Malaysia’s New Code On Takeovers And Mergers

Background

On December 15, 2010, the Malaysian Securities Commission introduced a new Code on Takeovers and Mergers 2010 (“Code”), replacing the previous 1998 Code. The new Code was made effective on the same date.

The Code is broadly similar to the 1998 Code but introduces improved protection for investors, enhances transparency of information through greater disclosure and also puts a heavier onus on independent directors of the target company (offeree).

The Malaysian market has been widely expecting a new Code since the implementation of the Capital Markets and Services Act (“Act”) in 2007, which also introduced new provisions on how takeovers could be implemented in Malaysia (see analysis at WSLR, March 2008, page 27).

Notably, the new Code does not address the controversial issue of preventing the takeover or privatization of public listed entities through a sale of their assets and liabilities. Currently, the sale of assets and liabilities is regulated under the Companies Act 1965, where the approval of 50 percent of shareholders plus one share is required for the sale. Following broad public debate and a consultative paper from the Securities Commission which sought to raise the level of shareholder approval of the privatization or takeover of public companies via the asset and liabilities route, there was wide speculation that the new Code would address this issue and align the position with other jurisdictions, such as Hong Kong and New Zealand, by increasing shareholder approval to 75 percent. According to certain commentators, it is expected that the shareholder approval threshold for such transactions will be increased to 75 percent by way of amendments to the listing requirements of Bursa Malaysia, the national stock exchange.

A number of changes have been introduced by the new Code, and this article highlights some of the key differences under the new Code.

Extension of the Code

The Code is now extended to real estate investment trusts (“REITs”) listed in Malaysia, as well as companies incorporated outside of Malaysia but listed in Malaysia. Accordingly, unit holders of Malaysian listed REITs and shareholders of foreign incorporated companies are now given the same protection as shareholders of listed Malaysian companies, under the Code. This extension is consistent with market reality, with the advent of REITs as well as numerous Chinese companies listed on Bursa Malaysia.

Announcements

The Code now obligates a potential offeror to make an announcement as to whether there is a takeover or possible takeover, if there is untoward movement or increase in the volume of share turnover of an offeree. The board of directors of an offeree shall, after being approached by the potential offeror, make an announcement as to whether there is a takeover offer or possible takeover offer and is obligated to keep a close watch on its share price and volume of share turnover. Until a firm announcement of the takeover exercise is made, both the potential offeror and the offeree are required to make brief announcements that negotiations are taking place.

If an announcement of a takeover offer is premature or inappropriate and no further announcement following the initial announcement of the existence of negotiations occurs within one month, a potential offeror or offeree is required to make a monthly announcement setting out the progress of negotiations until a takeover announcement is made or the negotiations are terminated. A potential offeror who announces that he does not intend to make a takeover offer is prohibited from announcing a takeover offer for six months after making such an announcement. An offeror is now also required to announce his firm intention to make a takeover offer within two months from his first preliminary announcement unless an extension of time is granted by the Securities Commission.

Prescription of Conduct

In supplementing the standard of conduct expected by the Securities Commission in the conduct of a takeover under the Act, the Code now spells out the principles of conduct required by offerors, advisers, and the board of directors of the offeree involved in a takeover offer. These include the requirement for all stakeholders to observe good standards of commercial behavior so that minority shareholders are given a fair and equal opportunity to consider the merits and demerits of a takeover offer, to provide fair and equal treatment to all shareholders and, in particular, minority shareholders, and to ensure that there is full, frank and complete disclosure of information. The Code also expressly prohibits the creation of false markets and behavior which distorts transparency, as well as provides further details on the prohibited actions which could frustrate an offer. In light of these impending changes as well as personal liability exposure, employers in Malaysia must be mindful of the requirements and of the need to properly implement and follow through with appropriate policies and practices.

Parties Acting in Concert

In addition to setting out the criteria the Securities Commission will take into account when deciding whether a person is acting in concert, the Code also prescribes two new categories of Parties Acting in Concert (“PACs”), in addition to the presumed categories of PACs under the Act. The first relates to a company, its directors and shareholders, where there is an agreement, arrangement or understanding between them, which restricts the ability of the director or shareholder from offering or accepting a takeover offer or from increasing or reducing his or her shareholding in the company (“Restriction”). The second relates to partners in partnership (where “partnership” is not given its strict legal interpretation, but is defined to simply mean two or more persons having a business arrangement and common interest in several companies between them) and where such Restriction exists.

The Code also introduces a set of criteria to rebut the PAC presumptions under the Act, including the pattern, volume, timing and price of shares purchased by such persons, the voting pattern of the shares and the financial dependence between such persons. Persons who are not acting in concert can present evidence to rebut the legal presumptions.

Voluntary General Offers

Previously, although not expressly permitted in the old Code, as a matter of practice, an offeror had the discretion and flexibility to impose a level of percentage of acceptances for the offer to become unconditional under a voluntary general offer that was higher than 50 percent plus one share. Under the new Code, it is expressly provided that an offeror can only impose a higher level of acceptances than 50 percent plus one share for the takeover offer to become unconditional, provided that the consent of the Securities Commission is obtained for such purpose. The offeror will be required to prove to the Securities Commission that he is acting in good faith, in imposing such higher level of acceptances. The ability to set a higher level of acceptances than 50 percent and, in particular, to a level of not less than 90 percent of the share capital of the target company not already owned by the offeror, is critical to an offeror who intends to exercise compulsory acquisition or “squeeze-out” provisions to cause a listed offeree to be taken private or delisted from Bursa Malaysia.

Schemes of Arrangement, Compromise, Amalgamation or Selective Capital Reduction

The Code now makes very clear that a scheme of arrangement, compromise, amalgamation or selective capital reduction (“Scheme”) will be treated as a takeover offer and fall within the purview of the Securities Commission. While guidelines had been introduced under the old Code via the enactment of the Act in 2007, the new Code now makes clear that a mandatory general offer is now triggered where control or acquisition of the target company is obtained through a Scheme.

In this regard, the Code imposes a higher standard than that ordinarily required for schemes of arrangement or reconstructions, under the Companies Act 1965. In addition to the Scheme needing to be approved by at least 50 percent in number and 75 percent of value of the shareholders, the number of votes cast against the resolution to approve the scheme at such meeting cannot be more than 10 percent. The offeror and advisers are also required under the new Code to consult with the Securities Commission before undertaking a Scheme.

It is not clear how a Scheme (which involves a statutory court process and the shareholders of a target being asked to vote on a takeover proposal put to them by the company (in collaboration with the offeror)) will be implemented under the Code, other than that waivers from the requirements of a number of the provisions of the Code may be sought from the Securities Commission. Crucially, the grant of such waivers is subject to fulfillment of certain requirements, including that the offeror and the persons acting in concert with the offeror collectively hold more than 50 percent of the voting shares of the offeree and the consent of the Securities Commission is obtained in connection with any circular or explanatory statement in respect of the Scheme. Given the provisions of the new Code, Schemes will now likely be much less attractive or feasible compared to a mandatory or voluntary general offer.

Chain Principle

While the 1998 Code contained provisions for the triggering of a mandatory offer through the acquisition of an upstream entity, the new Code now clarifies the pricing of the offer for the shares of the downstream entity. The Code states that where the downstream entity is listed, the offer price will be based on the highest of: 1) the volume weighted average traded price of the downstream entity for the prior 20 market days leading up to the announcement of the takeover offer; 2) the proportion of the price paid for the upstream entity over the interest of the downstream entity; or 3) the highest price paid for the voting shares of the downstream entity by the offeror or any person acting in concert with the offeror, in the six-month period prior to the commencement of the takeover offer for the upstream entity. Where the downstream entity is not listed, the offer price may be based on the net tangible asset value, net asset value or any method which is fair to the shareholders of the offeree. The offeror has the ability to provide the basis for the offer price of the downstream entity to the Securities Commission.

Enhanced Disclosure Requirements

The new Code imposes more onerous disclosure obligations, particularly on the board of the offeree and the independent adviser. However, the timeframe for the issuance of such circular has not changed. It is still required to be issued within 10 days of the dispatch of the offer document of the offeror. The independent advice circular is required to contain advice relating to the offeror’s intentions in connection with a number of matters, including the offeror’s objective and rationale for the takeover offer and long-term commercial justifications for doing so.

In rendering a view as to the reasonableness of the takeover offer, the independent adviser is also required to comment and advise on profit forecasts of the offeree and their accuracy as stated in the offer document. If the offeror includes within the offer document a valuation of the assets of the offeree, the independent adviser is required to comment and advise on such asset valuation. In practical terms, this will likely pose a serious challenge to the independent adviser, as it will have a much shorter time frame to assess the valuation than the offeror’s adviser. The Securities Commission expressly contemplates the possibility of independent advisers applying to it for consent to perform an “informal” asset valuation.

Conclusion

While the new Code does not introduce drastically new principles, it does develop further detail on existing provisions, establishes new parameters for greater investor protection and enhances transparency of takeover offers to minority shareholders and the investing public.

In general, it appears that the Securities Commission is keen to expand its regulatory role to encompass areas where it previously did not regulate. It also seeks to play a much more involved role in takeover transactions by requiring parties to seek consultation with it in a number of circumstances. This will likely increase the expectations of the market in relation to the timeliness, transparency and quality of the Commission’s processes.

The Securities Commission may also have to answer to the market if participants determine that the new Code will impede the ability to undertake public company mergers and acquisitions, being a critical feature of any well-functioning market economy and efficient market.

Brian Chia is a Partner in Wong & Partners, Kuala Lumpur, a member firm of Baker & McKenzie International. He may be contacted at brian.chia@wongpartners.com.