Malaysia

4 Chapter M&A

    • M & A trend in Malaysia

      The Mahathir government, which was born in Malaysia in 1981, has attained economic development by following the "Bumiputra Policy" which gives preferential treatment to Murray system and indigenous people which continue since the war, and attracts "Look East Policy" and active foreign investment. In the subsequent Abdullah administration, with Najib regime, a move to revise the policy that can follow the Bumiputra policy but can become a barrier to attracting foreign capital was adopted.

      Malaysian economy maintain a stable growth rate of about 5%. Also, according to the World Bank's announcement in 2015, Malaysia  ranked 18th in the world in countries where doing business operation is easy. The country is also considered  the second largest in ASEAN countries after Singapore. Also in the report of the International Federation in 2013, it was announced that Malaysia received the third foreign investment in ASEAN. In recent years, its market value has been recognized and the number of companies developing business in Malaysia is increasing.

      The following graph shows the trends in the number of M & A transactions published in Malaysia from 1990 to 2013 (until the first quarter).

      In and out M & A  in Japan versus other Asian countries is 189 in 2012 and 202 in 2013, of which 13 M & A to Malaysia are 12, respectively (source: MARR). The table below is the detailed information on M & A of In-Out against Malaysian companies in 2013.

    • Risks that must be considered in order to be different from general M & A

      Since the laws and regulations in Malaysia is different from Japan therefore, related laws and procedures that will be applied in doing M & A in the country are not the same in some matters. Compared in the doing M & A in Japan, the company that will do M & A in Malaysia must pay more attention in the following points:

       

      ■ Difference in legal system, tax system, accounting standard

      Because Malaysia’s processes are based on a different legal system, tax system, and accounting standards from Japan, there are various points to remember in proceeding M & A. This will become a constraint on the acquisition structure and the conclusion of the contract and will affect the business activities and others after the acquisition.

       

      ■ Foreign capital regulation

      In Malaysia, there are many restrictions on foreign capital  investment in service industry etc in the past, but in 2012 and 2014 many regulations have been abolished and the degree of freedom of corporate activities is increasing more and more.

       

      ■ Restrictions on M & A transaction method

      The general method of M & A in Malaysia is through share transfer, business transfer, etc. However, a careful consideration is needed in choosing the M & A method to be used since  Mergers and Acquisitions and Corporate Splits are not allowed under the Companies Act of the country.

       

      ■ Business evaluation and corporate evaluation are difficult

      In acquisitions of company, the question of how much should be paid to acquire a company arise. Methods for measuring corporate value in M ​​& A in Japan are divided into three categories: (1) net asset method, (2) multiple method, and (3) DCF method. Among them, (2) multiple method and (3) DCF method are common measurement methods being used.
       


      However, we must consider the fact that in emerging countries it is difficult to obtain accurate financial data  and to consider future cash flows and discount rates through the DCF Law.

       

      [Net Asset Method]

      The net asset method  refers to the process of measuring the value of a company using the market value of net asset.It is a popular method for companies and small and medium enterprises who want to use simplify process because it is easy to understand by the parties with high objective. In theory it is simple, evaluate the value of assets in the BS by market price, and subtract the liabilities from it.

       

      [Multiple Method]

      Multiple method generally means selecting a similar company as a benchmark, obtaining a comparative magnification from the results of the previous term, the current term, the next term of the profit and loss of the company, multiplying the financial data of the target company by the comparative magnification to calculate the corporate value. However, in emerging countries there are many uncertainties about the credibility of such data, so the appropriateness of corporate evaluation will bea problem.

       

      In such a case, for example, the method of using industry-specific drivers, such as the production volume in the manufacturing industry and the number of stores in the convenience store industry, and the method of using the driver specific to the industry are also necessary ways to consider to conservatively estimate the differences of emerging countries and correct magnification.

      The multiple method is simpler than the DCF method, and there is an advantage that it can be understood even if the calculated enterprise value is linked with the market price of the industry. However, there is a problem that it is not possible to reflect exchange rate or capital cost concerning the setting of the scaling factor which is the basis of calculating corporate value.

       

      [DCF Method] ...

      The DCF method is a method of calculating corporate value using a discounted present value that discounts future cash flows at a certain discount rate. Future cash flows are money left after paying expenses and taxes and making the necessary investment to continue the business. In addition, discount rates are calculated by weighted average of shareholders' equity amount and liability capital amount, and some enterprise calculate it by setting internal profit ratios for each business.

      For calculating future cash flows, it is common to use international currency such as yen or dollar converted using the spot rate instead of local currency. However, in this case, the risk of future exchange rate fluctuations may  not be reflected in the cash flow.

      As for the discount rate, there is a method of using the discount rate set in each country, or a method of using a discount rate by adding a certain risk to the discount rate of each country. In the former case there is a problem that the country risk and the business risk are not reflected while in the latter methodconsideration about the appropriateness of the judgment of how much risk is necessary. Companies that place emphasis on convenience generally use the former, others use the latter.

       
    • Laws and regulations concerning M & A

      Status of Law Maintenance (Regulation) on M & A

      M & A in Malaysia is regulated by the Acquisition Code (Malaysian Code on Take-overs and Mergers 2010) as stipulated in Article 217 of the CMSA (Capital Markets and Services Act 270: Capital Markets and Service Act).In addition, if the target company is a listed company, the acquisition  is also subject to regulation under Listing Requirements of Bursa / Malaysia. The main regulatory authorities concerned with  M & A cases are Securities Commission (SC) which regulates CMSA, Bursa Malaysia for listed companies and Central Bank for companies that perform financial business.

      In addition, the M & A guidelines (Guidelines on Contents of Applications Relating to Take-Overs and Mergers) for submitting application documents correctly to the Securities Commission (SC) and practical notes are prescribed in accordance with the second part of Chapter 6 of CMSA and the 2010 Acquisition Code. The Practice Notes (CAPITAL MARKET AND SERVICES ACT 2007 – MALAYSIAN CODE ON TAKE – OVERS AND MERGERS 2010 10 PRACTICE NOTES) has been issued under Article 377 of the 2007 CMSA. The Guidelines and Practice Notes should be confirmed in conjunction with CMSA Chapter 6, Part 2 and the 2010 Acquisition Code.

       

      Foreign Capital Regulation on M & A

      ■ Regulation on Foreign Capital Investment

      The shareholding ratio of Malaysian companies by foreign capital investment was regulated concurrently with government agencies such as the Ministry of International Trade and Industry, which is the authorizing body of the manufacturing industry, in the "M & A Guidelines for Inner and Foreign Countries (2009)". However, these guidelines have been abolished together with the general foreign capital restrictions on stockholdings in Malaysian company acquisitions. However, foreign capital investment may still be subject to regulation depending on the type of industry. . For example, in the case of the financial industry, the Malaysian Central Bank regulates foreign capital investment.  Establishment of different organizations will be under different regulations depending on the industry they belong.

      In Malaysia, general regulations on the entry of foreign capital investment do not apply only in M & A. Specifically, there are existing foreign capital restrictions on the shareholding ratio of foreign capital investment in relation to Bumiputra policy that favor Malay residents. In recent years, restrictions have been greatly relaxed to actively attract foreign capital, but in reviewing M & A, it is necessary first to grasp the outline of foreign capital regulation.

       

      M & A Method and Procedures

      ■Procedures and Content of Each Method for Acquisition

      For M & A transactions in Malaysia, the following methods can be considered:

      ■Regulation on Stock Acquisition

      [Tender Offer Regulations]

      The Tender Offer Regulation is mandatory to purchase shares after publicly announcing the price, quantity and period of purchase in accordance with CMSA and acquisition code It is mainly being imposed when acquiring shares of a listed company to prevent  preferential treatment to specific shareholder and uncertain transactions. It is a regulation to maintain fairness of transactions.

       

      I. Mandatory Tender Offer (Acquisition Code  Article 9)

      In the following cases, the acquirer will be obliged to make a mandatory tender offer.

      (a) When the acquirer obtains "control" (CMSA Article 216)

       

      · If the acquirer acquired a voting rights ratio that exceeds 33% or more of the voting rights  than what is stated in the provisions of the acquisition code

      · If the acquirer  holds 33% of the voting rights and gain control over the company by acquiring shares with "significant influence"

      · In the event that SC determines that the acquirer has control

       

      (b) Holds more than 33% but less than50%  of the voting rights and acquires more than 2% of the company's voting stock in 6 months

      Further detailed conditions are defined in Practice Note 9.

       

      II. Optional Tender Offer

      In the Acquisition Code, an optional tender offer other than the compulsory tender offer is defined as a public tender offer. The Optional Tender Offer is use by the purchaser to acquire 100% of the issued shares of the target company even if the above-mentioned conditions of the mandatory tender offer are not applicable.

       

      Partial Tender Offer (Acquisition Code  Article 10)

      Partial Tender Offer is the case  of acquiring less than 100% of the issued shares of the target company. The partial tender offer is use to prevent violations of foreign capital investors in controlling  their investments. In addition, in order to make a partial tender offer, it is necessary to obtain written approval from SC.

       

      IV. Procedure of the Tender Offer The acquirer will purchase the shares after publicly announcing the number, price, duration and other information of the shares to be acquired in advance. Procedures of the Tender Offer are regulated by the Acquisition Code and it is necessary to follow various procedures.

       

      On the day of public tender offer, the acquirer will notify the securities exchange if the securities of the target company's board of directors, SC and the target company are listed on the Bursa-Malaysia Stock Exchange. The Board of Directors of the target company will make a public announcement through newspaper within one day from the notice and will notifiy the same stock exchange when the securities of the target company are listed on the Bursa-Malaysia Stock Exchange. The Purchaser will submit the offer document to the SC within 4 days and obtain the SC approval. Subsequently, it send the SC approved offer documents to the target company's board of directors and shareholders within 21 days (Posting Date, PD). Within 10 days from the PD, the target company will provide its shareholders  with comments / information of the Board of Directors on the Tender Offer and a report by an independent advisor (). As shown in the figure below, the period of the tender offer is from 21 days after PD to 74 days. In addition, in case of any conditions such as increasing or withdrawing shares to be acquired  after voluntary tender offer is commenced, approval by SC is required.
       

      [Acquisition by Third Party Allotment]

      In Malaysia, in addition to acquiring outstanding shares, it is also possible to acquire new shares through third-party allotment. In order to issue new shares, a general resolution of the general meeting of shareholders is required. In addition, when acquiring a listed company that falls under Article 9 of the Acquisition Code, the above-mentioned mandatory tender offer regulation will be applied.

       

       

      [Stock Transfer]

      Stock transfer in Malaysia is a typical M & A method. This applies to cases where the above-mentioned tender offer is not applicable., Stock transfer methods and procedures are mainly prescribed by the Company Law and related laws.
       

      [Stock Request for Sale]

      According to the share selling right (CMSA Article 222), the Purchaser can request the sale of the shares owned by minority shareholders. This is a system in which  the Purchaser can obtains approval to purchase the shares which the minority shareholders were not able to purchase within two months of 90% or more of the shareholders within 4 months after the Tender Offer. The purchaser is required to send a notification for its application to purchase the shares.  The acquirer can acquire 100% of the shares of the target company by forcibly acquiring the shares of a small number of counter-shareholders.

      , In addition, in the case of exercising the right to request for the sale of shares, the acquirer must acquire the shares of the opposite shareholder at the same conditions (including the price) as those already acquired in principle. On the other hand, the opposing shareholders can file a claim in the court against the selling request, and the court will judge the possibility of exercising the claim.

       

      [Scheme of Arrangement]

      Scheme of arrangement is a system whereby an acquirer can acquire the shares of a target company when certain conditions are met, such as approval by the general shareholders' meeting of the target company and approval by the court. Although there is no such system under the Japanese law, similar systems can be seen in many Asian countries such as Malaysia and Singapore who were influenced by British law. Unlike other acquisition methods, the target company has the initiative and can flexibly determine concrete contents, such as stock cancellation and corporate splitting, therefore the transaction is not limited to stock transfer. Scheme of Arrangement is regulated by the Company Law. It is a method of company reorganization used for various purposes and uses, such as corporate restructuring, interest adjustment with creditors and investors, merger or restructuring of group companies.

      With the Scheme of Arrangement, the acquirer can acquire 100% of the shares of the target company and make it a wholly owned subsidiary. The flow is as follows.
       

      [Business Transfer]

      Business transfer is the transfer of assets and liabilities which are organized for a certain project purpose and has the function as an integrated body. This is done by concluding a contract between the transferor company (target company), the one that will transfer the business and the transferee company (purchaser) to whom the business is transferred. After obtaining shareholders’ approval through ordinary resolution at the general shareholders meeting, the transferor will conduct business transfer procedures. Particularly when transferring a business of a listed company, approval of over 75% of the shares hold by the attending shareholder is required.
       

      M & A Guidelines

      Submission of Application Documents

      Application forms for acquisitions, mergers and compulsory acquisitions ("M & A")  stipulated by the SC are as follows:

       

      I. Application form cover letter format

      A. Descriptions of application summary

      B. Background explanation

      C. Details and relevance

      D. Acquired / unacquired licenses related to the proposed M & A plan

      E. Proposed M & A proposal made public by the target company but not yet applied

      F.Time table of M & A implementation

      G. Confirmation that the applicant has not been subject to bankruptcy, failure to file returns to tax authorities, failure to comply with the securities standards and government interrogation for a fixed period of time

      H. Declaration of conflict of interest by advisor

      In the case where conflicts of interest actually exist, the advisor discloses its nature and countermeasures

      I. Statement that the applicant declares that all application information / documents have been carefully considered for CMSA 221 and Acquisition Code 41

      J. An advertisement declared by the advisor that all application information / documents have been carefully considered for CMSA 221 and Acquisition Code 41

      K. Payment to SC (Reference: 1993 Securities Commission (Fees and Charges) Rules)

      L. Name and phone number of the applicant's window

      M. Name, address and signature of authorized person of advisor’s company

       

      II. Submission of application documents

      The independent advisor will submit the following documents on behalf of the applicant.

       

      A. Send two copies of the application form to Malaysia Securities Chairperson.

      Address: No.3, Persiaran BukitKiara, BukitKiara, 50490 Kuala Lumpur, Malaysia

      B. Enclose the data of Guidelines Appendix I, II, III, VII along with all application documents by CD.

      (See guideline: http: //www.sc.com.my/wp-content/uploads/eng/html/resources/guidelines/tom/TOM_guidelines_101215.pdf)

      C. Enclose a consistent checklist for the guidelines. If consistency catnnot be obtained, detailed explanation of all information is necessary.

       

       

      Procedure by Acquisition Code

      In addition to the usual contracts related to M & A, the following documents are required when offering under the Acquisition Code.

       

      1. Publication of Acquisition Offer Notice: The Acquirer will publish acquisition offer notice through at least three of the major national newspapers (one paper in official languages, one in English) addressed to the Board of Directors of the target company and the Malaysian Securities Commission SC), and if the target company is listed, to the Malaysian Stock Exchange. Publication of takeover offers must include in particular the following information:

       

      Information on the Purchaser and Stakeholders

      b. Offer amount

      c. Non-cash consideration

      d. Type and number of voting shares and voting rights of the target company after acquisition

      e. Details to be agreed on the acquisition

      f. Acquisition offer requirements

       

      2. Publication of Notice of Offer: Besides publishing a notice of offer on the paper addressed to the board of directors of the target company, if the target company is listed, it must also notify Bursa and Malaysia. This announcement must include all information needed, addressed to the board of directors of the target company and the information on whether or not the acquirer is interested in other offers.

      3 Offer document: In order to obtain SC approval, the acquirer must submit the offer documents to SC. 
    • Tax relating to M & A

      [Transfer Income (Capital Gain) Tax]

      In Malaysia, there is no transfer income tax other than real estate profit tax (RPGT). RPGT is defined as taxes imposed on capital gains from the sale of assets and shares owned by a real estate company (RPC). Capital gains from the sale of real estate and shares held by real estate companies held for five years or more are not covered by real estate income tax.

       

      [Tax Losses and Depreciation]

      If losses and  depreciation are not being used as deductions for tax purposes and therefore accumulated in the company, they cannot be used anymore as deductions when the company is liquidated.

      Previously, unused tax losses and unprocessed depreciation in the event that there was a change in majority shareholders were deemed not to be carried forward in the following year. However, at present, the Ministry of Finance makes it clear that this regulation applies only to dormant companies whose direct shareholders have changed more than half.

       

      [Income Tax]

      The tax authorities can imposed income tax payment for even the past five years from the end of the assessment year. In addition, the authorities can imposed payment for the period beyond five years if they assert that taxpayers made false declarations, intentional defaults, negligence, etc.

       

      [Stamp Duty - Transaction Tax]

      Stamp duties are taxes imposed on legal documents. Stamp duties and transaction taxes will be imposed on transfer or transfer contracts, etc. according to the transaction price. For example, the stamp tax imposed on real estate transfers in asset acquisitions is as follows:

       

      1. less than 100,000 ringgits -1%

      2. more than 100,000 but   less than 500,000 Ringgits -2%

      3.500,000 ringgit or more -3%

       

      In the stock acquisition, stamp duty is charged at the rate of 0.3% to the higher of payment amount or market price.
    • Tax relating to M & A

      ■Competition law

      In the Competition Law (Competition Act 2010) and the Competition Commission Act 2010, a prohibition of non-competitive agreements and abusive monopolistic positions are stated, so attention is required for M & A. Guidelines on those   proceedings at the time of violation are announced in 2012.

       

      ■ Large Inventory Reporting Regulation

      Holding certain shares in large quantities may affect management rights and fluctuations in stock prices and may affect the stakeholders of the company. For the purpose of protecting general investors from such  situation, large volume holding report regulation is stipulated in Securities Industry Regulation (Securities Industry Regulations 1998). Specifically, if shareholders acquire more than 5% of the voting-right shares of a public company (a company that stipulates in the articles of incorporation that it requires the company's approval at the time of transfer of shares), or if there is a change in shares held, it is necessary to report large volume holdings in writing to the target company and SC within 7 days.

       

      ■ Insider Trading

      In Article 188 of CMSA, in the provision concerning insider trading for the purpose of protecting investors, it is forbidden to sell stocks of those who have internal information on the issue of the company's shares. Insiders with internal information are also prohibited from acting to provide internal information to others and to induce the sale and purchase of shares. In this article, internal information is considered to be  unavailable to the general public which has an influence on the price of securities. When these violations are discovered, violators will be imposed an imprisonment of 10 years or less and a fine of 1 million ringgit or more as stipulated in Article 209 of CMSA.

       

      ■ Shareholder Rights

      Shareholders may have collective consent rights under CA 1965 in the following cases:

      1. Acquisition and cancellation of businesses and assets of companies with significant value

      2. Transactions in which the officers of the company and its holding companies, major shareholders, or persons related to officers acquire or sell stocks or non-cash capital of the company

      In the case of a listed company, the shareholder's right to agree on the transaction is attributable to the transaction ratio calculated by the formula on the listing standard.