Malaysia Michael Lim Hee Kiang Grace Yeoh Cheng Geok Shearn Delamore & Co 1. Mergers and acquisitions involve the consolidation of companies and businesses. An acquisition is the purchase of one company by another. Acquisitions can be either friendly or hostile. Mergers, on the other hand; involve the joining together of two companies whereby one company transfers all of its assets and businesses to the other, which continues to exist. The shareholders of the company transferring the assets and businesses receive shares of the company purchasing the assets and businesses. Sometimes, mergers are effected by the sale of the shares of two companies to a new company and the issuance of shares in the new company to shareholders of the two ‘companies, Business combinations in Malaysia are carried out via both methods. Evaluation of the company/determination of the purchase price Before proceeding to carry out an M&A transaction, the purchaser must carry out an evaluation of the strategies to be employed and the rationale for the transaction. In respect of the former, factors to be taken into account would normally include: * the prospects of success and the method for effecting the transaction, such as ‘whether to acquire shares of the target or merely its assets; + whether the products or services of the target ate complementary to its own; cost savings; + any cultural mismatch; + the price it can afford to pay; + the comparative cost of the alternative ways (If any) of achieving its business objectives; + whether the anticipated returns from the target meet the required rate of return on the aggregate capital employment in the investment; and + the legal implications. JIn respect of the latter, the goal(s) of the acquisition must be identified. For example, is the goal to acquire new customers, drive down costs, increase the number of products that can be delivered to customers or a combination of all of these? In this chapter, we shall focus predominantly on the legal aspects rather than the commercial or financial aspects. Determination of the purchase price will depend on what is being acquired. It may be: + the price of the shares sold, arrived at on a ‘willing seller, willing buyer’ basis; + the value of the assets in the market or as determined by an expert; or 287Malaysia 24. 2.2 288 + a figure simply agreed between the parties. Arriving at a mutually agreeable price is normally the most complex part of negotiating the deal, as the value of the target to a purchaser is unlikely to be the same as the value of the target to the seller of a business or the shares of a target (the vendor) ‘Valuation is normally carried out using one of a number of techniques based on financial information available to the purchaser (whether before or after the conduct of a due diligence audit), and adjusting the resultant figure to reflect additional benefits, savings or costs to the purchaser from the acquisition. Common methods of valuation include ascertaining the value of a target based on its net tangible assets or as a multiple of the target's earnings. A premium or discount may then be applied on the value as determined. Structuring the acquisition Asset or share sale ‘The decision of whether an acquisition should be carried out by way of the sale of assets or shares depends on various factors. One consideration is the reason for the acquisition: that is, whether the acquirer merely wants ownership of the assets of the target or whether it wishes to assume control over the management of the target. In the latter case, the acquirer may achieve this by purchasing the requisite amount of shares, giving it voting control in the target. A share sale transaction is technically simpler than the acquisition and transfer of assets (although tax indemnitles and warranties may be more extensive) and may have tax advantages, although some of these have now been removed by recent tax legislation disallowing carry forward of tax losses in cases of a change of control (see section 2.2 below). Another consideration is the size of the target. However, if the target is small or has only @ single business, the acquisition of the shares of the target may be relatively straightforward, ‘The practical aspects involved in carrying out an acquisition also bear consideration. In relation to the acquisition of the shares of a company, it is usual for due diligence to be carried out on the affairs of the target generally, including its assets and liabilities. The due diligence exercise becomes necessary where the target company is listed on Bursa Malaysia Securities Berhad. Public companies listed 02 Bursa Malaysia Securities Berhad must comply with the Bursa Listing Requirements and the provisions of the Securities Commission Act 1993. One of the requiremen's of the Securities Commission Act is that the information contained in offer documents relating to a takeover offer must be true, accurate and not misleading: ‘The process involved in the acquisition of shares of a Usted company can be extensive and complicated. Depending on the nature of the assets of the target, the’ purchase of assets may prove to be simpler, provided that the assets being acquired are subject to no charges or encumbrances. Tax ‘There is currently no capital gains tax on the sale of shares in Malaysia, although23 Michael Lim Hee Kiang, Grace Yeon Cheng Geok income tax may be payable if the vendor is considered as trading in shares. All disposals occurring from April 1 2007 will be exempted from property gains tax. ‘Stamp duty is levied on the transfer of certain assets and shares on an ad valorem basis under the Stamp Act 1949 (eg, on a transfer of land). The duty payable on a transfer of land is on a graduated scale. For shares, the rate is a fixed 0.3%. In both cases, the stamp duty will be based on the purchase price, or the market value of the land or shares, whichever is greater. ‘One of the advantages of acquiring a company ~ that is, being able to utilise its, tax losses and unabsorbed capital allowances ~ has now been removed. The Ministry of Finance has recently issued guidelines on the carry-forward of accumulated tax losses and unabsorbed capital allowances by companies which are subject to the continuity of ownership test effective from Year of Assessment 2006. The guidelines, seek to clarify the continuity of ownership test which was introduced in the Finance ‘Act 2008. Based on the guidelines, where there is a substantial change of more than 50% in the immediate shareholding of a company, the accumulated tax losses and unabsorbed capital allowances will be allowed to be carried forward as long as there is no change of more than 50% in the company’s ultimate shareholder. Financing ‘The target and its subsidiaries cannot make any loan or give any collateral for financing the acquisition of the target. The Companies Act 1965 prohibits the giving of financial assistance by a company in relation to purchase of its own shares subject to certain limited exceptions. Section 67(1) of the act provides that no company shall. give, whether directly or indirectly, and whether by means of a loan, guarantee or the provision of security or otherwise - any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or, where the company is a subsidiary, in its holding company, or in any way purchase, deal in or lend money on its own shares. ‘The penalty for contravention of this section may result in imprisonment of up to five years or a fine of RM100,000, or both. This prohibition is very wide, but applies only in relation to the acquisition of shares and not to the acquisition of assets. Purchasers have three means of financing the purchase: * Cash - the cash required to finance the purchase may be from the purchaser's internally generated funds or through borrowings or the issue of shares. ‘When the consideration is borrowed, the lender will usually require the purchaser to provide a means of securing the repayment of those borrowings. ‘The shares of the target to be acquired by the purchaser can be used to secure the borrowings, although certain regulatory consents may have to be obtained or there may be restrictions in the memorandum or articles of association of the target. Where the purchaser is purchasing the shares of the target, generally, it cannot secuse its borrowings against the assets of the target because of Section 67(1) of the Companies Act. + Issue of shares ~ as an alternative to internally generated funds or borrowings, the purchaser may issue shares to fund the acquisition, This is more common. in the case of listed companies due to the marketability of listed shares. The 289Malaysia 24 25 290 issue of shares commonly takes the form of a rights issue, an open offer or a placing. Alternatively, the purchaser may prefer to issue shares credited as fully paid direct to the vendor in satisfaction of the whole or part of the purchase consideration. * Issue of loan capital - the purchaser may prefer to issue, and the vendor accept, a loan note or series of loan notes recording the grantor’s indebtedness to the holder, the interest payable and the terms of repayment. A loan note may or may not be secured and, from the vendor's perspective, the attraction of a loan note will partly depend upon the creditworthiness of the purchaser and/or the security being offered by the purchaser, and partly on the interest rate payable. Loan notes and other debt instruments may be issued to third parties instead to raise the necessary financing. Structure of consideration ‘The purchaser will also need to consider the various payment structures available and the attractiveness of those structures to both parties, The following are some of the various structures available: © fixed consideration payable in cash on completion — the fixed price reflects the parties’ view of the actual financial condition of the target and the purchaser can obtain protection against the actual figures turning out to be materially different to those anticipated by the use of warranties or an indemnity; © formula cash price - the formula used to strike up the price for the target is applied to historic, actual or future financial performance. The parties may agree to apply the formula to the financial position on completion. It will be necessary to draw up the ‘completion accounts’ of the business as at completion so that the earnings or net assets of the target can be calculated at that date; © deferment of payment of part of the consideration until agreed future performance targets are met - the vendors will usually seek security for part of the purchase price outstanding in the form of, for example, retaining title to the assets or a bank guarantee until the consideration is paid in full; ‘+ _ satisfaction of the consideration payable by the issue of its shares credited as fully paid to the vendor or placing of its shares to finance the purchase; and ‘+ establishment of escrow arrangements or accounts for the deposit of documents such as share certificates and transfers, land titles and other documents or monies to be released upon the occurrence of certain contingent events. Accounting treatment ‘The presentation of the profits and targets of the target will, however, vary according to whether acquisition or merger accounting is adopted. Under Section 26C of the Financial Reporting Act 1997, financial statements which must be prepared or lodged under any law administered by the Securities Commission, the central bank (Bank Negare Malaysia is the central bank), or the Registrar of Companies (the Registrar of ‘Companies is now known as the Companies Commission of Malaysia) by any person2.6 Michael Lim Hee Kiang, Grace Yeoh Cheng Geok other than foreign companies listed on a stock exchange in Malaysia shall comply with accounting standards approved by the Malaysian Accounting Standards Board (MASB). Under Section 26D of the Financial Reporting Act, it is provided that where financial statements are required to be prepared or lodged under any law administered by the Securities Commission, the central bank or the Registrar of Companies, such financial statements shall be deemed not to have complied with the requirements of such law unless they have been prepared and are Kept in accordance with the approved accounting standards. ‘The Financial Reporting Standards (FRS) are a set of accounting standards issued or adopted by the MASB for application by all entities other than private entities. PRS 3, which is the most relevant set, took effect on January 1 2006 and applies to business combinations. FRS 3 requires all business combinations within their scope to be accounted for using the purchase method. FRS 1222004 permitted business combinations to be accounted for using one of two methods: the merger method for combinations classified as merger and the acquisition method for combinations Classified as acquisitions. A ‘business combination’ is defined in the International Financial Reporting Standards as “the bringing together of separate entities or businesses into one reporting entity". There are fairly detailed rules as to what is not included within the definition. A ‘private entity’ is a private company incorporated under Section 15 of the ‘Companies Act that: + is not itself required to prepare or lodge any financial statements under any law administered by the Securities Commission or Bank Negara Malaysia; and + isnot a subsidiary or associate of, or jointly controlled by, an entity which is required to prepare or lodge any financial statements under any law administered by the Securities Commission or Bank Negara Malaysia. Private entities must comply with either: ‘+ the Private Entity Reporting Standards in their entirety; or ‘+ the FRS in their entirety. ‘Under the FRS, goodwill acquired in a business combination represents a payment made by the purchaser in anticipation of future economic benefits from assets that are not capable of being individually identified and separately recognised. ‘The purchaser shall, at the acquisition date, recognise goodwill acquired in a business combination as an asset, and initially measure that goodwill at its cost, being the excess of the cost of the business combination over the purchaser's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Goodwill acquired in a business combination shall not be amortised. Instead, the purchaser shall test it for impairment annually, or more frequently if events or changes in ‘circumstances indicate that it might be impaired. Regulatory approvals ‘The approval of the Foreign Investment Committee, which is part of the Economic Planning Unit of the Prime Minister's Department, is generally required for joint 291Malaysia ventures, some takeovers and mergers between companies and acquisitions | and foreign interests (15% individually or in excess of 30% in total). In re acquisition of shares in manufacturing companies licensed by the Min International Trade and Industry, the ministry's approval will be required in: that of the Foreign Investment Committee. Approval of other regulatory aut may also be required depending on the industry. For certain takeovers, the a of the Securities Commission is required instead. In certain cases of acquisition of shares in excess of specified percenta approval of the relevant authorities must be obtained prior to entry ir agreement. An example of this would be Section 45 of the Banking and F Institutions Act 1989, which provides that no person shall enter into an agi or arrangement to acquire or dispose of any interest in the shares of a institution by which, if the agreement or arrangement is carried out, it acquire, together with any interests in the shares of that institution which w« i already held by it, or by it and by persons acting in concert with it; oF \ together with an aggregate interest in shares of not less than 5% of the share: institution, without obtaining the prior written approval of the minister to er such agreement or arrangement, the interests in shares previously disposed any single person or any persons acting in concert, to such single person persons acting in concert. 3. Pre-contract 3.1 Exclusivity agreements ‘ Exclusivity (sometimes referred to as ‘lock-out’) is one-sided in favour purchaser and js usually achieved by the vendor undertaking in favow prospective purchaser that the purchaser will have the exclusive opport negotiate with it, and that it will not negotiate with a third party to sell or deal with the relevant assets for a period of time. This allows the pre purchaser an interval to conduct a due diligence and carry out negotiations the constraints and pressure imposed by competitive bidding. To be enfox lock-out requires careful drafting, In this respect ‘+ the period of exclusivity is clearly defined; ‘+ the consideration passing from the purchaser for the lock-out is id ‘The consideration is often drafted as the incurrence of fees relating tc diligence investigations of the target. The undertaking will be unen! until such time as the purchaser incurs these fees. If the vendor ¥ after signing the undertaking but before the due diligence investig: ‘ which the lock-out refers began, the purchaser would be unprotecte + the extent of the costs undertaking is clearly defined to identify » whose costs are covered, for what period and on what basis : calculated, 3.2 Non-binding ‘heads of agreement’ Heads of agreement or heads of terms, or a memorandum of understanding 2923.3 34 ‘Michael Lim Hee Kiang, Grace Yeoh Cheng Geok used to record the principal terms of the transaction which have been reached. These ‘would normally be executed before either due diligence or drafting of documents commences, The heads of agreement tends to be drafted as a non-legally binding document. In order to avoid uncertainty, in addition to the words ‘subject to contract’ being inserted, it should be expressly stated that the parties do not intend for the provisions of the heads of agreement to become legally binding and that the terms as finally agreed between the parties will be captured in a detailed acquisition agreement to be drafted at a later stage. The disadvantage of non-legally binding documents is that they cannot stop either party from seeking to re-negotiate some of the terms later on, Confidentiality agreements Purchasers should be required to enter into a confidentiality undertaking to protect the vendor from unauthorised use of the information made available and to prevent prospective purchasers from making a public announcement to undermine the vendor's negotiating position. The key features of confidentiality undertakings are an acknowledgement by the purchaser that: * information is being given to it on a confidential basis and that unless the transaction proceeds to completion, none of the confidential information will be disclosed to other parties or used by the purchaser; + it will use the confidential information only for the purpose of assessing the acquisition of the target; + no disclosure of the negotiations shail be made; * if the transaction is aborted, all documents, material and other written information of a confidential nature given to the purchaser are to be returned and any copies of such documents destroyed; and + the vendor is to be entitled to injunctive relief for any breach of confidentiality. However, purchasers that are required to make disclosures to certain authorities of announcements of such matters should take care to ensure that their undertakings ‘are qualified to permit such disclosure as they may be required to make, For example, if the acquirer is listed on Bursa Malaysia Securities Berhad it may be required to make an announcement yinder the Bursa Listing Requirements. Due diligence It is advisable for a share sale agreement to include the requirement for a due diligence as a condition precedent. Due diligence audits would be required where a cicular is required for the acquisition or disposal or application to the Securities ‘Commission by a company listed on Bursa Malaysia Securities Berhad. The scope of ‘work for the due diligence exercise should be clearly defined and agreed between the parties, in the form of an agreed checklist and identified priorities. The due diligence exercise should cover the corporate records of the target (and its subsidiaries and associate companies, where applicable), banking facilities, contracts and agreements, hire purchase agreements and employment matters. The due diligence should be 293Malaysia 294 sufficiently comprehensive in order to enable the acquirer to evaluate the risks involved before pursuing the proposed acquisition any further. It is common nowadays for a due diligence exercise to be conducted by way of a data room, especially where the transaction involves large foreign companies which own subsidiaries in a number of jurisdictions. In view of the volume of documentation to ‘be reviewed in such cases and the various participants from different jurisdictions, the use of a data room facilitates and expedites the due diligence exercise. Each participant of the due diligence exercise is given access to the data room where it can retrieve the relevant documents to be reviewed from a single source. ‘The vendor's approach to preparing and compiling the data room may be influenced by: ‘+ the timetable for the transaction; + the resources available to the vendor; © the nature of the transaction; + accurate indexing of the documents; and + location of the data room. ‘At the same time, the vendor's advisers normally produce data room rules limiting: + the number of people who may attend on behalf of the bidder; ‘+ the hours and days that the data room is open; and + whether documents can be copied (and, if so, limits on the number of copies that may be made). Care should be taken to ensure that insider dealing laws are not broken. It is important to consider whether any of the information which the vendor proposes to add to the data room will render the bidders ‘insiders’. If the data room is Likely to contain such inside information, the vendor may wish to make the bidders aware of this fact (either in the text of the confidentiality letter or the data room rules), and semind them of the relevant restrictions. Insider dealing laws are contained in the ‘Companies Act, the Securities Industry Act 1983 and the Bursa Listing Requirements. Employment law and pension issues In an acquisition of shares, the business of the target, and therefore the employees, remains with the target. Any accrued rights affecting the workforce and any liabilities in respect of dismissal will remain with the target. In the event that there is redundancy as a result of the acquisition, the Employment Act 1955 provides that the affected employees (within the scope of the act) are entitled to redundancy payments, which are calculated based on a formula as set out under the act Regulation 8(2) of the Employment (Termination and Lay-Off Benefits) Regulations 1980 provides that where there Js a change in ownership of a business, if the new owner of the business does not immediately offer to continue to employ the employee under terms and conditions of employment not less favourable than ‘those under which the employee was employed before the change occurred, the contract of service of the employee shall be deemed to have been terminated, and61 62 ‘Michael Lim Hee Kiang, Grace Yeoh Cheng Geok consequently, the party by which the employee was employed immediately before the change in ownership occurred would be liable for the payment of all termination benefits payable under the regulations. This would apply to an acquisition of assets resulting in the transfer of the business of the target to the purchaser. Therefore, the vendor should procure that the purchaser offer such continued employment on the same terms of the existing employment contracts to employees of the target to avoid liability for the payment of termination benefits. Another option would be to Introduce a voluntary separation scheme where employees are invited to apply and are paid compensation based on a set formula under the scheme. Competition law Malaysia has no general antitrust or competition law, although competition policy has been applied in specific sectors such as the multimedia sector (the Multimedia and Communications Act 1998) and the energy sector (the Energy Commission Act 2001). However, according to the Ninth Malaysia Plan report released by the Economic Planning Unit of the Prime Minister's Department, the government is currently formulating a Fair Trade Practices Law premised on the Fair Trade Practices Policy to provide a more conducive environment for market competition. Specific provisions of the purchase contract Liability of the purchaser ‘Where the business of the target is being acquired, the agreement normally provides that the purchaser will be liable for obligations and entitled to rights in respect of the business only as from the date of completion of the acquisition. The purchaser may be held liable for breach of representations and warranties made, or for a failure to comply with the conditions precedent of the agreement. Provision is usually made for termination of the agreement or forfeiture of any deposit paid by the purchaser. However, provisions which seek to impose penaities on a party in breach will be void under Section 75 of the Contracts Act 1950. Liability of the vendor ‘Where the business of the target is being sold, the agreement normally provides that the purchaser will be liable for obligations and entitled to rights in respect of the business only as from the date of completion of the sale. In the case of acquisitions of shares of the target, obligations and rights remain in the target, but it is normal for the vendor to give warranties on the financial state of affairs of the target up to a specified date. The vendor may be willing to offer the purchaser assurance through the giving of warranties, but is unlikely to accept liability in excess of the sale proceeds. Accordingly, the vendor will usually demand a limitation on maximum liability equal to the sale proceeds. The vendor may also wish to set a level under which it is not economical for proceedings to be commenced in relation to breach of, warranties, in order to avoid incurring excessive legal costs. Further, the parties may agree that in certain cases individual claims of very minimal value are not recoverable. Such de minimis clauses are generally agreed to by purchasers. Under the 298Malaysia 63 64 296 Limitation Act 1953, statutory limitation for an action for breach of warranties is six years from the date of breach. The purpose of warranties is to enable the purchaser to uncover information on the target prior to entry into an agreement. Having disclosed information to the purchaser, the vendor may wish to use a disclosure letter to identify exceptions to the warranties made in order to avoid liability under the warranties for the matters disclosed. Any disclosures in the disclosure letter would have the effect of negating the warranties to the extent of the information disclosed, and a purchaser would be advised not to accept general disclosures unless it has fully reviewed those disclosures. Representations and guarantees In relation to a transaction whereby the business of the target is transferred, most abilities in respect of the affairs of the business (Including tax liabilities) remain with the vendor up to the transfer date. A vendor will usually be required to provide an extensive list of warranties in respect of the target if the shares of the target are being acquired and in respect of the business, if it is the business of the target that is being acquired. Representations and warranties will normally cover matters such as accounts, litigation, assets, taxation, finance, contracts and commitments, and ‘employees. Common representations and warranties made by each party to the other party would include that: ‘+ thas full legal right, authority and power to execute the agreement; « ithas been duly authorised by all necessary corporate action and all necessary approvals or authorisations required by regulatory authorities to acquire the assets/shares; © the acquisition of assets/shares does not contravene or conflict its memorandum or articles of association; and + performance of its obligations under the agreement will not result in breach of any other agreements or covenants it is currently party to. ‘The concept of an indemnity for tax as used in the United Kingdom is similarly applied in Malaysia. It is quite common for agreements to contain a provision whereby the vendor covenants to indemnify the purchaser and/or the target against any liability for taxation arising from any acts, omission or transactions occurring before the completion of the acquisition or any undisclosed liabilities. Agreements will usually provide for the consequences in the event of breach ot default of the agreement by either party. Usually, the non-defaulting party will be entitled to terminate the agreement if the defaulting party has not remedied the breach within a certain period of time. The agreement may provide for the right to specific performance by the defaulting party. Damages for breach of contract a€ normally awarded on the basis of losses that are foreseeable, unless the defaulting party is aware of any special loss that may result from the breach, in which case the special loss is also recoverable. Collateralisation of representations and guarantees and the purchase price ‘The purchaser may make provision in the agreement to protect itself from Joss65 66 ‘Michael Lim Hee Kiang, Grace Yeoh Cheng Geok incurred as a result of breach of representations and warranties made by the vendor by retaining a portion of the purchase price. In this situation, there may be an adjustment to the purchase price which was originally agreed between the purchaser and the vendor. The vendor may seek collateralisation in relation to the payment of the purchase price by retaining title to the assets or shares until the purchase price is paid in full. However, in the case of acquisition of shares of targets which are listed on Bursa Malaysia Securities Berhad, the rules relating to the transfer of shares or upon creation of securities in respect of shares will also need to be complied with. Non-compete clauses In the commercial sector, it is normal for goodwill to form part of the business of the company and as such it will have to be transferred to the purchaser in the event that the business of the company is acquired. A transfer of the goodwill of the business will confer on the purchaser the exclusive right to carry on the business transferred with the exclusive right to use the name under which the business has been transferred. Some agreements, however, make no express provision for the assignment of goodwill, but provide for non-compete covenants to be undertaken by the vendor. Such covenants are drafted to protect the value of the goodwill ‘transferred, but care must be taken in drafting such covenants to ensure that they will not be held void as covenants in restraint of trade. Under Section 28 of the Contracts Act, every agreement by which anyone is restrained from exercising @ lawful profession, trade or business of any kind is to that extent votd, save for agreements not to carry on business of which goodwill is sold and agreements between partners prior to dissolution, or during continuance of partnership. In practice, a purchaser of a business is usually entitled to protect itself against ‘competition per se on the part of the vendor and to protect the value of the goodwill ‘transferred. Confidentiality clauses ‘The parties are advised that this clause should be sufficiently comprehensive to cover, confidentiality of the terms of the agreement and anything related to the ‘transaction, all information and documents received in the course of the transaction and so on. The information to be protected should be clearly defined and the obligations of confidentiality of each party should be carefully drafted to suit the parties’ requirements. The confidentiality clause should survive termination of the agreement. It is not unknown for perpetual obligations to be imposed; however, where the confidential information concerned 4s commercial rather than technical, there is likely to be some implied limitation on the length of the obligation. The confidentiality clause should not merely prevent a party from disclosing confidential information, but should also provide that the party shall use the confidential information solely for the purpose for which it was disclosed and not for its own benefit, ‘However, parties that are required to make disclosures to certain authorities or ‘announcements of such matters should take care to ensure that their undertakings are qualified to permit such disclosure as they may be required to make. 297Malaysia 67 68 69 6.10 298 Arbitration clauses ‘An agreement between the parties to submit to arbitration amounts to a voluntary surrender of each party’s rights to pursue its remedy for breach of contract in the courts; thus, careful consideration should be given before inclusion of such a clause in the agreement. The parties may want to settle any dispute between them before an arbitrator as the first choice of settlement, failing which the dispute can then be brought to the courts. The choice of arbitrator will usually be agreed on by both parties; however, it is common for the clause to provide for the appointment of an arbitrator in the event of disagreement, In such case, the common method is to designate a third party to act as appointing authority at the request of either party to the agreement after an appropriate period of time. Where both parties are based in Malaysia, the designated third party will usually be the director of the Kuala Lumpur Regional Centre for Arbitration. It is open to the parties to specify which arbitration, rules are to apply to the agreement. Choice of law clauses Generally, the Malaysian courts will give effect to a choice of law clause. Exceptions may be in the case of breach of public policy or lack of nexus with the subject matter of the agreement. Service of notice clauses ‘This clause should provide that all notices should be in writing and specify the form of the notice in writing, such as the contents and authorised signatory. It should also set out the permitted methods of service and, in respect of each specified method of service, when delivery will be deemed to take place. Contact details such as the initial addresses, fax numbers and telephone numbers of the parties shall be provided in the agreement. Due execution If a party to an agreement is a company, the agreement should be executed in accordance with its intemal regulations. For Malaysian companies, due execution must be in accordance with the provisions of its memorandum and articles of association. Normally, no notarisation is required for execution of acquisition agreements. It is possible for local counsel to provide a legal opinion on the capacity of the particular company to enter into an agreement or to confirm that due execution of the agreement has taken place, should the parties wish, but this is not a legal requirement. Disclosure requirements In relation to private companies, there is no fixed guideline on what must be disclosed, save for what is contractually agreed between the parties. The solicitors involved in the due diligence exercise should be given unrestricted access to all documents as provided for in the due diligence checklist. There are continuing disclosure requirements on listed companies under the Bursa Listing Requirements. ‘There is a general requirement on listed companies to make immediate public disclosure of any material information, including the entry into a joint venture agreement and a change in management. The listed company must also makeMichael Lim Hee Kiang, Grace Yeoh Cheng Geok immediate announcements to Bursa Malaysia Securities Berhad in various circumstances as set out in the Listing Requirements, including: © change of control in the listed company; + the acquisition of shares in another company; + any other event resulting in such company becoming the subsidiary of the listed company; and * the receipt of notice of change in substantial shareholding in the listed company. Under the Companies Act and the Securities Industry (Reporting of Substantial Shareholding) Regulations 1998, there are disclosure requirements on shareholders of certain companies. These are: + a company all or any of the shares in which are listed for quotation on the official list of a stock exchange as defined in the Securities Industry Act 1983; ‘+a public company whose shares are not listed for quotation on the official list of a stock exchange as defined in the Securities Industry Act 1983; + a body corporate incorporated in Malaysia that is for the time being declared by the minister of domestic trade and consumer affairs, by notification in the Gazette, to be a company for the purposes of this division; or + a body, not being a body corporate, formed in Malaysia that is for the time being declared by the minister, by notification in the Gazette, to be a company for the purposes of this division, ‘The licences of some companies may also require them to disclose matters such as any change of shareholding, although others require the consent of the relevant authority. Acquisition of assets of insolvent companies In relation to companies involved in winding-up proceedings, the relevant parties to the acquisition will be the acquirer and the liquidator. A receiver may be appointed notwithstanding the commencement of the winding-up of the company; however, the powers of the receiver to carry on business and retain and sell secured assets may be restricted. Acquisition of public companies If the target is a public company (listed or unlisted), or a private company which has shareholder funds or paid-up capital of RM10 million or more, and where the purchase consideration is RM20 million or more (@ qualifying company), the provisions of the Malaysian Code on Takeovers and Mergers 1998, the Securities Commission Act and the Bursa Listing Requirements may be applicable where an MG&A transaction takes place. ‘The acquisition of a public company which is the subject of the takeover offer is regulated by the Securities Commission and Bursa Malaysia Securities Berhad within the legal framework of the Securities Commission Act, the Malaysian Code on Takeovers and Mergers and the Bursa Listing Requirements, as well as the 299Malaysia 300 corresponding guidelines and practice notes issued by the respective authority. Generally, the offeree is usually acquired by way of an acquisition of a block of shares from the major shareholder followed by the making of an offer for the remaining shares of the company. The Malaysian Code on Takeovers and Mergers requices that a mandatory takeover offer be extended to the shareholders of the remaining voting shares of the company if: an acquirer has obtained control in a company (ie, the amount of shares acquired is more than 33% of the voting shares of the company); or + aperson that holds more than 33% but less than 50% of the voting shares of the company acquires more than 2% of the remaining voting shares of the company. The mandatory takeover offer must be conducted in accordance with the provisions of the Malaysian Code on Takeovers and Mergers and the practice notes issued by the Securities Commission. The Malaysian Code on Takeovers and Mergers sets out requirements relating to: * the announcements, notices and documents to be provided to the shareholders of the listed company; + the terms of the offer; + the timing of the offer; © the form and content of the offer document; and «the relevant obligations of various parties in relation to disclosure. Immediate announcement of the offer must be made via press release to the public. The party making the offer must also notify the board of directors of the company, Bursa Malaysia Securities Berhad and the Securities Commission. ‘Where the offeror has received acceptances in relation to 90% of the shares for which the offer has been made within four months of making of the offer, the offeror may compulsorily acquire the remaining shares by giving notice to the dissenting shareholders in the manner provided in the code, Within one month of notice being given, a dissenting shareholder may request a statement in writing of the names and ‘addresses of all other dissenting shareholders as shown in the register of members. Upon the giving of the notice and fulfilment of request for such statement (but not ‘until 14 days after the posting of the statement to the dissenting shareholder), the offeror shall be entitled or bound to acquire those shares on the terms of the offer. ‘Sometimes, even with the compulsory acquisition process put in motion, it may not be possible to acquire 100% of the shares of a public company. As alternatives t the acquisition of shares of the target, acquisition of control of a company can be obtained through a scheme of arrangement under Section 178 of the Companies Act Further, if there is any impediment to obtaining 100% of a public company, it may be worthwhile considering the acquisition of 100% of the business of the target by special purpose vehicle set up by the purchaser instead. ‘This chapter was prepared with the assistance of Michelle Wong and Lee Su-Anne.