholders within seven days.

Separately, the Malaysian corporate disclosure policy requires a listed target to disclose to the public all material information necessary for informed investing by making immediate public disclosure of any material information. If, prior to the making of a takeover offer announcement, the listed target enters into a memorandum of understanding with the potential offeror, the listed target is required to make an announcement to the Exchange.

Prior to the announcement of an offer or possible offer, all persons privy to any confidential information, particularly price-sensitive information, must treat the information as secret.

Offerors and offerees generally follow the legal requirements on making proper disclosures on an offer or a potential offer, as the SC may impose a penalty, issue a reprimand or impose a moratorium on trading on any person who contravenes the SC’s Rules on Take-overs, Mergers and Compulsory Acquisitions (which sets out the procedures and conducts relating to takeovers).

The scope of due diligence will depend on the nature of the target’s business and whether it is a private or public company. Generally, it involves a review of the legal, financial, tax and operational matters. The focus of the due diligence is to assess whether there are issues that might affect the buyer’s assumptions or rationale for the transaction (for example, synergies, state of affairs and growth). While it is not common for targets to provide vendor sell-side due diligence reports, it is becoming less of a rarity.

Legal due diligence on a listed target should be limited to publicly available information. If the listed target provides information that are not publicly available, it needs to ensure that such information is not price-sensitive in nature. When conducting a due diligence on a listed target, parties need to be cautious so as not to infringe the insider trading prohibitions.

It is common for potential acquirer and seller to enter into an exclusivity agreement (than a standstill agreement) at the initial stage of the transaction to prevent the seller from engaging in discussions with or entertain any third party with respect to disposal of shares in the target.

In the case of a private target, there is no fixed rule on how a tender exercise may be conducted. Some sellers might provide a template definitive agreement to all bidders, whereby each bidder will vet and mark-up the definitive agreement to incorporate their respective terms and conditions.

In the case of a listed target, the tender offer terms and conditions need to be set out in an offer document (which must first be submitted to the SC for comment). The corporate information of the offeror company, the intention regarding the offeree and its employees and the offer price need to be set out in the offer document.

In a private M&A, the law does not prescribe a timeframe to complete a transaction. In practice, the time taken to complete a transaction depends on the nature of the business, size and type of assets, level of due diligence required, restrictions on foreign ownership and extent of regulatory and third-party procedures involved. Generally, parties agree on a three-month period to fulfil the conditions precedent though this period may need to be adjusted depending on the type of approvals being sought. It is not unusual for parties to set aside three to nine months to complete a deal from the time of execution of a term sheet or memorandum of understanding.

Auction processes are becoming more common as a process to maximise the price of businesses being sold, in a structured and time-efficient manner.

In a takeover, the time for completion is not prescribed by the takeover rules though it does prescribe timelines for the fulfilment of certain steps in a takeover.

In a takeover, a mandatory offer will be triggered in the following circumstances:

  • where the acquirer has obtained control in a company (ie, the acquirer acquired, held or is entitled to exercise or control the exercise of more than 33% voting shares or voting rights in the target); or
  • where the acquirer has triggered the creeping threshold (ie, the acquirer having owned more than 33% but not more than 50% of the voting shares or voting rights in the target, acquired a further 2% or more of the voting shares or voting rights of the target in any period of six months).

Mandatory offer obligations will apply to all members of a group of PACs in any member of the group acquires voting shares or voting rights such that collectively the group triggers a mandatory offer obligation.

An offeror may apply for an exemption from a mandatory offer obligation where the objective of a proposal is to rescue an offeree which is financially distressed.

Further, a mandatory offer may apply to a person or group of PACs acquiring more than 50% shares in an upstream entity (which controls a downstream entity either directly or indirectly through intermediate entities or which holdings when aggregated with those held by PACs would secure or consolidate control of the downstream entity) thereby acquiring or consolidating control in a downstream entity.

Cash is the more common consideration in a takeover exercise.

In a mandatory offer, the offeror must provide a wholly cash consideration or if other consideration is provided, a wholly cash alternative. In a voluntary offer, the offeror must provide a wholly cash alternative where the offeror and his PACs have acquired 10% or more voting shares or voting rights of the offeree for cash within six months prior to the commencement of and during the offer period.

In a private M&A, it is not uncommon for shares to be used as consideration.

A mandatory offer must be conditional only upon the offeror having received acceptances which would result in him or her, or his or her PACs, holding in aggregate more than 50% of the offeree’s voting shares or voting rights, and no other conditions may be attached. Where the offeror and his or her PACs already hold more than 50% of the offeree’s voting shares or voting rights, the mandatory offer shall be unconditional.

A voluntary offer must be conditional upon the offeror having received acceptances which would result in the offeror holding in aggregate more than 50% of the offeree’s voting shares or voting rights. Such acceptance condition is not applicable if the offeror already holds more than 50% of the offeree’s voting shares or voting rights. Note that the holding of the offeror and his or her PACs shall not be aggregated to compute the level of acceptance in a voluntary offer. A voluntary offer may include other conditions except conditions which fulfilment depend on the subjective judgement of the offeror or an event within the offeror’s control.

The minimum acceptance for both a mandatory offer and a voluntary offer is more than 50% of the offeree’s voting shares or voting rights. Please see 6.4 Common Conditions for a Takeover Offer.

A takeover offer may not be conditional on the bidder obtaining financing. The main adviser in the takeover exercise shall confirm that resources are available to the offeror sufficient to satisfy full acceptance of the offer. The SC may require evidence to support a statement that resources are available to satisfy the offeror’s obligations in respect of the offer and that an acquirer has sufficient resources to complete the purchase of shares in the offer.

In a takeover, it is common for a bidder to obtain undertakings from principal shareholders as to their acceptance of the offer. The bidder is also not allowed to enter into any arrangement with offeree shareholders which have favourable conditions not extended to other shareholders.

In a private M&A, parties may agree on a break-up fee if there is an unsuccessful transaction. The bidder may also impose non-compete and non-solicitation obligations on the principal shareholders or outgoing shareholders.

In a takeover, a bidder may not be able to seek additional governance rights, save for the offer being conditional upon the bidder obtaining acceptances which would result in the bidder and the persons acting in concert holding more than 50% of the target’s voting shares. 

A shareholder may appoint another person as his or her proxy to exercise all or any of his or her rights to attend, participate, speak and vote at a members’ meeting. A shareholder may appoint more than one proxy in relation to a meeting, provided that the shareholder specifies the proportion of his or her shareholdings to be represented by each proxy.

The instrument appointing a proxy and the power of attorney or other authority shall be deposited at the registered office of the company at least 48 hours before the time for the holding of the meeting or, in the case of a poll, not less than 24 hours before the time appointed for the taking of the poll, otherwise the instrument of proxy shall be invalid.

In a takeover, where an offeror has received acceptances of not less than 90% of the nominal value of the offer shares, the offeror may compulsorily acquire the remaining shares within four months from the date of the takeover offer. The acceptances shall not include shares already held by the offeror and his or her PACs at the date of the offer.

It is common for a bidder to obtain irrevocable undertakings from principal shareholders as to their acceptance of the offer.

Depending on the bargaining position between the offeror and the principal shareholders, the principal shareholders may negotiate for an out if a better offer is made.

In a public M&A, once the offeror has a firm intention to make a takeover offer, they must make an immediate announcement including by way of press notice given to at least three main newspapers – one of which shall be in the national language and one in the English language – and send a written notice to the offeree’s board, the SC and the Exchange (if the offeree or offeror is listed on the Exchange) within one hour of incurring an obligation to make an offer (ie, when a mandatory offer obligation is triggered or the sale and purchase agreement which will cause the offeror to trigger a mandatory offer obligation becomes unconditional). The announcement of its firm intention to make a takeover offer needs to be made within two months from the first preliminary announcement, unless an extension of time has been granted by SC.

Upon receipt of the offer, the offeree’s board shall make an immediate announcement of the receipt of the offer to the Exchange and dispatch a copy of the offer to all offeree shareholders within seven days.

Prior to forming a firm intention to make a takeover offer, the bidder is required to make an announcement of a potential offer where the offeror has yet to approach the offeree’s board but the offeror’s action has contributed to speculation of a possible offer or (with prior consultation with the SC) undue movement in the offeree’s share price, or where negotiations or discussions are to be extended to more than a very restricted number of people upon consultation with the SC, or the sale and purchase agreement which will trigger a mandatory offer obligation is signed.

Shareholders’ approval is required before the board exercises any power for the allotment and issuance of shares in the company. The shareholders may grant approval to a particular exercise or generally and may prescribe conditions for the exercise of the board’s power to allot and issue shares. Upon allotment, the company shall register the allotment in its register of members and lodge with the CCM a return of allotment within 14 days.

In the case of a listed target, the listed target is required to make an immediate announcement to the Exchange of any proposed issue of its securities and be mindful of the takeover rules.

In a takeover exercise, the offeror is required to state the following information in its offer document:

  • details of its turnover, exceptional items, net profit or loss before and after tax, non-controlling interests, net earnings per share and net dividends per share;
  • a statement of its assets and liabilities shown in the last published audited financial statements;
  • particulars of all known material changes in its financial position subsequent to the last published audited financial statements.

Malaysian companies need to comply with approved accounting standards in the preparation of its financial statements. The approved accounting standards for private companies in Malaysia is the Malaysian Private Entities Reporting Standard (MPERS), which is in pari materia with the International Financial Reporting Standards for Small and Medium-sized Entities issued by the International Accounting Standards Board, except for the requirements on property development activities. Generally, entities other than private entities apply the Malaysian Financial Reporting Standards (MFRS).

The terms and conditions in respect of a takeover offer shall be spelt out in the offer document issued by the offeror. Where the offeror has entered into any arrangement or agreement with any board members or principal shareholders or other persons in relation to the takeover offer, such arrangement or agreement need to be disclosed in the offer document.

Where the transaction includes any amendment to the constitution or change of the composition of the board of directors, chief executive or chief financial officer of the listed target, the listed target is required to make an announcement to the Exchange.

Generally, the board has all the powers necessary for managing, directing and supervising the management of the business and affairs of the company. Directors have a statutory duty to exercise their powers for a proper purpose and in good faith in the best interest of the company. The interest of the company should be the primary concern of the directors when undertaking an M&A.

Apart from the general statutory duty of directors, in a takeover exercise, the board of directors is responsible for the following:

  • appointing an independent adviser to provide comments, opinions, information and recommendation on the takeover offer in an independent advice circular;
  • making a preliminary announcement on a potential takeover offer in circumstances set out in 5.1 Requirement to Disclose a Deal;
  • making an announcement upon receiving a written notice of takeover offer, and dispatching a copy of the written notice to all offeree shareholders;
  • accepting full responsibility for the accuracy of information contained in the document issued by the board in relation to the takeover offer;
  • treating all offeree shareholders equally, including providing some information to all offeree shareholders;
  • issuing its comments, opinion and views on the takeover offer in an offeree board circular to the offeree shareholders;
  • refraining from any action or any decision which could effectively result in any bona fide takeover offer being frustrated or the shareholders being denied an opportunity to decide on the merits of the takeover offer without shareholders’ approval;
  • ensuring prompt registration of transfers during an offer period so that shareholders can freely exercise their rights; and
  • responding to the offeror’s request for details in respect of the register of members and record of depositors.

The directors may delegate any power of the board to any committee. Given the time and attention needed for an M&A transaction, it is not uncommon for the board to establish an ad hoc committee to oversee the M&A transaction.

Where one or more directors are conflicted in a transaction, appointing a committee of independent directors may avoid the issue of conflict provided the conflicted directors are not part of the ad hoc committee and does not nominate any member of the ad hoc committee.

The business judgement rule is codified under the Malaysian Companies Act 2016, whereby a director shall exercise reasonable care, skill and diligence with the knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities and any additional knowledge, skill and experience which the director in fact has. Such duty is deemed discharged if the director makes the business judgement for a proper purpose and in good faith, does not have a material personal interest in the subject matter of the business judgement, is informed about the subject matter of the business judgement, and reasonably believes that the business judgement is in the best interest of the company.

Malaysian courts have demonstrated reluctance to substitute their own decision in what was a proper and prudent business and commercial decision of the directors. In the absence of fraud, breach of fiduciary duty and conspiracy, the courts do not undertake the exercise of assessing the merits of a commercial or business judgement made by directors.

A director in exercising his or her duties as a director may rely on professional advice. The director’s reliance on professional advice is deemed to be on reasonable grounds if the director makes an independent assessment of the advice having regard to the director’s knowledge of the company and the complexity of the structure and operation of the company.

In a takeover exercise, the board is required to appoint an independent adviser to provide comments, opinions, information and recommendation on the takeover offer.

Conflicts of interests are the subject of judicial scrutiny in Malaysia.

A director is prohibited from using any information acquired by virtue of his or her position as a director of the company, using his or her position as such director or using any opportunity of the company which he or she become aware of as a director, to gain a benefit for himself or herself or any other person, or cause detriment to the company. A director is required to disclose the nature of his or her interest to the board if any conflict of interest arises.

Where a director has a conflict of interest in a takeover offer, the director may amend the director's responsibility statement to make it clear that he or she does not accept responsibility for the views of the board on the takeover offer. The SC should be consulted on whether directors controlling shareholders, directors and their respective PACs can vote at the shareholders’ meeting where an actual or potential conflict of interest exists.

The Malaysian takeover laws do not prohibit hostile takeover (ie, an acquirer acquiring control of a listed target against the will of the existing management/board). The board is required to issue its comments, opinion and views on the takeover offer in an offeree board circular to the offeree shareholders. The board, however, is prohibited from taking any action or making any decision which could effectively result in any bona fide takeover offer being frustrated or the shareholders being denied an opportunity to decide on the merits of the takeover offer without shareholder approval.

In a takeover offer, the board is prohibited from taking any action or making any decision which could effectively result in any bona fide takeover offer being frustrated or the shareholders being denied an opportunity to decide on the merits of the takeover offer without shareholders’ approval. Depending on the defensive measures taken, the board may need to seek shareholders’ approval.

A strong management team which is reliable, transparent and accountable to shareholders may be a strong defensive measure against hostile offer, as shareholders may have more confidence in the existing management team to continue leading the company.

The board may seek competing offers from other bidders (who are friendly parties or white knights) as a defensive measure against a hostile offer. The competing offers should offer better terms than the hostile offer in order to attract more acceptances from the offeree shareholders.

Directors should have regard to their statutory duty of exercising their powers for a proper purpose and in good faith in the best interest of the company when undertaking any defensive measures.

Directors have a statutory duty to exercise their powers for a proper purpose and in good faith in the best interest of the company. Directors should not reject an M&A transaction outright without assessing the merits of the transaction in the best interest of the company.

In a private company, shareholders may pass a special resolution making recommendations to the board on matters affecting the management of the company, which may include an M&A transaction involving the company, provided such rights for management review is provided in the company’s constitution. Such recommendations, approved by a special shareholders’ resolution and if in the best interest of the company, are binding on the board.

In a takeover offer, the board is prohibited from taking any action or making any decision which could effectively result in any bona fide takeover offer being frustrated or the shareholders being denied an opportunity to decide on the merits of the takeover offer.

There are cases of litigation arising from breaches of warranties and indemnity claims. Typically, these are litigated through arbitration.

Disputes typically arise between the acquirer and the seller for breach of representations and warranties committed before completion but only discovered after completion of the transaction. Where there are purchase price adjustment mechanism or earn-out payment being incorporated into the transaction documents, disputes may arise between the parties as to the calculation of the final amount of payment.

While shareholder activism is on the rise in Malaysia, it is not a major activity of shareholders. In Malaysia, the Minority Shareholders Watch Group (MSWG) was established in 2000 to protect the interests of minority shareholders through shareholder activism. MSWG has the objective to develop and disseminate the educational awareness on corporate governance, to become the platform to initiate collective shareholder activism on questionable practices by management of listed companies and to monitor breaches and non-compliance of corporate governance practices by listed companies.

That said, there has been more activism in respect of concerns on crimes/misconducts (including bribery) committed by top management of companies, including undisclosed related party transaction.

It is expected for activists to seek increase and improvement in shareholder value. That said, there are also activist shareholders who have discouraged companies from M&A. For example, shareholders have raised concerns as to the acquisition by 7-Eleven Malaysia Holding Berhad (7-Eleven) of 47% of the shares of Myinteractivelab Sdn. Bhd. as the target is loss-making and has no proven track record. While there appeared to be insufficient justification as to how the target is synergistic or supplements the existing business of 7-Eleven, unfortunately the transaction was not subject to the approval of 7-Eleven’s shareholders.

A recent example of interference from minority shareholders is the proposed merger between JF Apex Securities Berhad, a subsidiary of listed Apex Equity Holdings Berhad (Apex Equity), and Mercury Securities Sdn. Bhd. (Mercury Securities).

A majority of Apex Equity’s shareholders approved the proposed merger whereby Apex Equity will take over the business of Mercury Securities. The minority shareholders then sought a court order to invalidate the resolution passed, and the court granted such order on the ground that circular to shareholders was opaque. A second general meeting was subsequently called and the proposed merger was re-approved. The minority shareholders again intervened by opposing to the grant of a vesting order for the proposed merger. The minority shareholders have also instituted an oppression proceeding against the company, which is pending appeal at the time of writing.

Lim Jo Yan & Co

Level 17-10, Q Sentral
2A, Jalan Stesen Sentral 2
Kuala Lumpur Sentral
50470 Kuala Lumpur, Malaysia

+603 2276 1605

contact@limjoyanco.com www.limjoyanco.com
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Trends and Developments


Authors



Zaid Ibrahim & Co (ZI) is a founding firm of the ZICO Law network, and a full-service firm with more than 170 lawyers. Always committed to provide high-quality legal service to its clients, ZI has earned a reputation for its ability to devise innovative and workable solutions to satisfy the complex needs of its clients. The firm's impressive track record features engagements by local and multinational corporations on unique and complex commercial transactions, mergers and acquisitions exercises, fundraising on large infrastructure projects in Asian emerging markets as well as strategic law reform initiatives. As a member firm of ZICO Law, the firm provides its clients direct access to a powerhouse of over 300 lawyers in all ten ASEAN countries, putting it in a unique position to provide cross-border legal-related services within its own regional network.

Trends

Introduction

Malaysia saw a major regime change in May 2018 when the ruling Barisan Nasional coalition (BN) that had been the ruling government for more than 60 years lost at the 14th General Election. The opposition Pakatan Harapan coalition (PH) led by Tun Mahathir Mohamad (Tun Mahathir) won with a majority and formed the new government. This change of government was made more dramatic by the comeback of Tun Mahathir – he was appointed as Malaysia’s seventh prime minister, 15 years after he resigned as Malaysia’s fourth prime minister, a position that he held for more than 20 years with the BN government.

On 24 February 2020, the political situation in Malaysia took a surprising turn when the new PH government collapsed after less than 22 months in power and a new Perikatan Nasional coalition (PN) government was formed with Tan Sri Muhyiddin Yassin as Malaysia's eighth prime minister. The question on everyone’s minds then was obvious – how will Malaysia, from a political, economic and social standpoint – be under the PN Government?

On 11 March 2020, the World Health Organization declared COVID-19 a pandemic.In Malaysia, the Prevention and Control of Infectious Diseases (Measures Within the Infected Local Areas) Regulations 2020 was issued to prevent movement of any person from one place to another except for very limited exceptions which includes travelling for purposes of purchasing food or daily necessities, and seeking healthcare services. As a result, substantial economic activities in Malaysia have come to a halt.

The government has been quick to announce and implement various economic incentives to help the country cope with the disastrous impact of the pandemic. On 27 February 2020, the PH Government announced the MYR20 billion Economic Stimulus Package which contains a total of 32 measures aimed at a three-pronged strategy of mitigating the impact of COVID-19, spurring people-centric economic growth and promoting quality investments. On 16 March 2020 the government set up the Economic Action Council to address the country’s financial issues, which also committed to implement this Economic Stimulus Package. On 23 March 2020, the Ministry of Finance announced the establishment of a Unit for the Implementation and Coordination of National Agencies on the Economic Stimulus Package to ensure that stimulus initiatives are implemented.

Such initiatives include a soft loan fund of MYR3.3 billion provided by the Central Bank of Malaysia through domestic financial institutions. Bursa Malaysia (the Malaysian stock exchange), the Securities Commission of Malaysia and the Central Bank have implemented various stimulus incentives and stated that they will ensure the continuing operations of the Malaysian financial markets. A second Prihatin Rakyat Economic Stimulus Package worth MYR250 billion was announced by the government on 27 March 2020 which aims to protect the welfare of the people and support small and medium-sized enterprises.   

Against this exceptional backdrop at the start of 2020, the business trends in Malaysia in various industry sectors and recent key legal developments are hereby discussed. 

Government and government-linked investment disposals and restructurings

In May 2018, Tun Mahathir declared that the nation’s debts and liabilities stood at MYR1 trillion, equivalent to a staggering 65% of the nation’s GDP. Among the measures that the previous government looked at to pare down the country’s debts include aborting/reviewing certain infrastructure projects, monetising assets and pruning stakes in non-strategic assets. Such measures fuelled the M&A activities by government-linked companies and government-linked investment companies such as Khazanah Nasional Berhad (Khazanah), which is Malaysia’s sovereign wealth fund, where there have been substantial disposals or talks of substantial disposals. These include Khazanah’s MYR8.42 billion sale of a 16% stake in IHH Healthcare Berhad (IHH) to Mitsui & Co Ltd (November 2018) and the disposal of Prince Court Medical Centre Sdn Bhd to IHH group for MYR1.02 billion on a locked-box basis (September 2019).

Talks on the proposed restructuring of Malaysia Airlines Berhad (Khazanah’s wholly-owned subsidiary) – which is still recovering from the twin tragedies of 2014 when flight MH370 mysteriously disappeared and flight MH17 was shot down over eastern Ukraine – continues. According to news reports in January 2020, Khazanah’s board was considering four proposals from local and foreign parties, including from AirAsia Group Berhad and Japan Airlines Co Ltd, who were said to be the two front-runners for the future plans for Malaysia’s national airline. However, with the COVID-19 pandemic crippling airline business around the world, it remains to be seen whether this proposal will materialise anytime soon.

Infrastructure

PH’s election manifesto stated that it would review all highway concession agreements with the ultimate view of gradually abolishing tolls. By the end of 2019, the then Tun Mahathir’s government received four proposals to buy over PLUS, the largest tolled highway concession owned by Khazanah (51%) and Employees Provident Fund (49%). Tan Sri Halim Saad and his associate became the front-runner for the deal with his MYR5.2 billion offer, and they later upped their offer by more than 30%, according to sources. Among other bidders were Widad Business Group Sdn Bhd, Maju Holdings Bhd and RRJ Capital. Eventually, the cabinet decided to not dispose of PLUS but promised an 18% discount to the toll rates from 1 February 2020 and extended the highway concession for another 20 years. 

Malaysia revived the East Coast Railway Link (ECRL) Project with a new project cost of MYR44 billion. Malaysia Rail Link Sdn Bhd, a wholly-owned subsidiary of the Minister of Finance Incorporated, is the project and asset owner of the ECRL while China Communications Construction Company Ltd (CCCC) is the main contractor. Scheduled for completion by December 2026, the 640 km ECRL will traverse the East Coast states of Kelantan, Terengganu, and Pahang as well as Negeri Sembilan, Putrajaya, and Selangor on the West Coast of Peninsular Malaysia. The Economic Action Council has stated that all projects allocated in the 2020 Budget, including the ECRL project, will continue to be implemented. 

Depending on the outcome of the country's political situation, the year 2020 may also see some development on the proposed Kuala Lumpur-Singapore High Speed Rail project (HSR) and the Singapore-Johor Rapid Transit System project (RTS Link), these being projects aiming at better connections between the two neighbouring countries.

On 31 October 2019, Tun Mahathir announced that the RTS Link, a planned cross-border rapid transit system that would connect Singapore and Malaysia, will proceed with a 36% cost cut from the original MYR4.93 billion to MYR3.16 billion. Both stations will have co-located Singaporean and Malaysian customs, immigration and quarantine facilities. The signing of this agreement has been extended until 30 April 2020. On the HSR, both countries formally agreed in September 2018 to postpone its construction to the end of May 2020, with Malaysia paying Singapore SGD15 million in abortive costs on 31 January 2019 in relation to suspension of the project.

Telcos

It has been the policy of the Ministry of Communications and Multimedia to reduce prices and make broadband more affordable to the general public. To this end, the Malaysian Communications and Multimedia Commission (MCMC) implemented the Mandatory Standard on Access Pricing that stipulates the ceiling wholesale prices chargeable by service providers for facilities and services used by retail telco players, which was expected to translate into lower retail prices for consumers. This resulted in a substantial drop in the share price of Telekom Malaysia Berhad, Malaysia’s largest fixed broadband market player, which stabilised to just below MYR4 by the end of December 2019. This translated to a market capitalisation loss of about MYR7.5 billion.

Against the backdrop of the utilitarian rakyat (people)-friendly government policy on broadband and declining share prices, another telco player, Axiata Group Berhad (Axiata) – 37%-owned by Khazanah – and Telenor ASA (Telenor), a Norwegian multinational telecommunications company and one of the world's largest mobile telecommunications companies with worldwide operations, announced on 6 May 2019 a proposed merger of their ASEAN and South Asia operations to create a Malaysia-headquartered global player in the telecommunication industry. This merger will also create the largest mobile operator in Malaysia. 

This potential merger likely prompted the MCMC to issue new guidelines on 17 May 2019, the Guidelines on Mergers and Acquisitions (GMA) and the Guidelines on Authorisation of Conduct (GAC), which sets out the process where parties may apply to the MCMC for an assessment of whether a proposed transaction is anti-competitive. After four months of negotiations, Axiata and Telenor announced on 6 September 2019 that the merger has been called off. It is generally believed that regulatory constraints at the domestic and regional levels played a dominant part in scuppering what would otherwise have created one of the largest mobile operators in the world. While there were subsequent reports of Telenor considering taking a stake in Axiata, the COVID-19 pandemic and the sudden change of government will likely put a hold on any development in this area for some time. 

Banking and financial institutions

The Central Bank of Malaysia (Bank Negara Malaysia, BNM) initiated a merger program in 1999 for banks to consolidate and merge to become more competitive and resilient. Merger exercises have occurred since then in the banking and financial institutions sector with the last merger being the MYR645 million acquisition of Asian Finance Bank Bhd by Malaysian Building Society Bhd in early 2018. Some exercises have not come into fruition – for example, the proposed three-way merger between CIMB Group Holdings Bhd, RHB Bank Bhd and Malaysia Building Society Bhd in 2015 and the proposed two-way merger between RHB Bank Bhd and AMMB Holdings Bhd in 2017.

Bank merger activity started again in 2019 and announcements have been made on the proposed merger between Al Rajhi Banking & Investment Corp (Malaysia) Bhd (a wholly-owned subsidiary of Saudi Arabia-headquartered Al Rajhi Banking & Investment Corp which is the world’s largest Islamic bank) and Malaysian Industrial Development Finance Bhd (a wholly-owned subsidiary of Permodalan Nasional Berhad). This merger is expected to be implemented via a share swap deal, whereby PNB would emerge as the majority shareholder with a 70% stake in the merged entities and Al Rajhi Saudi would hold the balance stake. There is also a proposed merger of Bank Pembangunan Malaysia Bhd (BPMB), Danajamin Nasional Bhd (Danajamin), Small Medium Enterprise Development Bank Malaysia Bhd and the Export-Import Bank of Malaysia Bhd. In December 2019, BNM gave the green light to BPMB and Danajamin to commence negotiations for the merger, which is expected to be completed within six months.

Insurance

M&A activities in the insurance industry was expected to be active two years ago, pursuant to the 70% foreign ownership limit imposed by BNM on licensed insurance companies. Historically, this policy had not been strictly enforced. The top three life insurers in Malaysia, Great Eastern, Prudential and AIA are 100% foreign owned. In mid-2017, BNM initiated a soft approach in implementing the policy by issuing letters to certain foreign-owned insurers requesting their foreign owners to reduce their stakes. From that point onwards, foreign insurers had been pursuing an initial public offering and/or private sale to pare down their foreign ownership to meet BNM’s expectation.

After GE14 and a change of BNM’s governor, it has been reported there is no more specific broad deadline for meeting the requirement and BNM will look at the matter on a case-by-case basis as well as discuss on a bilateral basis. In early 2019, Singapore-owned Great Eastern contributed MYR2 billion to mySalam scheme as an alternative to meet the foreign shareholding requirement. MySalam is a health insurance scheme aimed at providing coverage to the poorest 40% Malaysians. This flexibility is seen as a positive development for insurance M&A activities. BNM appears to have acknowledged the practical reality that sellers need to explore a range of divestment options at a more pragmatic timeline in tandem with market demand.

The apparent relaxation of foreign ownership did not freeze M&A activities in the insurance industry. RHB Bank paved the way for a dynamic insurance M&A post-GE14 when it received the green light from BNM at the end of July 2019 to sell up to 94.7% of its insurance unit, RHB Insurance, to Tokio Marine. However, RHB Bank announced in December 2019 that they were not proceeding with the disposal as the parties failed to reach a consensus on terms.

Oil and gas

M&A activity in Malaysia’s oil and gas (O&G) industry remains scant. This trend may pick up in 2020 and onwards as global companies pursuing expansion plans spot opportunities. According to the Ministry of International Trade and Industry, geographic advantage and large reserves make Malaysia an ideal base for expanding into Asia’s oil and gas markets. In September 2018, Sapura Energy Berhad, the largest listed oil and gas service provider in Malaysia, sold a 50% stake in its energy asset to Austrian oil and gas company OMV Aktiengesellschaft to pare down its debt. In March 2019, Murphy Oil Corp announced it was exiting Malaysia with a USD2.13 billion sale of its oil and gas assets in the country to Thailand’s PTT Exploration and Production Public Co Ltd.

Since its listing in February 2017, Serba Dinamik Holdings Berhad (Serba) has grown by leaps and bounds. Its global M&A activities – supported by its own organic growth – contributed to its unaudited revenue increasing to MYR3.2 billion in 2019. Notable acquisitions since then include an acquired stake of 40% in Konsortium Amanie JV Sdn Bhd for MYR34 million, a 25% stake in SGX-ST-listed CSE Global Limited and 25% in AIM-listed Green & Smart Holdings plc. The trend continued in 2019 when Serba completed multiple M&A exercises, including its acquisition of 25% in Netherlands-incorporated Psicon BV and 49% in OHP Ventures Incorporated.

All eyes were on Saudi Aramco, the Saudi Arabian national petroleum and natural gas company, when it was successfully listed on Saudi Tadawul stock exchange in December 2019. Questions then arose whether Petronas, Malaysia’s national oil company, should follow in Saudi Aramco’s footsteps to provide a significant boost to the local stock exchange. A Petronas IPO is probable, given that Malaysia had previously floated some of its national assets such as Tenaga National Berhad and Telekom Malaysia Berhad.

Tun Mahathir also indicated during an interview in December 2019 that his government may consider selling some of Petronas’ stake to the country's states (eg, Sabah and Sarawak). A dilution of the government’s exclusive equity control over Petronas would provide billions of much-needed cash to the government to pare down the nation’s debt. With the COVID-19 pandemic squeezing global stock markets, exacerbated by the plummeting crude oil prices, a Petronas IPO may yet prove to be a dream too far.

The Brent crude price was around USD65 per barrel at the start of January 2020. The oil price tanked towards the end of March 2020 as the Brent crude price dropped to around USD25 per barrel amid continued concerns over the COVID-19 pandemic’s impact on energy demand and the ongoing price war between Russia and Saudi Arabia. With a large percentage of the world’s population under some form of lockdown to control the pandemic, there is potential the price could go even lower. Although Petronas may be less exposed due to its high degree of vertical integration, other oil and gas industry players may become vulnerable during this challenging time. This could potentially drive M&A activities in the oil and gas industry as the players choose to consolidate to stay afloat.

Developments

Anti-money laundering

After the 1MDB scandal erupted, BNM issued two policy documents: (i) Anti-Money Laundering, Countering Financing of Terrorism and Targeted Financial Sanctions for Financial Institutions, and (ii) Anti-Money Laundering, Countering Financing of Terrorism and Targeted Financial Sanctions for Designated Non-Financial Businesses and Professions & Non-Bank Financial Institutions.

These policy documents came into force on 1 January 2020 and set out (i) the obligations with respect to the requirements imposed under the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001, and (ii) the requirements in implementing a comprehensive risk-based approach in managing money laundering and terrorism financing. The government’s seriousness in combating money laundering through regulatory measures and widely reported high-profile prosecutions for money laundering cases may trigger a more extensive due diligence process to address anti-money laundering compliance. Investors must, therefore, ensure that proper due diligence is carried out in any M&A to avoid compliance pitfalls.

Anti-corruption

Section 17A of the Malaysian Anti-Corruption Commission Act 2009 is also set to come into effect on 1 June 2020. This section imposes liability on commercial organisations (such as companies and partnerships) for corruption-related actions by associated persons (such as directors, partners, employees and persons who perform services for the commercial organisation) done for the benefit of the commercial organisation, unless it had in place adequate procedures designed to prevent persons associated with it from undertaking the corruption related actions.

In December 2018, the Prime Minister’s Office issued the Guidelines on Adequate Procedures to give clarity on the adequate procedures that must be in place to prevent corruption. Malaysia is emulating the UK and the USA which have had provision on corporate liability for corruption in their laws – ie, the UK Bribery Act 2010 and the US Foreign Corrupt Practices Act 1977 – for some years.

The staggering USD4 billion fines that Airbus agreed to pay at the end of January 2020 in order to settle a lengthy global corruption investigation in the UK, France and the USA was a grim reminder of the seriousness of the offence. The Airbus case also implicated two top executives of Malaysia’s low-cost carrier who immediately relinquished their executive positions upon the Airbus case being publicised. These two top executives were subsequently reinstated on 20 March 2020 following completion of an internal probe that cleared the duo from corruption allegations. It may be that pre-acquisition anti-corruption due diligence soon becomes an essential element of certain M&A in Malaysia.

Competition

The Competition Act 2010 has been in force since 1 January 2012. This Act prohibits anti-competitive agreements and abuse of dominance, but it does not provide for merger control. This may soon change as it has been reported that the Act may be amended (or regulations issued under the Act) to include merger control by 2020. The chief executive officer of the Malaysia Competition Commission was quoted as saying that the proposed merger control “would enable it to approve or reject mergers and acquisitions, or impose conditions on potential deals”. Once this is implemented, the cost for undertaking M&A in Malaysia can be expected to increase to cater for merger control compliance cost.

Fintech

Fintech has been the buzzword of late, along with cryptocurrency and blockchain. Malaysian regulators are keeping up with the fast-changing world of technology and innovation. The Securities Commission of Malaysia (SC), Malaysia’s securities regulator, released the Guidelines on Recognised Markets (GRM) to regulate equity crowdfunding (ECF) in 2015. A year later, the SC updated the GRM to provide for a peer-to-peer (P2P) financing framework. In January 2019, the SC updated the GRM to provide for the much-anticipated framework for crypto-exchanges, also known as digital asset exchange operators (DAX).

As of January 2020, there are ten ECF, 11 P2P and three DAX operators registered with the SC. On 15 January 2020, the SC published its Guidelines of Digital Assets (GDA), which sets out the requirements for an issuer seeking to raise funds through digital token offering and the registration of a platform operator to operate an initial exchange offering (IEO) platform. GDA is expected to come into force in the second half of 2020. 

A recent move by BNM to issue the exposure draft of the Licensing Framework for Digital Bank at the end of December 2019, coupled with the announcement of its plan to issue up to five digital banking licences to qualified applicants to operate such services is also expected to spur M&A activities once digital banking operation takes root in Malaysia.

Labuan International Business and Financial Centre (a tax-efficient financial centre set up by Malaysia in 1990 with its own separate set of laws specific for the financial activities carried out in Labuan) is also introducing new guidelines to push for fintech and digital products and activities. Currently, no special licence is required to operate an IFS (innovative financial service)-related business in Labuan. Interested business owners with IFS-related businesses need merely apply to operate as a Labuan-licensed entity under the Labuan Financial Services and Securities Act 2010 or the Labuan Islamic Financial Services and Securities Act 2010.

In 2018, the Labuan Financial Services Authority approved four IFS-related Labuan entities including Algebra, Asia’s first robo-adviser to offer Shari'a-compliant investments, and HWG Cash, Asia’s first stable and secure licensed cash token which offers cryptocurrency services out of Labuan. Labuan is now in consultation with industry players on introducing new guidelines relating to, amongst others, the licensing of digital financial services, including digital banks, insurtech, robo-advisory, digital asset exchange and regulating the issue of digital utility tokens and digital wallets.

Environment, social and corporate governance (ESG)

Malaysia recognises the importance of ESG as a concept that affects all aspects of present and future society. In December 2014, Bursa Malaysia and FTSE launched an ethical stock market index (ie, the FTSE4Good Bursa Malaysia Index), which is designed to highlight companies that demonstrate a leading approach to addressing ESG risks. This led to the launch of ESG-focused funds such as the Malaysian ESG Opportunity Fund launched in July 2015. In July 2019, Bond Pricing Agency Malaysia launched Malaysia’s inaugural ESG Bond Index series, which covers Malaysian ringgit-denominated long-term bonds and sukuk that have been classified as ESG.

As of January 2020, there were nine Malaysian entities including Khazanah, KWAP and EPF who became signatories to the United Nations-supported Principles for Responsible Investments (PRI). The PRI comprises voluntary and aspirational investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice. One of the core principles under the 11th Malaysia Plan (2016-2020) is sustainability and development resilience through green growth. This will continue under the 12th Malaysia Plan (2021-2025) that encompasses three dimensions including environmental sustainability.

In December 2019, the Securities Commission of Malaysia released the Sustainable and Responsible Investment (SRI) Roadmap for the Malaysian capital markets, aimed at creating an SRI ecosystem and charting the role of the capital markets in driving sustainable development. With ESG mandates gaining traction in Malaysia, more companies have started embarking on a transformative journey to tackle ESG risks in a bid to retain and attract investors.

Conclusion

With the new PN government still settling in amidst an extremely challenging economic landscape due to the COVID-19 pandemic, it remains to be seen whether the measures being taken and implemented can help the Malaysian business communities weather through. So far, the government has been reacting positively to the problem. Malaysia appears to be on the right track with the making of certain clear policy decisions designed to steer the country away from the worst-case scenario. It will require concerted efforts from everyone to ensure all policy decisions yield the desired outcome. 

Zaid Ibrahim & Co

Level 19 Menara Milenium
Jalan Damanlela
Pusat Bandar Damansara
50490
Kuala Lumpur

+60 3 2087 9999

+60 3 2094 4666

www.zicolaw.com
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Law and Practice

Authors



Lim Jo Yan & Co is a recognised boutique corporate and commercial firm. It has an energetic team which is passionate about its work and clients’ interests, with a clear focus on giving perspective to legal issues and creating a framework that is commercially workable. The firm is often engaged as local counsel for cross-border work with international law firms, primarily related to inbound acquisitions and advising on regulatory compliance. It also has a thriving Japan desk and acts for Japanese clients on a varied range of advisory and inbound transactional deals. Its corporate practice is known for being very responsive, cognisant of commercial realities and focused on providing practical solutions, and often punching far above its weight for its class. The firm is adept in handling acquisitions, disposals, joint ventures, private equity deals and fund formation in a range of sectors, including healthcare, education, manufacturing, fintech and TMT.

Trends and Development

Authors



Zaid Ibrahim & Co (ZI) is a founding firm of the ZICO Law network, and a full-service firm with more than 170 lawyers. Always committed to provide high-quality legal service to its clients, ZI has earned a reputation for its ability to devise innovative and workable solutions to satisfy the complex needs of its clients. The firm's impressive track record features engagements by local and multinational corporations on unique and complex commercial transactions, mergers and acquisitions exercises, fundraising on large infrastructure projects in Asian emerging markets as well as strategic law reform initiatives. As a member firm of ZICO Law, the firm provides its clients direct access to a powerhouse of over 300 lawyers in all ten ASEAN countries, putting it in a unique position to provide cross-border legal-related services within its own regional network.

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