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The M&A guide to

south east Asia and India

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This legal and investment guide does not purport to be comprehensive or constitute any legal advice. It is only a guide. The information
and the laws referred to are correct as at July 2009, but they may change quickly. If you would like any advice or further information
on anything contained in this guide, please contact Clifford Chance or any of the regional law firms who contributed to this guide - full
contact details can be found on the inside back cover.

© Clifford Chance 2009

www.cliffordchance.com
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Contents

Foreword 3

India 4

Indonesia 26

Malaysia 42

Philippines 62

Singapore 84

Thailand 100

Vietnam 120

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Foreword
At the time of writing and publication of this, the first Clifford Into the future with the benefit of experience
Chance M&A guide focusing on south east Asia and India, the
aftershocks of the global financial crisis continue to be felt. The legal systems of south east Asian countries are developing
rapidly and amendments and supplements to existing laws
The past 18 months have seen bank and corporate failures and are frequent. This dynamic legal environment, together with
near-failures, falling equity markets, and ever-increasing levels of inconsistent interpretation and application, can create difficulties
government money being used to prevent systemic failure in the for foreign investors.
financial markets.
Given these difficulties, the Clifford Chance Singapore office,
South east Asia - leading a recovery? in conjunction with AZB & Partners* (India), Castillo Laman Tan
Pantaleon & San Jose (Philippines), Chooi & Company (Malaysia),
Globally, the economic turmoil has caused global M&A activity the Clifford Chance Bangkok office (Thailand), Mochtar Karuwin
to decline by some 50 per cent. However, whilst the decoupling Komar (Indonesia) and VILAF (Vietnam), has produced this guide
argument has been largely disproven, there remains a prevailing for foreign investors investing in south east Asia and India.
view that the recession will be shorter and shallower in Asia than
in the West. In January 2009, Clifford Chance and AZB & Partners entered
into a “best friends” agreement, which is a reciprocal arrangement
Singapore, for example, was one of the first south east Asian allowing both firms to offer clients the best possible service.
countries into recession, yet the signs of recovery are already This sets a new benchmark for the delivery of legal services
noticeable. Set against the bleaker landscapes of Europe, this or transactions involving Indian businesses or to international
Asian recovery is strengthening the emerging markets focus within businesses investing in India.
the business and financial communities, with the region as the
centre of attention. Clifford Chance regularly advises clients on M&A transactions
in each of the jurisdictions covered in this publication (as well
In addition, the indications are that private equity firms, hedge as other jurisdictions in Indochina and the sub-continent). In
funds and other financial investors that had been focussing on addition to our full service office in Bangkok, we have lawyers on
portfolio management are now starting to emerge from that secondment with Mochtar Karuwin Komar in Jakarta, and VILAF
process with cash to deploy, assisted by an easing in the tight in Ho Chi Minh City.
credit conditions that had previously stifled their ability to leverage
transactions. As a result, the suggested demise of these classes Our extensive experience in this region means that we are
of investors as major players in the region’s M&A market seems uniquely positioned to advise our clients on national and pan-
unwarranted. Asian transactions, blending international standards with the
benefits of local knowledge. Our team also has broad sector
Lingering difficulties experience, with particular strength in financial institutions,
telecoms, natural resources and private equity.
However, hurdles remain. Until vendor and purchaser expectations
on the valuation of assets become more closely aligned, many We would like to thank each of the leading law firms across the
players with the resources to execute M&A transactions will sit on region for their contributions to this guide and are grateful, in
the sidelines. particular, to Wayne Palmer and Satbir Walia for the huge amount
of time and effort that they have dedicated to compiling this guide.
In addition, the relative complexity of navigating the regulatory
aspects of foreign direct investment in south east Asia and India
is fuelling the conservatism that has emerged amongst investors
after the financial crisis. The appetite for risk has abated, resulting
in increased scrutiny of proposed transactions at investment
committee and board level, which in turn has led to the rejection
of many transactions that would have been executed easily in Philip Rapp
recent times. Partner, M&A/Private Equity
Clifford Chance, Singapore
A number of jurisdictions in south east Asia have begun to ease Tel: +65 6410 2252
regulatory hurdles for foreign direct investment. For example, philip.rapp@cliffordchance.com
new mining laws in Indonesia allow direct foreign ownership of
certain categories of mining concession. Malaysia has passed
a law relaxing the requirements for a specified proportion of the Lee Taylor
equity of companies in certain sectors to be held by Malaysian Partner, M&A/Private Equity
nationals – the requirement to allocate 30 per cent of the equity Clifford Chance, Singapore
to Bumiputera has long acted as a deterring factor to foreign Tel: +65 6410 2290
investors. lee.taylor@cliffordchance.com

* AZB & Partners is an Indian partnership firm with offices in Mumbai, Delhi, Bangalore, Pune, Chennai and Hyderabad

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India

1. What are the forms of business entity In India? certain regulatory approvals may be required for appointment and
removal of directors.
Common forms of entity
Appointment of directors: The board may, if permitted by its
n Private company limited by shares AoA, appoint additional directors at a board meeting. However,
n P
ublic company limited by shares, which could either be an such additional directors can hold office only until the next annual
unlisted public company or a public company listed on a general meeting of the shareholders.
recognised stock exchange in India (listed company).
In the case of a listed company, the listing agreement requires
Less common forms of entity that the board should have an optimum combination of executive
and non-executive directors with not less than 50 per cent of the
n Company limited by guarantee board comprising non-executive directors. Further, depending on
n Unlimited company whether the chairman of the board is a non-executive director and
n Partnership firms whether the non-executive chairman is a promoter or a related
n Limited liability partnership1 person, the number of independent directors on the board of the
n Proprietary firms listed company will vary in accordance with the listing agreement.
n Association of persons
Retirement of directors: In the case of a public company, one
third of the directors on the board can be non-rotational directors.
2. How is a company managed? Of the remaining directors, one third of the directors retire from
their office compulsorily at each annual general meeting, but are
The basic management structure eligible for reappointment.

What form does the management structure take? A private company has the flexibility to provide in its AoA the
manner of appointment, retirement and vacation of the office for
The (Indian) Companies Act, 1956 (Companies Act) provides that all its directors and there is no requirement for any director to retire
the board of directors (board) of every public company and private by rotation.
limited company must comprise at least three directors and two
directors, respectively. Removal of directors: Any company may, by an ordinary
resolution, remove a director before the expiry of his term, subject
All the powers of management of the affairs of a company are to compliance with the procedures set out in the Companies
vested in the board, with the exception of certain powers that Act, unless the directors have been appointed according to the
can only be exercised with the shareholders’ consent or with the principle of proportional representation.
approval of the Government of India (GoI), the Company Law
Board, the Regional Director, the Registrar of Companies (RoC) or What powers does the board have?
a court of law.
The board has wide powers and is entitled to exercise all powers
All the decisions of the board are normally taken by a majority of and do all such acts, either on its own or through its committees,
the directors on the board, in accordance with the provisions of with the exception of such powers and acts that are reserved for
the Articles of Association of the Company (AoA). the shareholders according to either its AoA or by the provisions
of the Companies Act.
How are directors appointed to and removed from office?
The board may also delegate its powers, with certain exceptions,
The manner of appointment, removal and retirement of directors to a particular director or to a committee.
of a company is governed by the AoA, the Companies Act and,
in the case of a listed company, also by the agreement executed Are there any residency requirements for directors?
by the listed company with the stock exchange on which it is
listed (commonly known as a listing agreement). In addition, In the case of a private company, there is no requirement that
depending upon the sector in which the company is engaged, directors must be resident in India. In the case of a public

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The Limited Liability Partnership Act, 2008, was notified earlier this year on 9 January 2009. As a result, the limited liability partnership is not yet common.

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company, the Companies Act prescribes that a managing director The listing agreement stipulates further duties that must be
or a whole time director or a manager must be a resident in India. observed by the directors. For example, directors have to make
Where such a person is a non-resident, the appointment would be various disclosures of their shareholdings in other companies to
subject to GoI approval. the company, as well as offices held in other firms and bodies
corporate.
Board meetings can be held in India or outside provided the
quorum is present at that place. Participation in board meetings Directors, as agents of the company, should display the utmost
by teleconferencing or videoconferencing is possible, as long as standards of care, skill and diligence while exercising powers and
the prescribed quorum is present in one place. For the purpose of functions on behalf of the company.
calculating the quorum at a meeting of the board, attendance by
teleconferencing or videoconferencing is not taken into account. Duty to the shareholders

Is there any requirement for directors to hold shares? Ordinarily, directors are not the agents or trustees of the
shareholders and therefore they do not owe any fiduciary duties
There is no statutory requirement for the directors to hold shares. to the shareholders. A director’s duty to a shareholder does not
evolve from a legal relationship such as in the case of a company
What duties do directors owe? and is dependent on establishing an independent special factual
relationship between a shareholder and a director. However, a
Overview director is expected not to mislead the shareholders.

The duties and responsibilities for directors of an Indian company The shareholders of an Indian company, whether public or private,
arise under both statutory and common law. Under the principles may, by way of a derivative action, bring a claim against the
of common law, directors, as agents and trustees of a company, directors in the name of the company for breach of their duties to
owe a duty of care, loyalty and trust to the company and are the company and breach of trust or misfeasance (in the event of
required to act in a bona fide manner and in its best interests. fraud by directors).

Additionally, the Companies Act lays down the duties and Similarly, an aggrieved shareholder may bring a claim against the
responsibilities for directors of Indian companies. These can be directors by way of a representative action either in his own name
broadly classified as: or on behalf of other aggrieved shareholders on the grounds of
mismanagement or oppression.
n fiduciary duties to the company;
n duties arising in their capacity as an agent of the company; and The Companies Act provides that shareholders, that are not less
n o
ther duties under the Companies Act to the company, its than 100 in number or not less than one-tenth of the total number
employees, shareholders and creditors. of its members, whichever is less, or any member or members
holding not less than one-tenth of the issued share capital of the
Duty to the company company, can institute such action. However, such derivative/
representative actions by shareholders are not common in India.
As fiduciaries, the directors are expected to subordinate their
personal interests to those of the company and must act in a Duty to creditors
bona fide manner towards its best interests.
The directors have a statutory duty not to conduct the business
Directors are under a duty to disclose their interest in any contract of the company in a manner so as to defraud the creditors of the
to the board. The term “interest” includes an indirect interest company.
and extends to cases where the relatives of the director have an
interest in the contract. Duty to employees

Directors are required to obtain the consent of the GoI in certain The directors must ensure that the interests of the employees are
cases where the directors are interested. safeguarded and all the statutory contributions and other benefits
available to an employee under the various labour laws in India are
The directors cannot, except with the consent of the shareholders made available to the employees.
by a special resolution, hold an office or place of profit (whether
directly or indirectly) in the company.

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What types of liability can directors incur? What are the auditing requirements for companies?

Directors of Indian companies may incur both civil and criminal Without exception, all incorporated companies in India must
liability. Apart from the Companies Act, there is other Indian comply with the statutory requirement of having their accounts
legislation (such as labour and environmental laws) that holds audited. The auditor should be a member of the Institute of
the directors in charge of and responsible for the conduct of the Chartered Accountants of India.
business of the company liable for violations by the company of
any provisions of such legislation. 3. What are the most common types of M&A transaction?

However, the directors may absolve themselves from such liability Private companies
if they are able to prove that they were not involved in, or did not
participate in, the violation of the relevant legislation. Share acquisitions

The Companies Act deems certain officers to be “officers in Share acquisition transactions involving private companies enjoy
default”, including the managing director and the whole-time a more relaxed regime while public companies are exposed to a
director of the company. However, if the company does not have more stringent regulatory regime.
a managing director or a whole-time director, then any director
specified by the board would be liable as an “officer in default”. Subject to compliance with the foreign direct investment (FDI)
policies (briefly described in section 5), a non-resident entity can
If no such director is specified by the board, then all the directors acquire securities of an Indian company, by way of sale, from a
of the company would be liable for the contravention. In such resident entity under the “Automatic Route” (as defined in section
a situation, they can be held responsible for non-compliance, 5), provided that the price at which the transfer takes place is not
default, failure or violation of any of the company’s statutory less than
obligations and can be disqualified from acting as a director or
being involved in the management of a company. n t
he ruling market price, where the shares are listed on a stock
exchange, or
Directors may be liable in tort for negligently causing loss to a n afair valuation of the shares by a chartered accountant as per
person with whom the company has entered into a contract if the the guidelines issued by the Controller of Capital Issues, and
circumstances impose a personal duty on the directors to act with n i
n the case of unlisted shares, as certified by a chartered
proper skill or care towards that person. accountant.

Directors may be liable for misfeasance if the business of a However, if the company whose shares are to be transferred
company is carried on with the intent, or for the purpose of, operates in the financial services sector, or in cases where the
defrauding its creditors. Takeover Code is applicable, the approval of the Reserve Bank of
India (RBI) is required.
A person may be disqualified from acting as a director or
being involved in the management of a company in certain In the case of the Regulated Sectors (as defined in section 5), the
circumstances, for example, if: acquisition would need to comply with the sectoral guidelines,
if any, and the approval of the applicable regulators, if required
n h
e is found to be of unsound mind by a court of competent under such guidelines, would have to be sought.
jurisdiction;
n h
e is an undischarged insolvent or has applied to be Transfer of securities from a non-resident entity to a non-resident
adjudicated as an insolvent and his application is pending; Indian and vice versa is not permissible under the Automatic
n h
e does not attend three consecutive meetings of the board Route and the prior approval of the RBI (in addition to the approval
or any meetings of the board for a continuous period of of the relevant regulator, if applicable) is required.
three months, whichever is longer, without obtaining leave of
absence from the board; In the case of transfer of securities from non-resident to resident
n h
e fails to pay any call with respect to shares of the company and vice versa, Regulation 20 (again, defined in section 5)
held by him alone or jointly with others within six months of the prescribes certain mandatory filings with the RBI through the
last date of payment; authorised dealer in the prescribed format, such as the Form
n h
e is convicted of any offence involving moral turpitude and FCTRS. These filings, along with the filings required by the
sentenced to imprisonment for not less than six months; or Registrar of Companies under the Companies Act, must be made
n a
n order disqualifying him from appointment has been passed within the stipulated time.
by the court.
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Business/asset acquisitions The Income Tax Act, 1961 (the Tax Act), provides certain benefits,
including a waiver of capital gains tax, if an amalgamation satisfies
A buyer can either acquire the entire business or undertaking of a the preconditions set out in the Tax Act.
company (i.e. the assets and liabilities of the company) for a lump
sum amount without assigning any values to individual assets and Joint ventures
liabilities (a slump sale) or can choose to cherry pick the assets
and liabilities of a company, leaving certain assets and liabilities Subject to compliance with the FDI Policy, a non-resident entity
behind in the transferor entity (an asset transfer). may set up a joint venture company in India with a resident entity.
In sectors under the FDI Policy with foreign equity ceilings, a joint
Transfer of immovable assets from a resident Indian entity to a venture with an Indian entity often becomes necessary to satisfy
non-resident entity is not permitted under the exchange control the conditions of balanced shareholding over and above the
regulations in India. However, a foreign buyer may set up a wholly foreign investment ceiling.
owned local Indian transferee company in India to acquire the
immovable assets. In other sectors, from a new entrant’s perspective, factors such
as the local partner’s pre-established marketing and distribution
Acquisition of movable assets/properties may be effected through chain, human resource availability, etc, play an important role in
actual or constructive delivery, provided that the relevant transfer deciding to opt for a joint venture.
requirements are complied with.
Demerger
Acquisition of intangible property must take place pursuant to
a written document and the transfer must be recorded with the A business transfer can also be effected by a demerger, pursuant
relevant registration authority. to a scheme of arrangement under the Companies Act (which
involves shareholder/creditor consent and court sanction) by one
While structuring the acquisition of the business or assets of a company (the demerged company) of one or more undertakings
company, due attention must be paid to transaction costs in the to another company (the resulting company) such that:
form of stamp duty, capital gains tax, sales tax, etc.
n all the property and liabilities of the undertakings in question are
A transaction that is considered to be a slump sale would be transferred to the resulting company at the values appearing in
taxed only if the consideration for the transfer of the business the books of accounts of the demerged company;
exceeds the “net worth”. Such profits are taxable as capital gains n the resulting company issues shares in itself to the
and not as business income. Apart from income tax, a slump sale shareholders of the demerged company in consideration for
may also be beneficial from the perspective of value added tax the above transfer;
(VAT), which applies to the sale of goods. An asset transfer (i.e. n shareholders holding not less than three-quarters in value of
sale of assets/goods as opposed to the sale of an undertaking as the shares in the demerged company become shareholders of
in the case of a slump sale) is subject to VAT. the resulting company; and
n the transfer of the undertakings is on a “going concern” basis.
Amalgamations
Public companies
The Companies Act sets out the procedure and requirements for
the amalgamation of companies. Apart from an amalgamation Takeovers (see section 6 for a more detailed summary of
of Indian companies, the Companies Act also envisages an takeovers involving listed companies)
amalgamation between an Indian company and an “unregistered
company”, which may include a foreign company or a branch SEBI (Substantial Acquisition of Shares and Takeovers)
of a foreign company. Mergers between branches of foreign Regulations, 1997 (the Takeover Code) applies to any “substantial
companies in India with Indian companies have been sanctioned acquisition” of shares or control of either a listed company, or
in the past under the terms of the Companies Act. of an unlisted public company or a private limited company that
owns or controls a listed company.
Mergers must be sanctioned by the High Courts of the respective
states in which the amalgamating companies are registered. A listed company must comply with Section 372A of the
Generally, amalgamation of two companies takes approximately Companies Act and the requirements of the Takeover Code. The
six months. provisions for share acquisitions described in section 3 also apply
to public companies.

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Schemes of arrangement Amalgamations

As in the case of a private company, any corporate restructuring The various provisions for amalgamations described in section
of a public company is also governed by the provisions of the 3 also apply to listed and unlisted public companies. Further, as
Companies Act, which include inter alia the reorganisation of prescribed in the listing agreement, a listed company is required to
the share capital of the company by consolidation of shares file any scheme/petition proposed to be filed before any court or
of different classes, by division of shares into different classes, tribunal for the purposes of such merger and amalgamation with
reduction of the share capital of the company, and the issuance of the relevant stock exchange for approval at least a month before it
new shares or new classes of shares. is presented to the court or tribunal.

Corporate restructuring could either be achieved as a part of Joint ventures


internal restructuring methods which include the issuance of
new shares, buy backs of shares and reduction of share capital The various provisions for joint ventures described in section
(collectively, internal methods) or by the involvement of a third 3 apply to public companies subject to the specific corporate
party, by which either: governance and other conditions under the Companies Act
relating to public companies.
n a new company is formed to carry on the same business;
n there is the sale of an undertaking to another company; Public-to-private acquisitions (P2Ps)
n a demerger (disposal of an undertaking to another company);
n an amalgamation or merger of one or more companies; or There is no specific regulation governing a public-to-private
n t
 he rehabilitation of a sick industrial undertaking (collectively, acquisition in India. However, such acquisitions may be made
external methods). by acquiring the publicly held shares of a listed company and
subsequently delisting the company. This route would be
When undertaking a reorganisation of the share capital of the regulated by the Delisting Guidelines and the Takeover Code, as
company by the consolidation of shares of different classes or noted in sections 5 and 6, respectively.
by the division of shares into shares of different classes, the
Companies Act requires that the company, a creditor of the Do the parties have an obligation to negotiate in good faith
company, a member of the company, or the liquidator of the to one another in M&A transactions?
company, as the case may be, present an application under
Section 391 of the Companies Act on the scheme of arrangement There is no legal obligation on the parties to a proposed
or compromise to the High Court, which is required to conduct transaction to negotiate in good faith. As such, it is possible for
the process of the restructuring as provided under Sections 391 a party to terminate the negotiations or to negotiate with another
and 394 of the Companies Act. These provisions are applicable prospective buyer at any time prior to signing of the agreement.
for listed and unlisted public companies and private companies.
As a matter of comfort, parties generally execute a preliminary
When undertaking any of the external methods of corporate non-binding letter of intent, a term sheet or a memorandum of
restructuring, the board of a public company or a subsidiary of understanding that outlines the terms of the transaction, and
a public company could sell the whole or substantially the whole which may provide for a break fee and lock out clauses.
of an undertaking of the company only with the consent of the
members in a general meeting. 4. What percentage shareholding is required to achieve
effective control of a company?
Further, as prescribed in the listing agreement of the relevant
stock exchange, a listed company is required to file any scheme/ Under the Companies Act, shareholder resolutions are
petition proposed to be filed before any court or tribunal under categorised into ordinary resolutions and special resolutions.
the Companies Act for the purposes of carrying out any corporate
restructuring, with the relevant stock exchange for approval at Actions that may be undertaken by way of ordinary resolution are
least a month before it is presented to the court or tribunal. those actions that can be passed by a simple majority (50 per
cent or more) of the members of the company present and voting
In demergers, such approval typically stipulates a condition in person or by proxy. For example, such actions could include
whereby the shares of the resulting company are required to be amending the AoA, altering the share capital of the company,
listed on the relevant stock exchange. The provisions in relation to appointing or removing the statutory auditors of the company, or
business/asset acquisitions as described in section 3 also apply removing a director before the expiry of his period of office.
to public companies.

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Special resolutions on the other hand, are required to be passed scale sector, unless the company undertakes significant export
by at least three-quarters of the members of the company obligations. However, certain exemptions are made for foreign
present and voting either in person or by proxy. For example, investments in the small scale sector if the concerned unit is
special resolutions would be required to alter the provisions of an export oriented unit, or a unit in a free trade zone, an export
the memorandum of association, to change the objects of the processing zone, a software technology park or an electronic
company or change the place of the registered office from one hardware technology park (the small scale sector).
state to another. n w
here the non-resident investor has an existing (as of 12
January 2005) joint venture or technology transfer or a trade
Any shareholder holding more than 50 per cent of the share mark agreement in the “same field” in which the Indian
capital of the company will be able to exercise effective control of company now issuing the shares, or of which shares are being
the company, as typically he would have the right to acquired, is engaged (existing ventures). In such a case, the
foreign investor would have to obtain the prior permission of
n a
ppoint the majority of directors on the board and therefore the FIPB to make FDI in the Indian company. However, the
control the board; onus to provide the requisite justification and proof to the
n p
ass all the ordinary resolutions without having the need to satisfaction of the FIPB that the new proposal would not in
seek consent from any other shareholder; and any way jeopardise the interests of the existing partner would
n block a special resolution item. lie equally on the non-resident investor and the Indian partner.
Normally, a no-objection certificate from the Indian partner is
5. Regulation, consents and foreign investment restrictions required to obtain approval. This embargo under the Automatic
Route is not applicable:
General framework of foreign direct investment policy
• 
to the acquisition of shares of an Indian company engaged
The Foreign Exchange Management Act, 1999 (FEMA) is the in the information technology sector;
central legislation with which any foreign investor is required to • 
to investments by certain international financial
comply for its entry, operations and exit strategy in India, including institutions such as the International Finance Corporation,
the regulations of FEMA and more specifically Regulation 20, the Commonwealth Development Corporation, etc;
“Foreign Exchange Management (Transfer or Issue of Security by • 
to the establishment of wholly-owned subsidiaries in the
a Person Resident Outside India) Regulations, 2000” (Regulation mining sector (subject to the foreign investor having no
20), which regulates the transfer or issue of securities by or to existing joint venture for the same area and/or the particular
persons resident outside India. mineral);
• 
to investments made by venture capital funds registered
Under Regulation 20, an Indian company may - subject to the with the Securities and Exchange Board of India (SEBI);
prescribed FDI, sectoral regulations and licensing requirements • 
where the investment by the Indian or foreign party in an
applicable to various sectors and activities (if any) - issue equity existing venture is less than 3 per cent and
shares, compulsorily convertible preference shares or compulsorily • 
where the existing venture is defunct or sick.
convertible debentures (securities) to persons resident outside
India under the “Automatic Route” i.e. without the prior approval In addition to complying with the sectoral regulations, there
of the Foreign Investment Promotion Board (FIPB). are licensing requirements for certain industries (the Regulated
Sectors). These sectors are listed later in this section.
However, foreign investment is not permitted under the Automatic
Route in certain sectors and specific approval of the FIPB (the FDI is prohibited in certain sectors and in certain activities (the
Approval Route) is required. (See later in section 5 for a list of Prohibited Sectors). These sectors are listed on page 11.
sectors where the Approval Route is required).
The government has recently issued Press Notes 2, 3 and 4
In certain specified circumstances, the Automatic Route for FDI is (2009 Series), which seek to modify and clarify the position for
not available. The key circumstances are: calculating indirect foreign investment in Indian companies and the
transfer of ownership or control from residents to non-residents
n w
here the activities of the Indian company require an industrial in Indian companies. This may have an impact on whether or not
licence under the provisions of the Industries (Development the approval of the FIPB is required in certain types of companies
& Regulation) Act, 1951 (subject to exceptions) (the Licensed and may also impact the quantum of foreign investment in certain
Industries). These sectors are listed later in section 5. sectors.
n w
here more than 24 per cent foreign equity is proposed to
be inducted for manufacture of items reserved for the small

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Are there any regulated industries? Are there any restrictions on the foreign ownership of
shares in an Indian company?
FDI is prohibited in these Prohibited Sectors:
Outside the Prohibited Sectors, FDI of up to 100 per cent is
n retail trading (other than single brand retail); permitted in most sectors without any requirement for prior
n atomic energy; approval under the Automatic Route. However, in certain sectors,
n the lottery business; FDI is subject to sectoral caps and can only be undertaken within
n gambling and betting; these ceilings either through the Automatic Route, or with the prior
n real estate business; approval of the FIPB, depending on the applicable guidelines.
n agriculture (excluding floriculture, horticulture, development
of seeds, animal husbandry, piscicuture and cultivation of Sectoral caps are usually in the range of 26 per cent, 49 per cent,
vegetables, mushrooms etc. under controlled conditions and 51 per cent and 74 per cent. Schedule 1 sets out such sectors
services related to agro and allied sectors) and plantations and the applicable foreign investment limits.
(other than tea plantations);
n nidhi company; Some sectors also carry minimum capitalisation norms, linked
n construction of farm houses; and to the percentage of foreign ownership. For instance, in the
n trading in transferable development rights. real estate sector, if the investee company is a wholly owned
subsidiary of the foreign entity, it must be capitalised for a
Further, FDI is not permitted under the Automatic Route, and the minimum amount of USD10 million. If it sets up as a joint venture
specific approval of the FIPB is required, in the following cases: company with an Indian partner, it must be capitalised for a
minimum amount of USD5 million by the foreign partner within
i. sectors falling under the Approval Route i.e. (a) petroleum six months of commencement of business. In fund-based non-
refining (except for private sector oil refining), natural gas/LNG banking financial services, 100 per cent FDI is allowed, subject to
pipelines; (b) investing companies in the infrastructure and a minimum capitalisation of USD50 million.
services sector; (c) defence and strategic industries; (d) atomic
minerals; (e) print media; (f) broadcasting; (g) postal services; Are there any foreign exchange and investment controls?
(h) courier services; (i) establishment and operation of satellites;
(j) development of integrated townships; (k) tea sector; (l) asset Subject to compliance with the FEMA, an Indian company is
reconstruction companies; and (m) single brand retail; permitted to remit funds outside India and an offshore entity
is permitted to remit funds into India through normal banking
ii. if FDI is in excess of 24 per cent in a company engaged in the channels.
small scale sector;
Is there any merger control?
iii. licensed Industries i.e. (a) distillation and brewing of alcoholic
drinks; (b) cigars and cigarettes; (c) electronic aerospace and Merger control is handled under the Companies Act and the
defence equipment; (d) industrial explosives; (e) hazardous Competition Act, 2002 (Competition Act).
chemicals; and (f) if the proposed location of the industrial
undertaking attracts locational restrictions; Companies Act: Sections 108 A to 108 I of the Companies
Act deal with GoI approval and notification requirements from
iv. proposals falling outside the notified sectoral policy and/or a competition perspective and provide that, without the prior
caps (Please refer to Schedule 1); and consent of the GoI, a person may not acquire any equity shares in
a public limited company if the total nominal value of the shares so
v. if the foreign investor has an existing venture (as explained on acquired exceeds, or would together with the total nominal value
page 10). of the shares already held exceed, 25 per cent of the equity share
capital of such a company. No GoI approval is required in the case
Sectoral guidelines must be complied with inter alia in the of a private limited company that is not a subsidiary of a public
following cases (which may also require a specific approval limited company.
from the relevant regulator): (i) private banking; (ii) insurance;
(iii) telecoms; (iv) petroleum; (v) airports; (vi) mining; and (vii)
broadcasting (Regulated Sectors). Please refer to Schedule 1,
which sets out the details of these sectoral guidelines.

11
If the GoI is of the view that, as a result of the transfer, a change The Competition Commission of India is the competent authority
in the composition of the board of the company is likely to take for evaluating the effect of combinations on competition in
place and such a change would be prejudicial to the interests of markets in India.
the company or to the public interest, the GoI may prohibit the
transfer of the shares (and in certain exceptional cases, require the What are the employee issues?
shares to be transferred to the GoI).
Are works councils/consultation common?
Section 108 G of the Companies Act states that Sections 108 A
to 108 F of the Companies Act would apply only if the acquirer Under the provisions of the Industrial Disputes Act, 1947 (IDA), the
would, as a result of the acquisition, become the owner of a GoI may direct by order the formation of work councils in certain
“dominant undertaking”. The term “dominant undertaking” is industries. However, in practice, such work councils have not
defined in Section 2(d) of the Monopolies and Restrictive Trade been constituted so far. Under the IDA, such work councils may
Practices Act, 1969 (MRTP Act) to include an undertaking which, only make recommendations and an “approval” is not required
by itself or as a group produces, supplies, distributes or otherwise from work councils for an acquisition.
controls not less than one-quarter of the goods produced,
supplied or distributed, or controls not less than one-quarter of Are any actions required prior to or upon an acquisition for
any services rendered in India or any substantial part thereof. employees?
The MRTP Act has been repealed with effect from 1 September
2009; however, the term “dominant undertaking” as defined in the There are no specific actions required prior to or upon an
MRTP Act, should continue to apply to selective provisions of the acquisition. However, under Section 25FF of the IDA, a transfer
Companies Act unless the Companies Act is amended otherwise. of the ownership or management of an undertaking from
the employer to a new employer would result in a deemed
Competition Act: The Competition Act is not entirely notified. In retrenchment of every workman who has been in continuous
particular, the sections relating to “combinations” (i.e. the merger service for not less than one year, unless the following conditions
control sections) have not yet been notified. Section 6 of the are fulfilled (the Section 25FF Conditions):
Competition Act provides for the regulation of “combinations” and
prohibits anyone from entering into a combination that causes, or n t
he service of the workman is not interrupted by such a
is likely to cause, an appreciable adverse effect on competition transfer;
within the relevant market in India. n t
he workman’s terms and conditions of service are no less
favourable to the workman post transfer, in comparison with
Section 5 of the Competition Act provides the assets/turnover the terms and conditions prevailing prior to the transfer; and
thresholds applicable to acquisitions, mergers and amalgamations n t
he transferee is, under the terms of such transfer or otherwise,
used to determine whether a transaction would be regarded as legally liable to compensate the workman in the event of his
a “combination” for the purposes of the Competition Act. The (future) retrenchment, on the basis that the workman’s service
thresholds for the combined assets/turnover of the combining has been continuous and uninterrupted by the transfer i.e.,
party are: seniority benefits for the past period of employment of the
workman are preserved post transfer.
Individual thresholds: the combined assets of the enterprises
are valued at more than INR10 billion or the combined turnover is Are there any notification obligations for employees prior to or
more than INR30 billion. In case either or both of the enterprises upon an acquisition?
have assets/turnover outside India, then the combined assets
of the enterprises must be valued at more than USD500 million, If any of the Section 25FF Conditions noted above are not fulfilled,
including at least INR15 billion in India. every workman in employment immediately before the transfer of
the undertaking will be entitled to notice and compensation under
Group thresholds: the combined assets of the enterprises the provisions of Section 25F of the IDA as set out below:
valued at more than INR40 billion or a joint turnover of more
than INR120 billion, if the party being acquired or remaining after n o
ne month’s prior notice in writing is to be given to the
the merger or created as a result of amalgamation belongs to a workman or one month’s salary in lieu of such prior notice;
group. Where such a party has assets/turnover outside India, the n p
ayment of retrenchment compensation which will be
combined assets of the group must be valued at more than USD2 equivalent to 15 days’ average pay for every completed year of
billion, including at least INR15 billion in India. continuous service or any part thereof in excess of six months;
and

12
n i
f there is any change in the conditions of service to the the proposal amount, are at least twice the number of votes cast
detriment of a “workman” following an acquisition, notice of 21 by public shareholders against it. The concerned promoters or
days must be given to all workmen whose conditions of service acquirer can also vote on the delisting offer.
are being altered.
The listed company must obtain an in-principle approval from the
Timing stock exchange to delist its securities once shareholder approval
has been obtained.
There is no time limit specified under Indian laws.
The promoter or acquirer must issue a public announcement
With which stock exchange requirements must listed of the delisting offer. At this stage, the acquirer/promoter must
companies comply? deposit 100 per cent of the consideration (determined based on
the floor price as discussed below) into an escrow account with a
What rules generally govern listed companies? bank in India.

In addition to the Indian Companies Act and other sector specific A delisting offer must follow a price discovery mechanism. For
legislation, listed companies are governed by the provisions of: this purpose, the Delisting Guidelines prescribe a “floor price”,
which forms the minimum price for the price discovery process as
n t
he Listing Agreement, which includes various rules, regulations follows:
and by-laws of the exchanges including mandatory and non-
mandatory compliances to be met with by a listed company n where the equity shares are frequently traded in all the
with the stock exchanges on a periodic basis and further recognised stock exchanges where they are listed, the average
mandates a level of corporate governance to be followed by of the weekly high and low of the closing prices of the equity
such listed companies; shares of the company during the 26 weeks or two weeks
n t
he Takeover Code; and preceding the date on which the recognised stock exchanges
n t
he SEBI (Prohibition of Insider Trading) Regulations, 1992 were notified of the board meeting in which the delisting
(Insider Trading Regulations). proposal was considered, whichever is higher;
n f
or infrequently traded shares, the floor price will be determined
How does a company delist its share capital? by taking into account the following factors:

The SEBI (Delisting of Equity Shares) Regulations, 2009 (Delisting i. the highest price paid for the equity shares of the class
Guidelines) govern the manner in which securities of a listed sought to be delisted, including by way of allotment in a
company may be delisted from the stock exchanges. public or rights issue or preferential allotment, during the 26-
week period prior to the date on which the recognised stock
A company whose securities have been listed for a minimum period exchanges were notified of the board meeting in which the
of three years on any stock exchange may delist its securities delisting proposal was considered and after that date, up to
from the stock exchanges by providing a delisting offer – an exit the date of the public announcement; and
opportunity to the public shareholders (i.e. shareholders other than
the promoters and parties acting in concert with the promoters). This ii. other parameters including return on net worth, book value
exit opportunity involves a price discovery process known as the of the shares of the company, earnings per share, and the
“book building process” (discussed in detail below). price earning multiple vis-à-vis the industry average; and

A delisting offer can be launched by any promoter or acquirer n w


here the equity shares are frequently traded in some stock
that wants to delist the company’s securities. This process is exchanges and infrequently traded in other stock exchanges,
undertaken by a registered merchant banker (i.e. investment the highest prices arrived at in accordance with the first two
banker) on behalf of the promoters. The appointment of a bullet points above.
merchant banker is a mandatory requirement under the Delisting
Guidelines. The final delisting price at which the public shareholding is to
be acquired would be a price determined based on the “book
The delisting offer, however, must be supported by a resolution building process”. Under the book building process, the final offer
passed by the board. Further, a special resolution must be price would be determined as the price at which the maximum
approved by three-quarters of the shareholders of the listed number of shares has been offered by the public shareholders (the
company. However, the special resolution should be acted upon if, discovered price).
and only if, the votes cast by the public shareholders in favour of

13
Once the discovered price is determined, the promoter or acquirer What are the sanctions?
has the discretion to accept or reject it. If accepted, the promoter
or acquirer is required to purchase all the shares tendered by all The Companies Act provides for stipulated penalty amounts to be
the shareholders at or below the discovered price. paid for the contravention of the provisions governing the financial
assistance rules. Such transactions may be construed to be void
For the delisting offer to be successful, the shareholding of the and unenforceable.
promoter, along with the persons acting in concert, taken together with
the shares accepted at the final price, must reach the higher of: Are there any exceptions to the prohibition and is there any
procedure that can be followed to make financial assistance
n 90 per cent of the total issued shares of that class, excluding possible (i.e. a “whitewash procedure”)?
the shares that are held by a custodian and against which
depository receipts have been issued overseas; or There are no exceptions to the prohibitions against financial
n the aggregate percentage of pre-offer promoter shareholdings, assistance.
along with persons acting in concert with him and 50 per cent
of the offer size. 6. Public takeover

If the delisting offer is successful (i.e. the discovered price is What are the forms of a public offer?
accepted by the promoter or acquirer and the number of shares
acquired results in the public shareholding falling below the A public offer under the Takeover Code can be structured either
applicable level), the promoter or acquirer and the company must as a mandatory public offer or a voluntary public offer.
make an application to the stock exchanges to delist the shares.
A mandatory public offer under the Takeover Code would be
Following the delisting, the promoter or acquirer must allow triggered in the event of a direct or indirect acquisition of shares
a further one-year period for any of the remaining public and/or voting rights and/or control, beyond certain prescribed
shareholders to tender their shares to the promoter or acquirer at thresholds, in a listed company (the target company). The
the above mentioned discovered price. acquirer would be required to make a public offer to acquire a
further 20 per cent of the shares or voting rights of the target
Generally, the entire delisting process takes approximately three to company.
four months to complete.
In the case of a voluntary public offer, the public offer must be
Is financial assistance prohibited? for a minimum of 20 per cent of the voting capital of the target
company. However, in the event that the acquirer holds between
What is the nature of the prohibition? 55 per cent and 75 per cent of the shares or voting rights in a
target company, and wants to consolidate his holding in the target
The Companies Act prohibits a public company, or a private company company, he may do so by making a public announcement as
that is a subsidiary of a public company, from directly or indirectly, long as he does not breach the minimum public shareholding
granting any loan, guarantee or security or any form of financial requirement.
assistance to any person for the purposes of, or in connection with, the
purchase of shares in the company or its holding company. What is the regulatory framework for a public offer?

In light of this, a public company is not permitted to provide a The Takeover Code
loan or guarantee or offer its assets as security for any loan being
raised by an acquirer for the purpose of, or in connection with, a The regulatory framework for a public offer in India is governed
purchase or subscription made or to be made by such person for by the provisions of the Takeover Code. The Takeover Code
any shares in such public company or in its holding company. deals primarily with acquisitions, the consolidation of holdings,
conditional offers, a change in control, competitive offers, and
A public company cannot, without the prior approval of the GoI, investor protection. The Takeover Code inter alia provides for
give any guarantee or security to its directors in connection with a disclosures of shareholdings and control in a listed company, the
loan made by any person to them or in respect of a loan given to substantial acquisition of shares or voting rights in, and acquisition
any person by its director. of control over, a listed company, requirements in respect of a
public offer, and the procedure for calculation of the offer price of
Private companies are not subject to similar financial assistance the shares sought to be acquired under the Takeover Code.
prohibitions, unless the private company is a subsidiary of a public
company.
14
Application of the rules the date of the public announcement, whichever is higher; and
n t
he average of the weekly high and low of the closing prices
The Takeover Code is triggered in the event of a direct or indirect of the shares of the target company as quoted on the
acquisition of shares and/or voting rights and/or control, beyond certain stock exchange where the shares of the company are most
prescribed thresholds, in a target company. The acquirer is required frequently traded during the 26-week period prior to the public
to make a public offer to acquire a further 20 per cent of the shares or announcement or the average of the daily high and low of the
voting rights of the target company. The thresholds for the acquisition prices of the shares as quoted on the stock exchange where
of shares and/or voting rights are enumerated below: the shares of the company are most frequently traded during
the two weeks preceding the date of the public announcement,
n a
n acquirer who, along with persons acting in concert, acquires whichever is higher.
15 per cent or more of the shares or voting rights in the target
company, would be required to make a public announcement Where the shares of the target company are infrequently traded,
to acquire a further 20 per cent of the shares or voting rights of the acquirer and the merchant banker must determine the offer
the target company; price.
n a
n acquirer who, along with persons acting in concert, holds
15 per cent or more, but less than 55 per cent, of the shares or Cash/non-cash terms
voting rights in the target company, is required to make a public
announcement to acquire more than 5 per cent of the shares The offer price specified above can be paid by any of the following
or voting rights in the target company in any financial year; and means:
n a
n acquirer who, along with persons acting in concert, holds
55 per cent or more but less than 75 per cent of the shares or n i
n cash;
voting rights in a target company, is required to make a public n by issue, exchange and/or transfer of shares (other than
announcement to acquire any additional shares or voting rights preference shares) of the acquirer company, if the person
of the target company2 . However the Takeover Code permits seeking to acquire the shares is a listed body corporate;
such an acquirer, along with persons acting in concert with n by issue, exchange and/or transfer of secured instruments of
him, to acquire up to 5 per cent of the shares or voting rights in the acquirer company with a minimum “A” grade rating from a
the target company provided that certain conditions are met. credit rating agency registered with SEBI; or
n acombination of all three options.
Regardless of whether there has been any acquisition of shares
or voting rights in a target company, an acquirer cannot directly In the event that a payment has been made in cash by the
or indirectly acquire control over a target company, unless the acquirer for acquisition of shares under any agreement or
acquirer makes a public announcement in accordance with the pursuant to any acquisition in the open market or in any other
Takeover Code. Further, such acquisitions would include a direct manner during the 12 months immediately preceding the date
or indirect acquisition of control of a target company by virtue of the public announcement, the letter of offer must provide
of the acquisition of companies, whether listed or unlisted, and an option to the shareholders of the target company to accept
whether in India or abroad. payment either in cash or by exchange of shares or other secured
instruments referred to above.
What are the main offer terms?
Conditions
Minimum price requirements
No acquirer can add any conditions once the public offer is
The Takeover Code mandates that the offer price, with respect to made, except where the acquirer has made the offer conditional
a public offer, should be the highest of the following: as to the level of acceptance. Once the offer is launched, it is an
unconditional offer under the Takeover Code, unless withdrawn in
n t
he negotiated price decided upon as per the provisions of the the following manner:
agreement entered into for the acquisition of shares or voting
rights or agreeing to acquire the shares or voting rights; n t
he statutory approval(s) required has/have been refused;
n t
he price paid by the acquirer or persons acting in concert with n t
he sole acquirer, being a natural person, has died; or
him for acquisitions, including by way of allotment in a public or n s
uch circumstances as in the opinion of the SEBI merit
rights or preferential issue during the 26-week period prior to withdrawal.

2
The Listing Agreement prescribes a minimum public shareholding of 25 per cent or 10 per cent of the issued capital of a listed company and therefore, for the purposes
of this paragraph, in the event that the target company has an applicable minimum public shareholding of 10 per cent, the acquisition threshold of 75 per cent of the
shares or voting rights of the target company would be read as 90 per cent of the shares or voting rights of such a target company.

15
Funding the acquisition What is the timing of a public offer and what is the
procedure to be followed?
Subject to applicable foreign exchange regulations, the Takeover
Code does not specify any requirements for the arrangement of funds Simplified offer timetable
for an acquisition. However, the acquirer must satisfy the merchant
banker that firm arrangements for funds and money for payment The timetable below assumes that there are no competitive bids
through verifiable means to fulfil the obligations under the public offer for the acquisition of the shares of the target company.
are in place. Further, the public announcement is required to contain a
disclosure to the effect that firm arrangements for financial resources In the table below, “D” is the date of the public announcement
required to implement the offer are already in place, including details of an offer to acquire shares. All timelines are discussed with
regarding the sources of the funds, whether domestic or foreign or reference to this date.
otherwise. Further, the Takeover Code specifies that the acquirer must,
as security, set up an escrow account.

Date/Time period Events

Before D Acquirer to appoint a “Category I” merchant banker registered with SEBI. The merchant banker should not
be an associate or a group company of the acquirer or the target company.

Trigger date Date of execution of a memorandum of understanding, share purchase agreement or other document for
the acquisition of shares or voting rights in excess of prescribed thresholds or of the making of a decision
to acquire shares or control.

On or before D On or before the date of the public announcement, the acquirer has to place in an escrow account, a
specified percentage of the consideration payable under the public offer, as security for performance of
the acquirer’s obligations in respect of the offer.

D The merchant banker has to make a public announcement within four working days of the trigger date.

D+14 The draft letter of offer proposed to be sent to the target company’s shareholders has to be filed with SEBI
by this date.

D+30 This date would be the specified date for the purpose of determining the names of the shareholders to
whom individual letters of offer should be sent by the acquirer.

D+35 or later The target company must furnish to the acquirer within seven days of request by the acquirer or within
seven days from the specified date, whichever is later, a list of shareholders as of the specified date.

D+35 or later The letter of offer may be dispatched to shareholders if 21 days have elapsed after submission of the draft
with SEBI and SEBI has not reverted with its comments. If SEBI reverts with its comments, any changes
suggested should be reflected in the final letter of offer sent to the shareholders of the target company.

D+45 or later By this date, the letter of offer has to reach all shareholders of the target company as on the specified
date.

D+55 or later This is the date on which the public offer has to open.

D+75 Date of closure of the public offer. The public offer has to remain open for a period of 20 days.

D+82 Acquirer to open a special account with a “banker to an issue” registered with SEBI, and deposit therein,
the amount of consideration as would, together with the amounts lying in the escrow account, make up
the sum payable to the shareholders who tender their shares. The amounts in the escrow account are to
be transferred to this account.

D+90 The acquirer must complete all procedures relating to the public offer including the payment of
consideration. If the acquirer is unable to make payments to the shareholders within 15 days from the date
of closure of the offer, SEBI may grant an extension if satisfied that the delay was not due to the acquirer’s
default3. In case of delay beyond 15 days, SEBI may prescribe the interest payable to shareholders.

D+91 Merchant banker to issue a certificate to the acquirer of the completion by the acquirer of all its obligations
towards the public offer4.

D+120 The merchant banker has to send a final report on the public offer to SEBI by this date.

16
Announcements Acceptance period

A public announcement of an offer (excluding the case of an indirect The public offer to acquire shares should remain open for a period
acquisition or change in control) is required to be made by the of 20 days. However, the shareholders must have the option to
acquirer within four working days of entering into an agreement for withdraw any acceptances tendered up to three working days
acquisition of shares or voting rights or deciding to acquire shares or prior to the date of closure of the public offer.
voting rights exceeding the specified thresholds5.
Satisfying offer conditions
With respect to an acquisition of control over a company, the
public announcement is required to be made not later than four Other offer conditions that must be satisfied are detailed under the
working days after any such change or changes are decided to be section on main offer terms on page 15.
made.
Offer unconditional – payment
In the case of an indirect acquisition or change in control, a public
announcement must be made by the acquirer within three months The acquirer must pay the relevant consideration to the
of the consummation of such an acquisition or change in control shareholders by D+90 (as set out in the table on page 16).
or restructuring of the parent or the company holding shares of, or
control over, the target company in India. Competing bids

The public announcement should be made in all editions of one The original bidder has the option to make an announcement
English national daily newspaper with wide circulation, one Hindi revising the public offer within 14 days of the public
national daily newspaper with wide circulation, and a regional announcement of a competitive bid. If the original bidder does
language daily newspaper with wide circulation at the place where not make such an announcement, the date of closing of the public
the registered office of the target company is situated and at offer will stand extended to the date of closure of the public offer
the place of the stock exchange where the shares of the target under the last subsisting competitive bid. Any competitive offer by
company are most frequently traded. a competitor should be for such number of shares which, when
taken together with shares held by him along with persons acting
A copy of the public announcement must be submitted to SEBI in concert with him, should be at least equal to the holding of the
through the merchant banker to all the stock exchanges on which first bidder, including the number of shares for which the public
the shares of the company are listed, and to the target company offer by the first bidder has been made.
at its registered office to be placed before the board of the target
company. Further, both the original bidder and the competitor bidder must
have the option to make upward revisions to their public offers, in
The public offer will be deemed to have been made on the respect of the price and the number of shares to be acquired, at
date on which the public announcement has appeared in the any time up to seven working days prior to the date of closure of
newspapers detailed above. the public offer. However, the acquirer should not have the option
to change any other terms and conditions of their public offer,
The acquirer is also required to make a post offer public except the mode of payment following an upward revision in the
announcement following the closure of the public offer. public offer.

3
Where the approvals are not obtained due to the acquirer’s default, the escrow amount would be forfeited and the acquirer would also be liable for penalties prescribed.
The refusal of statutory approvals is a ground for withdrawal of the public offer. Upon such a withdrawal, the sums lying in the escrow account would be returned to the
acquirer.
4
Transfer of the shares in terms of any underlying agreement can only be consummated pursuant to this date.
5
The language of the Takeover Code and various decisions taken by SEBI and the Securities Appellate Tribunal indicate that the execution of an agreement or the making
of a decision to acquire shares or voting rights could trigger public offer requirements. Such agreements may be oral or written. However, the intention/decision to acquire
shares or voting rights has to be evident from the document in question. With respect to a “decision to acquire”, the public offer requirements would be triggered if any
document executed between the parties evidences a decision by a party to acquire shares or voting rights. This would presuppose some kind of consensus between
parties for the sale and purchase of the shares or voting rights in question.

17
Failed bids and further offers Target documentation

The Takeover Code provides that no public offer, once made, can There are no specific provisions under the Takeover Code that
be withdrawn except under the following circumstances: provide for the submission of documentation by the target
company for a public offer. However, certain disclosures with
n the statutory approval(s) required has/have been refused; respect to the target company are required to be made in the
n the sole acquirer, being a natural person, has died; and public announcement and the letter of offer.
n such circumstances as in the opinion of SEBI merit withdrawal.
Responsibility statements
In the event of withdrawal of the public offer under any of the
circumstances specified above, the acquirer or the merchant Where the acquirer is a company, the public announcement,
banker should: brochure, circular, letter of offer, or any other advertisement or
publicity material issued to the shareholders in connection with the
n make a public announcement in the same newspapers public offer must state that the directors accept responsibility for
in which the public announcement of the public offer was the information contained in such documents.
published, indicating reasons for withdrawal of the public offer;
and The acquirer should ensure that firm financial arrangements have
n simultaneously with the issue of such a public announcement, been made for fulfilling the obligations under the public offer and
inform SEBI and all the stock exchanges on which the shares suitable disclosures in this regard must be made in the public
of the target company are listed, and the target company at its announcement of offer.
registered office.
A due diligence certificate should be submitted by the merchant
Upon the withdrawal of a public offer as specified above, the banker to SEBI, along with the draft letter of offer.
acquirer should not make any public offer for the acquisition of
shares of the target company for a period of six months from the Within 45 days from the date of closure of the public offer, the
date of the public announcement of the withdrawal of the public merchant banker must send a final report to SEBI.
offer.
What are the practices relating to break fees and lock-out?
Furthermore, in the event of non-fulfilment of the prescribed
obligations under the Takeover Code, an acquirer should not The Takeover Code does not envisage the concept of break fees
make any public offer for the acquisition of shares of any listed in relation to a public offer.
company for a period of 12 months from the date of closure of the
public offer. Further, with respect to lock-out, in the event of withdrawal of a
public offer, the acquirer should not make any public offer for the
What documentation is involved in the process? acquisition of shares of the target company for a period of six
months from the date of the public announcement for withdrawal
Press announcement of the public offer.

The details of the public announcement under the Takeover Code Furthermore, on non-fulfilment of the prescribed obligations under
are explained under Announcements on page 17. the Takeover Code, an acquirer should not make any public offer
for the acquisition of shares of any listed company for a period of
Offer document 12 months from the date of closure of the public offer.

The Takeover Code provides for the filing of a draft letter of offer What are the rules on information gathering/provision?
by the acquirer through the merchant banker, with SEBI within 14
days from the date of the public announcement. The draft letter of The Takeover Code does not prescribe any rules in relation to the
offer should contain disclosures specified by SEBI and should be gathering of information from a public offer perspective, except for
despatched to the shareholders not earlier than 21 days from its the obligation of the directors of the target company to assist with
submission with SEBI. and provide the information sought by the acquirer.

A bidder should ensure that any due diligence on a potential target


company does not fall foul of the Insider Trading Regulations.
From a practical perspective, there are a number of measures

18
that a bidder should take to ensure that the due diligence exercise Target
does not amount to insider trading or violate the provisions of the
Insider Trading Regulations. One such measure is to obtain a clear There are no public disclosure requirements for the target
undertaking from the potential target company that the information company. However, the target company is required to assist and
that has been made available for the due diligence exercise would provide for the following information to the acquirer:
not amount to unpublished price sensitive information.
n t
he paid up share capital of the target company, the number of
What is the position regarding insider trading? fully paid up and partly paid up shares; and
n s
uch other information as is essential for the shareholders to
The Insider Trading Regulations provide that “no insider should on make an informed decision on the public offer.
his own behalf or on behalf of any other person, deal in securities
of a company listed on any stock exchange when in possession Does a memorandum of understanding (MoU) need to be
of any unpublished price sensitive information. Further, no insider disclosed?
should communicate, counsel or procure, directly or indirectly, any
unpublished price sensitive information to any person who, while The Takeover Code and various decisions taken by SEBI and
in possession of such unpublished price sensitive information, the Securities Appellate Tribunal indicate that the execution of
should not deal in securities.” an agreement or the making of a decision to acquire shares or
voting rights could trigger public offer requirements, irrespective
The penalties for insider trading are: of whether such agreements are oral or written. However,
the intention/decision to acquire shares or voting rights must
n imprisonment for a term that may extend to ten years; be evident from the document in question. With respect to
n i
mposition of a penalty amounting to the higher of INR250 a “decision to acquire”, the public offer requirements would
million, or three times the amount of profits made from insider be triggered if any document executed between the parties
trading; or evidences a decision by a party to acquire shares or voting
n both. rights. This would presuppose some kind of consensus between
parties for the sale and purchase of the shares or voting rights in
Further, SEBI may also: question.

n direct the insider not to deal in securities in any particular A MoU, where the intention/decision to acquire shares or
manner; voting rights is evident, operates as a trigger date for a public
n prohibit the insider from disposing of any securities in violation announcement and the Takeover Code prescribes disclosures
of the regulations; of various aspects of such documentation in the public
n restrain the insider from communicating or counselling any announcement.
person dealing with securities and direct the person who
acquired securities in violation of the regulations to return them What are the limitations to stakebuilding?
or
n direct the person who acquired these securities in violation of The Takeover Code provides for the following limitations to
the regulations to transfer an amount equal to the cost price stakebuilding while a public offer is pending:
or market price of the securities, whichever is higher, to the
investor protection fund of a recognised stock exchange. n n
o acquisition should be made by the acquirer during the last
seven working days prior to the closure of the public offer; and
What are the public disclosure requirements in a takeover n w
here an offer is made conditional upon a minimum level of
scenario? acceptance, the acquirer or any person acting in concert with
him should not acquire, during the offer period, any shares in
Bidder the target company except by way of fresh issue of shares of
the target company in accordance with the provisions of the
Generally a bidder must disclose detailed information about his Takeover Code.
interest in the target company (e.g. the object and purpose of the
acquisition of the shares and future plans, if any, of the acquirer Is there a requirement to make a mandatory offer?
for the target company, including disclosing whether the acquirer
proposes to dispose of or encumber any assets of the target As a general rule, a public offer has to be made for a minimum of
company in the succeeding two years, except in the ordinary 20 per cent of the voting capital of the target company, where an
course of business of the target company). acquirer who, along with person acting in concert, has acquired

19
15 per cent or more of the shares or voting rights of the target What is the procedure for a squeeze-out of the minority?
company.
There are no specific provisions for squeezing out the minority
The only exception to this rule is when an acquirer who (together under the Indian legal system, including under the Takeover Code.
with persons acting in concert with him), holds 55 per cent or However, there are various methods which can be implemented to
more, but less than 75 per cent, of the shares or voting rights “squeeze out” or “buy out” minority or residual shareholders of an
in a target company, wants to consolidate his holding without Indian company pursuant to the conclusion of a voluntary delisting
the target company breaching the minimum public shareholding process under the Companies Act. This is a challenging exercise
requirement. Such an acquirer may make an open offer to the and there are limited precedents of this nature in India.
shareholders of the target company to acquire their shares and
the size of such public offer should be the lesser of the following: Section 395 of the Companies Act provides for the compulsory
acquisition of the shares of a shareholder in a company by
n 20 per cent of the voting capital of the target company; or another company, pursuant to a scheme or contract approved
n s
uch other lesser percentage of the voting capital of the target in accordance with the section. When a company incorporated
company as would, assuming full subscription to the public in India (transferee company) offers to purchase shares in a
offer, enable the acquirer, together with the persons acting in company (transferor company) and such a public offer is accepted
concert with him, to increase his holding to the maximum level by the shareholders on the basis that 90 per cent in value and
possible which is consistent with the target company meeting 75 per cent in number of the shares are to be purchased within
the minimum public shareholding requirements laid down in the four months of the offer, such an acceptance would amount to
Listing Agreement. approval of a contract to purchase shares under Section 395 of
the Companies Act. Within two months, if the transferee company
What defences are available to a target company during the gives a notice to any dissenting shareholders, it will be entitled
stages of an offer? to acquire the shares of such dissenting shareholders. Such
an acquisition may be subject to the court’s order if any of the
The Takeover Code does not provide for any specific defences dissenting shareholders through an application to the court object
that a target company can avail of in the case of a hostile to the acquisition.
takeover. However, from a practical perspective, as the Takeover
Code assumes a level of co-operation with the target company 7. Overview of a private company acquisition
with respect to provision of information etc., the target company
has the ability to delay the public offer process by refusing to Timing
provide any necessary information.
Since there are a number of factors that would come into play in
What obligations are the directors of the bidder and target various types of private company acquisitions, timing varies from
under? transaction to transaction. However, if the target private company
operates in a regulated sector, the time taken in obtaining the requisite
Bidder approvals from the FIPB or the RBI or relevant authority, as the case
may be, will also have to be factored in to the timing process.
Where the acquirer is a company, the public announcement,
brochure, circular, letter of offer or any other advertisement or Steps
publicity material issued to the shareholders in connection with the
public offer must state that the directors accept responsibility for The following steps are involved in most transactions:
the information contained in such documents.
n typically in any acquisition transaction, the first step would be
Target company to execute a non-disclosure agreement;
n the next step would be to appoint the intermediaries, such as
The board of the target company has consideration obligations lawyers and accountants, etc. Depending upon the nature of
under the Takeover Code. The board of the target company is the transaction, investment bankers may also be appointed;
required to facilitate the acquirer in the verification of securities n negotiations commence soon after and the parties execute
tendered for acceptances. a heads of agreement or a term sheet or memorandum of
understanding;
n once the term sheet has been executed by all involved parties,
a due diligence process begins, including legal, financial and
technical diligence;

20
n sometimes, simultaneously with the start of the due diligence Amalgamations: Some states in India have included an
process, the parties proceed towards drafting the transaction amalgamation which has taken place through an order of the
documents such as the share purchase agreement or the jurisdictional State High Court, as a conveyance subject to stamp
share subscription agreement depending upon the type duty in the stamp laws of the relevant state.
of acquisition, shareholders agreement and other ancillary
documents if required. These transaction documents contain In some states, an exemption from payment of stamp duty
certain conditions that the investee company and/or the may be available on instruments evidencing transfer of property
promoters of the investee company are required to fulfil before between companies limited by shares in certain cases.
completion of the transaction (the conditions precedent);
n once the parties have reached an agreement on all the terms This stamp duty is subject to a cap of INR100 million (about
of the transaction documents, they proceed to execute the USD2.5 million).
transaction documents;
n on signing the transaction documents, the investee company Thin capitalisation/interest deductions
and/or the promoters proceed towards satisfying the
conditions precedent; and There is no thin capitalisation regime in India. Interest paid in
n after all the conditions precedent are fulfilled to the satisfaction respect of capital borrowed for the purpose of the business of the
of the investor and all regulatory approvals have been received taxpayer is tax deductible expenditure provided tax withholding
for the transaction, the parties proceed towards closing and requirements have been complied with.
carry out all the closing actions stipulated in the transaction
documents. Once these are fulfilled, closing of the transaction In the case of capital borrowed for the acquisition of an asset for the
is achieved. extension of an existing business, interest pertaining to any period
beginning from the date on which the capital was borrowed till the
8. What tax issues should be considered? date on which the asset was first put to use will not be tax deductible.
In appropriate cases, such interest may be capitalised as part of the
Tax gains asset. However, interest attributable to the period after the asset is put
to use is allowable as tax deductible expenditure.
Capital gains are calculated as sale consideration less the cost
of acquisition and expenses relating to transfer. The rate of tax Withholding tax
depends on whether the capital gains are considered to be
long or short term. Long-term capital gains are gains arising The rate of withholding tax on interest is 21.12 per cent in
from the sale of securities that have been held for more than 12 respect of cross border interest payments if the borrowing is in
months. Short-term capital gains are gains arising from the sale of convertible currency and 42.23 per cent in cases where money is
securities that have been held for up to 12 months or less. not borrowed or the debt is not incurred in convertible currency.
However, the effective rate in terms of various tax treaties into
Transfer taxes which India has entered ranges from 10 per cent to 20 per cent.
Tax withholding may not be applicable if the recipient of interest is
Stamp duty is payable at various rates on legal documents, the principal/central bank of the country concerned in terms of the
including bills of exchange, promissory notes and insurance extensive network of double tax treaties that India has signed.
policies. Usually, the buyer is liable to pay stamp duty. Stamp duty
is payable as follows: Withholding tax at the rate of 10.56 per cent is applicable on
payments of royalties and fees for technical services. The rate
Contracts for the transfer of shares: Stamp duty at 0.25 per may be marginally reduced to 10 per cent in terms of some of the
cent of the value of the shares is charged on transfer of shares tax treaties between India and the country of tax residence of the
of an Indian company. However, no stamp duty is payable on non-resident.
transfer of shares held in a dematerialised form (that is, shares that
are not evidenced by a share certificate but held electronically in a Dividends are subject to a tax in the nature of dividends
depository). distribution tax at 16.995 per cent in the hands of the distributing
Indian company. No tax withholding is required on such dividend
Conveyances for the transfer of immovable property: Stamp payments.
duty payable on transfer of immovable property may vary from
state to state. Generally, the rate of stamp duty may vary from 5 It is also possible to obtain a withholding tax order from the tax
per cent to 8 per cent of the consideration paid for the transfer. officer to determine the appropriate amount of tax withholding
applicable in a particular case.

21
Schedule 1: Summary of foreign investment limits

Sector FDI limit Whether FIPB Sectoral regulations


approval is required applicable

Satellites: establishment 74% FIPB Subject to sectoral guidelines


and operation issued by the Department of
Space.

Single brand product 51% FIPB Subject to guidelines for


retailing FDI in trading issued by the
Department of Industrial
Policy & Promotion vide.
Press Note 3 (2006 Series).

ISP with gateways, 74% Automatic Route up to 49% Subject to licensing and
radio-paging, end-to- security requirements
end bandwidth FIPB beyond 49% notified by the Department of
Telecommunications.

Basic and cellular, 74% (Including FDI, FII, Automatic Route up to 49%. Subject to guidelines notified
unified access non-resident Indian, in the Press Note 3 (2007).
services, national/ Foreign Currency FIPB beyond 49%.
international long Convertible Bonds
distance, V-sat, public (FCCBs), American
mobile radio trunked Depository Receipts
services (PMRTS), (ADRs), Global
global mobile personal Depository Receipts
communications (GDRs), convertible
services (GMPCS), preference shares,
and other value added and proportionate
telecom services foreign equity in Indian
promoters/investing
company)

Publishing of 26% FIPB Subject to guidelines notified


newspapers and by the Ministry of Information
periodicals dealing with & Broadcasting.
news and current affairs

Refining 49% in the case of FIPB (in the case of public Subject to sectoral policy
public sector units sector units) and no divestment or dilution
of domestic equity in the
100% in the case of Automatic Route (in the case existing public sector units.
private companies of private companies)

Insurance 26% Automatic Route Subject to licensing by the


Insurance Regulatory &
Development Authority.

22
Sector FDI limit Whether FIPB Sectoral regulations
approval is required applicable

Credit information 49% (FDI+ foreign FIPB Foreign investment in CICs


companies (CICs) institutional investors is subject to the Credit
(FIIs)) Information Companies
(Regulation) Act, 2005.
Investment by FII investment will be subject
registered FIIs will be to the conditions that:
limited to 24% only in
the CICs listed at the (a) no single entity should
stock exchanges within directly or indirectly hold more
the overall limit of 49% than 10% equity;
foreign investment
(b) any acquisition in excess
of 1% will have to be
reported to RBI as a reporting
requirement; and

(c) FIIs investing in


CICs should not seek
a representation on the
board based upon their
shareholding.

Commodity exchanges 49% (FDI+ FIIs) FIPB FII purchases should be


Investment by restricted to the secondary
registered FIIs under PIS market only.
will be limited to 23%
and investment under No foreign investor/entity,
the FDI Scheme limited including persons acting in
to 26% concert, will hold more than
5% of the equity in these
companies.

Banking: private sector 74% Automatic Route Subject to guidelines


(FDI+ FIIs) for setting up branches/
subsidiaries of foreign banks
issued by the RBI.

FM radio FDI + FII investment up FIPB Subject to guidelines notified


to 20% by the Ministry of Information
& Broadcasting.

Cable network 49% (FDI+ FIIs) FIPB Subject to the Cable


Television Network Rules
(1994) Notified by the
Ministry of Information &
Broadcasting. www.mib.nic.in

23
Sector FDI limit Whether FIPB Sectoral regulations
approval is required applicable

Direct-to-home 49% (FDI+ FIIs). FIPB Subject to guidelines issued


by the Ministry of Information
Within this limit, the FDI & Broadcasting.
component is not to
exceed 20%

Setting up hardware 49% (FDI+ FIIs) FIPB Subject to the up-linking


facilities such as up- policy notified by the
linking, HUB, etc Ministry of Information &
Broadcasting.

Up-linking a news 26% FDI+ FIIs FIPB Subject to guidelines issued


and current affairs TV by the Ministry of Information
channel & Broadcasting.

Up-linking a non-news 100% FIPB Subject to guidelines issued


and current affairs TV by the Ministry of Information
channel & Broadcasting.

Asset reconstruction 49% (only FDI) FIPB Where any individual


companies investment exceeds
10% of the equity,
provisions of Section 3(3)
(f) of the Securitisation and
Reconstruction of Financial
Assets and Enforcement of
Security Interest Act, 2002
should be complied with.

Ground handling 74%-FDI Automatic Subject to sectoral


services 100 %- for non-resident regulations and security
individuals’ investment clearance.

Scheduled air transport 49%-FDI; Automatic Subject to no direct or


services/domestic 100 %- for non-resident indirect participation by
scheduled passenger individuals’ investment foreign airlines and sectoral
airline regulations.

Non-scheduled air 74%-FDI Automatic Subject to no direct or


transport service/ 100 %- for non-resident indirect participation by
non-scheduled airlines, individuals’ investment foreign airlines in non-
chartered airlines, and scheduled and chartered
cargo airlines airlines. Foreign airlines are
allowed to participate in
the equity of companies
operating cargo airlines.
Also subject to sectoral
regulations.

24
25
re s
W-
LO
26
Indonesia

1. What are the forms of business entity in Indonesia? of attorney for specific purposes. There may be provisions in the
articles of association requiring prior approval from the board of
Common forms of entity commissioners or the general meeting of shareholders for the
board of directors to take certain actions. Common examples of
A limited liability company (in Indonesian, perseroan terbatas or transactions where there is a restriction on the board of directors’
abbreviated as “PT company”), either as: authority include borrowings and the provision of guarantees for
the liability of another person.
n “
closed” PT companies, which are private companies, and
n “
open” or “public” PT companies, which are companies that How are commissioners and directors appointed to, and removed
have conducted a public offer of shares or whose size of from, office?
capital and number of shareholders meet the stated thresholds
under the Indonesian capital market law. Open PTs are Members of the board of commissioners and the board of
subject to tighter corporate governance rules and to greater directors are appointed and removed from office by the
public disclosure obligations. Open PTs are referred to as PT resolutions of shareholders at a general meeting.
“Terbuka” in Indonesian and have the “Tbk” suffix attached to
their name. The board of commissioners may suspend a member of the board
of directors temporarily, but the decision whether to remove the
Less common forms of entity director remains with the general meeting of shareholders.

n Charitable foundation The articles of association may provide specific rules for
n Cooperatives nomination by a particular shareholder. For example, the articles
n Partnerships of association of a PT company may provide a veto right to
n Sole proprietorships a particular shareholder upon an appointment or removal of
members of the board of directors, or may provide specific rights
2. How is a company managed? to a shareholder to nominate a person to sit as president director
or vice president director.
The basic management structure
Are there any residency requirements for directors and
What form does the management structure of a PT company commissioners?
take?
All members of the board of directors of a PT company must
A PT company comprises (i) the general meeting of shareholders, reside in Indonesia.
(ii) the board of commissioners, and (iii) the board of directors.
Is there any requirement for directors to hold shares?
The general meeting of shareholders has all the authority not
given to the board of directors and the board of commissioners. There is no requirement that directors should also be shareholders
Common examples of decision referred to the shareholders under of the company, but they are permitted to do so.
the Law on Limited Liability Companies, Law No. 40 of 2007
(the Company Law) include the decision (i) to amend the articles What duties do directors owe?
of association, (ii) to increase or reduce capital, (iii) to merge or
consolidate with, or take over, another company, (iv) to dissolve and Overview
liquidate, (v) to approve the annual report and financial statements,
(vi) to elect the members of the board of directors and board of The duties and responsibilities of a director are as set out in the
commissioners, (vii) to file for bankruptcy, (viii) encumber or dispose Company Law.
of material assets and (ix) to approve an annual work plan.
As a fiduciary (a term not used in the Company Law, as Indonesia
The board of commissioners has a supervisory function, and follows the civil law tradition), a director must always act in the
the articles of association may confer authority on the board of best interests of the PT company. Accordingly, a director is not
commissioners to approve certain categories of transactions. permitted to place himself in a situation where his interests conflict
The board of directors has the authority to exercise the day- with his duty to the company or the stakeholders.
to-day management of the company and to represent the
company in court. The board of directors cannot delegate broad
management authority to any other party, but may grant powers

27
Duty to the company of his ceasing to be such, and the court is satisfied that his
conduct as a director of the company makes him unfit to be a
Directors are required to act and to exercise their powers in director of a company or to participate in the management of a
good faith in the best interests of the PT company. The duty company (whether directly or indirectly); or
of the directors to the company is distinct from the duty to the n h
e is convicted of certain offences including fraud and
shareholders. dishonesty detrimental to the state’s finance and/or financial
sector corporations;
The board of directors is fully responsible for the management of
the PT company. In certain circumstances, a director may also be personally
liable to the creditors of a company that has gone into insolvent
The board of directors is responsible for any loss suffered by the liquidation, for example, where:
PT company caused by its wrongful or negligent acts.
Directors must not put themselves in a position where their n h
e had knowingly contracted a debt when he had no
personal interests conflict with those of the PT company. reasonable or probable expectation that the company would
be able to pay that debt; or
Duty to creditors n he
 is found guilty of fraudulent trading.

The board of directors may be held criminally responsible in To minimise the risk of directors’ liability certain actions taken or
certain cases where the company is adjudicated bankrupt and its omissions made by directors can be ratified retrospectively or
conduct may have contributed to this condition. approved in advance by the general meeting of shareholders.

Article 126 of the Company Law provides that the PT company What are the auditing requirements for companies?
must take into consideration the interest of the creditors when
conducting a merger, consolidation, acquisition or separation. The Company Law requires public companies, companies
Any proposed reduction in issued capital, merger, consolidation, engaged in raising funds from the public (such as banks),
takeover, separation and dissolution of a company must be companies issuing debt securities, and companies with assets of
previously notified to the creditors and such actions usually at least IDR50 billion, to audit their accounts.
include a form of public notice.
All companies, whether public or private, must adopt the same
Duty to employees basic accounting principle i.e. the Indonesian Generally Accepted
Accounting Principles (Pedoman Standar Akuntansi Keuangan)
Article 126 of the Company Law provides that a PT company established by the Indonesian Accountant Association. Public
(including its board of directors) must take into consideration companies are also subject to capital market regulations on
the interests of the employees when conducting a merger, accounting.
consolidation, acquisition or separation.
3. What are the most common types of M&A transaction?
What types of liability can directors incur?
Private companies
Directors may incur:
Share acquisitions
n c
ivil liability for wrongful or negligent performance of their
duties; and/or A buyer can purchase shares in a company. These may be the
n c
riminal sanctions for violations of specific requirements shares of the target company or of a company that is one of the
concerning the organisation and operation of the company. target’s controlling shareholders.

A person may be disqualified from acting as a director or An alternative way of acquiring control of a private company in
being involved in the management of a company in certain Indonesia is to subscribe for newly issued voting shares.
circumstances, for example, where, within the immediately
preceding five years: Business/asset acquisitions

n h
e is an undischarged bankrupt; A buyer can also purchase the business and/or assets of a
n h
e had been a director of a company which went into insolvent company.
liquidation either while he was a director or within five years

28
Each asset has to be transferred subject to the particular legal company; or (ii) the ability to, directly or indirectly, by any means,
requirements. For some types of assets, this will mean simply control the management or policy, of the public company.
signing the transfer agreement and handing over the asset (i.e.
physical delivery) or signing the assignment agreement for the A takeover is governed by the Capital Market Law and its
intangible assets (e.g. receivables), whereas others will require implementing regulations, including Bapepam-LK Regulation No.
transfer documents and registration in the Land Title Registry (e.g. IX.H.1 on Take Over of Public Companies.
real property).
A takeover may be conducted by:
Merger
n avoluntary tender offer to all shareholders of the target
Two or more companies may, in accordance with the Company company; or
Law (Article 122), voluntarily (i.e. without a liquidation process) n t
he direct acquisition by a controlling shareholder of shares
merge and continue as one company. The surviving company amounting to more than 50 per cent of the total issued and
(which shall be either one of the merging companies) will succeed paid up shares in the target company.
to all the property, rights and privileges, as well as assume the
liabilities and obligations of each of the merging companies. The latter requires a mandatory tender offer for all remaining
shares, subject to exceptions.
The board of directors of each of the merging companies
must prepare a merger proposal and, upon approval from A mandatory re-sale of the acquired shares is required in the event
their respective board of commissioners, a merger plan will be that the voluntary tender offer or the mandatory takeover tender
jointly prepared by the merging companies and must be further offer results in the acquirer owning more than 80 per cent of the
approved by the general meeting of shareholders of each of the total issued and paid up shares in the company.
merging companies.
Merger
Consolidation
Public companies may merge in the manner as described under
Two or more companies may, in accordance with the Company “Private companies” above, provided that they comply with capital
Law (Article 122), voluntarily (i.e. without a liquidation process) market regulations.
consolidate into a newly formed company. The surviving company
(which shall be the newly formed company) will succeed to all the Consolidation
property, rights and privileges, as well as assume the liabilities and
obligations, of each of the consolidating companies. Public companies may also consolidate in the manner described
under “Private companies” above, provided that they comply with
The board of directors of each of the consolidating companies capital market regulations.
must prepare a consolidation proposal and, upon approval from
their respective board of commissioners, a consolidation plan will Joint ventures
be jointly prepared by the consolidating companies and must be
further approved by the general meeting of shareholders of each Public companies may enter into joint venture arrangements,
of the consolidating companies. subject to certain requirements under capital market regulations.

Joint venture Public-to-private acquisitions (P2Ps)

Two or more parties may form a joint venture to pursue a common Public-to-private acquisitions involve the general principles of
commercial goal. Joint ventures are governed by the general contract and can take many forms.
principles of contract.
In Indonesia, these acquisitions would normally involve the buyers
Public companies acquiring the publicly held shares in a company and subsequently
delisting and privatising the target company (go-private).
Takeovers (see section 6 for a more detailed summary of public
takeovers) There are no regulations relating to go-private transactions but,
upon written request, Bapepam-LK will issue a letter setting out
A takeover involves the direct or indirect acquisition of: (i) more the requirements to be fulfilled by the company for the process.
than 50 per cent of the total issued and paid up shares in a public

29
Do parties have an obligation to negotiate in good faith to 5. Regulation, consents and foreign investment restrictions
one another in M&A transactions?
Are there any regulated industries?
The general contract laws of Indonesia require the parties to enter
into an agreement in good faith. During the negotiations and at Banks, the financial sector and the mining sector are highly
any time prior to signing a binding contract, it may not be possible regulated.
for a party to pull out of negotiations completely or to negotiate
with another prospective buyer without good reason. The 2007 Investment Law reaffirms that the Capital Investment
Coordinating Board (BKPM) is the agency with authority to
The uncertainties of the pre-contractual (or post-contractual but formulate policies and standards and to operate the investments
pre-closing) period may be eliminated or reduced through express licensing scheme. However, the licensing authority for certain
lock up clauses (giving exclusivity to one party for a certain types of investment is the Central Government, which covers:
period), break fees (if the deal does not go forward) or express
language intended to deny the application of good faith principles n investments in non-renewable natural resources;
to the negotiations (e.g. permissibility to negotiate with other n investments in high priority industries; and
competing buyers). n f
oreign direct investments and investor utilisation of capital
from a foreign country pursuant to government-to-government
However, break fees are not common and may raise other issues agreements.
under the Company Law and, if involving a public company, the
Capital Market Law. Where a particular business sector is not prohibited from foreign
investment, generally an application must be made in advance
4. What percentage shareholding is required to achieve of completion to the relevant authority to seek approval of the
effective control of a company? investment amount, location and duty exemption.

A shareholding representing more than 50 per cent of the total There may also be additional, ongoing notification requirements in
issued shares will enable the shareholder to pass an ordinary respect of the operation of the business and any changes to the
shareholders’ resolution at a general meeting of shareholders. corporate structure.

An approval of the general meeting of shareholders under the Are there any restrictions on the foreign ownership of
Company Law to an amendment to the company’s articles of shares in an Indonesian company?
association requires an affirmative vote of a minimum of two-thirds
of the votes cast. The government issues a Negative List periodically, which lists the
relevant sectors (other than banks and companies in the financial
For a public company, Bapepam-LK Regulation X.J.1 on the sector) that are restricted or prohibited from foreign investment.
Main Provisions in an Articles of Association of Public Companies Please see Schedule 1 for foreign ownership restrictions on some
(Bapepam Regulation IX.J.1) requires the approval of more than of the sectors set out in the Negative List.
two-thirds of shareholders with valid voting rights present in the
meeting. Foreign ownership of shares in a closed PT (i.e. private) company
is only possible where the closed PT company is a foreign
The Company Law (and for public companies, Bapepam investment company (known as a PMA company) licensed by the
Regulation X.J.1) provides that, unless the articles of association BKPM.
provide for a higher requirement, affirmative votes from
shareholders representing at least three-quarters of the total votes Other restrictions on the ownership of shares in Indonesian
cast are required to pass resolutions of the general meeting of companies apply:
shareholders to approve the following:
n where Indonesian control is regarded as being in the national
n a merger, consolidation, acquisition and separation; interest (in industries such as publishing, broadcasting,
n the filing of a bankruptcy application; telecommunications and public utilities);
n the extension of the term of the company; n t
he maximum percentage of voting shares which a foreigner
n dissolution and liquidation; and can acquire in a bank incorporated in Indonesia is 99 per cent.
n t
o encumber and to dispose of a majority part of the net assets If acquiring at least 25 per cent of the total issued shares or
of the company. less, but obtaining control over the bank, approval from Bank
Indonesia (the Indonesian central bank) is required;

30
n approval from the Ministry of Finance of the Republic of The term “foreign party” applies to foreign citizens, foreign
Indonesia is required before acquiring voting shares in finance legal entities, Indonesian citizens having permanent residency
companies (multi-finance, insurance, factoring and leasing in other countries and not domiciled in Indonesia, the offshore
companies); branches of any Indonesian bank, or the offshore branches of
n the acquisition of voting shares in a securities company any Indonesian company. For a purchase above USD100,000 or
requires approval from Bapepam–LK; and equivalent, a certified copy of the underlying transaction agreement
n f
oreign individuals and corporations are prohibited from owning evidencing the need for the foreign currency must be submitted to
certain types of title to land. the bank, together with a statement that the foreign currency being
purchased from the Indonesian banking system does not exceed
Are there any foreign exchange and investment controls? the amount shown by the agreement for the underlying transaction.
The official elucidation of the regulation affirmatively provides
At present, there are no foreign exchange controls and the Rupiah that the measure does not constitute the instituting of a foreign
currency is freely convertible. Under the Indonesian Law No.24 exchange control.
of 1999 on Foreign Exchange Traffic and Exchange System (the
Law on Foreign Exchange) every resident is free to own and Is there any merger control?
utilise foreign currencies. Bank Indonesia is, however, given the
following authority by the Law on Foreign Exchange: The Indonesian Law on Prohibition of Monopolistic Practices And
Unfair Competition, Law No.5 of 1999 (the Anti-Monopoly Law)
n t
o require information on foreign currency transactions prohibits common ownership of two or more companies engaged
by residents. The Law on Foreign Exchange places a in the same market activities if the market for the goods or
corresponding obligation on residents to disclose information, services is highly concentrated (i.e. two or three companies have
either directly to Bank Indonesia or through other parties (e.g. an aggregate market share of 75 per cent or more).
banks), as may be regulated by Bank Indonesia;
n t
o regulate foreign exchange transactions by the banking A notification procedure for mergers and acquisitions above a
industry; and certain level (to be set by the regulation) must be submitted to the
n t
o propose to the government the currency exchange system, Business Competition Commission.
for determination by the government.
Article 28 of the Anti-Monopoly Law contains a prohibition on
A reporting system administered by Bank Indonesia on “foreign mergers and consolidations or the acquisition of the shares of
currency remittances” is conducted by non-financial institutions. other companies that will cause monopolistic practices and/or
The obligation is applicable to companies with total assets of at unsound business competition.
least IDR100 billion, or total annual gross revenues of at least
IDR100 billion. The scope of the reports is: The Business Competition Commission issued a regulation that
allows the submission of a voluntary pre-merger notification. With
n transactions (which are not made through onshore banks or respect to control, the Pre-Notification Regulation provides that
non-bank financial institutions but through overseas current subject to the thresholds of value of assets, value of sales or
accounts (OCAs), inter-company/office accounts (ICAs) and market share, a pre-notification can be made if:
means other than OCAs or ICAs affecting offshore financial
assets and/or offshore financial liabilities) and n t
here is an acquisition of shares with voting rights of at least 25
n any increase or decrease of foreign assets and liabilities. per cent of total issued shares;
n t
here is an acquisition of shares with voting rights of less than
The physical removal from Indonesia of Rupiah notes and coins 25 per cent of total issued shares, but resulting in an effective
in amounts of IDR100 million and above requires prior approval change of control; or
from Bank Indonesia. Since early 2001, cross-border Rupiah n t
here is an acquisition of assets or another transaction that
remittances have been prohibited. results in an effective change of control.

Since late 2008, banks are required to obtain from each of their As the Pre-Notification Regulation is fairly new, it is yet to be
customers or a foreign party who intends to purchase foreign tested and currently it is not clear how the test of control will be
currencies, a duly stamped statement guaranteeing that their implemented, nor what protections, if any, will be available if the
overall purchase of foreign currency against Rupiah from one or transactions are notified and are not challenged.
more banks in Indonesia does not exceed USD100,000 in the
month for each customer or foreign party.

31
What are the employee issues? n t
he fact that the transfer is taking place, the approximate date
on which it will take place and the reasons for it; and
Are works councils/consultation common? n t
he implications of the transfer and the measures that the
seller envisages he will, in connection with the transfer, take in
Only certain Indonesian companies have work councils or relation to the affected employees or, if he envisages that no
employee representation in place of an employee/trade union. measures will be so taken, this must be notified.

Are any actions required prior to or upon an acquisition for Timing


employees?
In the event of the acquisition of shares or assets, the employer
Pursuant to the Company Law and applicable regulations, will remain the same and the employees will maintain their
mergers, consolidations and acquisitions of listed and unlisted employment with the company.
companies must take into account the interests of employees and
the intended treatment of employees in the companies concerned In the case where transfers of employment are required, it should
must be disclosed in the required transaction documentation. be effective simultaneously with completion of the sale of the
business.
Additionally, the general statutory and regulatory provisions of
Indonesian employment law will apply. These will usually require With which stock exchange requirements must listed
notice to be given to the employees at some point. companies comply?

Dismissal of employees following an acquisition will be legal if prior What rules generally govern listed companies?
approval from the Industrial Relation Court is obtained.
PT companies whose shares are listed on a stock exchange must
Terminated employees are entitled to statutory severance pay, comply with the regulations of the stock exchange where the
and this right will be triggered in certain cases upon a change of shares are listed (Stock Exchange Regulations). Currently there
control or, if the merger or acquisition is achieved by a transfer of is only one stock exchange operating in Indonesia, the Indonesia
assets, even if the employees are offered continued employment Stock Exchange (the IDX).
with the acquirer.
The Stock Exchange Regulations consist of, among others,
In these circumstances, the employer can offer two options to the the Listing Regulations, Trading Regulations and Disclosure
employees, namely: Regulations.

n t
o take up employment with the new employer on similar terms How does a company delist its share capital?
and conditions of employment with the past service period
of the employee continuing with the new employer who will A listed company must be listed for at least five years in order to
have the contractual responsibility for employees’ accrued file a delisting plan to the IDX. A delisting plan sets out the reason
severance rights in the future, or for delisting, the time line and the mechanics of delisting.
n t
o terminate employment with the employer and receive
severance pay and start work with the new employer without The procedure includes:
an accrued past service period.
n filing the delisting plan to the IDX;
If there is a trade union in the company, negotiation to reach either n p
ublishing information to the shareholders to delist prior to the
of the options above can be carried out through a trade union general meeting of shareholders and the submission of the
representing the employees. The employees or trade union’s same information to the IDX;
agreement will support the issuance of the Industrial Relation n approval from the general meeting of shareholders to delist;
Court’s approval. n p
ublishing the result of the meeting and providing information
on the procedure for selling shares to a designated buyer; and
Are there any notification obligations for employees prior to or n fi
ling a delisting application to the stock exchange for its
upon an acquisition? approval.

In practice, the seller of a business must notify the affected Delisting is not officially discouraged, but has proven difficult in
employees and their trade unions of: many cases, due to the need to buy out minority shareholders at
above market prices.

32
Is financial assistance prohibited? Bapepam-LK is authorised to review and declare effective a
tender offer statement filed by an acquirer.
What is the nature of the prohibition?
There are sanctions for breaches of the Capital Market Law and
The prohibition against financial assistance stems from the basic its implementing regulations. Sanctions may include fines, orders
rule of the Company Law that tangible value must be received by and the cancellation of the acquisition transaction.
a company for issue of its shares and the value must be retained
by the company. There may not be a return of capital or the There are a number of other laws regulating certain aspects of
taking of value except in the case of company liquidation or a takeovers, including the general requirements of the Company
reduction in company capital. Law and the Government regulation No.27 of 1998, the Anti-
Monopoly Law, and the Labour Law.
Banks licensed in Indonesia are also prohibited from providing a
loan to a party for the purchase of shares. In addition, the regulations issued by the stock exchange may be
relevant if the shares of the bidder (or the target) are listed on the
What are the sanctions? IDX.

An act of financial assistance by a company is invalid and may Application of the Capital Market Law and its implementing
give rise to the personal liability of the company’s management. regulations

Where banks provide a loan for the purchase of its shares, the The Capital Market Law applies to:
sanction is a decrease of the compliance rate of the bank as
imposed by Bank Indonesia. n a
takeover of a publicly listed company or an unlisted public
company, being a company with 300 or more shareholders and
Are there any exceptions to the prohibition, and is there any with paid up capital of IDR3 billion; and
procedure that can be followed to make financial assistance n a
merger or consolidation involving a public company or an
possible (i.e. a “whitewash procedure”)? unlisted public company.

There are no such exceptions in Indonesia. The Capital Market Law does not apply to takeovers or mergers
of private companies, but it applies to takeovers and mergers of
6. Public takeovers foreign incorporated companies listed on the IDX. To date there
are however, no foreign incorporated companies listed on the IDX.
What are the forms of a public offer?
What are the main offer terms?
A takeover of a public company in Indonesia can be structured as:
Minimum price requirements
n a
voluntary public offer to acquire all or a majority of the issued
(and to be issued) share capital of the target from existing Generally, the tender offer price must be the greater of:
shareholders;
n a
direct acquisition of shares from a controlling shareholder n t
he price being offered in a tender offer by another party within
which will require a mandatory tender offer; or 180 days prior to the announcement of the tender offer plan
n a merger. and
n t
he highest market price during the period of 90 days
Takeovers can be either recommended by the target’s board of immediately prior to the announcement of the tender offer plan.
directors, or initiated by the controlling shareholder.
Specifically, in a mandatory tender offer triggered by a takeover
What is the regulatory framework for a public offer? directly from the controlling shareholder, the pricing must be as
follows:
The Capital Market Law and its implementing regulations
n i
f the mandatory takeover is in respect of shares of a public
The principal source of regulation is the Capital Market Law, company that are unlisted and not traded on any stock
Law No.8 of 1995 (the Capital Market Law), as implemented exchange, the offer price must be at least the higher of: (i) the
by regulations issued by Bapepam-LK., including Bapepam-LK share price paid for shares in the takeover; or (ii) the fair price
Regulation No. IX.H.1 on Take Over of Public Companies. determined by an independent appraiser;

33
n i
f the takeover is in respect of shares of a public company that If the tender offer results in the acquirer owning more than 80
are listed and traded on exchanges but have not been traded per cent of the paid-up capital of the company, it is required to
or have been temporarily suspended for 90 days or more resell the shares to the public so that the shares owned by the
prior to the announcement of a tender offer or negotiation of a public amount to at least 20 per cent of the paid up capital of the
proposed takeover, as the case may be, the offer price must be company owned by at least 300 shareholders within two years
at least the higher of (i) the average of the highest daily traded after the completion of the tender offer process.
share price within the last 12 months prior to the last trading
day or the day that it was temporarily suspended or (ii) the If the takeover results in the acquirer owning more than 80 per
share price paid for shares in the takeover; cent of the paid up capital of the public company, it is required to
n i
f the takeover is in respect of shares of a public company that re-sell to the public shares at least equivalent to the percentage of
are listed and traded on exchanges, the offer price must be at shares obtained from the tender offer and owned by at least 300
least the higher of (i) the highest traded share price within the shareholders within two years.
last 90 days prior to the date of the announcement of tender
offer or the negotiation of the proposed takeover, as the case An exception to the re-sale requirement applies where the
maybe, or (ii) the share price paid for the shares in the take company conducts a corporate action such as a stock split or
over; a new issuance without conducting a rights issue, which would
n i
f the takeover is in respect of indirect shares of a public result in either 20 per cent of the company being owned by the
company that are not listed and not traded on exchanges, public or being owned by at least 300 shareholders.
the offer price must be at least the equivalent of the fair price
determined by an independent appraiser; Funding the acquisition
n i
f the takeover is in respect of indirect shares of a public
company that are listed and traded on exchanges but have In a cash offer, or where the offer involves an element of cash, the
not been traded or have been temporarily suspended for 90 bidder must publish shareholders’ information in a newspaper
days or more prior to the announcement of a tender offer or including a confirmation by an accountant, bank or financial
negotiation of a proposed takeover, as the case may be, the adviser that the relevant bidder has sufficient financial resources to
offer price must be at least equivalent to the average of the satisfy full acceptance of the offer.
highest daily traded share price within the last 12 months prior
to the last trading day or the day it was temporarily suspended; What is the timing of a public offer and what is the
and procedure to be followed?
n i
f the takeover is in respect of indirect shares of a public
company that are listed and traded on an exchange, the Announcements
offer price must be at least equivalent to the average of the
highest daily traded share price within the last 90 days prior to In the case of a mandatory tender offer, an announcement by
the announcement of a tender offer or the negotiation of the the acquirer regarding the start of negotiations is voluntary. An
proposed takeover, as the case may be. announcement tends to lock the price of the shares.

Cash/non cash terms An announcement must be made to the public and the tender
offer plan publication must be filed with Bapepam-LK.
There is no limitation in terms of the form of consideration for an
offer. It may be in cash, securities (with cash alternative), or a An announcement of the tender offer statement must be made
mixture of both. after it becomes effective.

Conditions Acceptance period

The regulation does not specify any permitted conditions to a The offer must be open initially for at least 30 days from the
tender offer. Therefore, any condition to the tender offer must be announcement of the tender offer statement. No extension is
approved by Bapepam–LK. allowed in the case of a mandatory tender offer. In a voluntary
tender offer, the bidder may extend the acceptance period by up
I
n the event that such a condition is attached, the condition shall to 90 days.
apply equally to all shareholders, except to holders of shares with
different rights or benefits attached. There is no minimum level of
acceptances requirement.

34
Offer timetable: Mandatory tender offer timeline
* indicative timing

Date/Time period Events

D The purchaser and seller commence negotiations.

D+2 The purchaser publishes a commencement of negotiation announcement (price lock up date) (voluntary)
The purchaser liaises/appoints supporting institutions:
(i) a custodian bank/securities company to issue a statement letter that the purchaser has the ability to
finance the offer (a financial support statement), to act as custodian of the purchaser and to administer
the acceptance of the offer (scripless shares) and (ii) a share registrar (usually the target company) to
administer the acceptance of the offer (scrip shares).

The appointed custodian bank/securities company issues the financial support statement. The purchaser
completes the takeover (direct acquisition with the selling shareholder) and within two business days, the
purchaser liaises with Bapepam-LK on the draft tender offer plan announcement and draft tender offer
statement.

D+[21]* The purchaser submits the draft tender offer plan announcement to Bapepam-LK and the target company.

The appointed custodian bank/securities company notifies the Indonesian Central Securities Custodian
(KSEI) of the plan.

D+[23]* The purchaser publishes the tender offer plan announcement.

D+[28]* The purchaser submits a draft tender offer statement to Bapepam-LK, IDX, KSEI, the target company and
other tender offeror (if any).

The purchaser consults with Bapepam-LK on the draft tender offer statement.

D+[43]* Bapepam-LK declares the tender offer statement effective.

D+[45]* The purchaser publishes the tender offer statement and the tender offer begins.

D+[75]* The tender offer closes.


KSEI receives purchase funds in its account from the appointed custodian bank/securities company.

D+[76]* Share transfer settlement period commences.

D+[91]* Last settlement date.

D+[101]* The purchaser submits (i) a report to Bapepam-LK on the results of the tender offer and (ii) a report to
Bapepam-LK and IDX on acquiring more than 5 per cent of shares in the target company.

Satisfying offer conditions A competing bidder may announce a written statement either to
support, or to oppose, the offer of a previous bidder.
A bidder may withdraw from the tender offer if one of the specific
conditions attached is not fulfilled. Failed bids and further offers

Offer unconditional payment There are no specific rules on the possibility of making a further
offer in the event of a failed bid.
Payment of shares in a tender offer must be made to the
accepting shareholders by the twelfth calendar day from the What documentation is involved in the process?
closing of the tender offer period.
The commencement of negotiation announcement
Competing bids
This should state the:
There are no specific rules relating to competing bids. A bidder
cannot cancel the tender offer after the announcement of the n identity of the acquirer;
tender offer plan, unless approved by Bapepam-LK. n number of shares to be acquired;
n identity of the proposed seller;
n purpose of acquisition;

35
n method of negotiation; and What are the rules on information gathering/provision?
n matters being negotiated.
Information is to be provided equally to all shareholders and
The tender offer plan announcement competing bidders.

This should state the: A bidder may sometimes undertake some due diligence on the
target before extending an offer. If it is proposed that price-
n identity of the offeror; sensitive information is to be provided by the target to the bidder,
n terms of the offer; this could potentially create an insider trading offence if the bidder
n shares in the target company currently held by the acquirer; acquires the target shares from the target shareholders. Therefore
and such information must also be disclosed to the public as part of
n the financial support statement. the tender offer material.

The tender offer statement What is the position regarding insider trading?

This should state the: Insider trading in securities listed or traded in Indonesia is a
criminal offence, which may also carry civil liabilities.
n identity of the target company;
n shares to be acquired; In general, any person who has information concerning a
n l
owest and highest price of the shares in each quarter for the company that is not generally available and which a reasonable
last two years; person would expect to have a material effect on the price of
n identity of the offeror; shares or the decision of the investor to buy or sell shares, would
n brief description of any material relations or contracts for the be guilty of insider trading if he or she:
last three years between the offeror and the target company
and/or its affiliates; n deals in the securities;
n terms of the offer; n procures others to deal in the securities; and
n statement by the offeror of its ability to finance the offer and a n c
ommunicates the information to a third party where the third
financial support statement; party is likely to deal in the securities.
n purpose of the offer;
n future plans of the offeror for the target company; and The penalties for insider trading are:
n other information required to ensure the statement is not
misleading (i.e. non public material information obtained n a
n administrative sanction as determined by Bapepam-LK
from the due diligence, including price sensitive information, which may be in the form of a warning letter, cancellation or
if any, for the purpose of complying with the Insider Trading revocation of licence, fine, or an order to unravel the trade; or
Regulation). n a
criminal sanction of imprisonment for up to 10 years and a
fine of up to IDR15 million.
Responsibility statements
In addition to these penalties, a person who has engaged in
The offer document, target document and all announcements insider trading may also be liable to compensate any person
made by the bidder and the target must contain a responsibility trading contemporaneously with him for the unlawful profit gained
statement made by the directors of the bidder or target (as the or loss avoided.
case may be) assuming responsibility for the information in the
document or announcement. What are the public disclosure requirements in a takeover
scenario?
What are the practices relating to break fees and lock-out?
Bidder
There is no prohibition on break fees and lock-out for private
companies. A “lock up” clause may not be applicable to prevent In general, a person who has acquired an interest of 5 per cent
the required compliance with the tender offer rules for acquisitions or more of the shares of a public company must report this to
of public companies. Bapepam-LK and to the IDX. Any subsequent changes in the
percentage level must also be disclosed.
A “break fee” arrangement is not common in Indonesia and it may
be in conflict with the fiduciary duties of the board of directors.

36
Target offer and owned by at least 300 shareholders within two years.
An exception to the re-sale requirement applies where the public
Dealings in target shares by directors, commissioners and company conducts a corporate action which would result in either
shareholders owning 5 per cent of the target must be publicly 20 per cents being owned by the public or owned by at least 300
disclosed. shareholders.

Does a memorandum of understanding (MoU) need to be Prior to the takeover, the acquirer that is conducting a negotiation
disclosed? of the takeover acquisition of a company may disclose the
information to the public company, Bapepam-LK, the Stock
Disclosure of an MoU is voluntary, provided the information Exchange and the public. If the acquirer makes such a disclosure,
required by a commencement of negotiation announcement is any material development on the negotiation process must also
disclosed (see page 35). be disclosed within two working days of each development.
There are exceptions to the mandatory tender offer requirement.
What are the limitations to stakebuilding? An acquirer proposing to undertake a takeover of a public
company may be exempted from conducting a mandatory offer
A direct or indirect acquisition of shares carrying more than 50 if, amongst other things, the acquisition is due to any of the
per cent or more of the voting rights of a company will trigger a following:
mandatory offer.
i. marriage or inheritance;
Is there a requirement to make a mandatory offer?
ii. the purchase or acquisition of up to 10 per cent of the shares
An acquisition of (i) more than 50 per cent of the paid up capital in the public company within a 12-month period;
of a public company or (ii) any shares in a public company, which
would result in the acquirer having the ability to determine in any iii. the implementation of a duty and authority of a state or
manner whatsoever, the management and/or policy of the public governmental body/agency pursuant to law;
company, requires a mandatory offer to be made to acquire the
remaining shares of the company, except those held by: iv. the direct purchase of shares owned and/or controlled by a
state or governmental body/agency as an implementation of
n the selling shareholder; item (iii) above;
n o
ther shareholders that have already been offered the shares
on the same terms and conditions by the acquirer; v. any final and binding court order or decision;
n another acquirer;
n a
major shareholder (a shareholder holding at least 20 per cent vi. a business merger, separation, consolidation or liquidation of a
of the public company); or shareholder;
n another controlling shareholder.
vii. the grant of shares without consideration in any form;
The offer must be made pursuant to a tender offer procedure
pursuant to the prevailing regulation. This requirement applies viii. a
 security interest for certain debts provided for in credit
to a direct or indirect acquisition of the public company by the agreements as well as security interest for debts within the
acquirer. framework of a restructuring of the public company stipulated
by a state or governmental body/agency pursuant to law;
In the event that the mandatory tender offer results in the acquirer
owning more than 80 per cent of the paid up capital of the public ix. the acquisition of shares pursuant to a rights issue or issuance
company, it is required to resell the shares to the public so that the of shares without pre-emptive rights;
shares owned by the public amount to at least 20 per cent of the
paid up capital of the public company and owned by at least 300 x. the acquisition of shares due to the implementation of policy of
shareholders within two years after the completion of the tender the state/governmental body/agency;
offer process.
xi. the conduct of a tender offer which may violate laws and
Further, if the takeover results in the acquirer owning more than regulations; or
80 per cent of the paid up capital of the public company, then it
is required to re-sell to the public the shares at least equivalent xii. the conduct of a voluntary tender offer.
to the percentage of shares obtained from the mandatory tender

37
An acquirer relying on the above exceptions is still required n i
f the bidder is an Indonesian PT company, to obtain approval
to disclose to the public company, Bapepam-LK, the Stock from the shareholders at a general meeting of shareholders.
Exchange and the public within two working days after the
acquisition, the following information: Target

n the identity of the acquirer; The board of directors of the target must announce a statement
n the number of shares acquired and the percentage informing of any misleading or incorrect statements made by the
shareholding held by the acquirer before and after the bidder.
acquisition; and
n valid
 supporting evidence of the exception relied upon. What is the procedure for a squeeze out of the minority?

In addition, the following information is required to be disclosed by There is no squeeze-out rule or procedure, and it is not possible
an acquirer relying on exceptions (iv) and (viii) above: to compel minority shareholders to sell their shares.

n a
ffiliation relationship (if any); If the tender offer results in the target company becoming
n the reason for the acquisition; and unqualified for listing on the IDX, the bidder must acquire all
n the plan that the acquirer has for the company. remaining shares of the target company except for shares held by
majority shareholders. A company will be delisted from the stock
Except for exceptions (i) (ii) v and (vi) this information must be exchange if the company is:
announced to the public in one newspaper in the Indonesian
language with national circulation. n experiencing a condition or event which has a significant
negative impact on the business or the public status of the
A tender offer is also not required if the takeover of the public company and the company is unable to demonstrate a
company is made indirectly through another public company, sufficient indication of recovery; or
provided that the public company contributes less than 50 per n the trading of the shares in the regular or cash market is
cent of the other public’s revenue at the time of the takeover temporarily suspended and is only possible on the negotiated
based on the consolidated financial statement of the other public market for at least 24 months.
company.
7. Overview of a private company acquisition
What defences are available to a target company during the
stages of an offer? Timing

A target company may make a written statement to support or The timing of a private acquisition depends on the cooperation
object to the tender offer. Such a statement may be a defence between the parties, the progress of negotiations and other
or an objection to the information announced in the tender offer matters specific to the transaction.
statement.
Steps
However, the target company is not permitted to enter into a
transaction solely with the aim of hindering a change of control of Set out in the table on page 39 is an overview of the steps that
the target company as a result of the tender offer as of the date of can be involved in a private company acquisition in Indonesia
announcement of the tender offer plan until the end of the tender based on the Company Law and the implementing regulation,
offer period. namely, Government Regulation No.27 of 1998 dated 24 February
1998 (GR 27).
What obligations are the directors of the bidder and target
under?

Bidder

The board of directors’ obligations are set out in the Company


Law and Capital Market Law and their respective implementing
regulations, and include:

n to keep the tender offer plan confidential within 15 days prior to
the announcement of the tender offer plan;
n to ensure that the information published is materially correct
and accurate;
n not to buy or sell shares in the target company within 15 days
prior to the announcement of the tender offer plan until the end
of the tender offer period; and

38
Overview of the steps in a private company acquisition

Actions Time

Acquiror conveys the intention for acquisition to acquiree’s N/A


board of directors

Preparation of proposal for acquisition plan; approved by N/A


acquiror’s and acquiree’s board of commissioners

Preparation of acquisition plan N/A

Announcement of summary of acquisition plan in one 30 days prior to Extraordinary General Meeting of
newspaper and written announcement to acquiree’s Shareholders (“EGMS”) notice
employees

Announcement of the acquisition plan, by way of registered 30 days prior to EGMS notice
letter, to the acquiree’s creditors

Deadline for submission of acquiree’s creditors’ objection to 14 days after announcement of acquisition plan
the acquisition plan
7 days prior to EGMS notice

EGMS notice 14 days prior to EGMS

EGMS approves the acquisition plan (with a quorum of at N/A


least ¾ of shareholders and approved by at least ¾ of the
attendees)

Second EGMS (with a quorum of at least 2/3 of shareholders 10 – 21 days after the first EGMS notice: 7 days prior to the
and approved by at least ¾ of the attendees) meeting

Third EGMS (quorum decided by head of local district court) 10 – 21 days after the second EGMS notice: 7 days prior to
the meeting

Signing of deed of acquisition N/A

Submission to Ministry of Law and Human Rights of the N/A


Republic of Indonesia (MoLHR) of copy of the deed of
acquisition resulting in the articles of association (AoA)
amendment (for acquisition through company)

Submission to MoLHR of copy of the deed of acquisition


resulting in the change of shareholding (for acquisition of
shares)

Register the AoA amendment to Company Registry As at MoLHR approval of the AoA amendment for
maintained by MoLHR amendments that require MoLHR approval

As at acknowledgment receipt by MoLHR for amendment


that doesn’t require MoLHR approval

As at acknowledgment receipt of change in Acquiree’s data


that doesn’t result in amendment of its AoA

Announcement in Supplement to the State Gazette of the 14 days as of the MoLHR approval or acknowledgment
Republic of Indonesia of the AoA amendment receipt of the AoA amendment

Announcement in one newspaper of the acquisition results 30 days as of date of effectiveness of the acquisition

39
8. What tax issues should be considered? rate or exemption under a bilateral tax treaty. Interest is defined
broadly to cover any consideration paid or payable for the use of
Capital gains money. It would also cover guarantee fees.

The general income (capital gain) tax rate ranges from 5 per cent Under current regulations, for the payor withholding obligor
to 30 per cent for individual domestic taxpayers and 28 per cent (Indonesian company/borrower) to apply a treaty rate, a Domicile
for corporate domestic taxpayers. Certificate (tax residency certificate) of the foreign recipient must
be presented to the Indonesian tax office.
A transfer of shares in an Indonesian company (other than a public
company) by a foreign party is subject to a final capital gains tax of Value added tax of 10 per cent may be charged in respect of
5 per cent of the sale price. certain services performed in Indonesia, or performed outside
Indonesia but where the benefit of such services is enjoyed
A sale of publicly listed shares is subject to a final 0.1 per cent in Indonesia. The determination of whether the benefit of the
tax on the total value of the share price if the shares are crossed services is enjoyed in Indonesia or the services are performed
through the exchange. The general income tax rate applies to in Indonesia is determined by the tax authorities based on a
capital gains from the over-the-counter sale of publicly listed consideration of the factual circumstances.
shares.

Transfer taxes

There is no transfer tax applicable in Indonesia, except with the


transfer of land title, where the transferee will bear 5 per cent of
the transfer price. The transferor will bear the 5 per cent income
tax. There may be a 10 per cent value added tax on the sale of
assets which will depend on the specifics of the asset transaction.
Stamp duty of IDR6,000 (USD0.75) is payable on each document
signed.

Thin capitalisation/interest deductions

A company may in general claim a deduction from interest paid


under a loan for the purposes of calculating taxable profits.

Withholding tax

In Indonesia, withholding tax applies to certain transactions such


as loans or certain services. In general, repayments of principal
are not subject to withholding tax. However, payments of interest
and any fee that is in the nature of an interest to an offshore
lender, as well as fees for services performed either in or outside
Indonesia, are subject to withholding tax at the rate of 20 per
cent of the gross amount subject to such lesser rates as may be
applicable under a bilateral tax agreement.

Dividend payments are also subject to withholding tax if the


shareholding is less than 25 per cent of the total issued shares in
the invested company. When the shareholding is 25 per cent or
more of the total issued shares in an invested company and the
shareholder is a domestic taxpayer, the dividend paid to such a
shareholder is not subject to withholding tax.

For an interest recipient who is domiciled offshore, an exception is


available where a recipient qualifies for the benefits of a reduced

40
Schedule 1: Summary of the Negative List in Indonesia
This table sets out only a summary of some of the industries listed in the Negative List in Indonesia.

Industry Permissible foreign equity

Offshore (outside the eastern Indonesian 95%


region) and onshore oil and gas drilling service

Power plant and power transmission 95%

Pharmaceuticals 75%

Venture capital 85%

Insurance (e.g. loss insurance, life insurance, 80%


reassurance and insurance and reassurance broker)

Telecommunications (fixed line organisation) 49%

Telecommunications (closed fixed line organisation 65%


and mobile network organisation)

Multimedia services 49% - 95% (depending on the type of services)

Foreign exchange bank, non-foreign 99%


exchange bank and shariah bank

41
re s
W -
L O

42
Malaysia

1. What are the forms of business entity in Malaysia? A degree of flexibility can be given to the management under
the articles of association, including the ability to change the
Common forms of entity management, alter procedures and delegate responsibility to
committees. Alternatively, the shareholders can, via the articles
„„ Private company limited by shares of association, restrict the powers of management, retaining
„„ Public company limited by shares (listed/unlisted) control over the day-to-day running of the company.
„„ Partnership
Are there any residency requirements for directors?
Less common forms of entity
A company is required to have at least two directors who must
„„ Companies limited by guarantee have their principal or only place of residence in Malaysia. These
„„ Unlimited companies two directors may be Malaysian citizens or otherwise. A company
„„ Limited partnership must also have at least one company secretary who must have
„„ Unincorporated associations his principal or only place of residence in Malaysia.

2. How is a company managed? Is there any requirement for directors to hold shares?

The basic management structure There is no legal requirement for shareholding qualification with
respect to directors but the articles of association can provide for
What form does the management structure take? such a requirement if the shareholders so decide.

Under the Malaysian Companies Act, 1965 (Companies Act), the What duties do directors owe?
business and affairs of the company must be managed by, or be
under the direction of, the board of directors. The non-executive Overview
directors have voting rights on board decisions and are, as with
executive directors, responsible for all decisions taken and powers The duties and responsibilities of a director arise under common
exercised by the board. law and the Companies Act.

The articles of association of the company set the threshold for As a fiduciary, a director must always exercise his powers for a
decisions of the board (e.g. whether unanimous vote or majority proper purpose and act in good faith in the best interests of the
vote is required). company. Accordingly, certain duties are placed upon a director,
and a director is not permitted to place himself in a situation where
How are directors appointed to and removed from office? his interests conflict with his duty.

In general, the appointment and removal of directors is governed Duty to the company
by the articles of association.  However, for a public company or
its subsidiary, the appointment of a director over the age of 70 Directors owe their primary duty to the company (as distinct from
years, and for a public company, the removal of its directors, is the shareholders) and generally, only the company has a cause of
governed by the Malaysian Companies Act, 1965 (Companies action against the directors for breach of their duties.
Act). Malaysian case law has indicated that the provisions of
the Companies Act regarding removal of directors also apply Generally, directors are required to act and exercise their powers
to private companies and therefore, as a matter of prudence, for a proper purpose and in good faith in the best interests of the
directors of a private company are also removed in accordance company as a whole, and not for their personal interest. A director
with the provisions of the Companies Act. who is appointed by a shareholder or debenture holder must act
in the best interest of the company and in the event of any conflict
What powers does the board have? between his duty to the company and his duty to his nominator,
he must not subordinate his duty to act in the best interest of the
The board has all the powers of managing, directing and company to his duty to his nominator.
supervising the management of the business and affairs of
the company subject to such limitations in the Companies Act A director is required to exercise reasonable care, skill and
(including powers that are specifically reserved to shareholders) diligence with the knowledge, skill and experience that
and the memorandum and articles of association. may reasonably be expected of a director having the same

43
responsibilities while taking into account any additional knowledge • in connection with the promotion, formation or management
skill and experience that the director has. of a corporation;
• involving punishable fraud or dishonesty;
A director must not put himself in a position where his personal • under section 132 (for breach of the statutory duty of
interests conflict with those of the company. Where a director is directors under the Companies Act) or under section 303
directly or indirectly interested in a contract, he may be counted (for breach of the duty to keep proper accounts of the
towards the quorum but is required to abstain from voting or company); or
participating in the discussion in a board meeting. • of an offence under the securities law or the Companies Act,

A director or an officer of a company must not make improper use within a period of five years after his conviction or if he is
of any information acquired by virtue of his position (as a director sentenced to imprisonment, after his release from prison;
or an agent) to gain (directly or indirectly) an advantage for himself
or for any other person, or to cause detriment to the company. „„ he is or has been a director of an insolvent company which
has gone into liquidation and was a director of such other
Duty to the shareholders company which went into liquidation within five years of the
date on which the first company went into liquidation.
The minority shareholders in a company may be entitled to bring
an action in their own name (on behalf of the company) against In certain circumstances, a director may also be personally liable
the directors for breach of their duties. To sustain such a claim, to creditors of a company that has gone into insolvent liquidation,
the shareholders must show that the company’s affairs have for example, where:
been conducted in a manner which either constitutes a “fraud on
the minority” or are unfairly prejudicial to their interests or the act „„ he had knowingly contracted a debt when he had no
complained of is ultra vires. reasonable or probable expectation that the company would
be able to pay that debt; or
The shareholders of an unlisted company may also apply to the „„ he is guilty of fraudulent trading.
court under section 181A of the Companies Act for leave to bring
an action in the company’s name, where such leave will be granted Section 140 of the Companies Act nullifies any provisions (whether
if the court is satisfied that the complainant is acting in good faith contained in the company’s articles of association or otherwise)
and it appears prima facie that the action should be brought. which exempt a company’s directors and officers from, or which
indemnify them against, any liability which by law would attach to
Duty to creditors them in respect of any negligence, default, breach of duty or trust
of which they may be guilty in relation to the company. However, if a
If a company is close to insolvency, the interests of the creditors judgment is granted in favour of such a director or officer or if he is
must be taken into account. If the directors act in a manner with acquitted, and the court grants him relief under the Companies Act,
an intent to defraud the creditors of the company or for any then the company may indemnify him against any liability incurred
fraudulent purposes when the company is insolvent, they may be by him in defending the proceedings (whether civil or criminal).
held guilty of misfeasance.
There are a number of ways in which directors can minimise the
What types of liability can directors incur? risk of liability:

Directors may incur: „„ certain actions taken or omissions made by directors can be
ratified retrospectively (where permitted under Malaysian law) or
„„ civil liability for negligent performance of their duties; and/or approved in advance by the shareholders;
„„ criminal sanctions for violations of specific requirements „„ the directors can maintain directors and officers’ liability
concerning the organisation and operation of the company. insurance policies; and
„„ the company can maintain a company reimbursement policy
A person may be disqualified from acting as a director or to indemnify the company where the company has itself
being involved in the management of a company in certain indemnified the directors and officers in the event the directors
circumstances, for example, where: and officers are found not guilty or a judgment or relief is
granted in their favour by the court.
„„ he is an undischarged bankrupt;
„„ he had been convicted whether within or outside Malaysia of
any offence:

44
What are the auditing requirements for companies? In the case of amalgamation with a court order, a majority in
number representing at least 75 per cent in value of the members
There is a statutory requirement of audit applicable to all or class of members of the amalgamating companies and/or a
companies in Malaysia. majority in number representing at least 75 per cent in value of
the creditors or class of creditors of the amalgamating companies
3. What are the most common types of M&A transaction? must approve the amalgamation, and the court order is binding
on all shareholders and/or creditors. Under the Companies Act,
Private companies the court order can provide for the transfer to the acquirer of the
whole or any part of the assets and business or liabilities of the
Share acquisitions target, the continuation by or against the acquirer of any legal
proceedings pending by or against the target or the dissolution of
A company can issue various types of shares with different rights the target, and any incidental matters.
attached. The most common are ordinary shares with full voting
rights and preference shares (which do not entitle the holder to Schemes of arrangement
the right to vote at a general meeting or to any right to participate
beyond a specified amount in any distribution whether by way of A scheme of arrangement is a legislative procedure under the
dividend or on redemption in a winding up or otherwise). Companies Act allowing a company to be acquired.

A buyer can purchase ordinary shares in a Malaysian private The use of a scheme of arrangement to acquire a wholly owned
company. By acquiring the ordinary shares in a company, the subsidiary requires the active co-operation of the directors of the
buyer acquires all voting rights attached to such shares. target and a court order.

An alternative way of acquiring control of a private company in The scheme can be effected either:
Malaysia is to subscribe for newly issued voting shares which,
after taking into account already existing shares, make up over by way of a share-for-share exchange: all shares in the target
50 per cent of the entire issued voting share capital of a company held by its existing shareholders (other than the acquirer) are
(with the existing shareholders being diluted). cancelled and in exchange new shares in the acquirer are issued
to those shareholders. The reserve created in the target by the
Business/asset acquisitions cancellation of the shares is capitalised and applied in paying up
further shares in the target which are issued to the acquirer in lieu
A buyer can also purchase the business and assets of a company. of those cancelled. This is usually used to effect the acquisition of
Each asset has to be transferred subject to the particular minority held shares in a subsidiary or for a share for share offer; or
formalities required. For some classes of assets, this will mean
simply handing over the asset (i.e. physical delivery), although by way of an acquisition of all or part of the assets and
others will require transfer documents (e.g. real property, contracts business of the target: the assets and business of the target are
and intellectual property). acquired by the acquirer in consideration for the issue of shares in
the acquirer to the target. The target then distributes the shares
Schemes of reconstruction or amalgamations in specie to its shareholders. If the target has no remaining assets
or liabilities, it is wound up.
Two or more local companies may voluntarily (i.e. without a
court order) or in connection with a scheme of reconstruction A majority in number representing at least 75 per cent in value
or amalgamation with a court order in accordance with the of the members or class of members of the amalgamating
Companies Act, amalgamate and continue as one company, companies and/or a majority in number representing at least
which may be one of the amalgamating companies or a new 75 per cent in value of the creditors or class of creditors of the
company. The amalgamated company will succeed to all the amalgamating companies must approve the scheme, and the
property, rights and privileges as well as assume the liabilities and court order is binding on all shareholders and/or creditors.
obligations of each of the amalgamating companies. 
The scheme can be carried out as part of the scheme of
In the case of amalgamation without a court order, the reconstruction or amalgamation.
shareholders of the amalgamating companies must approve the
amalgamation in accordance with the requirements of its articles
of association.

45
Joint ventures A potential bidder may be required to make a mandatory offer for
all the target’s shares if:
Two or more parties may form a joint venture to pursue a common
commercial goal. Joint ventures are governed by the general „„ taken together with shares held or acquired by persons acting
principles of contract and company law, and can take many in concert with it, the potential bidder acquires more than 33
different forms. per cent of the voting shares of the target; or
„„ together with persons acting in concert with it, it already holds
Takeovers more than 33 per cent but less than 50 per cent of the voting
shares of the target, and it (or persons acting in concert with
Prior to 16 July 2009, private companies incorporated in Malaysia it) acquires or intends to acquire voting rights in the target by
had to observe the letter and spirit of the Malaysian Code more than 2 per cent in any six-month period.
on Takeovers and Mergers (the Code) where they had either
shareholders’ funds or a paid-up capital of RM10 million or more The board of the target (and in some cases, the bidder as well)
based on the latest audited accounts (on a consolidated basis, if must obtain independent advice in respect of any takeover offer.
applicable), and where the purchase consideration for the voting
shares over a period of 12 months was RM20 million or more (see Schemes of arrangement
under Public companies below and section 6 for a more detailed
summary of takeovers). With effect from 16 July 2009, such The scheme of arrangement described on page 45 also applies to
private companies no longer fall within the purview of the Code. public companies. The use of scheme of arrangement is identical
with a successful share-for-share takeover bid by the acquirer for
Public companies all outstanding capital of the target, completed by compulsory
acquisition where the former shareholders of the target become
Takeovers (see section 6 for a more detailed summary of public the shareholders of the acquirer together with the existing
takeovers) shareholders of the acquirer and the target becomes a wholly
owned subsidiary of the acquirer.
A takeover occurs upon a full offer for 100 per cent of the target’s
shares. With the prior consent of the Malaysian Securities Schemes of reconstruction and amalgamations
Commission (SC), a partial offer for (i) less than 33 per cent (this
threshold will be reduced to 30 per cent by the end of 2009 once The amalgamation regime described on page 45 also applies to
the Capital Markets and Services Act, 2007 comes into force); or public companies with the important additional factor that the Code
(ii) more than 50 per cent of the total voting rights can be made, applies to an amalgamation involving two or more public companies.
without having to make a mandatory offer if the partial takeover
offer succeeds. Joint ventures

The conduct of takeovers is governed by the Code, which is Public companies are free to enter into joint venture arrangements
administered by the SC. The Code applies to, inter alia, listed or as described earlier on this page.
unlisted public companies incorporated in Malaysia.  A new code
on takeovers and mergers, likely to come into force at the end of Public-to-private acquisitions (P2Ps)
2009, will include foreign incorporated companies whose shares
are listed on Bursa Malaysia Securities Berhad (Bursa Malaysia). P2Ps are regulated by the Code, various statutes and the Listing
Currently, an undertaking is obtained from the promoters of foreign Requirements of Bursa Malaysia (the Listing Requirements).
incorporated companies that they will comply with the Code.
In Malaysia, these acquisitions involve the buyers acquiring
An offer for the shares of a public company may either be publicly held shares in a company by way of a takeover offer
recommended by the target’s board of directors, or hostile. A full under the Code or by way of a scheme of arrangement or scheme
offer cannot succeed unless the bidder has received acceptances of reconstruction under the Companies Act, and subsequently
which will result in the bidder (together with persons acting in de-listing such a company.
concert with it) holding more than 50 per cent of the voting rights in
the target. In the case of partial offers for more than 33 per cent, the The transaction will often involve the parent company of the listed
partial offer must be approved by the offeree shareholders holding company (and sometimes a newly incorporated company) as the
more than 50 per cent of the voting shares of the offeree not held bidding vehicle to make an offer to acquire the target’s shares not
by the offeror and persons acting in concert with the offeror. held by the parent company.

46
The offer will normally be recommended by the independent if on a poll, by members or their proxies present and voting at a
directors on the board and will not be hostile. The target will meeting holding 75 per cent or more of the voting shares). Under
sometimes have other significant shareholders prepared to give an the Companies Act, a shareholders’ resolution is required to
irrevocable undertaking to accept the offer prior to announcement. amend the articles of association, issue and allot shares, approve
In P2Ps, as the directors or management of the target will often be the acquisition or disposal of an undertaking or property of a
the directors or management of the offeror, the board of the offeree substantial value, appoint and remove an auditor and, subject to
must appoint an independent adviser to advise the board of the the court’s approval, to reduce the capital of the company.
offeree and its shareholders as soon as possible after it becomes
aware of the possibility that a takeover offer may be made. 5. Regulation, consents and foreign investment restrictions

Do the parties have an obligation to negotiate in good faith Are there any regulated industries?
to one another in M&A transactions?
Investments and acquisitions relating to targets that operate in
The laws of Malaysia do not impose any obligation on parties certain industry sectors require approval or a licence from the
to a proposed transaction to negotiate in good faith. As such, relevant ministry.
it is possible for a party to pull out of negotiations completely or
to negotiate with another prospective buyer without any good The most common sectors that are subject to these
reasons and at any time prior to signing of the sale and purchase approval requirements or restrictions are financial services,
agreement. To mitigate the risks associated with this, the parties telecommunications, aviation, direct selling, capital market
will often enter into an exclusivity agreement which incorporates services activities (i.e. dealing in securities, trading in futures
lock-out clauses and/or break fees. The break fees operate as contracts, fund management, advising on corporate finance,
the upper limit that may be claimed as damages and generally, the investment advice, and financial planning) and insurance. These
non-defaulting party is still required to prove its damages and loss. regulated industries are also subject to foreign shareholding limits.

4. What percentage shareholding is required to achieve There may be additional, ongoing notification requirements
effective control of a company? in respect of the operation of the business and approval
requirements for any changes to the shareholding.
A shareholder who holds 75 per cent or more of the voting shares
in a company can pass all shareholders’ resolutions at a general Are there any restrictions on the foreign ownership of
meeting except, inter alia, the following: shares in a Malaysian company

„„ the shareholder itself is not able to constitute a quorum for Prior to 30 June 2009, most acquisitions of interest in Malaysian
the meeting. Generally under the laws of Malaysia, a meeting companies by foreigners in the non-industrial sector required
requires at least two persons present and a single shareholder the prior approval of the Foreign Investment Committee (FIC)
who holds 75 per cent of the voting shares present at the pursuant to the Guidelines on the Acquisition of Interests,
meeting may not be able to form a quorum if he is the only Mergers and Takeovers by Local and Foreign Interests (FIC
member at the meeting; and Guidelines). It was the general policy of the FIC to impose equity
„„ in the case of an approval for a scheme of arrangement conditions on the Malaysian company concerned, the standard
or scheme of reconstruction or amalgamation under the condition being a requirement that foreign investment be limited
Companies Act where approvals of classes of shareholders are to 70 per cent of voting equity, with the remaining 30 per cent
required, the requirement to pass a shareholders’ resolution of being held by Malay and other Malaysian natives (collectively
any class of shareholders in respect of the scheme is a majority Bumiputera).
of shareholders who collectively hold 75 per cent or more of
the voting shares in a company. With effect from 30 June 2009, the FIC Guidelines have been
repealed. Since 30 June 2009, transactions involving purchase
Shareholders’ resolutions include both an ordinary resolution (a of shares in a company incorporated in Malaysia no longer fall
resolution that has been passed, if on a show of hands, by more within the purview of the FIC and will only be regulated by the
than 50 per cent of members or their proxies present and voting at respective sector regulators (for example, the Central Bank and
a meeting or, if on a poll, by members or their proxies present and the Minister of Finance for the banking and insurance industry,
voting at a meeting holding more than 50 per cent of the voting the Ministry of Domestic Trade, Cooperative and Consumerism
shares) and a special resolution (a resolution that has been passed, for direct selling and hypermarkets, the Securities Commission
if on a show of hands, by a majority of not less than 75 per cent for the capital market services industry, and the Ministry of
of members or their proxies present and voting at a meeting or, International Trade and Industry for the manufacturing industry).

47
Strategic industries such as telecommunications, aviation, ports, or a financial guarantee obtained by a resident from a non
water and energy will continue to be subject to the 30 per cent resident is required to be registered with Bank Negara Malaysia
Bumiputera requirement. (the Central Bank of Malaysia) at least seven working days
prior to the issuance or obtaining of the financial guarantee
However, acquisition of shares in a company which (i) holds total if the aggregate amount of the financial guarantee exceeds
real properties valued at more than RM20 million (approximately RM50 million (approximately USD14.3 million) and that financial
USD5.7 million), and (ii) has real properties constituting more than guarantee is to secure a credit facility that has not been
50 per cent of its total assets, will still require FIC approval and registered or approved by Bank Negara Malaysia;
be subject to an equity condition of 30 per cent Bumiputera, if „„ a transaction between a resident and a non resident is
such an acquisition results in a change in control of the company required to be reported to Bank Negara Malaysia if the
owned by Bumiputera interest and/or government agency. This threshold exceeds RM200,000 (approximately USD57,100) per
is pursuant to new Guidelines on the Acquisition of Properties by transaction; and
Local and Foreign Interests. Bumiputera is defined as: „„ a resident requires the prior approval of Bank Negara Malaysia
to obtain credit facilities in foreign currency in excess of RM100
„„ a Bumiputera individual which shall mean: million (approximately USD28.6 million) in aggregate on a
corporate group basis from non residents (other than from
• for Peninsular Malaysia, a Malay individual or aborigine a non resident, non-bank parent company, other resident
as defined in Article 160(2) of the Federal Constitution of companies within the same corporate group in Malaysia, and
Malaysia; licensed onshore banks).
• for Sarawak, an individual as defined in Article 161A(6)(a) of
the Federal Constitution of Malaysia; or A resident company is free to borrow:
• for Sabah, an individual as defined in Article 161A(6)(b) of
the Federal Constitution of Malaysia; or „„ any amount in foreign currency from its non-resident, non-bank
parent company, other resident companies within the same
„„ a Malaysian incorporated company or institution whereby corporate group in Malaysia, and licensed onshore banks; and
Bumiputera hold more than 50 per cent of the voting rights in „„ in Ringgit, including the issuance of Ringgit denominated
such company or institution. redeemable preference shares or loan stocks, of any amount
from its non-resident, non-bank parent company to finance
As stated above, equity conditions in the various regulated sectors activities in the real sector in Malaysia (i.e. sectors that
in Malaysia are generally determined by the respective ministries in contribute to the GDP growth of Malaysia and are non-
Malaysia and are subject to changes and review by the respective speculative).
ministries.
A resident company may issue ordinary shares, non-redeemable
Schedule 1 on page 61 sets out a general guide to the foreign preference shares and private debt securities to a non resident.
ownership restrictions in different industries in Malaysia.
Is there any merger control?
Are there any foreign exchange controls?
There is no national competition policy nor specific legislation
There are foreign exchange controls in Malaysia: regulating competition in Malaysia except for competition
practices for the communications and multimedia industries under
„„ investment in foreign currency assets by residents of the Communications and Multimedia Act 1998. However, the
Malaysia is permitted, save where the resident has domestic Ministry of Domestic Trade and Consumer Affairs is formulating a
credit facilities and it funds the investment either (i) through draft competition bill.
conversion of Ringgit in which case its investment is limited
to RM50 million (approximately USD14.3 million) per calendar Currently, for some trading activities, there are statutes protecting
year on a corporate group basis, or (ii) from foreign currency the consumer that have an indirect and consequential impact in
credit facilities in which case its investment is limited to RM100 encouraging competition or restraining anti-competitive conduct
million (approximately USD28.6 million) per calendar year on a (e.g. the Code, referred to under Takeovers on page 46, the
corporate group basis; Consumer Protection Act 1999, the Price Control Act 1946, the
„„ a resident is permitted to pay another resident in foreign Trade Description Act 1972, the Direct Sales Act 1993 and the
currency for settlement of goods and services only from its Moneylenders Act 1951).
export earnings;
„„ a financial guarantee issued by a resident to a non-resident

48
What are the employee issues? notifications (within 14 days after termination takes effect and within 30
days after termination takes effect). Notification to the Labour Office is
Are works councils/consultation common? done by submitting a standard form known as the “PK Form”.

Malaysian companies do not have employee work councils, Timing


although participation in trade unions is common in the lower
categories of employment in certain sectors. Unions may be Written termination notices by the seller must be issued to comply with
national or in-house unions. the minimum notice periods prescribed in the Employment Act. If the
notice period is short, the seller may indemnify the employee in lieu of
Are any actions required prior to or upon an acquisition for notice. If longer notice periods are prescribed by contract the longer
employees? notice periods would have to be complied with.

Employees in Malaysia enjoy certain protection in business or For employees not falling within the definition of “employee” in
asset purchases (as opposed to share acquisitions) under the the Employment Act, the notice periods afforded to them will be
Employment Act, 1955 (the Employment Act). Such protections governed by the terms of their employment contracts.
include:
Under the Employment Act, termination benefits must be paid by
„„ the services of employees must be terminated in writing and the seller within seven days of termination unless such payment is
the minimum termination notice period must not be less than not applicable (see below).
that provided for in the Employment Act (unless longer notice
periods are contractually agreed); and Under the Employment Act, if offers of continued employment
„„ payment of the minimum statutory termination benefits are made by the purchaser, on terms and conditions no less
(payable within seven days of termination) in accordance with favourable and previous service is recognised (thus avoiding the
the rates prescribed in the regulations of the Employment Act need for the seller to pay termination benefits), such offers must
(unless higher rates have been contractually agreed). Such be made within seven days of termination by the seller.
statutory termination benefits need not be paid if the purchaser
offers the said employees continued employment on terms In practice, the termination by the seller and continued
and conditions no less favourable and recognises the said employment by the purchaser is timed to take place
employee’s years of service at the seller (and the employee simultaneously and accordingly notices and arrangements are
accepts such continued employment or unreasonably refuses prepared and made in advance.
the same). It should be noted that “employee” under the
Employment Act is narrowly defined. For employees not falling With which stock exchange requirements must listed
within the definition, the protection afforded to them will be companies comply?
governed by the terms of their employment contracts.
What rules generally govern listed companies?
Automatic transfer of employment contracts in business or asset
purchases (as opposed to share acquisitions) is not recognised in Companies whose shares are listed on the Bursa Malaysia must
Malaysia. comply with the Listing Requirements.

Consultation with employees or their trade unions is encouraged The objectives of the Listing Requirements include ensuring that:
even though it is not expressly required by any laws.
„„ all listed issuers are of a certain minimum size, quality and
Are there any notification obligations for employees prior to or upon adequate operation;
an acquisition? „„ investors and the public are kept fully informed by the listed
companies of all facts and information that might affect their
Save for the termination notices referred to above and below, interests and in particular, full, accurate and timely disclosure
there is no mandatory obligation for any further notification to is made of any information which may reasonably be expected
employees, unless contractually agreed. Nevertheless, notification to have a material effect on the price, value or market activity in
and consultation with employees and unions is encouraged. the securities of the listed issuers;
„„ directors, officers and advisers of listed issuers maintain
The seller is however required by the Employment Act to notify the highest standards of integrity, accountability, corporate
the closest Labour Office of such termination of employment 30 governance and responsibility; and
days before the termination takes effect followed by two follow-up

49
„„ directors of listed issuers act in the interests of the company „„ when the facts are in a state of flux or subject to rapid change
as a whole, particularly where the public represents only a and a more appropriate moment for disclosure is imminent.
minority of the shareholders or where the directors or major The Listing Requirements also require listed companies to obtain
shareholders have material interests in transactions entered shareholders’ approval in respect of transactions entered into
into by listed issuers. by the listed issuer or its subsidiaries, such as acquisitions and
disposals where the percentage ratio is equal to or exceeds 25
The Listing Requirements require listed companies to disclose per cent or in the case of related party transactions, where the
material information known to the issuer concerning it or any of percentage ratio is equal to or exceeds 5 per cent.
its subsidiaries which are necessary for informed investing and to
ensure that everyone investing in its securities has equal access How does a company delist its share capital?
to such information. Information is considered material if it is
reasonably expected to have a material effect on: An application must be made to Bursa Malaysia to delist and the
applicant must fulfil the following criteria:
„„ the price, value or market activity of any of the listed issuer’s
securities; or „„ shareholders’ approval of delisting must be obtained at a
„„ on the decision of a holder of securities of the listed issuer or general meeting;
an investor in determining his choice of action. „„ the resolution must be approved by a majority in number
representing at least 75 per cent in nominal value of the shares
Some examples of events which should be announced include: held by the shareholders present and voting, on a poll, either in
person or by proxy at the meeting;
„„ joint ventures or mergers or memoranda of understanding; „„ the resolution must not have been voted against by 10 per cent
„„ acquisition or loss of a contract, franchise or distributorship or more in nominal value of the shares held by the shareholders
rights; present and voting, on a poll, either in person or by proxy at the
„„ involvement in litigation or arbitration; meeting;
„„ acquisition or disposal where the percentage ratio (as set out in „„ a reasonable exit alternative, normally in cash, should be
the Listing Requirements) is equal to or exceeds 5 per cent, or offered to (i) the shareholders and (ii) the holders of any other
in the case of a related party transaction, where the percentage classes of listed securities to be delisted; and
ratio is equal to or exceeds 0.25 per cent, except where the „„ an independent financial adviser has been appointed to advise
value is less than RM250,000, or the related party transaction on the exit offer.
is a recurrent one of a revenue or trading nature which is
necessary for day-to-day operations (there are various rules With which Securities Commission requirements must listed
and exceptions on what constitutes related party transactions); companies comply?
„„ a change in control or a change in management or change in
business direction; In addition to obtaining shareholders’ approvals for transactions
„„ events of default under financing or sale agreements; where the percentage ratio is equal to or exceeds a certain
„„ unusual market activity in the listed issuer’s securities which threshold limit, the listed issuer is also required to obtain the prior
signifies that a leak of information may have occurred; or approval of the SC where it proposes to acquire or dispose of
„„ where the listed issuer learns that there are signs that insider assets (whether or not by way of the issue of securities) which
trading may be taking place. result in a significant change in business direction or policy, i.e.:

Disclosure of material information may be made after the market „„ if the acquisition or disposal results in any one of the following
closes, and must be made to Bursa Malaysia, the press and percentage ratios being equal to or exceeding 100 per cent; or
newswire services. „„ if the acquisition or disposal results in a change in the core
business of the listed issuer within 12 months of the completion
In exceptional circumstances, a listed issuer may temporarily of the transaction.
refrain from publicly disclosing material information provided that
complete confidentiality is maintained. Some examples include: There are indications that, with effect from 3 August 2009, the SC’s
approval for a disposal which exceeds a certain threshold limit is no
„„ when immediate disclosure would prejudice the ability of longer required. To date, such a change has yet to be gazetted.
the listed issuer to pursue its corporate objectives (e.g. if The calculation of the percentage ratio used by the SC is different
the unfavourable result to the listed issuer outweighs the from that applied by Bursa Malaysia and inter alia involves a
undesirable consequences of the non disclosure); or calculation of any of the following:
„„

50
„„ net asset value attributable to the shares in the target which are the acquiring company to repay the loan used to finance the
the subject of the transaction compared with net asset value of purchase of shares in the target company, or distribution of
the listed issuer less net asset value of the shares in the target assets as dividends; or
which are the subject of the disposal; „„ repayment of capital whether by way of cash or in specie
„„ after-tax profits attributable to the shares in the target which are pursuant to section 64 of the Companies Act.
the subject of the transaction compared with after-tax profits of
the listed issuer less after-tax profits attributable to the shares Any financial assistance given in relation to borrowings that are
in the target which are the subject of the transaction; or used to refinance loans originally used for the acquisition of
„„ aggregate value of the consideration for the shares in the target shares in a company or its holding company may also be caught
which are the subject of the transaction (including amounts to notwithstanding that it may not be contemporaneous with the
be assumed by the buyer, such as seller’s liabilities) compared purchase or subscription of shares in the company.
with aggregate market value of all the ordinary shares of the
listed issuer. What are the sanctions?

Is financial assistance prohibited? The sanctions for breach of the financial assistance rules
are serious. The officers of the company may be fined up to
What is the nature of the prohibition? RM100,000 and/or imprisoned for up to five years. Directors may
also face civil claims for breach of their duties to the company.
A Malaysian-incorporated company (whether public or private)
is prohibited from giving financial assistance (either directly or The assistance itself (e.g. a loan or guarantee) will be voidable at
indirectly) by means of a loan, guarantee or the provision of the option of the company.
security or otherwise, for the purpose of or in connection with a
purchase of or subscription made or to be made by any person Are there any exceptions to the prohibition and is there any
for any shares in itself or its holding company. procedure which can be followed to make financial assistance
possible (i.e. a “whitewash procedure”)?
The purpose of the financial assistance rules is to maintain capital
to protect the company’s creditors and minority shareholders Depending on the circumstances of the transaction, there are
against the deployment of the company’s financial resources, limited statutory exceptions from the prohibition, for public and
prevent the misuse of assets, and provide for the equal treatment private companies, such as:
of all shareholders.
„„ where the lending of money is part of the ordinary business of
Such financial assistance may include gifts, loans, guarantees, a company;
provision of security, waiving debt, entering into a joint venture „„ the provision of a loan by the company pursuant to an employee
agreement with a third party without any benefit to itself so as to share option scheme for the purchase or subscription of shares in
induce the third party to finance a buyer of the company’s shares, the company or its holding company; or
or giving financial assistance to a vendor of shares. „„ in respect of public listed companies only, they may purchase
their own shares provided:
The following are arguably not caught by the financial assistance
prohibition: • it is solvent as at the date of purchase and will not become
insolvent by incurring debts involved in the obligation to pay
„„ any security or guarantee given for any part of the debt that is for the shares;
not used to acquire or refinance the acquisition of the shares in a • the purchase is made through Bursa Malaysia on which the
company or its holding company (e.g. a working capital facility); shares are quoted;
„„ any security or guarantee given by Co. A (previously a target • the purchase is made in good faith and in the interest of the
company) for a loan to Co. B (acquiring company) to purchase company;
shares in Co. A where Co. A has pursuant to a scheme of
amalgamation or reconstruction of a group of companies and the shares so purchased may be cancelled and/or retained
under section 176 or section 178 of the Companies Act now as treasury shares. Treasury shares may be distributed as
become a sister company of Co. B. provided that the scheme dividends to the shareholders or resold on the market of Bursa
of amalgamation or reconstruction was carried out for the Malaysia on which the shares are quoted.
commercial benefit or interest of the group;
„„ payment of dividends by the target company to its shareholder
(i.e. the acquiring company) which funds are then used by

51
6. Public takeovers What is the regulatory framework for a public offer?

What are the forms of a public offer? The Code

A takeover of a public company in Malaysia can be structured as: The principal source of regulation is the Code, which is a set of rules
designed to ensure an efficient, competitive and informed market and
„„ a public offer to acquire all the issued (and to be issued) share to ensure that all shareholders of an offeree have equal opportunities
capital (or units, as the case may be) of the target from existing to participate in benefits accruing from the takeover offer.
shareholders (or unit holders, as the case may be);
„„ a scheme of arrangement between the target, the The SC may be consulted by the parties via their advisers who
shareholders of the target (or unit holders, as the case may be) should communicate with the SC, during or before an offer.
and the bidder; or The Code has the force of law, and any breach of the Code may
„„ a scheme of amalgamation or reconstruction. result in sanctions such as private or public censure or reprimand,
a penalty of up to RM1 million depending on the severity, the
Other than an offer for all of the issued share capital of the target, withdrawal of the facilities of the stock exchange, suspension of
partial offers may be permitted with the prior consent of the SC. trading in the securities or the listing of the person in breach, or
In general, the SC is strict in approving partial offers (regardless requiring the person in breach to take such steps as the SC may
of the percentage involved) and will assess the grounds of an direct to remedy the breach or mitigate the effect of any breach,
application for partial offer on a case by case basis. Consent may including making restitution to any person aggrieved by such a
be given if a partial offer is made due to foreign equity restrictions. breach.
Where the partial offers would result in the bidder and persons
acting in concert with it holding more than 33 per cent but less There are a number of other laws regulating certain aspects of
than 100 per cent of the voting rights of the target, the takeover takeovers, including the general requirements of company law
offer is not successful unless: and laws governing the conduct of securities trading (e.g. insider
trading prohibitions).
„„ the bidder has received acceptances for not less than that
number of voting shares of the target as stated in the offer In addition, the Listing Requirements may be relevant if the shares
document; and of the bidder (or the target) are listed on Bursa Malaysia.
„„ the bidder has received a vote of approval of the takeover offer
by offeree shareholders holding in aggregate more than 50 per Application of the Code
cent of the voting shares in the target. This may be exempted
if the takeover offer has been accepted by one offeree The Code is drafted with listed and non-listed public companies
shareholder holding more than 50 per cent of the voting shares. in mind. The Code applies to all offerors, whether they are natural
persons (resident in Malaysia or not, and citizens of Malaysia or
Save with the consent of the SC, a bidder and any persons acting not), corporations or bodies unincorporate (whether incorporated
in concert with it cannot acquire any voting shares: or carrying on business in Malaysia or not), and extends to acts
done or omitted to be done in and outside Malaysia. 
„„ during the offer period other than by acceptances of the partial
offer; and What are the main offer terms?
„„ that had been the subject of the partial offer during the period
of 12 months from the expiry of the offer period. Consent Minimum price requirements
may be given by the SC where the partial offer has resulted
in a holding of less than 33 per cent of the voting shares of Where the bidder (or any of its persons acting in concert) is
the company or in a rescue operation where such purchase is subject to an obligation to make a mandatory offer under the
necessary to gain control of a company. Code, the consideration offered by the bidder must not be less
than the highest price paid or agreed to be paid by the bidder
Takeovers can be either recommended by the target’s board, or or any persons acting in concert with it in respect of the voting
hostile. shares of the target during the period starting six months prior to
the commencement of the offer period and the terms of the offer
must not be on less favourable terms with respect to value. If
voting shares have been acquired by the exercise of conversion
rights or warrants, the price will normally be established by

52
reference to the average high and low market prices of the voting Where unlisted securities are offered as consideration for the
shares in question at the close of business on the day on which acceptance of a takeover offer, the bidder shall disclose to the
the relevant notice was submitted to the target. offeree the value of the unlisted securities based on a reasonable
estimate by an independent valuer as may be approved by the
If, during the offer period, the bidder (or any persons acting in SC. Where listed securities are offered as consideration for the
concert with it) purchases shares above the offer price, the bidder acceptance of takeover offer:
must increase its offer to not less than the highest price paid for
the shares acquired during the offer period. „„ in the case of unissued securities, the value must be the price
as approved by the SC;
Cash/non cash terms „„ in the case of issued securities, the value must be the
weighted average market price of the securities for the past
In a voluntary offer, consideration for an offer may be in cash, five market days preceding the date of the written notice of
securities (e.g. loan notes, shares or other securities of the the takeover offer to the board of directors of the target, Bursa
bidder), or a mixture of both. However, where the consideration is: Malaysia and the SC; or
„„ where there is no trading of the securities for a continuous
„„ securities (including shares, debentures, notes, bonds) of a period of five market days immediately preceding the date
public company in Malaysia; of the written notice of the takeover offer to the Board of the
„„ debentures of a private company in Malaysia; or target, Bursa Malaysia and the SC, the value must be the
„„ securities (including shares, debentures, notes, bonds) of any weighted average market price of the securities for the past
company incorporated outside of Malaysia; five market days preceding the close of trading on the market
day when the securities were last traded.
the prior approval of the SC will be required for the bidder to
offer such securities in the takeover offer in addition to any other Conditions
approvals required by the bidder from the SC pursuant to the
takeover offer. Required condition: Every takeover offer must be conditional
upon a minimum level of acceptance. For both a mandatory offer
Cash consideration and a voluntary offer, the minimum level of acceptance is that
which would result in the bidder (and persons acting in concert
Cash consideration is compulsory in mandatory offers (see with it) holding more than 50 per cent of the voting rights.
Mandatory offers on page 58). This means that if a bidder wishes
to offer securities as consideration, it must give the shareholders Prohibited conditions: A mandatory offer must not be subject
of the target an option to receive cash in lieu of securities (the to any condition other than the conditions as to the minimum level
“cash alternative”). of acceptance. A bidder in a voluntary offer will normally subject
the voluntary offer to a number of conditions which should not
Where 10 per cent or more of the target’s shares have been be a defeating condition, the fulfilment of which depends on an
purchased for cash by the bidder (or any person acting in opinion, belief or state of mind of the bidder or an event that is
concert with it) during the offer period or within six months within the sole control or is a direct result of an action by the
prior to its commencement, the offer must be in cash (or bidder (or any person acting in concert with it).
accompanied by a cash alternative) at a price no lower than
the highest price paid for such shares during the offer period Usual conditions: The common conditions attached to a
or within six months prior to its commencement. A cash offer voluntary offer include:
or a cash alternative on the terms described in the foregoing
sentence may also be required even though less than 10 per „„ valid acceptances in respect of 90 per cent of shares being received
cent of the voting shares have been acquired by the bidder and by the first closing date or in respect of more than 50 per cent of
persons acting in concert with it in the previous six months, if the shares being received by the first closing date. Any reduction of the
circumstances are such that, in the view of the SC, a cash offer minimum level of acceptance from 90 per cent to more than 50 per
or a cash alternative is necessary to ensure similar treatment of cent during the takeover requires the prior approval of the SC and
shareholders of the same class. is generally not allowed (see Squeeze outs on page 59 as to the
importance of the 90 per cent threshold);
Non-cash consideration „„ passing of such resolutions as are necessary to implement the
offer at an extraordinary general meeting of the bidder;
Generally, non-cash consideration will consist of the bidder’s ordinary „„ in the context of a securities exchange offer, admission of new
shares though other equity related securities may be offered. shares in the bidder to listing by the Bursa Malaysia;

53
„„ necessary approvals from the regulatory authorities have been All conditions in a voluntary offer must be fulfilled within 21
obtained; days after the first closing date or after the minimum level of
„„ since the latest announced results to Bursa Malaysia, no acceptance is fulfilled, whichever is later, but in any event no
material adverse change has occurred in respect of the later than seven days after the 60 days from the date the offer
business, financial or trading position or profits or prospects of document is despatched, failing which the voluntary offer lapses.
the target and/or its subsidiaries;
„„ no contingent liability has arisen which is likely to materially and Funding the acquisition
adversely affect the target and/or its subsidiaries. Any adverse
change of 5 per cent or more in the consolidated net tangible In a cash offer or where the offer involves an element of cash, the
assets of the target since the last announced results may be bidder must include in its offer announcement a statement by the
considered material by the bidder for this purpose; financial adviser that the financial adviser is reasonably satisfied
„„ no governmental or regulatory body or any other person that there are sufficient financial resources available to the bidder
having proposed, threatened or effected any action, such that the bidder would be able to carry out the offer in full by
proceedings, suit, investigation or enquiry, or enacted, made way of cash.
or proposed any statute, regulation or order prior to the date
when the minimum level of acceptance is met, that would
make the voluntary offer void, unenforceable or illegal;
„„ no material adverse change in national or international,
social, monetary, financial, political or economic conditions or
exchange control that affect the business, financial or trading What is the timing of a public offer and what is the
position of the target group; and procedure to be followed?
„„ no dividends being declared by the target from the date of the
notice of takeover offer up to completion of the offer. Simplified offer timetable

Date/Time period Events

D-21 Earliest possible date for the press announcement and notification to the Board
of target, Bursa Malaysia and the SC

D-20 Board of target to inform Bursa Malaysia and make press announcement

D-14 Last date for board of target to post notification of the written notice to all offeree
shareholders

D-17 Bidder to submit offer document to the SC (Takeover Department) and Bursa
Malaysia for clearance. Application to be made to any other authorities whose
approval is required under the target’s licence (e.g. Minister of Finance for
financial institutions or insurance companies or Minister of International Trade
and Industry for licensed manufacturing companies)

Day 0 (D) Offer document despatched no later than 21 days after the press announcement

D+10 Last date for despatch of comments by target’s board and independent
advice circular by independent adviser (who shall be approved by the SC)
recommending acceptance or rejection of the takeover offer and risks involved

D+21 Earliest date for first closing date

First business day after first closing date Announcement to press, Bursa Malaysia and the SC of closing of offer,
(and all subsequent closing dates) acceptance levels, revision (if appropriate) and extension (if appropriate) of offer

D+46 Last day for despatch of notice on revision of offer. An offer, if revised, must be
(assuming first closing date is D+21) kept open for at least 14 days. Since the offer period must end on D+60 (save for
special circumstances), the last day for the despatch of notice on a revision of
offer is on D+46

D+60 Last date for fulfilment of minimum level of acceptance conditions

D+74 Last closing date. If an offer becomes unconditional on D+60, the closing date
will fall 14 days thereafter

54
Announcements within 21 days of the first closing date, or of the date the offer
becomes or is declared unconditional as to minimum acceptances
An announcement of a firm intention to make an offer is made by (whichever is the later), provided it is not later than D+67, failing
the bidder after approaching the target board. In a hostile offer, which the voluntary offer shall lapse.
the announcement is usually made immediately after approaching
the target board to restrict the time for the target board to marshal Offer unconditional - payment
its defences. An immediate announcement is required where
an obligation to extend a mandatory offer is triggered. Where The bidder must pay for the target’s shares as soon as
there is unusual market activity which signifies a leak regarding a practicable, but in any event:
possible offer or rumours or reports concerning the information
have appeared, Bursa Malaysia will require an immediate „„ within 21 days after the offer becomes or is declared
announcement to avoid the risk of a false market developing. unconditional in all respects;
Such announcements are essential even if the matter has yet to „„ within D+21 in the event the takeover offer has already become
be presented to the listed issuer’s board for consideration. or been declared wholly unconditional at the date of posting
the offer document; or
The announcement of a firm intention to make an offer crystallises „„ within 14 days of the receipt of valid acceptances where such
the obligation to make an offer (subject to any offer conditions). acceptances were tendered after the offer has become or been
A bidder will only be permitted by the SC to withdraw its offer in declared unconditional in all respects.
highly exceptional circumstances.
Competing bids
Acceptance period
An original bidder will be allowed to depart from the offer timetable
The offer must be initially open for at least 21 days from posting of and revise its offer if a competitive situation arises.
the offer document.
The Code requires that information, including particulars of
The bidder may on any closing date extend the offer by shareholders, given to one bidder or potential bidder must, on
announcing a revised closing date until the offer becomes request, be furnished equally and promptly to any other bona fide
unconditional as to acceptances which must happen on or before bidder or potential bidder, who should specify the questions to
D+60. The takeover offer is generally extended by not less than which it requires answers. 
14 days from the date in which the takeover offer becomes and is
declared unconditional, but in any event the closing date shall not Failed bids and further offers
be later than D+74.
When an offer has been withdrawn (which is permitted only with
On the first business day after the first closing date, any the prior consent of the SC) or failed, the bidder and all persons
subsequent closing dates and any date on which the offer is acting in concert with it cannot:
revised, extended or declared unconditional as to acceptances,
announcements must be made concerning acceptance levels and „„ make a further offer within 12 months without the consent of
specifying the percentages of the relevant classes of share capital the SC; or
represented by these figures. „„ acquire any voting rights of the target if the bidder or persons
acting in concert with it would thereby become obliged to
If revised, the offer must be kept open for at least 14 days from make a mandatory offer; or
the date the revised offer is posted. For this reason, the offer may „„ acquire any voting rights of the target if the bidder holds voting
not be revised after D+46. rights carrying over 48 per cent but not more than 50 per cent
of the voting rights.
Satisfying offer conditions
A bidder who wishes to make an offer for the same target within
The last possible date for announcing that the offer is 12 months from the date of the close of a previous partial offer
unconditional as to minimum level of acceptances is D+60. Where (whether successful or not) must also obtain prior consent from
there is a competitive offer situation and an extension is required, the SC. The bidder (and all persons acting in concert with it)
the SC’s approval will be required. must furnish the SC with details of any acquisition by them of any
shares in the target including an option to acquire any shares in
Except with the SC’s consent, in a voluntary offer, all conditions the target each month for a period of 12 months from the date
(other than minimum level of acceptances) must be fulfilled that the offer was withdrawn or failed.

55
What documentation is involved in the process? information and that each of them has taken reasonable care to
ensure both the facts stated and opinions expressed are fair and
Press announcement accurate and that no material facts have been omitted.

An announcement of a firm intention to make an offer must Target documentation


contain (amongst other things):
After receipt of notification of an offer, the target board must make
„„ the terms and conditions of the offer; an announcement to its shareholders informing them of the offer.
„„ details of existing holdings in the target held by the bidder and The target board must advise the shareholders of the target
any persons acting in concert with it; of its views by way of a circular which must contain the
„„ the total number of shares in respect of which the bidder or any board’s recommendation and the evaluation of the offer by an
persons acting in concert with it has received an irrevocable independent adviser appointed by the board within 10 days after
undertaking from the offeree shareholders to accept the the bidder has despatched the offer document.
takeover offer;
„„ details of any existing or proposed agreement, arrangement What are the practices relating to break fees and lock-out?
or understanding relating to voting shares between the
bidder or any persons acting in concert with it and the offeree A break fee arrangement, whereby a fee is paid by the target to
shareholders; and the bidder if a specified event occurs which prevents the offer
„„ confirmation that the bidder has sufficient financial resources to from succeeding is not practised in Malaysia and it is unlikely
extend the offer. that the SC will allow it because such an arrangement would be
contrary to minority interest protection.
Offer document
It is not a common practice for the bidder and the target to enter
Where an offer is recommended, the board of the target will, into a lock-out agreement whereby the target agrees not to enter
through its independent adviser (approved by the SC), issue an into, or solicit, negotiations with another potential bidder.
independent advice circular to the offeree shareholders giving
the independent adviser’s and the board’s recommendation with Care must be exercised in entering into a lock-out agreement as
respect to the offer. the target board has a duty not to take any action which could
frustrate an imminent bona fide offer without the shareholders’
The offer document issued by the bidder through its adviser must approval in a general meeting. A target also has to provide
contain the minimum information prescribed under the Code information on an equal basis to all competing bidders.
including without limitation:
What are the rules on information gathering/provision?
„„ the terms of the offer and the conditions attached to it;
„„ the acceptance procedure; The Code requires information to be provided equally to all
„„ the rationale for the offer; shareholders and also competing bidders.
„„ the bidder’s intention regarding the continuation of the bidder’s
business; A bidder may sometimes undertake some due diligence on the
„„ the bidder’s intentions regarding any major changes to be target before extending an offer. If price-sensitive information is
introduced to the business, including any plans to liquidate the proposed to be provided by the target to the bidder, this may
target, sell its assets or re-deploy the fixed assets of the target potentially create an insider trading offence for the bidder to
or make any major changes in the structure of the target; acquire the target shares from the target shareholders.
„„ whether the bidder has any intention to resort to compulsory
acquisition powers; and Publicly available information about the target may be obtained
„„ whether or not any agreement, arrangement or understanding from the Companies Commission of Malaysia and Bursa Malaysia
exists between the bidder or any person acting in concert with announcements made by the target. The target should not make
it and any of the offeree shareholders or past shareholders (i.e. price-sensitive information available to the bidder (i.e. information
persons who were shareholders of target during the period which would tend to, on becoming generally available, influence
six months’ prior to the offer) having any connection with or reasonable persons who invest in securities in deciding whether or
dependence upon the offer. not to acquire or dispose of securities).

The offer document must contain a responsibility statement If non-publicly available information (which is not price sensitive)
that each director of the bidder accepts responsibility for the is proposed to be given, it must be examined whether the target

56
(if listed) is required to disclose the information publicly under subsequent changes in the percentage level and cessation of his
the Continuing Disclosure Policy of the Listing Requirements of substantial shareholding must also be disclosed.
Bursa Malaysia. The target should also consider that it might be
required (unless the SC rules state otherwise) to provide the same During the offer period, the bidder or any persons acting in
information to a competing bona fide bidder or potential bidder concert with it shall not dispose of any voting shares of the target
which is less welcome. unless the disposal is between the bidder and persons acting in
concert with it. The following persons, inter alia, must publicly
What is the position regarding insider trading? disclose to the press, Bursa Malaysia and the SC, by noon the
following market day, dealings by them in the shares of the target
Insider trading is a criminal offence that may also carry civil and the bidder: (i) the bidder (including purchase of its own
liabilities. shares), (ii) persons acting in concert with it, (iii) chief executives,
directors or senior officers of the bidder, (iv) its related companies
In general, any person who has information concerning a and associated companies, or (v) their discretionary investment
corporation that is not generally available and which a reasonable clients (discretionary investment clients include individuals and
person would expect to have a material effect on the price or funds for whom the bidder or any of their associates manage on
value of the corporation’s securities, would be guilty of insider a discretionary basis). Where shares of the bidder are offered as
trading if he: consideration for the target shares, dealings in shares of the target
or bidder by the shareholders of the bidder holding 5 per cent or
„„ deals in the securities; more must also be disclosed.
„„ procures others to deal in the securities; and
„„ communicates the information to a third party where the third Target
party is likely to deal in the securities.
During the offer period, the following persons, inter alia, must
Insider trading applies to: publicly disclose to the press, Bursa Malaysia and the SC, by
noon the following market day, dealings by them in the shares
„„ acts and omissions in Malaysia in relation to securities of any of the target and the bidder: (i) the target, (ii) shareholders of the
body corporate formed or carrying on business or listed in or target holding 5 per cent or more, (iii) chief executives, directors
outside Malaysia; and or senior officers of the target, (iv) its related companies and
„„ acts and omissions occurring outside Malaysia in relation associated companies or (v) their discretionary investment clients
to securities of any body corporate formed or carrying on (discretionary investment clients include individuals and funds
business or listed in Malaysia. for whom the target or any of their associates manage on a
discretionary basis).
The consequences for insider trading are:
Does a memorandum of understanding (MoU) need to be
„„ a fine not exceeding RM1 million or imprisonment not disclosed?
exceeding 10 years or both; and/or
„„ the SC may, if it is in the public interest to do so, by civil Whether a MoU should be disclosed will depend on the type of
action (i) recover an amount equal to three times the unlawful acquisition, the parties involved and the terms of the MoU. Once
profit gained or loss avoided, and (ii) claim a civil penalty not announced, the listed issuer must inform Bursa Malaysia of the
exceeding RM1 million; and/or status on a quarterly basis or more regularly upon the occurrence
„„ a person who suffers loss or damages may recover the amount of a material change, whichever is earlier. In general, the Listing
of loss or damages by instituting civil proceedings against Requirements stipulate that a listed company must disclose
the other person, whether or not the other person has been information that is material (i.e. where it is reasonably expected
charged with an offence. to have a material effect on the price, value or market activity
of securities of that company and the decision of an investor in
What are the public disclosure requirements in a takeover determining his choice of action).
scenario?
In cases of doubt, the presumption must always be in favour of
Bidder disclosure. Some exceptional circumstances where disclosure
may be temporarily withheld include:
In general, a person who has acquired an interest in 5 per cent
or more of a Malaysia incorporated company listed in Malaysia is „„ when immediate disclosure would prejudice the ability of listed
required to disclose his interest to the company and the SC.  Any issuer to pursue its corporate objectives (e.g. where it would

57
prevent the listed issuer from carrying out its plan to acquire ii. where a person incurs such an obligation by reason of the
assets due to the resulting increase in cost); or person subscribing for new voting shares for (a) cash (e.g.
„„ when the facts are in a state of flux and subject to rapid rights issue) or (b) pursuant to an exercise of any conversion
change and a more appropriate moment for disclosure is or subscription rights or options;
imminent when the situation has stabilised. iii. where a person incurs such an obligation by reason of the
person acquiring new securities in fulfilment of obligations
What are the limitations to stakebuilding? under an underwriting agreement;
iv. where a person incurs such an obligation by reason of the
Acquisition of shares carrying more than 33 per cent of the voting person exercising the conversion or subscription rights in
rights of a company will usually trigger a mandatory offer. his convertible securities in order to maintain his previous
level of voting shares of the target which has been diluted
In general, a person who acquires an interest in 5 per cent or as a result of the exercise of conversion by other holders;
more of a Malaysia incorporated company listed in Malaysia is v. where a person incurs such an obligation by reason of an
required to disclose to the company and the SC his interest and acquisition of voting shares of a company and the remaining
any subsequent change in the percentage level of his interest or holders of voting shares of a company have given written
cessation of his substantial shareholding. undertakings not to accept an offer (this generally applies to
a private or public non listed company); and
Is there a requirement to make a mandatory offer? vi. where a person incurs such an obligation in respect of
transactions involving the acquisition of additional voting
There is a requirement under the Code to make a mandatory offer shares by members of a group acting in concert, provided
for the target’s shares if the shareholding of a person exceeds that in (i) (ii) and (iii) (a) the independent shareholders of the
certain thresholds. The SC may grant dispensations in limited target pass a resolution in a general meeting by way of
circumstances. a poll to waive their rights to receive a general offer from
the bidder and persons acting in concert with him, (b) the
A mandatory offer must be made when: person to whom shares have been issued and persons
acting in concert with him has not purchased voting
„„ a person acquires (together with shares held or acquired by shares in the six months prior to the posting of the circular
persons acting in concert with him) shares which carry more relating to the proposal and subsequent to negotiations,
than 33 per cent of the voting shares of a company; or discussion, understanding or agreement with the directors
„„ any person who (together with persons acting in concert with of the company relating to the proposed issue of the new
him) holds more than 33 per cent but less than 50 per cent of securities, whichever is the shorter period, and (c) the
the voting shares, or any person acting in concert with him, person to whom shares have been issued and persons
acquires additional shares which increase his percentage of the acting in concert with him have not acquired any voting
voting shares by more than 2 per cent in any six-month period. shares of the target during the period between the posting
of the circular or application to the SC for an exemption
In general, the acquisition of convertible securities does not give and the granting of an exemption by the SC. Statutory rules
rise to a mandatory obligation but the exercise of any conversion apply if such a resolution referred to in (a) above (“white-
or subscription rights or options is an acquisition of voting shares. wash resolution”) is sought from the target’s independent
There are comprehensive rules relating to whose shareholdings shareholders.
must be aggregated and who will be treated as a person acting in
concert with the bidder. What defences are available to a target company during the
stages of an offer?
The mandatory offer must offer a cash consideration or a cash
alternative at not less than the highest price paid by the bidder A target may attempt to ward off a hostile offer by undertaking
or any person acting in concert with him for shares of that class defences.
in the previous six months. It must be conditional only upon
acceptances of more than 50 per cent of the target shares. Defences available before a takeover offer is made (e.g. poison
pills) are rarely used by companies incorporated in Malaysia as
The SC may waive the requirement to make a mandatory offer in there are concerns of conflicts with the target board’s fiduciary
the following circumstances: duty. In general, whether by design or otherwise, some Malaysian
i. where a person incurs such an obligation by reason of the companies may have a capital structure which may make it
issue of new securities to him as consideration for a sale or more difficult or time consuming and expensive to obtain voting
disposal of assets or interest by that person; control of the target, especially where there are convertible

58
securities, warrants or other subscription rights and employees What is the procedure for a squeeze-out of the minority?
share options. A controlling shareholder may thwart an offer by
converting its securities to voting shares thus expanding the equity Where a takeover offer is made for a company incorporated in
and making it difficult for the bidder to know the precise number Malaysia and acceptances are received in respect of 90 per cent
of shares involved. or more of the shares to which the offer relates (other than shares
already held at the date of the takeover offer by the bidder, its
During the offer period, the target’s board is not allowed to take nominee, including persons acting in concert with it, or a related
any action which might deny shareholders an opportunity to corporation) within four months of the making of the offer, the
decide on the merits of an offer that has been received or a bona bidder may compulsorily acquire the shares of the non-accepting
fide offer which is reasonably believed to be imminent without shareholders. Once the Capital Markets and Services Act, 2007,
shareholders’ approval at a general meeting. comes into force (probably by the end of 2009), the threshold
will be 90 per cent or more of the shares of the target (including
After an offer has been received in a hostile takeover, the defence shares already held at the date of the takeover offer by the bidder
is usually confined to seeking a “white knight”, or stating in the or persons acting in concert with it).
target documentation that the target’s board does not believe that
acceptance of the offer is in the best interests of the target or its Shares acquired by the bidder, its related corporation or a
shareholders. nominee of the bidder or its related corporation prior to making
the offer cannot be taken into account in calculating whether the
Apart from the duty not to frustrate an offer, the target’s board 90 per cent threshold has been reached, although shares subject
must generally act in the best interests of the target’s shareholders to an irrevocable undertaking to accept the offer can usually be
as a whole. taken into account.

What obligations are the directors of the bidder and target Notices must be served on the non-accepting shareholders within
under? two months of reaching the 90 per cent threshold, and the non-
accepting shareholders have a right to apply to the court for an
Bidder order that the bidder shall not be entitled to acquire the shares or
specifying terms of acquisition different from those of the offer.
The Code imposes considerable obligations on the directors of If the bidder has, together with shares held by the bidder, its
the bidder. In addition, the directors of the bidder must consider nominee (including any person acting in concert with it) or related
the insider trading legislation if they are contemplating dealing in corporation, acquired not less than 90 per cent of all of the shares
the shares of the target and in the bidder. in the company, a minority shareholder also has a right to be
bought out by the bidder.
The advisers to the bidder should prepare a comprehensive
memorandum of the directors’ obligations as soon as the bidder 7. Overview of a private company acquisition
starts to consider the possibility of making an offer.
Timing
Target
The timing of a private acquisition depends on the cooperation
The Code imposes considerable obligations on the directors of the between the parties, and the progress of negotiations and other
target.  In addition they must comply with their obligations under the matters specific to the transaction.
Listing Requirements as well as their fiduciary duties to the target.
Steps
The directors of the target must not take any action which might
constitute oppression of the minority shareholders of the target. In general, the acquisition can be an auction process or a privately
The minority shareholders may seek statutory redress against negotiated deal in Malaysia.
oppression.
An example of an overview of the steps involved in an
The advisers to the target should prepare a comprehensive auction process involving an acquisition of a private company
memorandum of the directors’ obligations immediately following incorporated in Malaysia is as follows:
any offer approach.
„„ seller issues an information memorandum (IM), which describes
the business and affairs of the target, and must be deposited
with the SC within seven days after it is first issued;

59
„„ bidders sign a confidentiality agreement when receiving the IM; If an interest payment is re-characterised as a distribution then the
„„ bidders carry out due diligence on the target; borrower will not be entitled to a deduction in calculating its profits
„„ bidders are given a draft sale and purchase agreement, any for corporate tax purposes.
other ancillary agreements and disclosure letter;
„„ bidders submit their bid and their mark up of the draft sale and If the consideration given by the company for the use of the
purchase agreement; principal represents more than a reasonable commercial
„„ seller chooses the highest bidder and parties may negotiate return, the excess may not be available for tax deduction when
further on the draft sale and purchase agreement; calculating the profits for corporate tax purposes.
„„ parties sign the sale and purchase agreement;
„„ satisfaction of conditions precedent; The tax authority is empowered to disallow the portion of the
„„ completion; and interest charges that relates to the amount of financial assistance,
„„ post completion matters. which is excessive by reference to the fixed capital. Until a tax
ruling is issued, it is unclear what constitutes “financial assistance”
8. What tax issues should be considered? and “fixed capital” and how the arm’s length ratio is to be
determined. However, the tax authority has indicated that the debt
Capital gains to equity ratio should not be more than 3:1 and that any interest
attributable to the debt over and above the 3:1 ratio will not be
There is no capital gains tax in Malaysia. deductible as an expense.

Transfer taxes Withholding tax

Transfer tax (i.e. stamp duty) is payable on certain written If a person makes a payment of Malaysian source interest to a
agreements and transfer documents for the sale of shares. Stamp person not resident in Malaysia, that person may be obliged to
duty is also payable on the conveyance or transfer of immovable deduct income tax at the prevailing rate of 15 per cent. 
property.
Withholding tax at the rate of 10 per cent is applicable on
The rate of stamp duty for the transfer of shares of a company payments of royalties and rents for any moveable property which
incorporated in Malaysia is 0.3 per cent on the highest of the is deemed to be derived in Malaysia to a person not resident in
following: Malaysia. Such income shall be deemed to be derived in Malaysia
if the payer is a resident or the payment is charged as an outgoing
„„ consideration paid per share; or expense in the account of the business carried on in Malaysia.
„„ the net tangible asset value per share (normally determined by
reference to the latest available audited financial statements of Withholding tax rates may be reduced by applicable tax treaties
the company); between Malaysia and the country of residence of the non-
„„ the par value per share; or resident person.
„„ the price earnings ratio (which is based on profit after tax per
share) at a multiple depending on the industry. There are a number of exemptions where there is no requirement
to withhold tax; for example, interest paid by a Malaysian licensed
The rate of stamp duty for the transfer of immovable property is bank and interest paid out of certain qualifying debt securities.
1 per cent on the first RM100,000, 2 per cent on any amount
between RM100,001 and RM500,000, and 3 per cent on any There is no withholding tax on dividend payments.
amount exceeding RM500,000.

Stamp duty must be paid if title needs to be proved or the


agreements or documents are to be produced in evidence
before a court, tribunal, board, commission or similar body in, or
registered in, Malaysia.

Thin capitalisation/interest deductions

A company may in general claim a deduction from interest paid


under a loan used for the purposes of producing income when
calculating its taxable profits.

60
Schedule 1: General guide to the foreign ownership restrictions in Malaysia

Type of business General maximum permissible foreign shareholding

Activities which involve national interest, e.g. 30%


water and energy supply, broadcasting, defence
and security

Airlines 30%

Commercial banks (local domestic banks) 30% (100% will be considered for two new commercial banks in 2009
and three new commercial banks in 2011 to be established by world class
banks)

Investment banks 70%

Insurance 70% (a higher foreign limit will be considered on a case-by-case basis)

Money broking 100% (acquisition of current seven money broking firms, no new entrants)

Dealing in securities 70% (with minimum 30% Bumiputera equity)

Fund management 70% (with minimum 30% Bumiputera equity but 100% foreign
shareholding will be considered on a case-by-case basis for qualified
applicants)

Advising on corporate finance, financial planning 70% (with 30% local shareholding)

Supply of products and services to oil and 49% with at least 51% Bumiputera equity. (Priority is given to Bumiputera
gas companies and marketing activities and individuals/100% Bumiputera-owned companies to operate petrol
distribution of petroleum goods stations/skid tank/floating barge owned and built by oil companies)

Upstream oil and gas industry All foreign energy investment is conducted through production sharing
contracts between foreign operators and Petroliam Nasional Berhad
(Petronas)

Company that is set up to acquire non- 49%


performing loans from financial institutions in
Malaysia

Owns Malaysian vessels registered under the 49% (with at least 30% Bumiputera equity and the majority of the voting
Merchant Shipping Ordinance 1952 in Malaysia shares must be held by a Malaysian free from all encumbrances)

Freight forwarding agent 49% with at least 51% Bumiputera equity

Shipping agent 70% with at least 30% Bumiputera equity

Telecommunications First five years: 61%


Sixth year and thereafter: 49%

Retail and distributive trade e.g, hypermarkets, 70%


convenience stores, direct selling

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re s
W -
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Philippines

1. What are the forms of business entity in the Philiipines? How are directors appointed to and removed from office?

Common forms of entity Directors are elected from amongst the stockholders. At the election of
directors, cumulative voting is permitted and the candidates receiving
„„ Stock corporation the highest number of votes are elected as directors. The directors hold
„„ Partnership office for one year until their successors are elected and qualified as a
„„ Sole proprietorship director (e.g. a director must hold one share in the company, as set out
below, a requirement that can be fulfilled after a director is elected to
Less common forms of entity hold the office).

„„ Unincorporated joint venture Any director may be removed from office by a vote of the
„„ Unincorporated associations stockholders representing at least two-thirds of the outstanding
capital stock generally entitled to vote.
Common domestic entities set up by non-Philippine
nationals include: What powers does the board have?

„„ a subsidiary, which could be a domestic corporation or a The board exercises all the powers of the corporation, conducts
partnership. This is a legal entity that is separate and distinct all business and controls all property of the corporation. The
from its parent; board sets the corporate business policies and is responsible for
„„ a joint venture corporation or partnership with a Filipino partner. the efficiency of the management. In the exercise of corporate
This is commonly used with respect to nationalised industries powers, the board is guided by the articles of incorporation and
where a certain level of Filipino ownership is required by law; the by-laws of the corporation, the Corporation Code of the
„„ a branch office, which is an extension of, and therefore not a Philippines, Batas Pambansa Bilang 68 (the Corporation Code)
separate and distinct juridical person from the foreign parent; and other related laws. Stockholders have no right to interfere
and with the board’s exercise of its powers and functions, except with
„„ a representative office, which is another extension of, and respect to extraordinary corporate actions where the law requires
therefore not a separate and distinct juridical person from concurrent stockholder approval (see section 4).
the foreign parent. Unlike a branch office, it does not derive
income from the Philippines. Are there any residency requirements for directors?

2. How is a stock corporation managed? A majority of the directors must be residents of the Philippines.

The basic management structure Is there any requirement for directors to hold shares?

What form does the management structure take? Every director of a corporation must own at least one share of
such corporation, which must be registered in the director’s name
A stock corporation is managed by its board of directors. The in the stock books of the corporation.
number of directors must be at least five but cannot exceed 15.
What duties do directors owe?
The directors elect the corporate officers, namely the president
(who must be a director), secretary (who must be a citizen and a Overview
resident of the Philippines), treasurer, and other officers as may be
provided for in the by-laws of the corporation. The directors and The duties of directors are based on the Corporation Code and
officers perform the duties imposed on them by law and the by- related laws, regulatory issuances including the Revised Code of
laws of the corporation. The by-laws are rules of action adopted Corporate Governance (Securities and Exchange Commission)
by a corporation for its internal government and supplement the (SEC) Memorandum Circular No. 6, Series of 2009 (the Revised
articles of incorporation. Code of Corporate Governance), as well as the articles of
incorporation and the by-laws of the corporation.
The articles of incorporation of a close corporation (where, among
other things, the entire outstanding capital stock must be held by Duty to the company
not more than 20 stockholders as reflected in the stock books of
the corporation) may provide that its stockholders shall manage its The directors act as a body in the formulation of all corporate
business rather than the board. policies and the exercise of management powers. The law in

63
effect makes directors fiduciaries of the corporation, who must „„ the SEC will not approve a decrease in the authorised capital
serve the corporation with reasonable diligence, skill, good faith, stock which will prejudice the rights of the creditors;
loyalty, obedience and integrity. A director must have reasonable „„ redeemable shares will not be redeemed unless, after such
knowledge of applicable law and must direct corporate acts in a redemption, the corporation has sufficient assets to cover
manner that is in compliance with the law. debts and liabilities inclusive of capital stock; and
„„ a corporation may not acquire its own outstanding shares
Directors of corporations that are subject to the Revised Code of stock (upon acquisition, such shares of stock become
of Corporate Governance (i.e. corporations that sell securities “treasury shares”) unless such shares of stock are fully paid,
to the public that are required to be registered with the SEC, the acquisition is for a legitimate corporate purpose, and the
corporations that have assets in excess of PHP50 million corporation has unrestricted retained earnings to cover the
and at least 200 stockholders who each own at least 100 cost of the shares of stock to be acquired.
shares of equity securities, corporations with listed securities,
or corporations which are grantees of permits/licences and When a corporation becomes insolvent, its directors will be
secondary franchises from the SEC) have the express duties deemed trustees of all the creditors and the board must manage
of transparency, accountability, leadership, fairness, prudence corporate properties and assets with strict regard to the interests
and integrity. A director is expressly required to devote time to of the creditors.
corporate matters, and exercise independent judgment and
leadership in directing corporate affairs. Directors have the duty to ensure that the corporation does not
issue watered stocks (i.e. shares issued for less than the par or
A director may enter into a contract with the corporation provided issued value, or for non-cash consideration valued in excess of its
that the conditions set out in the Corporation Code are met, fair value).
including that the contract must be fair and reasonable and that
the relevant director’s presence and vote was not critical to meet Duty to employees
quorum and approval requirements. Fair and reasonable contracts
between two or more corporations with interlocking directors are The board, in the exercise of the corporation’s functions as
likewise allowed, subject to the requirements of the Corporation employer, is free to regulate all aspects of employment, subject
Code. The relevant director must fully disclose his adverse interest. to limits set by special laws particularly the Labor Code of the
Philippines, Presidential Decree No. 442, as amended (the Labor
Duty to the stockholders Code).

The Revised Code of Corporate Governance provides that the Employees have the right to participate in policy and decision-
board shall be committed to respect the following rights of the making processes to the extent they affect their legal rights and
stockholders: voting right, pre-emptive right, power of inspection, benefits, such as working conditions. For all other business
right to information, right to dividends, and appraisal rights. decisions, management prerogative is recognised.
Stockholders may bring an action against the directors for
their wrongful or fraudulent acts. Stockholders may also bring What types of liability can directors incur?
derivative actions (i.e. on behalf of the corporation) in order to
protect or vindicate corporate rights. A director who wilfully or knowingly votes for or assents to
patently unlawful acts of the corporation, or who is guilty of gross
Duty to creditors negligence or bad faith in directing corporate affairs, or acquires
any personal or pecuniary interest in conflict with his duty as
The directors’ obligation to the creditors flows from the trust fund director, may incur civil liability for all damages suffered by the
doctrine (the Trust Fund Doctrine). Under the Trust Fund Doctrine, corporation, its stockholders and other persons.
the capital stock of a corporation, as well as its other property and
assets, are generally considered a trust fund for the payment of A director may be held accountable to the corporation for secret
corporate debts, and the creditors of the corporation have a prior personal profits earned as a result of taking an interest adverse
right to payment over any of the stockholders. Pursuant to the to the corporation on a confidential corporate matter entrusted
Trust Fund Doctrine: to him and for profit earned on a business opportunity which
belonged to the corporation.
„„ except by a decrease in its capital stock as authorised under the
Corporation Code, a corporation may not distribute any of its assets A director may be held personally liable (jointly and severally with
or property to its stockholders except upon lawful dissolution of the the relevant stockholder) to the corporation or its creditors for the
corporation and after payment of corporate debts; issuance of watered stock where he consents or fails to object in

64
writing to such issuance of watered stock. audited and examined yearly by an independent certified public
accountant.
Unless specified otherwise, any breaches by a director of
the Corporation Code shall be punishable by a fine and/or 3. What are the most common types of M&A transaction?
imprisonment. A person found guilty of any violation of the
Corporation Code (or any offence punishable by imprisonment Private stock corporations
for a period exceeding six years) committed within five years prior
to the date of his election shall be disqualified as a director of a Share acquisitions
corporation.
A stock corporation can issue various classes or series of
Furthermore, Philippine penal laws generally contain a provision shares of stock with different rights, privileges and restrictions as
that when a corporation commits an offence, the fine and/ authorised by the articles of incorporation, provided that there is
or imprisonment shall be imposed on the directors or officers a class or series of shares which has complete voting rights. The
responsible for the violation. most common classification of shares is into common shares and
preferred shares, the latter normally being non-voting. However,
What are the auditing requirements for companies? the Corporation Code accords the following voting rights to non-
voting shares:
All corporations are required to submit annual financial statements
to the SEC. The financial statements of the following must be „„ amendment of the articles of incorporation (including that of
audited by a certified public accountant registered with the Board extending or shortening the corporate term);
of Accountancy: „„ adoption and amendment of the by-laws;
„„ sale, lease, exchange, mortgage, pledge or other disposition of
„„ stock corporations with paid-up capital of PHP50,000 or more; all or substantially all of the corporate property;
„„ non-stock corporations with annual gross receipts of „„ incurring, creating or increasing bonded indebtedness;
PHP100,000 or more, or total assets of PHP50,000 or more; „„ increase or decrease of capital stock;
„„ branch offices with assigned capital of PHP50,000 or more; „„ merger or consolidation of the corporation;
„„ branch offices of non-stock foreign corporations with total „„ investment of corporate funds in another corporation or
assets of PHP500,000 or more; and business in accordance with the Corporation Code; and
„„ representative offices with total assets of PHP500,000 or more. „„ dissolution of the corporation.

If corporations do not meet these thresholds, the financial A buyer can purchase shares of stock from the stockholders of a
statements must be certified by the treasurer of the corporation. target Philippine stock corporation. A buyer may also subscribe to
The external auditors and auditing firms of listed companies, newly issued shares of stock in, or purchase treasury shares of, a
public companies, brokers and dealers of securities, pre-need target corporation. When an acquisition is made in this manner, the
companies, and other holders of secondary licences from the SEC buyer acquires the target corporation with all its assets and liabilities.
should be accredited by the SEC.
Prior SEC approval must be obtained for non-cash consideration
Corporations subject to the provisions of the Securities Regulation for subscription to newly issued shares of stock.
Code, Republic Act No. 8799 (the SRC) (i.e. corporations with
registered or listed securities, corporations which are grantees During a share acquisition, a buyer should be aware of corporate
of permits/licences and secondary franchises from the SEC, and or contractual share transfer or share issuance restrictions.
public companies) are required to periodically present financial Unless otherwise stated in the articles of incorporation of the
statements to accompany the registration statements, annual relevant corporation, all stockholders have a pre-emptive right
reports, quarterly reports and management reports attached to to proportionally subscribe to shares of stock issued or treasury
the information statements, in SEC-prescribed forms. Financial shares sold by the corporation. Stockholders may also have a
statements submitted in compliance with the SRC requirements right of first refusal granted under the articles of incorporation or
must be audited by SEC-accredited auditors, except for interim under contract with respect to the sale of all shares of stock.
financial statements.
Unless an exemption may be claimed under the SRC (either that
The National Internal Revenue Code of 1997, as amended the security or the transaction is exempt from the registration
(the Tax Code) requires corporations, companies, partnerships requirement), no shares of stock may be issued, sold or
or persons with gross quarterly sales, earnings, receipts or distributed within the Philippines unless such shares of stock
output exceeding PHP150,000 to have their books of account are first registered with the SEC under the SRC. Among others,

65
an isolated transaction (i.e. the sale or issuance of shares of The merger or consolidation must be approved by at least a
stock that is not made in the course of repeated and successive majority of the board and two-thirds of the total outstanding
transactions of a like character) and a private placement are capital stock (including voting and non-voting) of each of the
exempt transactions. constituent corporations. Dissenting stockholders may exercise
their appraisal right.
Business/asset acquisitions
A merger or consolidation becomes effective upon approval by
A buyer may acquire the business, assets and, where applicable, the SEC.
liabilities of a corporation. The transfer of different types of assets
and liabilities may require different documentation and legal Any contractual restrictions on, or consent requirements for,
treatment. When assets such as land, motor vehicles and shares mergers or consolidations must also be observed.
of stock are transferred, the transaction must be registered or
recorded with the proper registry. Joint ventures

Where a sale covers all or substantially all of a corporation’s Two or more parties may form a joint venture to pursue a specific
assets (i.e. as a result of the sale, the corporation would be project or undertaking.
rendered incapable of continuing the business or accomplishing
the purpose for which it was created), it must be approved by A non-Philippine national would benefit from forming a joint
a majority of the board and two-thirds of the total outstanding venture with Filipinos in relation to undertakings or businesses
capital stock (including voting and non-voting) of the selling where the law prescribes a certain minimum of Filipino equity.
corporation. Dissenting stockholders may exercise their appraisal Where foreign investors hold a minority stake, they may obtain
right (i.e. the right to withdraw from the corporation by demanding minority protection rights, which are generally incorporated into
payment of the fair value of their shares and transferring such shareholders’ agreements and in the joint venture entity’s charter
shares to the corporation). documents.

When a sale or disposition is not in the ordinary course of Joint ventures can take several forms (e.g. a stock corporation or
business and constitutes all or substantially all of the business a partnership).
or trade or assets of a corporation, it is a sale in bulk within the
contemplation of the Bulk Sales Law, Act No. 3952 as amended Public companies
(the Bulk Sales Law). The seller must comply with the provisions
of the Bulk Sales Law by preparing an inventory of its assets A public company may be publicly listed or otherwise. Under the
and a list of its creditors, notifying its creditors of the price, terms SRC, a “public company” means any corporation with a class of
and conditions of the sale, and applying, on pro rata basis, the equity securities listed on an exchange or with assets in excess
proceeds of the sale to the payment of its creditors. A sale in bulk of PHP50 million and 200 or more stockholders, at least 200 of
carried out without complying with the provisions of the Bulk Sales which hold at least 100 shares of a class of its equity securities.
Law is void.
Share acquisitions
Private land may be held only by Filipino citizens or corporations
or associations of which at least 60 per cent of the capital is See the discussion under Share acquisitions for private stock
owned by Filipino citizens. corporations above. In addition, any acquisition of more than 5
per cent of any class of outstanding shares of a public company
A buyer must also note any corporate or contractual asset/ must be disclosed to the SEC and the Philippine Stock Exchange
business-sale restrictions (e.g. any restrictions in the by-laws or (PSE) in case of listed shares. The acquisition of at least 10 per
loan agreements). cent of any class of outstanding shares of a public company is
also subject to the filing of a beneficial ownership report with the
Mergers/consolidations SEC and the PSE in case of listed companies.

Two or more corporations may merge into a single corporation When the share acquisition amounts to at least 35 per cent of a
which must be one of the constituent corporations or may public company’s outstanding shares, or less than 35 per cent
consolidate into a new single corporation. The surviving or but would result in ownership of more than 51 per cent of the
consolidated corporation will succeed to all the property, rights outstanding stock, such acquisition shall be subject to the Tender
and privileges as well as assume the liabilities and obligations of Offer Rule (as described under Tender offers on page 97).
each of the constituent corporations.

66
Business/asset acquisitions These transactions involve the acquisition of publicly held shares
in a listed company and the subsequent delisting of the company.
See the discussion under Business/Asset acquisitions for private The PSE rules on voluntary delisting (discussed below) require that
stock corporations on page 66. The acquisition or disposition of a a tender offer be made to all stockholders of record and that the
business or asset having a material impact on a public company’s terms of the tender offer must be supported by a fairness opinion
situation is required to be disclosed to the SEC and the PSE in the or valuation report, prepared by a financial institution independent
case of a listed company. of the offeror and the target listed company.

Tender offers Do the parties have an obligation to negotiate in good faith


with one another in M&A transactions?
A tender offer is a publicly announced intention by a person acting
alone or in concert with other persons to acquire equity securities Overview
of a public company. Tender offers are governed primarily by SRC
Rule 19 (the Tender Offer Rule) of the Amended Implementing There is no specific obligation under Philippine law for parties
Rules and Regulations of the SRC (the Amended SRC Rules), to negotiate in good faith. An offer may generally be withdrawn
which is administered by the SEC. Tender offers are also subject at any time before it is absolutely and unqualifiedly accepted.
to the applicable provisions of the PSE listing and disclosure rules. It is becoming increasingly common for parties to enter into
a preliminary agreement (often called a “memorandum of
The following transactions are subject to a mandatory tender understanding” or a “memorandum of agreement”) setting forth
offer: (i) the acquisition, whether in a single transaction or multiple certain actionable rights of the negotiating parties such as rights
transactions within a period of 12 months, of at least 35 per cent of exclusivity, confidentiality or break fees. Under the Civil Code
of the outstanding shares of a public company; (ii) the acquisition of the Philippines, Republic Act No. 386 as amended (the Civil
of less than 35 per cent of the shares which would result in overall Code), the parties to a sale may enter in to an option contract.
ownership of more than 51 per cent of the outstanding shares; In an option contract, the seller, for a consideration distinct and
and (iii) the purchase of new shares from the unissued capital separate from the purchase price, grants the buyer an exclusive
resulting in at least 50 per cent ownership of the outstanding option to purchase an object for a certain price within the option
shares. (See section 6 for a detailed discussion of tender offers.) period.

The mandatory tender offer rules apply to direct and indirect Under general principles of civil law in Philippines, a person is
acquisitions. The acquisition of shares in a parent of a listed enjoined to exercise his rights in good faith, and is liable for injury
company resulting in a change in control or management of the resulting from an act which is contrary to morals, good customs
listed company will trigger the mandatory tender offer rule. or public policy. These general principles of law may be the basis
of a cause of action for bad faith during negotiations.
Consolidations/mergers
The general rule is still caveat emptor or buyer beware, and
The discussion on Consolidations/Mergers under private stock therefore due diligence remains a critical part of M&A transactions.
corporations on page 66 also applies to public companies,
subject to compliance with the requirements of the SRC, the Public companies
Amended SRC Rules and the PSE rules. A consolidation or
merger must be disclosed to the SEC and the PSE. The SRC provides civil and criminal penalties for the following
fraudulent, deceptive and manipulative acts or practices
Joint ventures committed in connection with a tender offer: (i) employing any
device, scheme or artifice to defraud any person; (ii) making any
The discussion under Joint ventures under private stock untrue statement of a material fact or omitting to state a material
corporations on page 66 also applies to public companies, fact; and (iii) engaging in any act which operates or would operate
subject to compliance with the disclosure requirements of the as a fraud or deceit upon any person.
SEC and the PSE.
The SEC has also ruled consistently that one of the requirements
Public-to-private acquisitions (P2Ps) for a valid tender offer by the issuer of shares is that the
transaction is designed and carried out in good faith.
Transactions similar to those referred to as “P2Ps” are primarily
regulated by the SRC, the Amended SRC Rules, and the PSE rules.

67
4. What percentage shareholding is required to achieve sale, alienation, mortgage, encumbrance or lease of property,
effective control of a company? franchises, certificates, privileges, or rights, or the merger or
consolidation of property, franchises, privileges or rights of a
Ownership of a majority of the outstanding voting capital stock telecommunications company.
of a corporation gives a person control of such a corporation.
However, effective control is achieved by ownership of at least Are there any restrictions on the foreign ownership of
two-thirds of the voting and the total (voting and non-voting) shares in a Philippine company?
outstanding capital stock. The following extraordinary corporate
actions require the approval or ratification of stockholders Schedule 1 lists the general areas of economic activity set out
holding two-thirds of the voting or total (voting and non-voting) in the Foreign Investments Negative List (the List) where the law
outstanding capital stock, as applicable: limits or prohibits foreign capital.

„„ amendment of the articles of incorporation (including extension Notably, foreign capital is prohibited in entities engaged in mass
or shortening of corporate term) (total outstanding capital media (except recording), while foreign ownership is limited in
stock, voting and non-voting); retail trade, advertising, ownership of private lands, and operation
„„ increase or decrease of the capital stock (total outstanding and management of public utilities, amongst others.
capital stock, voting and non-voting);
„„ incurring, creating or increasing bonded indebtedness (total The Anti-Dummy Law, Commonwealth Act No. 108, as amended,
outstanding capital stock, voting and non-voting); imposes criminal and civil penalties on those who violate
„„ sale, lease, exchange, mortgage, pledge or other disposition nationalisation laws. Non-Filipinos are prohibited from participating
of all or substantially all of the corporate property (total in the management, operation, administration or control of an
outstanding capital stock, voting and non-voting); entity engaged in a nationalised or partially nationalised activity,
„„ investment of corporate funds in another corporation or except that non-Filipinos may serve as technical personnel upon
business or for any purpose other than the primary purpose specific authorisation of the Philippine Department of Justice
(total outstanding capital stock, voting and non-voting); (DOJ). Non-Filipinos may serve as members of the board or
„„ merger or consolidation of the corporation (total outstanding governing body of the entity engaged in a partially nationalised
capital stock, voting and non-voting); activity, in a number that is proportionate to the actual and
„„ dissolution of the corporation (total outstanding capital stock, allowable non-Filipino equity.
voting and non-voting);
„„ delegating to the board the power to amend, repeal or adopt Regardless of the List, various laws have been passed over the
new by-laws (only capital stock generally entitled to vote); last two decades that indicate an effort to encourage foreign
„„ declaration of stock dividends (only capital stock generally investment in the Philippines. The Foreign Investments Act,
entitled to vote); Republic Act No. 7042, as amended, was enacted in 1991, with
„„ approval of a management contract between corporations the stated policy that foreign investments shall be promoted and
with interlocking stockholders and directors (only capital stock encouraged, to the extent allowed by the Philippine Constitution
generally entitled to vote); and and relevant laws. Laws were enacted to liberalise foreign
„„ removal of directors (only capital stock generally entitled to investment in the banking and retail trade industries. Under the
vote). Investors’ Lease Act, Republic Act No. 7652, a foreign investor
is able to lease private land for up to 75 years (a 50-year initial
5. Regulation, consents and foreign investment restrictions term, renewable once for a period not exceeding 25 years). A
comprehensive build-operate-transfer law was enacted to allow
Are there any regulated industries? and encourage private sector participation in infrastructure
projects traditionally undertaken by the government.
Most M&A transactions do not require special statutory or
regulatory consent or approval. However, industries such as Fiscal and non-fiscal incentives are granted under different laws
banking and telecommunications are subject to special regulation. for specific investment activities which are deemed to contribute
to the country’s development and export capacity including the
Bank mergers and consolidations must be approved by the Board of Investment and Philippine Economic Zone Authority
Bangko Sentral ng Pilipinas (BSP). An acquisition whereby the enterprises.
buyer acquires more than 40 per cent of the subscribed capital
stock of a telecommunications company must be approved Are there any foreign exchange and investment controls?
by the National Telecommunications Commission (NTC). In
asset acquisitions and mergers, the NTC must approve the There are currently no foreign exchange controls. As a rule, foreign

68
currency may be legally sold and purchased outside the banking The Civil Code allows recovery of damages arising from unfair
system. competition in agricultural, commercial and industrial enterprises.
The Price Act, Republic Act No. 7581 penalises cartels as a
Banks may sell foreign currency to service payments for any means of price manipulation. There are laws on unfair competition
foreign currency denominated transaction, except that BSP pertaining to the protection of intellectual property.
registration and/or approval must be obtained with respect to
foreign currency loans and direct foreign equity investments. There is a bill pending in Congress on anti-trust and monopoly
Direct foreign investments must be registered with the BSP to activities. The bill seeks to penalise the formation of cartels, the
allow access to the Philippine banking system for foreign currency act of monopolisation and the abuse of monopoly power or a
requirements, for capital repatriation and dividend remittance. dominant position.
Generally, the funds must be inwardly remitted and converted into
Pesos. Under the terms of the bill, an entity having at least a 50 per
cent share of the relevant market shall be deemed a monopoly
For outbound investments by Philippine residents, prior BSP or having a dominant position. It will be an abuse of monopoly
approval must be obtained for investments exceeding USD12 power or a dominant position if an entity, capitalising on such a
million in any single year. Where the outbound investment of a dominant position, undertakes abusive acts such as price fixing,
Philippine resident is funded by foreign currency purchased from bid rigging, limitation and control of markets, market allocation,
Philippine banks, dividends, earnings or divestment proceeds of arrangements to share markets and sources of supply, price
such outbound investment must be inwardly remitted and sold to discrimination, exclusivity arrangements, tie-in arrangements, and
the Philippine banks for Pesos. boycott.

The foregoing is subject to BSP’s authority, with the approval of The DOJ is primarily tasked to investigate and prosecute acts
the President of the Philippines, to restrict the availability of foreign punished under the proposed law. The bill imposes penalties that
currency during an exchange crisis, in the event an exchange are higher than those imposed under the Revised Penal Code as
crisis is imminent, or in times of national emergency. discussed above.

Is there any merger control or anti-competition law? What are the employee issues?

The Philippine Constitution provides that it is the policy of the Are works councils/consultation common?
state to regulate or prohibit monopolies when the public interest
so requires, and that no combinations in restraint of trade or The right of workers to self-organisation is guaranteed under
unfair competition shall be allowed. At present, the only detailed the Philippine law. Employees may form labour organisations
legislation on the matter is the Revised Penal Code, Act No. or unions for the purpose of collective bargaining. Workers’
3815, as amended (the Revised Penal Code) which penalises associations may also be formed for the mutual aid and protection
monopolies and combinations in restraint of trade. The acts of its members or for any legitimate purpose other than collective
punishable are: bargaining. The Labor Code also allows (but does not require) the
creation of labour-management councils or labour-management
„„ entering into any contract or agreement or taking part in any committees in both unionised and non-unionised establishments,
conspiracy or combination in the form of a trust or otherwise, in to allow employees to air concerns and grievances to their
restraint of trade or commerce or to prevent by artificial means employer.
free competition in the market;
„„ monopolising any merchandise or object of trade or commerce Are any actions required prior to or upon an acquisition for
in order to alter the object’s price or spreading false rumours or employees?
any other act that restrains free competition in the market; and
„„ any manufacturer, producer, processor or importer of any The actions that are required in relation to employees depend on
merchandise or object combining, conspiring or agreeing in any the type of transfer.
manner with any person whether or not similarly engaged as
manufacturer, producer, processor or importer, for the purpose In assets-only transfers and business enterprise transfers, there
of making transactions prejudicial to lawful commerce, or of is no law requiring a bona fide buyer to absorb the employees of
increasing the market price in any part of the Philippines, of any the seller. The most that the buyer must do is to give preference to
such merchandise or object. the separated employees of the seller (i.e. employees who meet
the qualifications for employment of the buyer) in the continued

69
operation of the business. The buyer may choose not to hire SEC and must be available for inspection by any stockholder of
the employees and in such a case, the seller must terminate the the company during reasonable hours on business days.
employees’ contracts and pay separation benefits.
PSE Listing Rules: The Listing Rules set out certain criteria
In a sale of shares of stock or equity transfers, there is no effect on for the listing of an applicant’s securities. In the case of M&A
the employees. transactions involving the issue of additional shares from the
unissued capital stock, the PSE Listing Rules require the
For mergers and consolidations, the general rule is that the stockholders to approve a transaction resulting in an issue of at
surviving or consolidated corporation assumes the obligations least 10 per cent of the resulting outstanding capital stock. In
of each of the constituent corporations. The employees of the case the new share issue will be subscribed to by a related party
merged or consolidated corporations are deemed absorbed of the issuer, the listing of the new shares shall not be allowed
by the surviving or new corporation as there is a succession of unless a rights or public offer among the minority stockholders is
corporate rights and obligations. first undertaken, or such rights offer is waived or the transaction is
otherwise exempt from the rights offer requirement.
Are there any notification obligations for employees prior to or
upon an acquisition? PSE Disclosure Rules: The Disclosure Rules seek to ensure
full, fair, timely and accurate disclosure for all listed companies.
There is generally no requirement to notify employees of an A fair and orderly market demands that all listed companies
intended acquisition, merger or consolidation, unless required by make available to the public information necessary to enable
a collective bargaining agreement. Notices to the employees are the stockholders and the public to appraise the position of the
required only when termination of employment results from the listed company; and to take reasonable steps to ensure that
transfer. everyone that invests in its securities enjoys equal access to
such information. A change in control, mergers, consolidations,
Timing acquisitions, the purchase and sale of significant assets, and the
public or private sale or issue of additional securities are among
Dismissals resulting from acquisitions, mergers and consolidations the matters mandating prompt disclosure to the SEC and the
require at least 30 days written notice to the workers whose PSE.
employment is to be terminated and to the Department of Labor
and Employment. How does a company delist its share capital?

With which stock exchange requirements must listed The delisting of securities listed on the PSE may either be: (i)
companies comply? involuntary, or (ii) voluntary.

What rules generally govern listed companies? A security may be suspended from being traded or involuntarily
delisted, at any time, after due notice, on any of the following
The following laws, rules and regulations generally govern listed grounds:
companies:
„„ failure to comply with the Listing Agreement or the Listing and
SRC and the Amended SRC Rules: The basic principle of Disclosure Rules of the PSE;
the SRC is to protect the investing public with respect to the „„ a false market exists in any securities and such can be
registration of securities, securities trading markets and securities attributed, directly or indirectly, solely to the issuer;
market professionals. „„ the trading volume of the listed security falls below the
published trading volume requirement of the PSE;
Revised Code of Corporate Governance: Listed companies „„ the listed company becomes incapable of continuing the
are required to adopt a manual on corporate governance in business or accomplishing the purpose for which it was
accordance with the Revised Code of Corporate Governance. The incorporated by reason of the abandonment, destruction,
manual is intended to supplement a corporation’s by-laws with condemnation, seizure or expropriation of its operating assets;
regard to corporate governance matters. The manual requires „„ liquidation or dissolution of the listed company;
a company to: (i) have at least two independent directors, (ii) „„ the stockholders’ equity becomes negative;
constitute its audit, nominations and compensation committees, „„ the company’s SRC registration or exemption from registration
and (iii) appoint a compliance officer. A manual also typically is revoked, cancelled or is no longer effective for any reason;
provides for the qualifications and disqualifications of its directors „„ the entire outstanding amount of the listed class or series
and officers. A listed company’s manual must be submitted to the of securities is to be retired through payment at maturity,

70
redemption, reclassification or otherwise; issued shares of stock of the lending-corporation, the financial
„„ repeated failure to make timely, adequate, and accurate assistance is likely to be invalidated as contrary to the Trust Fund
disclosures or failure to submit any reporting requirement in Doctrine. Moreover, the Corporation Code expressly prohibits the
accordance with the Disclosure Rules of the PSE, or wilful false issuance of shares of stock in exchange for promissory notes.
statements in the financial statements;
„„ the listed company buys any of its issued and outstanding The Trust Fund Doctrine could also be invoked to invalidate
shares into treasury in violation of the relevant rules of the financial assistance extended to a person to enable the latter
Corporation Code; to acquire from a stockholder, shares of stock of the lending-
„„ the listed company has failed to be in actual commercial corporation or its parent, especially where such shares of stock
operations within two years from date of listing; and have unpaid subscriptions.
„„ the listed company or its management engages in operations
which, under the law, are contrary to public interest, and the The validity of financial assistance extended by a corporation to
continuing listing is likely to give rise to an unacceptable risk of enable the borrower to acquire, from a stockholder, fully-paid
damage to the reputation of the PSE. shares of stock of the lending-corporation or its parent must be
tested on whether it is within the express or implied powers of
A company that has been involuntarily delisted is disqualified from the corporation (i.e. whether the primary and secondary purposes
relisting within a period of five years from the time it was delisted of the corporation authorise such an act) since a corporate act
and its directors and executive officers are disqualified from that is not within the express, implied or incidental powers of the
becoming directors or officers of any company applying for listing. corporation is ultra vires. Generally such acts are not provided for
as primary and secondary purposes of a corporation.
A company may request or apply for delisting with the PSE
(i.e. voluntary delisting). Delisting will be allowed subject to the Even if listed in the articles of incorporation among the purposes
payment of a delisting fee, provided there is compliance with the of the corporation, an act, if only authorised as a secondary
following: purpose, must be authorised by the majority of the board and at
least two-thirds of the total outstanding capital stock (including
„„ the delisting must be approved by a majority of the company’s voting and non-voting) of the corporation.
incumbent directors;
„„ all security holders must be notified, in a form satisfactory Nevertheless, a Trust Fund Doctrine challenge may be made
to the PSE, of the proposed delisting prior to the filing of the regarding financial assistance extended to enable the borrower to
petition; acquire, from a selling stockholder, fully-paid shares of stock of
„„ a petition for delisting must be filed with the PSE together with the lending-corporation or its parent. If not bona fide, the financial
proposed tender offer terms and conditions at least 60 days in assistance may be viewed as a scheme to enable the selling
advance of the date when delisting becomes effective; stockholder to receive a return of his capital (as corporate funds
„„ a tender offer to all stockholders of record must be made and are used for the payment of the purchase price) before settlement
supported by a fairness opinion or valuation report; of obligations to, and thus to the prejudice of, the corporation’s
„„ the person(s) proposing the delisting must show to the PSE creditors.
that following the acquisition of the tendered shares, said
person(s) have obtained a total of at least 95 per cent of the What are the sanctions?
issued and outstanding shares of the company;
„„ if the person(s) proposing the delisting are the beneficial An act undertaken in violation of the Trust Fund Doctrine is invalid
owners of 95 per cent of the issued and outstanding shares of for being in fraud of the corporation’s creditors.
the company at the time the petition for delisting is filed, such
person(s) must still make a tender offer to all other stockholders A breach of the Corporation Code prohibition against issuing
of record; and shares of stock in exchange for promissory notes is punishable by
„„ the listed company applying for delisting must not have any fine and/or imprisonment.
unpaid fees or penalties.
When a corporate act is ultra vires, the effects differ depending
Is financial assistance prohibited? on whether the act is illegal per se. An act is illegal per se when
it is prohibited by law, and the act may or may not be criminal in
What is the nature of the prohibition? nature. An ultra vires act that is illegal per se is void and may not
be ratified or validated. When an ultra vires act is not illegal per
Where financial assistance is extended by a corporation to a se: (i) it may not be enforced if it is yet to be performed; (ii) if fully
person for the latter to use to pay for its subscription to newly performed on both sides, neither party may set aside the act or

71
recover what has been given; or (iii) when performed on one side Philippines or abroad. Unless otherwise agreed by the parties,
and the other received benefits, recovery is generally permitted. the Tender Offer Rule would not apply to share acquisitions or
mergers involving non-public companies.
6. Tender offers
The PSE Disclosure Rules apply to listed companies, including
What are the forms of tender offer? those organised overseas but with shares listed on the PSE.

A tender offer is a publicly announced intention by a person acting What are the main offer terms?
alone or in concert with other persons to acquire equity securities
of a public company. No tender offer may be made unless: Minimum price requirements

„„ the tender offer is open to all security holders of the class of In a mandatory tender offer, a bidder is required to offer the
securities subject to the tender offer; and highest price paid by him for such shares during the past six
„„ the consideration paid to any security holder pursuant to the months. Where the offer involves payment by transfer or allotment
tender offer is the highest consideration paid to any other of securities, such securities must be valued on an equitable
security holder during such tender offer. basis.

A tender offer under the tender offer rule generally refers to a In the event the bidder increases the consideration offered
tender offer by a person other than the issuer who intends to after the tender offer has commenced, the bidder must pay the
acquire its shares. however, certain provisions of the tender offer increased consideration to all security holders whose tendered
rule relate to an “issuer tender offer”, also known as a “buy back”, securities are accepted for payment by the bidder, whether or not
which is a publicly announced intention (i) by an issuer to acquire the securities were tendered prior to the variation of the tender
any of its own equity securities, or (ii) by an affiliate of such issuer offer’s terms.
to acquire such securities.
No tender offer may be made unless the consideration paid to
Acquisitions that are below the threshold amounts of mandatory any security holder pursuant to the tender offer is the highest
tender offers are not subject to the tender offer requirements consideration paid to any other security holder during such a
under the tender offer rule but are required to comply with tender offer.
beneficial ownership disclosure requirements in cases of
acquisitions of more than 5 per cent and at least 10 per cent of If the tender offer is for less than the total outstanding securities
a class of outstanding shares. (See page 76 for further details of of a class but a greater number of securities is tendered, the
mandatory tender offers). bidder must take up and pay for the securities on a pro rata basis,
disregarding fractions, according to the number of securities
What is the regulatory framework for a tender offer? tendered by each security holder during the period such an offer
remained open.
SRC, Amended SRC Rules and PSE Rules
Cash/non-cash terms
The principal source of regulation is the Tender Offer Rule in the
Amended SRC Rules. The Tender Offer Rule seeks to protect the Consideration for an offer may be in cash, securities (e.g. loan
interests of the stockholders by regulating tender offers that seek notes, shares or other securities of the bidder), or a mixture of
to take over the issuer. both.

Compliance with the Tender Offer rule is mandatory and any Cash consideration
breach is subject to civil, criminal and administrative penalties.
The PSE Disclosure Rules apply if the target or the acquirer is a In a mandatory tender offer, a bidder must offer (in cash,
listed company. securities or a mixture of both) the highest price paid by him for
such shares during the past six months.
Application of the SRC, Amended IRR of the SRC and PSE Rules
and Regulations Non-cash consideration

The Tender Offer Rule applies to all tender offers where the target Where the offer involves payment by transfer or allotment of
is a public company, regardless of the nationality or status of the securities, such securities must be valued on an equitable basis.
buyer, and extends to all acts done or omitted to be done in the

72
Conditions What is the timing of a tender offer and what is the
procedure to be followed?
A tender offer may generally be withdrawn before the expiration
of the tender offer period. However, in the case of a mandatory Simplified offer timetable (see below)
tender offer required consequent to a proposed acquisition of
less than 35 per cent of the equity shares in a public company, A tender offer must remain open for at least 20 business days
but resulting in overall ownership of more than 51 per cent of from its commencement, provided that an offer must generally be
the total outstanding equity securities of the public company, the completed within 60 days from the date a public announcement
bidder must accept any and all securities tendered. This could be is made to acquire the securities. D+19 is the end of the minimum
construed to mean that the bidder may not withdraw its tender 20-business-day period for a tender offer.
offer under such circumstances.
Announcements
Funding the acquisition
Any person making a tender offer must make an announcement
A bidder must obtain confirmation from its financial adviser, of his intention in a newspaper of general circulation, prior to the
or other appropriate third party, that the bidder has sufficient commencement of the offer (such an announcement must not
resources to satisfy full acceptance of the offer. A bidder making be made until the bidder has the resources to implement the
a tender offer must not make any announcement regarding offer in full).
his intention to purchase securities until it has the resources to
implement the offer in full.

Date/Time period Events

[D+19] – 60 calendar days Earliest date for bidder to make a public announcement of its intention to acquire
shares of the target company and submit a copy of the notice to the SEC on the date of
publication

[D+19] – 60 calendar days Suggested date to dispatch copies of the tender offer materials to the stockholders.
Tender offer report on SEC Forms 19-1 and exhibits must be submitted to the SEC, the
PSE and the target company

D–2 business days Last day to file the tender offer report on SEC Forms 19-1 and exhibits with the SEC, the
PSE and the target company

Day 0 (D) Commencement of tender offer period

First day of publication in a


newspaper of general circulation

D+1 calendar day Second day of publication in a newspaper of general circulation

D+2 calendar days Third day of publication in a newspaper of general circulation

D+19 business days Last day of tender offer

D+29 business days Last day for payment of consideration or to return the tendered securities

D+10 calendar days after termination Bidder must report the results of the tender offer by filing copies of the final amendments
of tender offer to SEC Form 19-1

73
Acceptance period A bidder or an issuer must disseminate the tender offer by
complying fully with either the Long Form Publication or the
The tender offer, unless withdrawn, remains open until the Summary Publication requirement provided that such publication
expiration of: must be made through two newspapers of general circulation
on the date of commencement of the tender offer and for two
„„ at least 20 business days from its commencement, provided consecutive dates thereafter. In the case of Summary Publication,
that an offer must generally be completed within 60 days from the published notice must include instructions on how security
the date the intention to acquire is publicly announced; or holders may obtain promptly, at the bidder’s expense, any
„„ at least 10 business days from the date the notice of change in the additional information included in SEC Form 19-1 but not
percentage of class of securities being sought or in the consideration otherwise included in the published notice. In the case of Long
offered is first published, sent or given to security holders. Form Publication, amongst other things, the published report
must include the following information:
The bidder may extend the length of a tender offer upon prior
clearance from the SEC and after issuing, no later than the „„ the amount of class of securities being sought and the type
scheduled original expiration date, a notice of such an extension and amount of consideration being offered;
by press release or other public announcement. „„ the scheduled expiration date of the tender offer, whether the
tender offer may be extended and, if so, the procedures for
The bidder must permit securities tendered to be withdrawn: extension of the tender offer;
„„ the terms for acceptance or withdrawal of securities deposited
„„ at any time during the period that the tender offer remains pursuant to the tender offer;
open; and „„ the terms for pro rata acceptance of tendered securities and
„„ if not yet accepted for payment, after the expiration of 60 the plan in case of oversubscription by security holders; and
business days from the commencement of the tender offer. „„ the confirmation by the bidder’s financial adviser or another
appropriate third party that resources available to the bidder
Satisfying offer conditions are sufficient to satisfy full acceptance of the offer.

The bidder must either pay the consideration offered, or return A bidder must provide all stockholders of the target company with
the tendered securities, not later than 10 business days after the a copy of the published report and SEC Form 19-1.
termination or the withdrawal of the tender offer.
The bidder must promptly disclose any material change in the
Competing bids information published, sent or given to security holders.

The Tender Offer Rules of the PSE do not address competing bids. Tender offer materials include:

Failed bids and further offers „„ the bidder’s formal offer, including all the material terms and
conditions of the tender offer and all amendments thereto;
Except with the consent of the SEC, where an offer has been „„ the related transmittal letter (whereby securities of the target
announced but has not become unconditional in all respects and company which are sought in the tender offer may be
has been withdrawn or lapsed, neither the bidder nor any person transmitted to the bidder or its depository) and all amendments
who acted in concert with it in the course of the offer may, within thereto; and
six months from the date on which such offer has been withdrawn „„ press releases, advertisements, letters and other documents
or lapsed, announce an offer for the target company nor acquire published by the bidder or sent or given by the bidder to
any securities of the target company which would require such security holders which, directly or indirectly, solicit, invite or
person to make a mandatory tender offer under the SRC and the request tenders of the securities being sought in the tender
Amended SRC Rules. offer.

What documentation is involved in the process? A bidder is also required to file with the SEC and hand deliver to
the target company SEC Form 19-1, including all exhibits, and
Press announcement and other disclosures any amendments within the prescribed time period set out in the
Tender Offer Rules. Any material change in the information set
Any person making a tender offer must announce his intention in forth in SEC Form 19-1 must be reported as an amendment to
a newspaper of general circulation, prior to the commencement this form. The result of the tender offer must be reported as a final
of the offer, a copy of which must be submitted to the SEC on the amendment to SEC Form 19-1.
date of publication.

74
Target documentation security that is not generally available to the public; or (v) a person
who learns such information by a communication from any of the
The target company, if a listed company, must comply with the foregoing insiders.
Disclosure Rules of the PSE. Any material information with a
significant impact in the target company’s operations (such as Generally, it is unlawful for an insider to buy or sell a security while
those relating to its financial condition, prospects, development, in possession of material information with respect to the issuer or
projects, contracts entered into in the ordinary course of the business the security that is not generally available to the public, subject to
or otherwise, joint ventures, consolidation, tender offer, takeover, certain exempting circumstances.
reverse takeover, mergers and acquisitions, as well as information
concerning a significant change in ownership of the target company’s Where a tender offer has commenced or is about to commence,
securities or change in control) must be disclosed. it is unlawful for any person (other than the tender offeror) in
possession of material non-public information relating to such
Responsibility statements a tender offer, to buy or sell the securities of the issuer that are
sought or will be sought by such tender offer if such a person
The Tender Offer Report on SEC Form 19-1 to be submitted knows or has reason to believe that the information is non-public
to the SEC, the PSE (in case of a listed target company) and such information has been acquired directly or indirectly from
and the target company, must be signed by the bidder or its the tender offeror, those acting on its behalf, the issuer of the
representative, and must include the following acknowledgment: securities sought or to be sought by such a tender offer, or any
“After reasonable inquiry and to the best of my knowledge and insider of such issuer. It is also unlawful to communicate material
belief, I certify that the information set forth in this report is true, non-public information relating to the tender offer to any other
complete and correct”. person where such communication is likely to result in a violation
of the restriction on insider trading.
What are the practices relating to break fees and lock-out?
A director or principal officer of a target company must not deal in
The SRC or the Amended SRC Rules do not prohibit break fees the issuer’s securities during the period within which material non-
or lock-outs. public information is obtained and up to two full trading days after
the price sensitive information is disclosed.
What are the rules on information gathering/provision?
The penalties for insider trading include:
A bidder may undertake due diligence on the target company
subject to the latter’s consent. The target company may give „„ administrative sanctions imposed by the SEC (e.g. suspension
price-sensitive information. However, the target company may or revocation of its certificate, fine or disqualification from being
not communicate material non-public information relating to the an officer or principal stock holder of an issuer);
tender offer to any other person where such communication is „„ a conviction in the regular courts for insider trading which may
likely to result in a violation of the restriction on insider trading. entail imprisonment and/or a fine;
Aside from the Tender Offer Report on SEC Form 19-1, other „„ claims for damages arising from civil actions which may be
publicly available information may be secured from the SEC and brought against the insider; and
the PSE, as well as other government agencies. „„ expulsion from membership of the PSE.

What is the position regarding insider trading? What are the public disclosure requirements in a takeover
scenario?
Insider trading in securities of a public company is considered
unlawful and exposes the offender to criminal and civil liability. The Bidder
SRC and the Amended SRC Rules do not limit the insider trading
restriction to securities of companies listed on the PSE. The bidder, if a public company, is required to comply with the
disclosure requirements of the SEC (and the PSE if it is also a
An “insider” is defined as: (i) the issuer; (ii) a director or officer (or listed company).
person performing similar functions) of, or a person controlling
the issuer; (iii) a person whose relationship or former relationship The bidder must publish, send or give to security holders in the
to the issuer gives or gave him access to material information manner prescribed under Section 7(A) of the Tender Offer Rule, a
about the issuer or the securities that is not generally available to report containing the following information:
the public; (iv) a government employee, or director, or officer of
an exchange, clearing agency and/or self-regulatory organisation
who has access to material information about an issuer or a

75
„„ the identity of the bidder including his/its present principal acquisition or disposition of its own shares prior to the pre-open
occupation; period of the next trading day after the transaction was executed.
„„ the identity of the target company; The planned acquisition or disposition must likewise be in
„„ the amount of class of securities being sought and the type accordance with the rules and regulations of the SEC.
and amount of consideration being offered;
„„ the scheduled expiration date of the tender offer, whether the Does a memorandum of understanding (MoU) need to be
tender offer may be extended and, if so, the procedures for disclosed?
extending the tender offer;
„„ the terms for acceptance or withdrawal of securities deposited A MoU must be promptly disclosed if it meets any of the following
pursuant to the tender offer; standards:
„„ the terms for pro rata acceptance of tendered securities and
the plan in case of oversubscription by security holders; „„ where the information is necessary to enable the issuer and the
„„ the confirmation by the bidder’s financial adviser or another public to appraise their position or standing, such as, but not
appropriate third party that resources available to the bidder limited to information relating to the issuer’s financial condition,
are sufficient to satisfy full acceptance of the offer; and prospects, development projects, contracts entered into in
„„ the information included in SEC Form 19-1. the ordinary course of business or otherwise, mergers and
acquisitions, dealings with employees, suppliers, customers,
When an issuer or its subsidiary has merged or consolidated with and others, as well as information concerning a significant
or otherwise acquires a direct or indirect interest in an unlisted change in ownership of the issuer’s securities owned by
company, a person or group, and said interest is 10 per cent or insiders or those representing control of the issuer;
more of the total book value of the listed company, the trading of „„ where such information is necessary to avoid the creation of a
the securities of the listed company must be suspended until the false market for its securities; or
terms and conditions of the transaction, and the details pertaining „„ where such information may reasonably be expected to
to the business or project acquired are actually disclosed and, if materially affect market activity and the price of its securities.
applicable, the latest audited financial statements of the unlisted
company, are submitted to the PSE. The Tender Offer Report in SEC Form 19-1 requires the disclosure
of any contracts, arrangements, understandings or relationships
In addition, any acquisition of more than 5 per cent of any class between the bidder and issuer, naming the person with whom
of outstanding shares of a public company is required to be such contracts, arrangements, understandings or relationships
disclosed to the SEC and the PSE in the case of listed shares. have been entered into.
The acquisition of at least 10 per cent of any class of outstanding
shares of a public company is also subject to the filing of a What are the limitations to stakebuilding?
beneficial ownership report with the SEC and the PSE in the case
of listed companies. Certain acquisitions of shares require a mandatory tender offer
(please see paragraph below on mandatory tender offers).
Target
Foreign equity restrictions also apply if the target company is
The target company, if a public company, is required to comply engaged in a nationalised activity (please see page 68).
with the disclosure requirements of the SEC (and the PSE if it is a
listed company). Any material information with a significant impact Is there a requirement to make a mandatory offer?
on the target listed company’s operations (such as those relating
to its financial condition, prospects, development, projects, A tender offer must be made to all holders of the same class of
contracts entered into in the ordinary course of the business or equity securities in the following cases (a mandatory tender offer):
otherwise, mergers and acquisitions, dealings with employees,
suppliers, customers and others, as well as information „„ when a person or group of persons acting in concert intends
concerning a significant change in ownership of the target listed to acquire 35 per cent or more of equity shares in a public
company’s securities owned by insiders or representing control of company in one or more transactions within a 12-month period;
the company) must be disclosed. „„ when a person or group of persons acting in concert intends
to acquire less than 35 per cent of the equity shares in a public
In case of an issuer tender offer, the issuer must promptly disclose company, but the result of which is overall ownership of more
any planned acquisitions of its shares or disposition of treasury than 51 per cent of the total outstanding equity securities of a
shares. In addition, the issuer must submit a disclosure regarding public company; or
the actual number of shares and the transaction price for each

76
„„ when any purchase of shares from the unissued capital stock Target
results in ownership of at least 50 per cent of the outstanding
capital stock. In the case of a tender offer other than by an issuer, a target
company must not engage in any of the following transactions
The mandatory tender offer requirement does not apply to the during the course of a tender offer, or before the commencement
following (notwithstanding their exemption, purchasers of shares thereof if its board has reason to believe that an offer might
in the following transactions must comply with the disclosure and be imminent (except if such a transaction is in pursuance of a
other obligations under the Amended SRC Rules): contract entered into earlier, or with the approval of stockholders
in a general meeting or, where special circumstances exist, SEC
„„ any purchase of shares from the unissued capital stock approval has been obtained):
provided that the acquisition will not result in 50 per cent or
more ownership of shares by the purchaser; „„ issue any authorised but unissued shares;
„„ any purchase of shares from an increase in authorised capital „„ issue or grant options in respect to any unissued shares;
stock; „„ create or issue, or permit the creation or issuance of, any
„„ purchase in connection with foreclosure proceedings involving securities carrying rights of conversion into, or subscription for,
a duly constituted pledge or security arrangement where the shares;
acquisition is made by the debtor or creditor; „„ sell, dispose of or acquire, or agree to acquire, any asset, the
„„ purchases in connection with privatisations undertaken by the value of which amounts to 5 per cent or more of the total value
government of the Philippines; of assets prior to acquisition; or
„„ purchases in connection with corporate rehabilitation under „„ enter into contracts otherwise done in the ordinary course of
court supervision; business.
„„ purchases through an open market at the prevailing market
price; or A director or principal officer of a target company must not deal in
„„ merger or consolidation. the issuer’s securities during the period within which material non-
public information is obtained and up to two full trading days after
What defences are available to a target company during the the price sensitive information is disclosed.
stages of an offer?
What is the procedure for a squeeze-out of the minority?
The target’s board must generally act, within the bounds of the
law, in the best interests of the target’s stockholders. Minority stockholders may not be compulsorily bought out.

A target company may protect itself from a hostile takeover by 7. Overview of a private corporation acquisition
including a poison pill (a defence available before a takeover offer
is made) provision in its articles of incorporation and granting Timing
its stockholders pre-emptive rights. Listed companies do not
usually have rights of first refusal provisions in their articles of The timing of a private acquisition depends on the cooperation
incorporation. between the parties, and the progress of negotiations and other
matters specific to the transaction.
The acquisition of a public company must not breach any
nationality requirements stated in the Constitution and other laws. Steps
A target company may pre-empt a hostile takeover by foreign
parties by engaging in activities which are limited by law to entities The tables on page 78 illustrate broadly the typical steps of an
which are wholly or partially owned by Filipinos (e.g. ownership of asset/business/share transfer, the original issuance of shares
private land). by a private corporation and a merger/consolidation. The order
of events may vary from transaction to transaction, and it is
What obligations are the directors of the bidder and target possible that some activities are dispensed with or undertaken
under? simultaneously.

Bidder

The SRC and the Amended SRC Rules impose the obligation
upon the directors to consider the prohibitions on insider trading.

77
Asset/Business/Share transfer Original issuance of shares

Auction Preliminary agreement (as applicable)


„„ Confidentiality
Preliminary agreement „„ Exclusivity
„„ Confidentiality
„„ Exclusivity Due diligence

Due diligence Corporate approval of issuer


„„ Board approval
Draft/negotiate acquisition agreement „„ Waiver of pre-emptive right

Corporate approvals SEC prior approval of non-cash consideration for shares of


„„ Board stock (as applicable)
„„ Stockholder (as applicable)
Regulatory prior approval of share issuance (as applicable)
Regulatory prior approval of acquisition (as applicable)

Execution of acquisition agreement Subscription agreement


„„ Payment of consideration
Compliance with conditions precedent
Filing with SEC of 10-1 and/or application for SEC
Closing of acquisition confirmation that issuance is exempt from registration
„„ Execution of deed of transfer requirement (as applicable)
„„ Payment of consideration

Post closing Payment of documentary stamp tax


„„ Payment of taxes/remittance of tax withheld
„„ Secure tax clearance/BIR authorisation to register/ record Issuance of stock certificate
transfer
„„ Register transfer with the Registry of Deeds, Land
In tax-free property-for-share swaps: annotation of the
Transportation Office (as applicable)
substituted basis on the proper evidence of title to the (i)
„„ Record transfer in the stock transfer book of the relevant/
shares of stock issued, and/or (ii) the property transferred as
target corporation
consideration for the issued shares of stock.
„„ Compliance with regulatory notice or other requirements,
for corporations with special regulatory licences.

and of shares which are listed but traded outside of the local
8. What tax issues should be considered? stock exchange. The capital gains tax rate is 5 per cent for the
first PHP100,000 of the gain, and 10 per cent for gains in excess
Capital gains of PHP100,000. Where, however, the share acquisition is carried
out through a tax-free exchange as provided under the Tax Code,
In business acquisitions, where the assets of the business no capital gains tax is due on the transfer of shares.
acquired do not include land and/or buildings and shares of stock, A capital gains tax of 6 per cent is likewise due on transfers of land
the gain or profit from the sale of the assets is considered an and/or buildings, which is imposed on the higher of the actual selling
ordinary gain or ordinary income subject to the regular corporate price and the fair market value of the property (generally, the zonal
income tax of 30 per cent, rather than a capital gain. For income value, for land). The Commissioner of Internal Revenue (CIR) has
tax purposes, gain derived from the sale or other disposition of the authority to divide the Philippines into different zones and areas,
property refers to the excess of the amount realised from the sale and the zonal value is the fair market value of real properties located
or other disposition over the adjusted cost basis of the property. in each zone or area in the Philippines, as determined by the CIR
In a share acquisition, as a general rule, capital gains tax is due on after consultation with the private and public sectors. The 6 per cent
the sale of shares which are not listed in the local stock exchange capital gains tax is required to be withheld by the income payor and

78
Mergers/Consolidations cent of the gross selling price, depending on the proportion of the
shares of stock sold to the total outstanding shares of stock after
the listing with the local stock exchange.
Preliminary agreement
„„ Confidentiality
Documentary stamp tax
„„ Exclusivity

Documentary stamp tax (DST) is due on the original issuance of


Due diligence
shares at the effective rate of 0.5 per cent, the rate being imposed
on the aggregate par value of the shares for par value shares, and
Draft/negotiate plan of merger
on the amount of consideration for no par value shares. Transfers
of shares which are (i) not listed, and (ii) listed but not traded
Corporate approval
through the local stock exchange, are subject to DST at the
„„ Board of directors of constituent corporations
effective rate of 0.375 per cent based on the aggregate par value
„„ Stockholders of constituent corporations
for par value shares, whereas transfers of no par value shares are
BIR confirmation of tax-free merger subject to DST at the rate of 25 per cent of the DST paid upon the
original issuance thereof. Transfers of shares which are listed and
Filing of articles and plan of merger with the SEC traded through the local stock exchange are exempt from DST.

Regulatory prior approval of merger (as applicable) DST is likewise imposed, as a general rule, on transfers of
real property at the effective rate of 1.5 per cent based on the
SEC approval of merger higher of the actual selling price and zonal value of the property.
Where, however, the transfer is made by virtue of a merger, a
Post-merger: consolidation, or a tax-free exchange as provided under the Tax
„„ Payment of documentary stamp taxes on original issuance Code, no DST is imposed on the transfer of real property.
of shares pursuant to the merger
„„ Harmonisation of employee benefits (as applicable) In a merger or consolidation, only DST on original issuance of
„„ Registration of change of owner in the relevant evidence of shares is due.
ownership (original certificate of title or transfer certificate
of title for land; stock certificate for shares of stock) Value-added tax
„„ In tax-free property-for-share swaps: annotation of the
substituted basis on the proper evidence of title to the (i) In case of asset acquisitions, the sale of assets that are primarily
shares of stock issued, and/or (ii) the property transferred held for sale to customers or held for lease in the ordinary course
as consideration for the issued shares of stock of business, including real property used by the company in its
„„ Compliance with any post-merger notice or other trade or business, is subject to 12 per cent value-added tax.
regulatory requirement, for corporations with special In a tax-free exchange involving the transfer of real property by a
regulatory licences company engaged in real estate business in exchange for shares
in a company not engaged in real estate business, the transfer of
real property is subject to 12 per cent value-added tax.
remitted to the Bureau of Internal Revenue (BIR).
No capital gains tax is due in case of a merger or consolidation No value-added tax is due in the case of a merger or
which complies with the non-recognition of gain or loss provisions consolidation.
of the Tax Code.
Local transfer tax
Stock transaction tax
The sale of corporate assets consisting of real property is subject
The sale of shares that are listed and traded through the local to local transfer tax at the rates prescribed by the local ordinance
stock exchange is subject to stock transaction tax at the effective of the locality where the property is situated, 0.5 per cent being
rate of 0.5 per cent of the gross selling price. the maximum rate imposed on the higher of the actual selling
price and the zonal value of the property.
Tax on initial public offering
Thin capitalisation/interest deductions
The sale of shares through an initial public offering (IPO) is subject
to IPO tax at the rates of either 4 per cent, 2 per cent, or 1 per Philippine law does not have thin capitalisation rules, but thin

79
capitalisation is expressly recognised in BIR regulations governing control of at least 75 per cent or more in nominal value of the
the audit of interrelated parties or situations involving loans outstanding issued shares or paid up capital of the transferee/
from shareholders. Without thin capitalisation rules prescribing assignee.
guidelines and presumptions as to what constitutes thin
capitalisation, the BIR determines the reasonable ratio of debt to Anti-avoidance
equity considering all factors surrounding the case.
To exempt gains arising from a merger or consolidation, the
The BIR has published a draft of its proposed transfer merger or consolidation must be undertaken for a bona fide
pricing regulations which includes general provisions on thin business purpose and not solely for escaping the burden of
capitalisation. These regulations have not been finalised yet. In taxation. To establish a business purpose, each and every step of
these regulations, the BIR provides a threshold 3:1 ratio. This the transaction must be considered and the whole transaction or
is the general rule, unless a different debt-to-equity ratio is series of transactions must be treated as a single unit.
prescribed by special laws or the special provisions of any existing
law. This 3:1 ratio does not apply to banks, financing companies
and non-bank financial intermediaries performing quasi-banking
functions. In the interim, the BIR, as a matter of policy, subscribes
to the OECD Transfer Pricing Guidelines.

A company may generally deduct interest expense incurred


in connection with the company’s business for tax purposes.
However, where the company has interest income which is
subject to final tax, its interest expense is not fully deductible as
the same must be reduced by 33 per cent of the interest income
subject to final tax.

Creditable withholding tax

Where the assets to be sold by a domestic corporation include


real property which is classified as an ordinary asset (i.e. real
property used in business as opposed to one held for investment
or speculation), the sale is subject to a creditable withholding tax
which the buyer must withhold from the selling price and remit
to the BIR on the seller’s behalf. The tax withheld is an advance
collection of the corporate income tax due from the seller. Thus,
the seller can claim a credit for the tax withheld against its
corporate income tax liability for the taxable year. The applicable
creditable withholding tax rate is usually 6 per cent and is based
on the highest of the selling price or consideration, the fair market
value appearing on the latest tax declaration, or the zonal value (in
case of land) published by the BIR.

Loss carryovers

As a general rule, net operating loss carryovers are allowed as a


deduction only to the taxpayer who sustained and accumulated
the operating losses. Thus, in an asset sale, any net operating
losses in the seller cannot be transferred or assigned to the buyer.
In case the transfer or assignment of the taxpayer’s net operating
losses arises from the said taxpayer’s merger or consolidation
with another person, the transferee or assignee is not entitled to
claim the same as deduction unless, as a result of the said merger
or consolidation, the shareholders of the transferor/assignor gain

80
Schedule 1: Summary of the foreign investments negative list in the Philippines

Foreign ownership limited by mandate of the Constitution and specific laws

Industry Permissible foreign equity

Mass media, except recording No foreign equity

Practice of all professions No foreign equity (This is limited to Filipino citizens except as
(a) Engineering (aeronautical, agricultural, chemical, civil, prescribed by law.)
electrical, electronics and communication, geodetic,
mechanical, metallurgical, mining, naval architecture and
marine, and sanitary)
(b) Medicine and allied professions (medicine, medical
technology, dentistry, midwifery, nursing, nutrition and
dietetics, optometry, pharmacy, physical and occupational
therapy, radiologic and x-ray technology, and veterinary
medicine)
(c) Accountancy; architecture; criminology; chemistry; customs
brokerage; environmental planning; forestry; geology; interior
design; landscape architecture; law; librarianship; marine
deck officers; marine engine officers; master plumbing;
sugar technology; social work; teaching; agriculture;
fisheries

Retail trade enterprises with paid-up capital of less than No foreign equity (Full foreign participation is allowed for retail
USD2.5 million trade enterprises: (i) with paid-up capital of USD2.5 million or
more provided that investments for establishing a store is not
less than USD830,000; or (ii) specialising in high end or luxury
products, provided that the paid-up capital per store is not less
than USD250,000.)

Cooperatives No foreign equity

Private security agencies No foreign equity

Small-scale mining No foreign equity

Utilisation of marine resources in archipelagic waters, territorial No foreign equity


seas, and exclusive economic zone as well as small-scale
utilisation of natural resources in rivers, lakes, bays and lagoons

Ownership, operation and management of cockpits No foreign equity

Manufacture, repair, stockpiling and/or distribution of nuclear No foreign equity (Domestic investments are also prohibited.)
weapons

Manufacture, repair, stockpiling and/or distribution of biological, No foreign equity (Domestic investments are also prohibited.)
chemical and radiological weapons and anti-personnel mines
(Various treaties to which the Philippines is a signatory and
conventions supported by the Philippines)

Manufacture of firecrackers and other pyrotechnic devices No foreign equity

Private radio communications networks Up to 20%

Private recruitment, whether for local or overseas employment Up to 25%

81
Industry Permissible foreign equity

Contracts for the construction and repair of locally-funded Up to 25%


public works, except:
(i) infrastructure/development projects covered in RA 7718; and
(ii) projects which are foreign funded or assisted and required to
undergo international competitive bidding

Contracts for the construction of defence-related structures Up to 25%

Advertising Up to 30%

Exploration, development and utilisation of natural resources Up to 40% (Full foreign participation is allowed through financial
or technical assistance agreement with the President.)

Ownership of private land Up to 40%

Operation and management of public utilities Up to 40%

Ownership/establishment and administration of educational Up to 40%


institutions

Culture, production, milling, processing, trading excepting Up to 40% (Full foreign participation is allowed provided that
retailing, of rice and corn and acquiring, by barter, purchase or within the 30-year period from start of operation, the foreign
otherwise, rice and corn and the by-products thereof investor shall divest a minimum of 60 per cent of their equity to
Filipino citizens.)

Contracts for the supply of materials, goods and commodities Up to 40%


to government-owned or controlled corporation, company,
agency or municipal corporation

Project proponent and facility operator of a BOT project Up to 40%


requiring a public utilities franchise

Operation of deep sea commercial fishing vessels Up to 40%

Adjustment companies Up to 40%

Ownership of condominium units where the common areas in Up to 40%


the condominium project are co-owned by the owners of the
separate units or owned by a corporation

Financing companies regulated by the SEC Up to 60% (No foreign national may be allowed to own stock
in financing companies or investment houses unless the
country of which he is a national accords the same reciprocal
rights to Filipinos.)

Investment houses regulated by the SEC Up to 60% (No foreign national may be allowed to own stock
in financing companies or investment houses unless the
country of which he is a national accords the same reciprocal
rights to Filipinos.)

82
Foreign ownership is limited for reasons of security, defence, risk to health and morals and protection of small and medium scale
enterprises

Industry Permissible foreign equity

Manufacture, repair, storage, and/or distribution of products Up to 40%


and/or ingredients requiring Philippine National Police (PNP) However, the manufacture or repair of these items may
clearance: be authorised by the Chief of the PNP to non-Philippine
nationals, provided that a substantial percentage of output,
(a) Firearms (handguns to shotguns), parts of firearms and as determined by the said agency, is exported. The extent of
ammunition therefore, instruments or implements used or foreign equity ownership allowed must be specified in the said
intended to be used in the manufacture of firearms authority/clearance
(b) Gunpowder
(c) Dynamite
(d) Blasting supplies
(e) Various ingredients used in making explosives
(f) Telescopic sights, sniper scopes and other similar devices.

Manufacture, repair, storage and/or distribution of products Up to 40%


requiring Department of National Defense (DND) clearance: However, the manufacture or repair of these items may be
authorised by the Secretary of the DND to non-Philippine
(a) Guns and ammunition for warfare nationals, provided that a substantial percentage of output,
(b) Military ordnance and parts thereof (e.g., torpedoes, depth as determined by the said agency, is exported. The extent of
charges, bombs, grenades, missiles) foreign equity ownership allowed must be specified in the said
(c) Gunnery, bombing and fire control systems and components authority/clearance
(d) Guided missiles/missile systems and components
(e) Tactical aircraft (fixed and rotary-winged), parts and
components thereof
(f) Space vehicles and component systems
(g) Combat vessels (air, land and naval) and auxiliaries
(h) Weapons repair and maintenance equipment
(i) Military communications equipment
(j) Night vision equipment
(k) Stimulated coherent radiation devices, components and
accessories
(l) Armament training devices
(m) Other as may be determined by the Secretary of the DND

Manufacture and distribution of dangerous drugs Up to 40%

Sauna and steam bathhouses, massage clinics and other Up to 40%


similar activities regulated by law because of risks posed to
public health and morals

All forms of gambling, e.g. race track operation Up to 40%

Domestic market enterprises with paid-in equity capital of less Up to 40%


than the equivalent of USD200,000

Domestic market enterprises which involve advanced Up to 40%


technology or employ at least 50 direct employees with paid-in
equity capital of less than the equivalent of USD100,000

83
84
Singapore

1. What are the forms of business entity in Singapore? Are there any residency requirements for directors?

Common forms of entity A company is required to have at least one director who is ordinarily
resident in Singapore. It must also have a company secretary, who
„„ Private company limited by shares cannot be a sole director and must be resident in Singapore.
„„ Public company limited by shares (listed/unlisted)
„„ Partnership Is there any requirement for directors to hold shares?

Less common forms of entity There is no requirement that directors should also be shareholders
of the company but they are permitted to do so.
„„ Companies limited by guarantee
„„ Unlimited companies What duties do directors owe?
„„ Limited partnership
„„ Limited liability partnership Overview
„„ Unincorporated associations
The duties and responsibilities of a director arise under common
2. How is a company managed? law and the Companies Act. Such duties and responsibilities
come about by virtue of the special position a director occupies in
The basic management structure the company. As a fiduciary, a director must always act in the best
interests of the company. Accordingly, certain duties are placed
What form does the management structure take? upon a director, and a director is not permitted to place himself in
a situation where his interests conflict with his duty.
Management of a company is usually carried out by the board,
which may also comprise non-executive directors whose role is to Duty to the company
participate at board meetings and oversee the executive directors’
actions. Non-executive directors have voting rights on board Directors owe their primary duty to the company (as distinct from
decisions and are considered under Singapore law to be, as with the shareholders) and generally, the company alone has the right
executive directors, responsible for all decisions taken and powers to sue the directors for breach of their duties.
exercised by the board.
Directors are required to act and exercise their powers in good
Decisions of the board are normally taken by majority vote, unless faith in the best interests of the company as a whole, and not for
the articles of association provide otherwise. their personal interest.

How are directors appointed to and removed from office? Section 157(1) of the Companies Act requires a director to, at all
times, act honestly and use reasonable diligence in the discharge
The manner of appointing or removing directors is governed by of the duties of his office.
the articles of association and in some cases, the Companies
Act (Cap. 50) (the Companies Act). For instance, directors Directors must not put themselves in a position where their
may be appointed by the board on the recommendation of the personal interests conflict with those of the company.
non-executive directors or by the shareholders at a general
meeting.  Directors of a public company may only be removed in Section 157(2) of the Companies Act states that an officer
accordance with the provisions of the Companies Act. or agent of a company shall not make improper use of any
information acquired by virtue of his position (as an officer or
What powers does the board have? agent) to gain (directly or indirectly) an advantage for himself or for
any other person, or to cause detriment to the company.
The board has the authority to exercise all powers of the company
which are not specifically reserved for the shareholders. Directors have a duty to act with the degree of skill and care that
may reasonably be expected from someone in the position of
Once a management structure has been chosen, a degree of director, taking into account that particular director’s ability and
flexibility can be given to the management under the articles of experience.
association, including the ability to change the management,
alter procedures and delegate responsibility. Alternatively, the
shareholders can, via the articles of association, greatly restrict
the powers of management, retaining control over the day-to-day
running of the company if required.

85
Duty to the shareholders „„ he is convicted of persistently failing to comply with the
requirements of the Companies Act; or
The minority shareholders in a company may be entitled to bring „„ he is subject to a disqualification or disqualification order under
an action in their own name (on behalf of the company) against section 34, 35 or 36 of the Limited Liability Partnership Act.
the directors for breach of their duties. To sustain such a claim,
the shareholders must show that the company’s affairs have been In certain circumstances, a director may also be personally liable
conducted in a manner which either constitutes a “fraud on the to creditors of a company that has gone into insolvent liquidation,
minority” or is unfairly prejudicial to their interests. In practice, this for example, where:
is difficult to prove and such claims are rare.
„„ he had knowingly contracted a debt when he had no
The shareholders of an unlisted company may also apply to the reasonable or probable expectation that the company would
court under section 216A of the Companies Act for leave to bring be able to pay that debt; or
an action in the company’s name. Leave would be granted if the „„ he is guilty of fraudulent trading.
court is satisfied that the complainant is acting in good faith and it
appears prima facie that the action should be brought. There are a number of ways in which directors can minimise the
risk of liability:
Duty to creditors
„„ certain actions taken or omissions made by directors can
If a company is close to insolvency, the interests of the creditors be ratified retrospectively or approved in advance by the
must be taken into account. If the directors act in a manner that shareholders;
prejudices the creditors of the company when the company is „„ the articles of association can provide for the company to
insolvent, they may be held to be guilty of a misfeasance. indemnify the director against any liability incurred by him in
defending any proceedings. However, such provision must not
Duty to employees purport to exempt or indemnify the director in respect of any
liability arising out of negligence, default, breach of duty, or
The Companies Act allows directors to take into account the breach of trust for it would otherwise be rendered void; and
interests of the company’s employees when performing their „„ the company can maintain insurance policies for its directors.
functions.
What are the auditing requirements for companies?
What types of liability can directors incur?
There is a statutory requirement of audit.
Directors may incur:
However, exempt private companies with an annual turnover of
„„ civil liability for negligent performance of their duties; and/or SGD5,000,000 or less, and dormant companies do not need to
„„ criminal sanctions for violations of specific requirements audit their accounts, although they must continue to maintain proper
concerning the organisation and operation of the company. accounting records and prepare true and fair financial statements
that comply with the Financial Reporting Standards prescribed by
A person may be disqualified from acting as a director or the Council on Corporate Disclosure and Governance.
being involved in the management of a company in certain
circumstances, for example, where: 3. What are the most common types of M&A transaction?

„„ he is an undischarged bankrupt; Private companies


„„ he had been a director of a company which went into insolvent
liquidation either while he was a director or within three years Share acquisitions
of his ceasing to be such, and the court is satisfied that his
conduct as a director of the company makes him unfit to be A company can issue various types of shares with different rights
director of a company or to participate in the management of a attached. The most common are ordinary shares with full voting
company (whether directly or indirectly); rights and preference shares (which are normally non-voting).
„„ he had been a director of a company that was used for
purposes against national security or interest, and has been A buyer can purchase shares in a Singapore private company. By
disqualified by a court from acting as a director; acquiring the shares in a company, the buyer acquires all voting
„„ he is convicted of certain offences including fraud and dishonesty in rights attached to such shares.
connection with the formation or management of a corporation;

86
An alternative way of acquiring control of a private company in wherever this is possible and appropriate.  Apart from Singapore-
Singapore is to subscribe for newly issued voting shares which, incorporated public companies, the Code applies as well to
after taking into account already existing shares, make up over foreign-incorporated companies with a primary listing of their
50 per cent of the entire issued voting share capital of a company shares on the Singapore Exchange Securities Trading Limited (the
(with the existing shareholders being diluted). SGX-ST).  Listed public companies incorporated in Singapore but
which have their primary listing on a foreign exchange may apply
Business/Asset acquisitions for a waiver of the application of the Code. In addition, the Code
also extends to business trusts with a primary listing of their units
A buyer can also purchase the business and assets of a company. in Singapore, or unlisted business trusts with more than 50 unit
Each asset has to be transferred subject to the particular holders and net tangible assets of SGD5,000,000 or more.
formalities required. For some classes of assets, this will mean
simply handing over the asset (i.e. physical delivery), although An offer for the shares of a public company may either be
others will require transfer documents (e.g. real property). recommended by the target’s board of directors (the board), or
hostile. A full offer cannot succeed unless the bidder has received
Amalgamations acceptances which will result in the bidder (together with parties
acting in concert with it) holding more than 50 per cent of the
Two or more local companies may, in accordance with the voting rights in the target. In the case of partial offers for more
Companies Act, voluntarily (i.e. without a court order) amalgamate than 50 per cent, the partial offer must be approved by more than
and continue as one company, which may be one of the 50 per cent of the votes cast at a general meeting by way of a
amalgamating companies or a new company. The amalgamated poll on a separate resolution or on the form of acceptance for the
company will succeed to all the property, rights and privileges partial offer (in a separate box with the number of voting shares
as well as assume the liabilities and obligations of each of the indicated).
amalgamating companies. 
A potential bidder should give careful consideration to the number
The shareholders of the amalgamating companies must approve of shares it is proposing to acquire in the market place, as it may
the amalgamation by special resolution at a general meeting (and be required to make a mandatory offer for all the target’s shares if:
by any other person, if the proposal requires the approval of that
person). In addition, the directors of each amalgamating company „„ taken together with shares held or acquired by its concert
must make solvency statements in relation to the amalgamating parties, it acquires 30 per cent or more of the voting rights of
companies and the amalgamated company. the target; or
„„ together with its concert parties, it already holds between 30
Joint ventures per cent and 50 per cent of the voting rights of the target, and
it (or its concert parties) increases its voting rights in the target
Two or more parties may form a joint venture to pursue a common by more than 1 per cent in any six-month period.
commercial goal. Joint ventures are governed by the general
principles of contract and company law, and can take many It is required for the board of the target (and in some cases, the
different forms. bidder as well) to obtain independent legal and financial advice in
respect of any takeover offer.
Public companies
Schemes of arrangement
Takeovers (see section 6 for a more detailed summary of public
takeovers) A scheme of arrangement is a legislative procedure allowing a
company to be restructured.
Full offers for 100 per cent of the target’s shares or partial offers
for (i) less than 30 per cent; or (ii) more than 50 per cent of the The company proposes the scheme to its shareholders which,
total voting rights can be made. if approved by a statutory majority, is binding on all shareholders
once sanctioned by the High Court.
The conduct of takeovers is governed by the Singapore Code on
Take-overs and Mergers (the Code), which is administered by the It can be used as a way of structuring a takeover, usually between
Securities Industry Council (SIC). The Code is drafted with listed friendly companies, but will be subject to the Code unless
public companies in mind, but unlisted public companies with 50 certain conditions are met and, in such cases, exemptions from
or more shareholders and net tangible assets of SGD5,000,000 complying with material obligations of the Code can be obtained
or more must also observe the letter and spirit of the Code, from the SIC.

87
Amalgamations 4. What percentage shareholding is required to achieve
effective control of a company?
The amalgamation regime described on page 89 also applies to
local public companies with the important additional factor that A 75 per cent shareholder has effective control of a company.
the Code applies to an amalgamation involving one or more public This enables the shareholder to pass all shareholders’ resolutions
companies. at a general meeting.

Joint ventures Shareholders’ resolutions include both an ordinary resolution (a


resolution that has been passed by more than 50 per cent of
Public companies are also free to enter into joint venture members or their proxies) and a special resolution (a resolution
arrangements as described at on page 89. passed by a majority of not less than 75 per cent of members or
their proxies). Significantly, a shareholders’ resolution is required
Public-to-private acquisitions (P2Ps) to amend the articles of association, approve financial assistance
in connection with the acquisition of shares and, subject to the
P2Ps are regulated by the Code, various statutes and the listing court’s approval, to reduce the capital of the company.
rules (Listing Rules).
5. Regulation, consents and foreign investment restrictions
In Singapore, these acquisitions involve the buyers acquiring the
publicly held shares in a company, and subsequently de-listing the Are there any regulated industries?
company in question.
Investments and acquisitions relating to targets which operate
The transaction will often involve the parent company of the listed in certain industry sectors require approval or a licence from the
company (and sometimes the incorporation of a new company) as relevant government body.
the bidding vehicle to make the offer to acquire the target’s shares
not held by the parent company. The reasons for privatisation The most common sectors that are subject to those
typically include the efficiencies arising from the integration of approval requirements or restrictions are financial services,
resources of the group companies. telecommunications (for facilities-based operators) and insurance.
These regulated industries are also subject to statutory foreign
The offer will normally be recommended by the independent shareholding limits.
directors on the board and will not be hostile. The target will
sometimes have other significant shareholders prepared to give an If the transaction is not prohibited outright, an application normally
irrevocable undertaking to accept the offer prior to announcement. needs to be made in advance of completion to the relevant
In very limited circumstances, it may also agree to underwrite authority seeking approval or, in some cases, a licence.
some of the transaction costs if the offer is unsuccessful.
There may also be additional, ongoing notification requirements in
The main point of distinction between P2Ps and standard respect of the operation of the business and any changes to the
takeovers is that as the directors of the target will often be the corporate structure.
directors or employees of the parent company which is acquiring
the shares in the target held by shareholders other than itself and Are there any restrictions on the foreign ownership of
its affiliates, an independent committee of directors (which is not shares in a Singapore company?
connected with the parent company) must be established.
There are generally no restrictions on the foreign ownership
Do the parties have an obligation to negotiate in good faith of shares of companies in Singapore (either listed or unlisted).
to one another in M&A transactions? However, there are ownership restrictions in relation to the following:

The laws of Singapore do not impose any obligation on parties „„ foreign individuals and corporations are prohibited from owning
to a proposed transaction to negotiate in good faith. As such, certain types of residential property;
it is possible for a party to pull out of negotiations completely or „„ where Singaporean control is regarded as being in the national
to negotiate with another prospective buyer without any good interest (in industries such as publishing, broadcasting,
reasons and at any time prior to signing of the sale and purchase telecommunications and public utilities) ownership restrictions
agreement. To mitigate the risks associated with this, the parties may be imposed in relation to such industries;
will often enter into heads of agreement which incorporate lock- „„ the percentage of voting shares which any one person can
out clauses and/or break fees which are binding on the parties. acquire in a bank incorporated in Singapore is restricted and

88
must be approved by the Monetary Authority of Singapore Section 47 prohibition: Undertakings with a dominant position
(MAS); (whether in Singapore or elsewhere) are prohibited from abusing
„„ MAS approval is required before an arrangement or agreement such a position in ways that are anti-competitive and which work
is entered into which would lead to a person potentially against long term economic efficiency. The Third Schedule of the
acquiring 5 per cent or more of the voting rights or obtaining a Competition Act contains exclusions to the section 47 prohibition.
“controlling” interest in an insurer; An “undertaking” means any person, being an individual, a body
„„ MAS approval is required before an arrangement or agreement corporate, an unincorporated body of persons or any other entity,
is entered into which would lead to a person potentially capable of carrying on commercial or economic activities relating
acquiring 5 per cent or more of the voting rights or obtaining to goods or services.
“control” of a finance company; and
„„ the conditions of the licences of securities dealers and advisers Section 54 prohibition: Mergers that have resulted, or are
may require MAS approval where there are shareholding expected to result, in a substantial lessening of competition within
changes that lead to changes of “control”. any market in Singapore for goods or services, and which have no
offsetting efficiencies, are prohibited unless the merger falls within
Are there any foreign exchange and investment controls? an exclusion in the Fourth Schedule of the Competition Act.

There are currently no foreign exchange controls in force in Certain industry sectors are currently excluded from the scope of
Singapore. the Competition Act (set out in the Third and Fourth Schedules
of the Competition Act), but such exclusions are not intended
Is there any merger control? to be permanent, and will be reviewed from time to time to
determine their necessity.  The exemptions apply to goods and
The Competition Act (Cap. 50B) (the Competition Act) contains services already regulated by other competition laws, such as the
provisions relating to competition and the abuse of a dominant electricity and gas and telecommunications industries, as well
position in the market, and established the Competition as certain other specified activities such as the postal service,
Commission of Singapore (the Commission). public transport and clearing and exchange houses.  In addition,
regulated entities that are already required to seek approval for
The Competition Act seeks to prohibit anti-competitive activities mergers and acquisitions will not be subject to additional approval
that unduly prevent, restrict or distort competition.  However, by the Commission pursuant to section 54 of the Competition Act.
enforcement action will only be taken if there is an appreciable
adverse effect on competition in Singapore, or if there is no The Competition Act applies to a party, agreement, abuse of
net economic benefit. In assessing whether an action is anti- dominant position or merger if such party, agreement, abuse of
competitive, consideration will also be given to whether it dominant position or merger has infringed any of the prohibitions
promotes innovation, productivity or longer-term economic above, notwithstanding that:
efficiency.
„„ the agreement has been entered into outside Singapore;
Other than the matters or mergers specifically excluded under „„ any party to such agreement is outside Singapore;
the Competition Act, the Competition Act applies to commercial „„ any undertaking abusing the dominant position is located
and economic activities carried on by private sector entities in outside Singapore;
all sectors, regardless of whether the “undertaking” is owned by „„ the merger has taken place outside Singapore;
a foreign entity, a Singapore entity, the Singapore Government „„ any party to such merger is located outside Singapore; or
or a statutory body, although the behaviour of the Singapore „„ any other matter, practice or action arising out of such
Government, statutory bodies or any person acting on their behalf agreement, dominant position or merger is outside Singapore.
is exempt.
What are the employee issues?
The Competition Act contains the following prohibitions:
Are works councils/consultation common?
Section 34 prohibition: Agreements, decisions and practices
which prevent, restrict or distort competition in Singapore are Singapore companies do not have employee work councils,
prohibited unless they are excluded under the Third Schedule although participation in trade unions is common in certain
of the Competition Act, or fall within a category specified in a sectors (e.g. manufacturing).
block exemption order. An example of a prohibited agreement
is one which fixes purchase or selling prices, or any other trading
conditions.  

89
Are any actions required prior to or upon an acquisition for The purposes of the Listing Rules include ensuring that:
employees?
„„ the issue and trading of securities is conducted in a fair and
Employees in Singapore enjoy certain protections in business orderly manner, and that potential investors are given sufficient
or asset purchases (as opposed to share acquisitions) under information;
the Employment Act (Cap. 91) (the Employment Act). Such „„ investors are kept fully informed by the listed companies of all
protections include: factors that might affect the investors’ interests; and
„„ when there is information which may have a material effect
„„ the automatic transfer of employment contracts on their on the market activity and prices of listed securities, such
existing terms to the buyer, together with all rights and duties information is immediately disclosed by the listed companies.
attached; and
„„ consultation rights with trade unions or other employee The Listing Rules set out certain criteria which require listed
representatives prior to the transfer. companies to disclose large transactions, such as acquisitions
and disposals. Based on these criteria, certain transactions would
It should be noted that “employees” under the Employment Act also require shareholder notification and approval. Transactions
is narrowly defined. For employees not falling within the definition, that are disclosable and require shareholder approval include
the protection afforded to them will be governed by the terms of major acquisitions, takeovers and reverse takeovers.
their employment contracts.
Listed companies are required by the Listing Rules to announce and
Are there any notification obligations for employees prior to or upon publicly disseminate any information known to the issuer concerning it
an acquisition? or any of its subsidiaries or associated companies which:

The Employment Act imposes an obligation on the seller of a „„ is necessary to avoid the establishment of a false market in the
business to notify the affected employees and their trade unions listed company’s shares; or
of: „„ would be likely to have a material effect on the price or value of
securities of the listed company.
„„ the fact that the transfer is to take place, the approximate date
on which it is to take place and the reasons for it; Examples of events which should be announced are:
„„ the implications of the transfer and the measures that the
seller envisages he will, in connection with the transfer, take in „„ joint ventures or mergers;
relation to the affected employees or, if he envisages that no „„ firm evidence of significant improvement/deterioration in near-
measures will be so taken, that fact; and term earning prospects;
„„ the measures that the buyer envisages he will, in connection „„ change in effective control or a significant change in
with the transfer, take in relation to such of those employees management; and
who will become his employees after the transfer or, if he „„ events of default under financing or sale agreements.
envisages that no measures will be so taken, that fact.
How does a company delist its share capital?
Timing
An application must be made to the SGX-ST to delist and should
Transfer under the Employment Act takes place automatically fulfil the following criteria;
upon the transfer of the business.
i. Shareholder approval of delisting must be obtained at a
In all other cases, transfers should be effected prior to or general meeting;
simultaneously with the completion of the sale of the business ii. The resolution must be approved by a special resolution (a
(although this is subject to contract). majority of at least 75 per cent in nominal value of the shares
held by the shareholders present and voting, on a poll,
With which stock exchange requirements must listed either in person or by proxy at the meeting) and the listed
companies comply? company’s directors and controlling shareholder need not
abstain from voting on the resolution;
What rules generally govern listed companies? iii. The resolution must not have been voted against by 10
per cent or more in nominal value of the shares held by the
Companies whose shares are listed on the SGX-ST must comply with shareholders present and voting, on a poll, either in person
the Listing Rules, which are set out in the Listing Manual of the SGX-ST. or by proxy at the meeting;

90
iv. A reasonable exit alternative, normally in cash, should be a discharge of liabilities in the ordinary course of business, or a
offered to (a) the shareholders and (b) the holders of any buyback of its shares in certain circumstances.
other classes of listed securities to be delisted; and
v. An independent financial adviser has been appointed to Singapore law provides a specific exemption for companies in
advise on the exit offer. certain circumstances which, provided the legislative procedure
is followed, allows the shareholders of a company to approve the
Where the company is delisting pursuant to a voluntary liquidation financial assistance. This is known as the “whitewash procedure”.
or scheme of arrangement, paragraphs (i) - (iii) will not apply.
There are detailed technical formalities (including a timescale) to
Is financial assistance prohibited? be complied with if the exemption is to be obtained, and specific
legal advice should be obtained.
What is the nature of the prohibition?
In addition, financial assistance will be permitted if, inter alia, the
A Singapore-incorporated company (whether public or private) directors make a solvency statement in respect of the giving of
is prohibited from giving financial assistance (either directly or financial assistance and all members of the company approve the
indirectly) for the purpose of the acquisition of shares in itself or its financial assistance, or the financial assistance does not exceed
holding company. 10 per cent of the aggregate of the total paid-up capital and
reserves of the company.
The purpose of the financial assistance rules is to maintain capital
to protect creditors, prevent the misuse of assets and provide for 6. Public takeovers
the equal treatment of all shareholders.
What are the forms of a public offer?
Financial assistance can be given in many forms including gifts,
loans, guarantees, giving security, waiving debt or other obligations A takeover of a public company in Singapore can be structured as:
or where, as a result of the assistance, net assets of the company
giving the assistance are reduced to a material extent. „„ a public offer to acquire all the issued (and to be issued) share
capital (or units, as the case may be) of the target from existing
Any security or guarantee given for any part of the debt that is shareholders (or unit holders, as the case may be);
not used to acquire or refinance the acquisition of the shares in a „„ a scheme of arrangement between the target, the shareholders
company or its holding company (e.g. a working capital facility) is of the target (or unit holders, as the case may be) and the
not caught by the financial assistance rules. bidder; or
„„ an amalgamation.
Any financial assistance given in relation to borrowings that are
used to refinance loans originally used for the acquisition of shares Other than an offer for all the issued share capital of the target,
in a company or its holding company may also be caught. partial offers may be permitted as well. Partial offers which would
not result in the bidder and persons acting in concert with it
What are the sanctions? holding 30 per cent or more of the voting rights of the target are
usually allowed by the SIC. The SIC will not consent to any partial
The sanctions for breach of the financial assistance rules are offer which would result in the bidder and parties acting in concert
serious. The officers of the company may be fined and/or with it holding not less than 30 per cent but not more than 50 per
imprisoned for up to three years. Directors may also face civil cent of the voting rights of the target. However, the SIC may grant
claims for breach of their duties to the company. consent to a partial offer which would result in the bidder and its
concert parties holding shares carrying more than 50 per cent
The assistance itself (e.g. a loan or guarantee) will be voidable at of the voting rights of the target subject to the fulfilment of the
the option of the company. conditions set out in the Code.

Are there any exceptions to the prohibition and is there any Takeovers can be either recommended by the target’s board, or
procedure which can be followed to make financial assistance hostile (see Announcements on page 96).
possible (i.e. a “whitewash procedure”)?

Depending on the circumstances of the transaction, there are


limited exceptions from the prohibition, for public and private
companies, such as a distribution of assets by way of dividend,

91
What is the regulatory framework for a public offer? What are the main offer terms?

The Code Minimum price requirements

The principal source of regulation is the Code, which is a set of Where the bidder (or any of its concert parties) purchases shares
rules designed to provide a flexible framework and to ensure fair in the target during the period starting three months prior to the
and equal treatment of all shareholders. commencement of the offer period, the offer to holders of that
class of share cannot be on less favourable terms in terms of
The SIC may be called upon to give guidance and direction to the value. The back-stop date is six months instead of three months if
parties during or before an offer. the bidder (or any of its concert parties) is subject to a mandatory
requirement to make an offer under the Code.
Although the Code does not have the force of law, any breach of
the Code may result in sanctions such as private or public censure If, after the announcement of a firm intention to make an offer by
or reprimand, and the withdrawal of the facilities of the Singapore the bidder but before the offer closes for acceptance, the bidder
securities markets. In practice, compliance with the Code is (or any of its concert parties) purchases shares at above the
considered mandatory. offer price, the bidder must increase its offer to not less than the
highest price paid for the shares acquired.
There are a number of other laws regulating certain aspects of
takeovers, including the general requirements of company law The SIC may agree to different terms in exceptional
and laws governing the conduct of securities trading (e.g. insider circumstances.
trading prohibitions).
Cash/non-cash terms
In addition, the Listing Rules may be relevant if the shares of the
bidder (or the target) are listed on the SGX-ST. Consideration for an offer may be in cash, securities (e.g. loan
notes, shares or other securities of the bidder), or a mixture of
Application of the Code both.

The Code is drafted with listed public companies in mind, but Cash consideration
unlisted public companies with 50 or more shareholders and
net tangible assets of SGD5,000,000 or more must also comply Cash consideration is compulsory in mandatory offers (see
(wherever possible) with the Code. The Code does not apply mandatory offer requirements on page 99). This means that if a
to takeovers or mergers of other unlisted public companies or bidder wishes to offer securities as consideration, it must give
private companies. The Code applies to all offerors, whether they the shareholders of the target an option to receive cash in lieu of
are natural persons (whether resident in Singapore or not, and securities (the “cash alternative”).
whether citizens of Singapore or not), corporations or bodies
unincorporate (whether incorporated or carrying on business in Where 10 per cent or more of the target’s shares are purchased
Singapore or not), and extends to acts done or omitted to be for cash by the bidder (or any of its concert parties) during the
done in and outside Singapore.  offer period or within six months prior to its commencement, the
offer must be in cash (or accompanied by a cash alternative) at a
Apart from Singapore-incorporated public companies, the Code price no lower than the highest price paid for such shares during
also applies to foreign-incorporated companies with a primary the offer period or within six months prior to its commencement.
listing of their shares on the SGX-ST.  Listed public companies
incorporated in Singapore but which have their primary listing on a Non-cash consideration
foreign exchange may apply for a waiver of the application of the
code. Generally, non-cash consideration will consist of the bidder’s
ordinary shares, though other equity related securities may be
In addition, the Code now extends to business trusts with a offered.
primary listing of their units in Singapore, or unlisted business
trusts with more than 50 unit holders and net tangible assets of Where 10 per cent or more of the target’s shares are purchased
SGD5,000,000 or more. using securities as consideration by the bidder (or any of its
concert parties) during the offer period or within three months
prior to its commencement, the bidder must make available a
securities offer as well as a cash alternative.

92
Conditions Usual conditions: The common conditions attached to a
voluntary offer include:
Required conditions: Every takeover offer must be conditional
upon a minimum level of acceptance. For both mandatory „„ valid acceptances in respect of 90 per cent of shares being
offers and voluntary offers, the minimum level of acceptance received by the first closing date, although this will usually
is that which would result in the bidder (and persons acting provide that it can be reduced by the bidder so long as it is
in concert with it) holding more than 50 per cent of the voting more than 50 per cent (see Squeeze-outs on page 100 as to
rights. Voluntary offers which are conditional on a higher level of the importance of the 90 per cent threshold);
acceptance are subject to approval by the SIC. The bidder has to „„ passing of such resolutions as are necessary to implement the
satisfy the SIC that it is acting in good faith in imposing a high level offer at an extraordinary general meeting of the bidder;
of acceptance. „„ in the context of a securities exchange offer, admission of new
shares in the bidder to listing by the SGX-ST; and
Prohibited conditions: A mandatory offer must not be subject „„ necessary regulatory filings having been made and clearances
to any condition other than the conditions as to the minimum obtained.
level of acceptance. A bidder in a voluntary offer will normally
subject the voluntary offer to a number of conditions which Funding the acquisition
should not generally require subjective judgements by the bidder.
In addition, the bidder should not invoke any condition (except In a cash offer or where the offer involves an element of cash,
as to a minimum level of acceptance) causing the offer to lapse the bidder will need to include in its offer announcement an
unless the circumstances giving rise to the offer lapsing are of unconditional confirmation by a financial adviser (or by another
material significance to the bidder in the context of the offer, and appropriate third party) that the bidder has sufficient financial
information about the condition is not available from public records resources to satisfy full acceptance of the offer.
or is not known to the bidder before the offer is announced.

Simplified offer timetable

Date/Time period Events

D-21 Earliest possible date for the press announcement.

Day 0 (D) Offer document dispatched (no earlier than 14 days but no later than 21 days after
the press announcement).

D+14 Last date for dispatch of response document by target.

D+28 Earliest date for first closing date.

First business day after first closing Announcement of acceptance levels and (if appropriate) extension of offer.
date (and all subsequent closing
dates)

D+46 Last day for despatch of notice on revision of offer.


(assuming first closing date is D+28) An offer, if revised, must be kept open for 14 days. Since the offer period must end
on D+60 (save for special circumstances), the last day for the despatch of notice on
a revision of offer is on D+46.

D+60 Last date for fulfilment of acceptance conditions.

D+74 Last closing date. If an offer becomes unconditional on D+60, the closing date will
fall 14 days thereafter.

93
What is the timing of a public offer and what is the If revised, the offer must be kept open for at least 14 days from
procedure to be followed? the date the revised offer is posted. For this reason, the offer may
not be revised after D+46.
Please see simplifed offer timetable on the previous page.
Satisfying offer conditions
Announcements
The last possible date for announcing that the offer is
An announcement of a firm intention to make an offer is made by unconditional as to acceptances is D+60. The SIC will normally
the bidder after approaching the target board. In a hostile offer, consent to an extension of this period in a competitive offer
the announcement is usually made immediately after approaching situation.
the target board to restrict the time for the target board to
marshal its defences. An immediate announcement is required Except with the SIC’s consent, all other conditions must be
where an obligation to extend a mandatory offer is triggered. fulfilled within 21 days of the first closing date, or of the date the
Where there is evidence of a leak regarding a possible offer, the offer becomes or is declared unconditional as to acceptances
SIC will require an immediate announcement to avoid the risk (whichever is the later).
of a false market developing. Such an announcement may be a
holding announcement stating no more than that an offer for the Offer unconditional - payment
target is under consideration. A holding announcement must be
followed up by further monthly announcements on the progress The bidder must pay for the target’s shares as soon as
of the talks until a firm intention to make an offer or a decision not practicable, but in any event within 10 days after (i) the offer
to proceed with an offer is announced. becomes or is declared unconditional in all respects; or (ii)
the receipt of valid acceptances where such acceptances
The bidder will announce a firm intention to make an offer and if were tendered after the offer has become or been declared
required, a holding announcement is made by the target. In certain unconditional in all respects.
circumstances, e.g. where there is an undue movement in the
share price of the target, the target or the substantial shareholders Competing bids
of the target may be required to make an announcement.
An original bidder will be allowed to depart from the offer timetable
The announcement of a firm intention to make an offer crystallises and revise its offer if a competitive situation arises.
the obligation to make an offer (subject to any offer conditions). A
bidder will only be permitted not to proceed in highly exceptional The Code requires that information, including particulars of
circumstances. shareholders, given to one bidder or potential bidder must, on
request, be furnished equally and promptly to any other bona
Acceptance period fide bidder or potential bidder, who should specify the questions
to which it requires answers.  This rule also covers bids for all (or
The offer must be initially open for at least 28 days from posting of materially all) of the assets and/or business of the target.  The SIC
the offer document. would normally regard a person to be seeking to acquire materially
all of the assets and/or business of a company if such assets and/or
The bidder may on any closing date extend the offer by businesses account for or contribute more than 30 per cent of the
announcing a revised closing date until the offer becomes offeree company’s sales, earnings, assets or market capitalisation.
unconditional as to acceptances, which must happen on or
before D+60. Extensions are usually in increments of 14 days Failed bids and further offers
until requisite acceptances are received at which point the offer is
generally extended until further notice. When an offer has failed, the bidder cannot make a further offer
within 12 months without the consent of the SIC, or acquire
On the first business day after the first closing date, any any voting rights of the target if the bidder or persons acting
subsequent closing dates and any date on which the offer is in concert with it would thereby become obliged to make a
revised, extended or declared unconditional as to acceptances, mandatory offer. A bidder who wishes to make an offer for the
announcements must be made concerning acceptance levels same target within 12 months from the date of the close of a
and specifying the percentages of the relevant classes of share previous partial offer (whether successful or not) must also obtain
capital represented by these figures. the SIC’s prior consent.

94
What documentation is involved in the process? What are the practices relating to break fees and lock-out?

Press announcement A break fee arrangement, whereby a fee is paid by the target to
the bidder if a specified event occurs which prevents the offer
An announcement of a firm intention to make an offer must from succeeding, is allowed. However, a break fee may not be
contain (amongst other things): enforceable if it has been assessed as a penalty rather than a
genuine pre-estimate of loss.
„„ any conditions to which the offer will be subject;
„„ the principal terms of the offer; The SIC’s approval should be sought if a break fee arrangement
„„ details of existing holdings in the target held by the bidder and is proposed as the SIC would be concerned that the target’s
any concert parties; and shareholders’ interests might be adversely affected. In addition, the
„„ confirmation that the bidder has sufficient financial resources to bidder must ensure that the target has the capacity to enter into a
extend the offer. break fee arrangement and, amongst other things, the directors
and advisers of the target are acting in the best interest of the
Offer document company.

Where an offer is recommended, the offer document will include The Code stipulates a 1 per cent cap on break fees.  In addition,
the target board recommendations and will be a joint bidder/ the bidder and its financial adviser must provide certain
target document. confirmations to the SIC.

The offer document sets out in detail the terms of the offer, the It is not a common practice for the bidder and the target to enter
conditions attached to it, the acceptance procedure, as well as into a lock-out agreement whereby the target agrees not to enter
the bidder’s arguments in support of the offer and an explanation into, or solicit, negotiations with another potential bidder.
of its plans for the target.
Care must be exercised in entering into a lock-out agreement as
The offer document must contain a responsibility statement made the target board has a duty not to take any action which could
by the directors of the bidder assuming responsibility for the frustrate an imminent bona fide offer without the shareholders’
information. approval in general meeting. A target also has to provide
information on an equal basis to all competing bidders.
The offer document must contain the minimum information
prescribed under the Code. What are the rules on information gathering/provision?

Target documentation The Code requires information to be provided equally to all


shareholders and also competing bidders.
After receipt of notification of an offer, the target board must make
an announcement to its shareholders informing them of the offer. A bidder may sometimes undertake some due diligence on the
The target board must advise the shareholders of the target of its target before extending an offer. If price-sensitive information is
views after having obtained competent independent advice within proposed to be provided by the target to the bidder, this may
14 days after the bidder has despatched the offer document. potentially create an insider trading offence for the bidder to
acquire the target shares from the target shareholders.
If the offer is a recommended offer, the target’s directors’ views
will be set out in the offer document. Otherwise a separate Publicly available information about the target may be obtained
document will be issued by the target. from the Accounting and Corporate Regulatory Authority (ACRA)
or the SGXNET (a financial network maintained by the Singapore
Responsibility statements Exchange Ltd) announcements made by the target. The target
should not make price-sensitive information available to the
The offer document, target document and all announcements bidder.
made by the bidder and the target have to contain a responsibility
statement made by the directors of the bidder or target (as the If non-publicly available information is proposed to be given,
case may be) assuming responsibility for the information in the it must be examined whether the target (if listed) is required to
document or announcement. disclose the information publicly under the Corporate Disclosure
Policy of the SGX-ST.  If the information is commercially sensitive
or a business secret, the bidder and the target would normally

95
enter into a confidentiality agreement before disclosure is made. The Securities and Futures Act (Chapter 289) (the SFA) has
The target should also consider that it might be required (unless the been amended such that a substantial shareholder of a foreign
SIC rules otherwise) to provide the same information to a competing incorporated company with a primary listing on SGX-ST must
bona fide bidder or potential bidder which is less welcome. also disclose his interest to the company. Further the substantial
shareholder would only have the disclosure obligations to the
What is the position regarding insider trading? company and not to the SGX-ST.1

Insider trading in securities listed or traded in Singapore is a criminal Once a takeover commences, the bidder is required to publicly
offence which may also carry civil liabilities. The offence, if committed disclose to the SGX-ST and the SIC, by 12 noon the following
in Singapore, also extends to securities quoted outside Singapore. business day, dealings in the target shares for itself, its associates
or their discretionary investment clients (discretionary investment
In general, any person who has information concerning a clients include individuals and funds for whom the bidder or any
corporation that is not generally available and which a reasonable of their associates is accustomed to make investment decisions
person would expect to have a material effect on the price or without prior reference).
value of the corporation’s securities, would be guilty of insider
trading if he: In a competitive bidding situation, a bidder is also required to
disclose dealings in a competitor’s shares.
„„ deals in the securities;
„„ procures others to deal in the securities; and Target
„„ communicates the information to a third party where the third
party is likely to deal in the securities. Dealings by directors, substantial shareholders and associates of
the target in the target shares must be publicly disclosed.
The penalties for insider trading are:
Once amendments to the SFA come into force, dealings by the
i. a fine not exceeding SGD250,000 or imprisonment not chief executive officer of the target in the target shares must also
exceeding seven years or both; or be publicly disclosed and the target will be required to notify SGX-
ii. in lieu of (i), a civil penalty at the greater of three times the ST of such change in shareholding notifications it receives from
unlawful profit gained or loss avoided, or up to SGD50,000 substantial shareholders, directors and chief executive officers as
if the person is not a corporation, or SGD100,000 if the soon as practicable.
person is a corporation; or
iii. in lieu of (i) and (ii), a civil penalty of a sum not less than Where shares of the bidder are offered as consideration for the
SGD50,000 and not more than SGD2,000,000, if the target shares, dealings by the target in the bidder shares must be
person had not gained a profit or avoided a loss. publicly disclosed.

In addition to these penalties, a person who has engaged in The target documentation would have to state, among other
insider trading may also be liable to compensate any person things, changes of the target directors’ shareholdings in the target
trading contemporaneously with him for the unlawful profit gained for the last six months prior to the commencement of the offer.
or loss avoided.
Does a memorandum of understanding (MoU) need to be
What are the public disclosure requirements in a takeover disclosed?
scenario?
The need for disclosure of an MoU will depend on the type of
Bidder acquisition, the parties involved and the terms of the MoU. In
general, the SGX Listing Manual stipulates that a listed company
In general, a person who has acquired an interest in 5 per cent or must disclose information that:
more of a Singapore incorporated company listed in Singapore is
required to disclose his interest to the company and the SGX-ST „„ is necessary to avoid the establishment of a false market in its
and any subsequent changes in the percentage level must also be securities; or
disclosed. „„ is likely to have a material effect on the price or value of
securities of that company.

1
The amended provisions of the SFA will come into force on a date to be gazetted.

96
Where a reasonable person would not expect the information to be What defences are available to a target company during the
disclosed, the information is confidential, or the information concerns stages of an offer?
an incomplete proposal or negotiation, an exception may apply to the
disclosure requirement depending on the circumstances. A target may attempt to ward off a hostile offer by undertaking
defences.
What are the limitations to stakebuilding?
Defences available before a takeover offer is made (poison pills)
Acquisition of shares carrying 30 per cent or more of the voting rights are rarely used by companies incorporated in Singapore as there
of a company will usually trigger a mandatory offer (see below). are concerns of conflicts with the target board’s fiduciary duty.

Is there a requirement to make a mandatory offer? During the offer period, the target’s board is not allowed to take
any action which might deny shareholders an opportunity to
There is a requirement under the Code to make a mandatory offer decide on the merits of an offer that has been received or a bona
for the target’s shares if the shareholding of a person exceeds fide offer which is reasonably believed to be imminent.  In addition,
certain thresholds. The SIC may grant dispensations in limited there is the general prohibition on a target’s board taking actions
circumstances. without shareholders’ approval which might frustrate an offer.

A mandatory offer must be made when: After an offer has been received in a hostile takeover, the defence is
usually confined to seeking a “white knight”, or stating in the target
„„ a person acquires (together with shares held or acquired by documentation that the target’s board does not believe that acceptance
persons acting in concert with him) shares which carry 30 per of the offer is in the best interests of the target or its shareholders.
cent or more of the voting rights of a company; or
„„ any person who (together with concert parties) holds not less Apart from the duty not to frustrate an offer, the target’s board
than 30 per cent but not more than 50 per cent of the voting must generally act in the best interests of the target’s shareholders
rights, or any person acting in concert with him, acquires as a whole.
additional shares which increase his percentage of the voting
rights by more than 1 per cent in any period of six months. What obligations are the directors of the bidder and target
under?
There are comprehensive rules relating to whose shareholdings
must be aggregated and who will be treated as a concert party. Bidder

The mandatory offer must offer a cash consideration or a cash The Code imposes considerable obligations on the directors of the
alternative at not less than the highest price paid by the bidder bidder. In addition, the directors of the bidder will need to consider
or any person acting in concert with him for shares of that class the insider trading legislation if they are contemplating dealing in
in the previous six months. It must be conditional only upon the shares of the target and, in some circumstances, the bidder.
acceptances of more than 50 per cent of the target shares.
The advisers to the bidder should prepare a comprehensive
The SIC may waive the requirement to make a mandatory offer in memorandum of the directors’ obligations as soon as the bidder
the following circumstances (if the independent shareholders of starts to consider the possibility of making an offer.
the target pass a resolution in a general meeting by way of a poll
to waive their rights to receive a general offer from the bidder and Target
his concert parties):
The Code imposes considerable obligations on the directors of the
„„ if a company issues new securities as consideration for an target.  In addition they must comply with their obligations under
acquisition; the Listing Rules as well as their fiduciary duties to the target.
„„ if a company issues new securities for a cash injection;
„„ if a person acquires new securities in fulfilment of obligations The directors of the target must not take any action which might
under an underwriting agreement; or constitute oppression of the minority shareholders of the target. The
„„ on the distribution of shares of a downstream company to the minority shareholders may seek statutory redress against oppression.
shareholders of the upstream company.
The advisers to the target should prepare a comprehensive
Statutory rules apply if such a resolution (a “whitewash resolution”) memorandum of the directors’ obligations immediately following
is sought from the target’s independent shareholders. any offer approach.

97
What is the procedure for a squeeze-out of the minority? shares, and stamp duty is payable on any document that effects,
whether directly or indirectly and whether wholly or partially,
Where a takeover offer is made for a Singapore company and any arrangement for the disposal of shares. Stamp duty is also
acceptances are received in respect of 90 per cent of the shares payable on the conveyance or transfer of immovable property.
to which the offer relates within four months of the making of the The rate of stamp duty for the transfer of shares of a company
offer, the bidder may compulsorily acquire the shares of the non- incorporated in Singapore is 0.2 per cent of the higher of the
accepting shareholders. consideration paid per share or the net tangible asset value per
share (normally determined by reference to the latest available
Shares acquired by the bidder, its related corporation or a audited financial statements of the company).
nominee of the bidder or its related corporation prior to making
the offer cannot be taken into account in calculating whether the The rate of stamp duty for the transfer of immovable property
90 per cent threshold has been reached, although shares subject is 1 per cent for the first SGD180,000, 2 per cent for the next
to an irrevocable undertaking can usually be taken into account. SGD180,000, and 3 per cent thereafter.

Notices must be served on the non-accepting shareholders within Stamp duty must be paid if title needs to be proved or the
two months of reaching the 90 per cent threshold, and the non- agreements or documents are to be produced in evidence before
accepting shareholders have a right to apply to the court for an a court in, or registered in, Singapore.
order that the bidder shall not be entitled to acquire the shares or
specifying terms of acquisition different from those of the offer. Thin capitalisation/interest deductions

If the bidder has acquired not less than 90 per cent of all of the A company may in general claim a deduction from interest paid
shares in the company, a minority shareholder also has a right to under a loan used for the purposes of producing income when
be bought out by the bidder. calculating its taxable profits.

7. Overview of a private company acquisition If an interest payment is re-characterised as a distribution then the
borrower will not be entitled to a deduction in calculating its profits
Timing for corporate tax purposes.

The timing of a private acquisition depends on the cooperation If the consideration given by the company for the use of the
between the parties, and the progress of negotiations and other principal represents more than a reasonable commercial
matters specific to the transaction. return, the excess may not be available for tax deduction when
calculating the profits for corporate tax purposes.
Steps
Withholding tax
Set out on the next page is an overview of the steps that can
be involved in a private company acquisition in Singapore If a person makes a payment of Singapore source interest to a
(private company transactions can vary enormously in how they person not resident in Singapore, that person may be obliged
are structured and this illustration is by no means indicative of to deduct income tax at the prevailing rate of 15 per cent for
every transaction, e.g. there may be simultaneous signing and 2006 and subsequent years.  Withholding tax at the rate of
completion). 15 per cent is also payable on commission, fee or any other
payment in connection with any loan or indebtedness or with any
8. What tax issues should be considered? arrangement, management, guarantee, or service relating to any
loan or indebtedness.
Capital gains
Withholding tax at the rate of 10 per cent is applicable on
There is no capital gains tax in Singapore. payments of royalties and rents for any moveable property to a
person not resident in Singapore.
Transfer taxes
Withholding tax rates may be reduced by applicable tax treaties
Transfer tax (called stamp duty) is payable on certain written between Singapore and the country of residence of the non-
agreements and transfer documents for the sale of shares. A resident person.
disposal of shares effected by the cancellation and issue of
new shares to the transferee shall be treated as a transfer of

98
There are a number of exemptions where there is no requirement to
withhold tax, for example certain interest paid by or received by a
Singapore bank and interest paid out of qualifying debt securities.

It is also possible to obtain authorisation from the Inland Revenue


Authority to pay interest without withholding tax if the lender is
entitled to an exemption under a double taxation treaty. There is
no withholding tax on dividend payments.

BUYER SELLER
Information memorandum
(auction)
Heads of agreement

Exclusivity Confidentiality agreement


agreement (may be simultaneous to information
memorandum for auction)

Preliminary
enquiries Reply to enquiries
STAGE
ONE
Legal review
Draft disclosure letter
Draft acquisition
agreement
(seller for auction) Agree acquisition
agreement and
disclosure letter

STAGE Exchange acquisition agreement


TWO Seller delivers disclosure letter to buyer

Ensure compliance with conditions


STAGE
THREE
Repeat searches

STAGE
FOUR Completion

STAGE
FIVE Post-completion matters

99
re s
W -
L O
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Thailand

1. What are the forms of business entity in Thailand? (the SET) is also required to have a company secretary, who is
responsible for certain regulatory compliance matters.
Common forms of entity
No other statutory requirements exist that require a PCL to have
„„ Private limited company a president, managing director or any other officer, although
„„ Public limited company (usual abbreviation is “PCL”, as the provision can be made for officers with these titles in a PCL’s
words are in a different sequence in Thai) articles of association.
„„ Limited partnerships
A listed company is subject to additional requirements concerning
Less common forms of entity the composition of its board and qualifications of its members.
In particular, a listed company is required to have an “audit
„„ Ordinary partnerships. committee” comprising at least three independent directors under
„„ Foundations, which are usually for charitable objects. (There the SET’s Listing Rules.
are no special forms of joint ventures formally recognised in
Thailand). Two-tier management structures with a supervisory board are not
„„ A joint venture may be merely a contractual arrangement, with possible within the framework of Thai company law. The body to
no requirement for the joint venture agreement to be registered which the board is ultimately responsible, and which establishes
or published. However, unless the joint venture is of a any applicable limits on the authority or powers of the board, is
temporary nature, it is usual for joint ventures to be conducted the general meeting of shareholders.
through a specially formed limited liability company.
„„ Sole proprietorships do not require commercial registration but How are directors appointed to and removed from office?
they may need to register for other statutory purposes and/or
obtain permits from relevant government agencies, depending A director may only be appointed for his full term by a general
on the type of business to be conducted. meeting of the shareholders of a company. If there is a vacancy
„„ Unlimited companies and companies limited by guarantee do in the board of directors, the remaining directors may, unless
not exist as corporate forms under Thai law. prohibited by the company’s articles of association, fill the vacancy
for the unexpired term of the director that is replaced.
2. How is a company managed?
Only a general meeting of the shareholders may remove a director.
The basic management structure In the case of a PCL, the resolution requires the votes of not less
than three-quarters of the votes of shareholders present and
What form does the management structure take? entitled to vote, representing in aggregate not less than half of the
number of shareholders present and entitled to vote. However, a
Both a PCL and a private limited company have a single board director automatically ceases to hold office if he becomes mentally
of directors, which is responsible for the management of the incompetent or adjudicated bankrupt.
company, although the board of directors may delegate specific
powers to one or more managers or to a committee of directors. Directors are normally elected for a three-year term but at least
Only individuals may be directors. one-third of the directors must retire annually. In the case of PCLs,
all the directors resign annually at the annual general meeting of
A PCL must have a minimum of five directors but there is no shareholders. A retiring director is eligible for re-election.
maximum number. A private limited company must have a
minimum of one director but there is no maximum number. What powers does the board have?
At least half of the directors of a PCL must be resident in
Thailand, although do not need to be Thai nationals. There are no The board of directors, as a whole, has the powers and duties
nationality or residency requirements for directors of private limited to manage the company but must do so in compliance with the
companies, except in specially regulated business sectors, as objects and articles of association of the company and resolutions
noted below. of shareholders’ meetings.

A PCL is required to have a chairman of the board who has However, the company may appoint one or more directors in any
certain statutory duties, such as convening board meetings and is combination, to manage the company and to bind the company
usually elected by simple majority vote from amongst the board’s by their signatures. The powers of the directors who may bind
members. A PCL that has approval to offer shares to the public the company are described in the company’s certificate (affidavit)
or whose shares are listed on the Stock Exchange of Thailand issued by the Ministry of Commerce (the MoC), upon which the

101
public may rely. Only documents signed in accordance with the What duties do directors owe?
authorities registered with the MoC will bind the company.
Overview
To be validly executed by a company, documents must be signed
by one or more authorised directors in accordance with their The duties and responsibilities of a director arise under the objects
specific signing authorities recorded at the Companies Registry. and articles of association of the company and resolutions of
If required by a company’s articles, the company’s seal must also shareholders’ meetings, as well as under relevant laws and
be affixed. A power of attorney may be executed to authorise a regulations. The core duty is to act in good faith and with care to
person to perform specific functions and this power of attorney preserve the interests of the company.
must also be executed in accordance with the signing authorities
recorded at the Companies Registry. Duty to the company

Are there any residency requirements for directors? The Civil and Commercial Code (the CCC) imposes a duty on
the directors of a private company to conduct the company’s
At least half of the directors of a PCL must be resident in Thailand, business in the same manner as a careful businessman who
although they do not need to be Thai nationals. applies the standards of a professional person in that business. In
addition, a director:
There are no residency requirements for directors of private limited
companies. As a matter of practical necessity, however, at least „„ must not undertake commercial transactions of the same
one director able to sign for the company (as only directors can nature as, and competing with, those of the company, either on
be given unlimited signing authority) may need to be resident in his own account or that of a third person, and
Thailand. Moreover, in September 2008, the MoC changed its „„ may not be a partner with unlimited liability in another
interpretation of the law regarding a private-company’s board commercial concern carrying on a business of the same nature
of directors. First, a director of a private limited company must as, or competing with, that of the company.
perform his duties in person and can no longer appoint another
person to act as his proxy to attend and vote at a meeting of the The directors of PCLs are subject to more detailed and onerous
board of directors. Secondly, a private limited company must hold duties. The Public Limited Companies Act imposes a duty on the
real meetings of the board with directors physically present. As a directors to act in a loyal, honest and careful manner and in the
result, the board of directors of a private limited company can no interests of the company.
longer adopt a resolution without holding a physical meeting, even
though the articles may purport to allow this. In each case, directors are liable to the company for any loss
resulting from their failure to meet such standards and duties to
The following specially regulated business activities have shareholders and creditors.
additional requirements concerning the nationality of directors:
In addition, the Securities Act imposes a duty on each director of
„„ for PCLs undertaking insurance (life and non-life), commercial a PCL, which has approval to offer shares for sale to the public
banking, securities, credit foncier and finance business or whose shares are listed on the SET, to perform his duties with
activities, at least three-quarters of the directors must be Thai responsibility, due care and loyalty in conducting the business of
nationals; and the company.
„„ for companies conducting certain restricted businesses under
the Foreign Business Act, at least two-fifths of the directors In performing his duties with responsibility and due care, a director
must be Thai nationals. must act in the same manner as an ordinary person undertaking
the same business would under similar circumstances. However,
Is there any requirement for directors to hold shares? there is a “safe harbour” in which a director will be deemed to
have performed his duties to the required standard, if the director
Directors’ duties are not specifically directly owned to can prove that, the decision was made with an honest belief that
shareholders of the company, although in some circumstances it was in the best interests of the company, in reliance on sufficient
shareholders may have a direct claim against a director for indirect information and without any conflict of interest.
loss suffered as a shareholder in the company.
To perform his duties with loyalty, a director must:

„„ act in good faith and in the best interests of the company;


„„ act with a proper purpose; and

102
„„ not act when there is any significant conflict of interest with the the creditors to present any objection they may have within six
interests of the company. months after the date of notice. If any objection is raised, the
company cannot proceed with the amalgamation unless it has
Every director and executive of a PCL must file with the company satisfied the claim or given security for it.
and the Securities and Exchange Commission (the SEC) a report
on his interests (and those of his related persons) in relation to the A PCL must then notify all known creditors of the passing of a
company and each subsidiary within 30 days of his appointment resolution to reduce its share capital or for its amalgamation within
and when any reportable interest is subsequently acquired or 14 days from the date of the shareholders’ meeting at which it is
disposed of. passed and must specify in the notice that any objection thereto
must be submitted within two months of receipt of the notice. If
Duty to the shareholders any objection is raised, the company cannot reduce its capital or
proceed with the amalgamation, unless it has paid its debts or
Directors must manage the company under the direction of given security for the debts.
general meetings of shareholders.
Duty to employees
Claims against the directors for compensation for damage
caused by them to the company may be made by the company There is no statutory requirement for directors to take the interests
or, if the company refuses to act, by any of the shareholders. of employees into account when performing their functions
However, where the acts of a director have been approved by (additional to obligations of the company as an employer under
a shareholders’ meeting, such director is no longer liable to the labour and health and safety legislation, for which the board is
shareholders who approved them or to the company for those responsible for ensuring the company’s compliance).
acts. Shareholders who did not approve such acts cannot claim
against a director later than six months after the date of the What types of liability can directors incur?
shareholders’ meeting at which such acts were approved.
The directors may have unlimited personal liability if this is
In the case of PCLs, if a director is in breach of such duties, the specified in the company’s memorandum of association.
company may sue the director. If the company fails to do so, any Where the formation and registration requirements for a private
shareholder(s) holding at least 5 per cent of the shares of the limited company are not completed within three months following
company may make the claim, and also request that the court the statutory meeting that constitutes the company, the directors
removes such director from office. of that company are personally liable to pay back all monies paid
in by subscribers as capital of the company.
Shareholders of a PCL together holding at least 5 per cent of the
shares of the company may file, on behalf of the company, a claim In the case of a PCL, either its promoters or its board of directors
to regain benefits illegally acquired by directors. (depending on which received the money) may be required to
pay back all monies paid up by subscribers if the company is not
Shareholders of a PCL incurring loss from false statements or a registered within three months following the statutory meeting that
failure by directors to disclose significant facts may bring a civil constitutes the company.
action on their own behalf to claim compensation from such
directors. The directors may have liabilities to shareholders and the
company (whose claims may be enforced by a liquidator or the
Duty to creditors official receiver for the benefit of creditors) for improper acts and
transactions authorised or permitted by them at a time when the
There are no director-specific duties owed to creditors. However, company is insolvent.
when a company proposes to reduce its share capital, it must
notify all creditors known to the company of the proposed Any director of a PCL who fails to perform his duties with
reduction and require creditors to present any objection they responsibility, due care and loyalty, or does so with dishonest
may have to such reduction within 30 days from the date of such intent, shall be liable to imprisonment for a term not exceeding five
notice. If any objection is raised within this period of 30 days, the years. In addition, they will be liable for a fine not exceeding two
company cannot proceed with the capital reduction unless it has times the damage incurred or the benefit obtained but not less
satisfied the claim or given security for it. than THB1,000,000.

The company must similarly send all known creditors a notice Investors adversely affected by false statements or the failure of a
with particulars of any proposed amalgamation and require PCL’s directors or executives to disclose material facts that should

103
have been disclosed may bring a civil action on their own behalf Newly issued shares of a private limited company will always be
to claim compensation from the directors or executives involved in subject to pre-emption rights of the shareholders, although these
such wrongful acts. may be waived.

What are the auditing requirements for companies? Business/asset acquisitions

The board of directors must prepare and have an annual financial The private acquisition of a business in Thailand is achieved by
statement examined by an auditor prior to its submission for purchasing either the shares of the company or the assets that
approval at the annual meeting of shareholders. comprise the company’s business.

3. What are the most common types of M&A transaction? An asset acquisition takes the form of acquiring all (subject to
the restrictions on foreign ownership of land) or some of the
Private companies company’s individual assets and making provision for assigning
or transferring relevant contracts and intangible rights. Except for
Share acquisitions exemption from tax in certain circumstances, Thai law does not
provide for the acquisition of an entire business (including liabilities
The shares of a Thai company can be acquired through one or and contractual rights and obligations) as a going concern and
more private transactions in order to obtain control. By acquiring contracts and liabilities are not automatically transferred with
the shares and being registered as a shareholder, the buyer the assets of a business unless there are express contractual
acquires the voting rights in the target. The transfer of shares may provisions. Consequently:
be subject to restrictions contained in the company’s articles of
association. „„ specific contractual provisions must be made to transfer the
benefit of a contract and when (as is common) a contract
In respect of business activities, if an acquisition results in 50 per contains restrictions on assignment, the consent of the
cent or more of the share capital (by nominal value) of a company counter-party will be required;
being held by foreigners (which includes Thai companies in „„ the transfer of liabilities will require the agreement of the
which 50 per cent or more of the capital is held by foreigners), creditors or counter-parties or (if it is intended that the seller
the company may not carry on certain business activities listed in should be released) a novation;
the Foreign Business Act unless a licence is obtained. However, „„ employees do not automatically transfer with the assets of
exemptions may also be obtained by certain types of business (or the business and the consent of the individual employees
their owners) such as those: will be required. While the buyer may be obliged to honour
their employment contracts, no employees can be compelled
„„ located on formally designated industrial estates operated by to work for the buyer and a new employment contract is
the Industrial Estates Authority of Thailand (the IEAT); effectively required for each transferring employee; and
„„ which qualify for the foreign investment promotional incentives „„ numerous permits, licences and approvals may be required
offered by the Board of Investment (the BoI); or to carry on a business, (particularly if it involves manufacturing
„„ where majority ownership is beneficially owned by US persons or processing (e.g. a factory licence, waste disposal, use of
throughout the ownership chain up to the ultimate owner. hazardous materials, labelling of consumer products, etc)) and
consents, and in some cases new licences, may have to be
The restrictions do not apply to most manufacturing and obtained.
processing activities but may arise if other restricted activities are
conducted by a business, even if only ancillary to unrestricted core While it is not a strict requirement that business assets need be
manufacturing or processing activities. purchased by a Thai company (they could equally be owned by
a branch of a foreign corporation), the conditions imposed by the
In respect of a company that owns land, if an acquisition results BoI when granting investment incentives (which include exemption
in more than 49 per cent of the share capital (by nominal value) from the restrictions in the Foreign Business Act and on land
being held by foreigners, the company will be required to sell ownership) may require the use of a Thai company.
the land within a period of six to 12 months and thereafter be
prohibited from owning land. However, the first two exemptions The buyer will not inherit any tax liabilities of the seller but, as
stated above may apply. a practical consideration, it is advisable to conduct limited due
diligence to ensure that the Thai tax authorities will not seek to
A private limited company is prohibited from issuing new shares to enforce tax claims by seizing assets formerly owned by a tax
persons other than its directors or shareholders. defaulter.

104
The buyer of assets comprising a business will need to ensure Public companies
that he can obtain all the required licences, authorisations and
approvals necessary to conduct the business. Takeovers (see section 6 for a more detailed summary of public
takeovers)
Amalgamations/mergers
Only PCLs may offer their shares to the public and be listed.
A full amalgamation of one company with another is possible and
this will result in the creation of a new legal entity. The merging The need to ensure compliance with the foreign-ownership
entities do not continue in existence after the completion of the restrictions of the Foreign Business Act necessitates listed
amalgamation, but the newly created entity inherits all assets, companies having separate quotas of their shares listed on the
rights and liabilities of the merging entities. This type of full legal Foreign Board and on the Main Board of the SET.
merger is an alternative to a share-for-share acquisition of one
company by the other or of both by a newly established holding Typically the percentage available for purchase by foreigners will
company. be limited to 40 per cent or less (which is lower than the 49.9 per
cent limit imposed by the Act to allow a margin for error).
If one of the parties to the amalgamation is a private company, the
amalgamation requires prior approval by a “special” shareholders’ Except for the restrictions automatically imposed on shares
resolution passed at a shareholders’ meeting by 75 per cent of traded on the Foreign Board, listed shares are not permitted to be
those shareholders attending with a right to vote. subject to any restrictions on transfer.

Each party to the amalgamation must notify all its known creditors Public bids, by means of tender offers, are regulated under
of the decision to merge and advertise their intention to merge in the Securities Act and the Takeover Rules issued in 1995 (and
the national press. A six-month period is allowed for creditors to substantially revised in 2003 and 2008) by the SEC. A tender offer
raise objections and the amalgamation will not be effective until the may be either hostile or recommended by the board of the target.
claims of any objecting creditors are either secured or satisfied.
The Rules relating to notification of significant acquisitions
Special arrangements must be made for employees as Thai and requiring mandatory tender offers if certain threshold
labour law deems their employment to be terminated upon the shareholdings are reached apply only to PCLs listed on the SET.
amalgamation (with a consequent entitlement to compensation)
unless they agree in writing to become employees of the merged Schemes of arrangement
entity. The merged entity would assume all existing obligations
to employees, whose continuity of employment would be The common law concept of a court-approved restrucuturing,
maintained, in these circumstances. executed by agreement between a company and its shareholders
or creditors to make structural changes not otherwise allowed by
Despite the principle of the uninterrupted succession of rights by law, does not exist in Thai law. However, in some cases the same
the new entity, many of the licences, authorisations and permits result can be achieved by other methods, as Thai law allows:
required to do business will need to be amended or reissued.
„„ the legal amalgamation of companies;
Joint ventures „„ a reductions of share capital through the return of capital to
shareholders; and
Joint ventures are not subject to any separate regulation or „„ a bankrupt company to be restructured under a rehabiliation
legislation, except for tax legislation that provides for the taxation plan that may involve the rescheduling of debts and/or a waiver
of an unincorporated joint venture as if it were a separate legal of debts in exchange for shares (and for the company to be
entity. protected from creditors claims whilst being rehabilitated) under
provisions in the Thai Bankruptcy Act.
At the parties’ option, joint ventures may take the form of a PCL,
a private limited company, a partnership or may be merely a Amalgamations
contractual arrangement between the parties.
„„ An amalgamation requires prior approval by a shareholders’
resolution passed at a shareholders’ meeting by 75 per cent
of those shareholders attending with a right to vote. An offer
must also be made by the majority shareholder(s) to acquire
the shares of dissenting shareholders of each party to the

105
amalgamation at either (if listed) the last price traded on the which require a resolution passed by a simple 50 per cent plus
SET prior to the resolution or (if unlisted) a price determined majority of the votes of shareholders attending and having the
by an independent valuer. The majority shareholder(s) must right to vote.
make the offer because the merged entity cannot acquire the
shares of dissenting shareholders on its own behalf. The offer 5. Regulation, consents and foreign investment restrictions
to dissenting shareholders must be open for acceptance for at
least 14 calendar days. Shareholders that do not accept within Are there any regulated industries?
this time receive shares in the new company resulting from the
amalgamation. Additional restrictions, requirements for prior approvals, and
reporting obligations apply to specially regulated businesses,
Joint ventures notably the media, telecommunications, banking, finance and
insurance sectors. For example, a merger between an insurance
PCLs are free to enter into joint venture arrangements as company and a non-insurance company is prohibited.
described on page 107.
Are there any restrictions on the foreign ownership of
Public to private acquisitions (P2Ps) shares in a Thai company?

The acquisition of insolvent PCLs by foreign multinationals has Under the Foreign Business Act, prohibitions exist that prevent
occurred on a number of occasions but private acquisitions of foreign individuals and corporations and foreign majority-owned
PCLs are generally not common. Dual listings or “migration” of Thai companies carrying on certain business activities, including
Thai listed companies seeking secondary or even primary listings the media, transport, agriculture, mining, construction, wholesaling,
on foreign stock exchanges, notably the Singapore Exchange retailing and most types of service business. These restrictions
(SGX-ST), have occurred but after the strong recovery of the Thai often have a significant impact on acquisitions in Thailand.
capital markets during 2003 these are less common.
Under the Land Code, foreign individuals and corporations and
Do the parties have an obligation to negotiate in good faith foreign majority-owned Thai companies are prohibited from
to one another in M&A transactions? owning land in Thailand.

Thai law neither recognises any obligation to negotiate in good A summary of the foreign investment restrictions in Thailand is set
faith nor any obligation not to discontinue negotiations without out in Schedule 1.
good cause.
US individuals and corporations (provided they are majority,
To mitigate the risks of the counterparty discontinuing negotiations beneficially-owned by US nationals) and Thai companies that
without good reason or concurrently negotiating with another are majority US owned are exempt from most restrictions in the
prospective buyer, the parties will often enter into heads of Foreign Business Act (but not the Land Code’s prohibition on
agreement or an equivalent document outlining the agreement ownership of land) under a bilateral Treaty of Amity and Economic
reached in principle and incorporating a lock-out clause. Relations between Thailand and the USA.

4. What percentage shareholding is required to achieve Exemptions may also be granted to several types of business
effective control of a company? including those:

Ownership of at least 75 per cent or more of the shares and „„ located on formally designated industrial estates operated by
voting rights of a company will give a shareholder absolute the IEAT; or
control of all the decisions to be made at shareholders meetings „„ which qualify for the foreign investment promotional incentives
(allowing special resolutions to be passed). Such a shareholder offered by the BoI.
will be able to, for example, amend the memorandum or articles
of association, increase or reduce the share-capital, pass a A Thai company (either PCL or private company) which is majority
resolution to liquidate the company, or to merge the company with owned by foreigners and which is carrying on a business normally
another company. restricted to foreigners under a licence under the Foreign Business
Act (i.e. has been exempted from the Foreign Business Act) must
Ownership of 50 per cent or more of the shares and voting have a fully paid up registered share capital of not less than the
rights of a company gives absolute control of the appointment of higher of:
directors and all other decisions (except those described above),

106
„„ THB3 million for each restricted business that it carries on; and „„ so long as the TCC is satisfied that there exists ‘reasonable
„„ 25 per cent of the yearly average of the estimated expenses for commercial necessity’ (meaning it may be beneficial to the
each business over a 3-year period. promotion of business activity and will neither cause serious
damage to the economy nor materially adversely affect
Are there any foreign exchange and investment controls? consumer rights benefits), the TCC may approve a merger
even though it results in competition being reduced or a
The Thai Exchange Control Act B.E. 2485 (1942) empowers monopoly or cartel being created; and
the Finance Minister to administer all exchange controls but „„ to proceed with a merger or acquisition that requires merger
in practice the exercise of this power has predominately been approval without first obtaining such approval is a criminal
delegated to the Bank of Thailand (the BoT), which in turn offence.
delegates certain functions to Thai commercial banks.
The TCC also has broad discretion to order any business that
Inward remittances of foreign currencies are generally allowed, commits an unfair trade practice to suspend, cease or correct
although receipt must be reported to the BoT (failure to report an such practice and if a business has market share exceeding 75
inward remittance may result in later difficulties in remitting funds per cent, the TCC is empowered to order it to suspend or cease
abroad). In addition, the conversion of this money into Thai Baht certain activities or alter its market share, regardless of whether it
(THB) is required, subject to an exemption if the need to pay an has committed unfair trade practices.
equivalent amount of the same currency within three months can
be demonstrated. What are the employee issues?

Outward remittances of foreign currencies to discharge any Are works councils/consultation common?
contractual payment obligations arising from acquisitions are
permitted subject to reporting requirements. Other remittances There are no statutory requirements for consultation with unions
may require the BoT’s prior consent. or work councils concerning acquisitions, disposals or mergers.
However, employees of an entity whose business is discontinued
Is there any merger control? on its sale have certain statutory rights as regards the buyer.

The Fair Trade & Competition Act B.E. 2542 (1999) establishes Prior consultation concerning acquisitions, disposals or mergers is
a regime under which prior approval from the Trade Competition a common contractual requirement in collective agreements with
Commission (the TCC), the national competition authority, is recognised trade unions
required for any integration of two or more businesses (i.e. the
buying of shares or assets resulting in the control of the business’ Are any actions required prior to or upon an acquisition for
policy on business administration, supervision and management) employees?
that would give the merged entity a “dominant position” in any
market for goods or services in Thailand. In case of share acquisitions, no action is required to transfer
employees as they remain employed by the company after its
This merger approval requirement is not yet in force (as of 12 June ownership is transferred to the buyer.
2009) and will have effect only when thresholds for its application
have been established. Draft ministerial regulations have been In case of asset acquisitions, the employees of a business do
circulating since October 2000 but as yet no indication has been not automatically transfer to the buyer and if the buyer wishes
given as to when they will be issued in final form. to take on the employees, he must seek their consent (although
when an entire business is acquired and the seller discontinues all
Once in force, the merger approval regime will apply to almost all business activities, the buyer has certain obligations to the former
sectors of commercial activity. Only state and municipal bodies, employees of the business) (see Business/asset acquisitions on
agricultural co-operatives existing solely for the mutual benefit page 106 for further detail).
of their members, and certain other designated entities will be
excluded. Are there any notification obligations for employees prior to or
upon an acquisition?
If the requirement for merger approval applies:
The notification and information obligations of a buyer for both share
„„ the TCC is statutorily required to respond to applications within a and asset deals are summarised in the tables on page 108. Note
maximum of 90 days, subject to one (only) extension of 15 days; however that, in addition, if the business is situated on an industrial
estate regulated by the IEAT or receives a BoI promotion, notification to
or the consent of these public authorities may be required.
107
i. Share deal

Action Employees Trade unions Employee representatives Public authorities*


(other than trade unions)

Inform No No (unless expressly agreed in any No No


collective agreement concluded
with a trade union, which would
be unusual but would be legally
binding if it was a term of the
collective agreement)

Consult No No (unless expressly agreed in any No No


collective agreement concluded
with a trade union, which would
be unusual but would be legally
binding if it was a term of the
collective agreement)

Obtain No No No No
consent from

Veto right by No No No No

ii. Asset deal

Action Employees Trade unions Employee representatives Public authorities*


(other than trade unions)

Inform No No (unless expressly agreed in any No No


collective agreement concluded
with a trade union, which would
be unusual but would be legally
binding if it was a term of the
collective agreement)

Consult No No (unless expressly agreed in any No No


collective agreement concluded
with a trade union, which would
be unusual but would be legally
binding if it was a term of the
collective agreement)

Obtain Yes No No No
consent from (Employees
will not
transfer on
an asset
sale unless
they enter
into new
employment
contracts
with the
purchaser,
and they are
under no
obligation to
do so)

Veto right by No No No No

* Public authorities for the purpose of this section are any governmental or quasi-governmental authorities responsible for supervising the labour market and employment
related issues.

108
Timing offer, together with the financial advisers and independent directors’
recommendations, must be sent to each shareholder prior to the
In the case of an asset acquisition, the buyer should obtain general shareholders meeting convened to consider the proposal.
agreement from employees it wishes to take on prior to, or at least
simultaneously with, completion of the acquisition. Is financial assistance prohibited?

With which stock exchange requirements must listed What is the nature of the prohibition?
companies comply?
There is no prohibition under Thai law on a company giving
What rules generally govern listed companies? financial assistance for the acquisition of its own shares or the
shares of its holding company, except that a company cannot
Acquisitions of shares in listed companies are regulated by the accept a pledge of its own shares.
Securities Act, the Takeover Rules and other regulations issued by
the SEC and the Capital Market Supervisory Board (the CMSB), A subsidiary may own shares in its parent company without
as well as the rules and regulations of the SET. The rules and limit, subject to the requirements as to minimum numbers of
regulations of the SET do not apply to unlisted PCLs. shareholders.

Due to the re-organisation of the SEC following amendments to What are the sanctions?
the Securities Act in 2008, whilst the existing SEC board remains
the principal board responsible for policy making on supervision This is not applicable.
and development of the overall market, the newly-formed CMSB
is now responsible for day-to-day regulation and the issuance Are there any exceptions to the prohibition and is there any
of rules and regulations governing operational issues. However, procedure which can be followed to make financial assistance
all relevant SEC notifications issued by the SEC’s board before possible (i.e. a “whitewash procedure”)?
the establishment of the CMSB remain in effect until the CMSB
issues new notifications to repeal such existing SEC notifications. This is not applicable.
The CMSB has issued a limited number of its own regulations but
many aspects still rely on the SEC’s existing notifications. 6. Public takeovers

The two regulated markets operating in Thailand are the SET What are the forms of a public offer?
and the Market for Alternative Investment (the MAI). The MAI is
operated by the SET as a separate market for smaller “growth” A public offer for shares may be either mandatory or voluntary.
companies. Thai law does not provide for any difference in procedure for
recommended and hostile offers.
On-market trades are conducted in paper-less form, with the
transfer being electronically processed between brokers and the Offers are required to take the form of a tender offer, under which
Thailand Securities Depository Co Limited (the TSD), which is the shareholders are invited to tender their shares for purchase by the
SET-owned share registry for listed securities. offeror.

How does a company delist its share capital? What is the regulatory framework for a public offer?

Delisting a PCL requires the prior approval of 75 per cent or more The Takeover Rules
of the votes at a general meeting of shareholders and objections
from no more than 10 per cent of shareholders. The board must Takeover activity is governed by the provisions of the Public
also make arrangements for the controlling shareholder(s) to offer Limited Companies Act B.E. 2535 (1992) and the Securities
to acquire the shares of dissenting minority shareholders after the and Exchange Act B.E. 2535 (1992), including the takeover
company has resolved to delist. rules issued thereunder in 1995 (and substantially revised by the
SEC and CMSB in 2003 and 2008) (the Takeover Rules), which
Under the SET’s rules, on delisting the company is required to borrowed extensively from the UK’s rules.
appoint an independent financial adviser to make recommendations
to the independent directors and the minority shareholders, Regulations on the Takeover Rules are founded on the principle
particularly concerning the mandatory offer required to be made of complete and accurate disclosure as well as the principle of
by the controlling shareholder(s). Additionally, a written explanation fair and equitable treatment of shareholders. The Takeover Rules
of the reasons for delisting and the facts relevant to the mandatory require that:

109
„„ any person acquiring shares in order to take over control of the Cash/non-cash terms
business must make a tender offer which provides a fair exit
for all shareholders; and Under a voluntary offer, the offered price can be in any form (either
„„ in making a tender offer: cash or non-cash).

• all securities holders must be treated equally; Thai offers are usually for cash but may be for shares (or, in theory,
• all information must be correct and complete; and for other forms of consideration). Where alternatives are offered,
• all securities holders must be given enough time to decide. at least one must be cash unless special conditions applicable to
a share-for share exchange are complied with.
The terms and conditions of the takeover bid must be consistent
with the requirements of the Takeover Rules. Cash consideration

A partial tender offer is allowed only if there is a resolution of a The cash portion of a combined price under a mandatory offer
shareholders’ meeting endorsing such proposal. In the event that must not be lower than the highest cash price paid by the bidder
a partial tender offer is made, the purchase of tendered shares (or any of its related parties) over the preceding 90 days (or as
must be allocated on a pro rata basis. otherwise set out under Minimum price requirements above).

The Takeover Panel plays a vital role in the implementation of the If no shares were acquired in the preceding 90 days, the minimum
Takeover Rules. The Panel is appointed by the SEC, drawn from price is the five-day weighted average price for the shares on the
experts in the areas of finance and law. The Panel is vested with SET prior to the offer being triggered or, if none, a fair price for the
the authority to consider certain requests in connection with the shares as determined by an independent financial adviser.
Takeover Rules, such as a request for an exemption from making
a tender offer, or a request to make a bid at a price inconsistent Non-cash consideration
with the Takeover Rules, etc.
If the offered price is not cash, a financial adviser must appraise
Application of the Takeover Rules the price.

Not every PCL is subject to the Takeover Rules. The Takeover Conditions
Rules apply where the targeted business is:
A voluntary offer may be made subject to those requirements
„„ a listed company; that the buyer deems appropriate such as a required number of
„„ a company whose securities are traded in an over-the-counter acceptances or regulatory consents (e.g. merger approvals, see
centre; or page 109). These conditions must be clearly set out in the offer
„„ a PCL having characteristics specified in a notification of the document. It should be noted that:
CMSB (but none has yet been issued).
„„ 90 per cent or more of the voting shares must be held to delist
What are the main offer terms? a company; and

Minimum price requirements „„ a successful offer for more than 25 per cent or 50 per cent
will trigger a mandatory offer for all outstanding shares once
A bidder must offer a single price for each class of shares and the the 25 per cent or 50 per cent thresholds of voting rights are
same price to all shareholders of that class. exceeded.

The offered price, whether under a mandatory offer or a voluntary A mandatory offer may not be subject to any conditions except a
offer, must not be lower than the highest price paid by the bidder right to withdraw the offer if a material adverse event affects the
(or any of its related parties) over the preceding 90 days. target or if the target takes action which significantly reduces the
value of its shares or it delists.
On a delisting offer, the offered price must additionally be not
lower than the net asset value of the target adjusted to market, or In the following situations, it must be a term of the tender offer
the five-day weighted average price for the shares on SET prior that all shares and (with some exceptions) outstanding warrants
to announcement of the delisting proposal, or a fair price for the and convertible debentures tendered will be purchased:
shares as determined by an independent financial adviser.

110
„„ on a delisting of the target (when the Public Companies Act Funding the acquisition
imposes an obligation on the target’s board to ensure an
offer is made to acquire the shares of dissenting minority The bidder’s sources and methods of funding the acquisition
shareholders after the requisite 75 per cent + majority vote must be set out in the offer document.
(with no more than 10 per cent of shareholders objecting) has
resolved to delist the company); or The bidder’s financial adviser is required to verify that the bidder
„„ a mandatory offer. has the financial resources required to proceed with the offer
and in the case of a mandatory offer, that the price is at least
the minimum required price. A certificate to that effect must be
Simplified offer timetable included in the offer document.

Date/Time period Events

D+1 The offeror’s shareholding reaches any of the 25 per cent, 50 per cent or 75 per
cent trigger points (in case of a mandatory tender offer), or the offeror announces its
intention to make a tender offer (in case of a voluntary tender offer).

D+2 For a mandatory offer triggered by a share acquisition, the offeror submits a report
of the total number of shares it holds in Form 246-2, together with a statement of
intention to make a tender offer in Form 247-3, to the SEC.

D+9 The offeror submits to the SEC an offer document in Form 247-4 prepared by a
financial adviser together with a tender offer acceptance form and pays the fees for
the submission of the offer document.

Upon submission of the offer document to the SEC, the offeror must take the
following actions:
„„ deliver the offer document together with a tender offer acceptance form to the
following persons immediately following the submission of the offer document to
the SEC: (i) all holders of each class and issue of securities, as shown in the latest
register of securities holders, for which an offer is being made; (ii) the target; and (iii)
the SET; and
„„ advertise the making of the tender offer in at least two daily Thai language
newspapers and one daily English language newspaper for at least three
consecutive business days following the date on which the offer document has
been submitted to the SEC.

D+10 The offer becomes effective.

D+12 The offeror must commence the purchase of securities tendered (which is required on
the third business day after the date of submission of the offer document to the SEC).

The offer period must be at least 25


consecutive business days but not more
than 45 consecutive business days.

D+37 (in case of the 25-day offer period) The offer period expires. The offeror completes the purchase of securities.

D+42 The offeror submits the result of the tender offer in Form 256-2 to the SEC, with a
copy to the SET.

111
What is the timing of a public offer and what is the comply with. However, the SET’s trading rules effectively require
procedure to be followed? that the offeror must have placed funds with its broker by the
date securities are transferred and payment is then received by an
Announcements accepting shareholder either immediately or (If settlement is through the
SET’s automated trading system) three business days later.
Once an intention to make an offer is announced, the intention
must be confirmed to the SEC within three business days and the If a tender offer takes a bidder’s shareholding over 50 per cent, the
offer made within the next seven business days. bidder may only purchase further shares during the subsequent six
months at the same (not a higher) price.
A bidder must have a financial institution authorised by the SEC
as its adviser, who must confirm the bidder is able to proceed with If a bidder has purchased fewer than the total number of shares
the offer (see Funding the acquisition on page 111). tendered by shareholders, it may not within the subsequent 90 days
purchase a further number of shares that will cause it to acquire more
The financial adviser must prepare the offer, which must be than one-fifth of the shares covered by its tender offer.
submitted to the SEC, posted to all shareholders and advertised
in the national press over the next three business days. Competing bids

If a person fails to make an offer after announcing an unconditional If there is a competing bidder, the original bidder has the
intention to do so, that person may not make an offer in relation to opportunity to improve its offer. The original bidder is a also
the same company for a period of one year from the date of the permitted to extend the period of its offer beyond the presently
announcement. mandatory 45 day cut-off so that it expires concurrently with the
competing bid.
If an announcement of an intention to make an offer is explicit that
the making of the offer is subject to certain conditions (e.g. due There is however no requirement for equality of information for
diligence or further negotiations), then there is no obligation to competing bidders.
make an offer if those conditions are not satisfied.
Failed bids and further offers
Acceptance period
Generally, a new offer cannot be made within one year of any
An offer must be open for acceptance for at least 25 business previous offer, although dispensations may be granted by the SEC
days from the date it is filed with the SEC, which may be extended and a mandatory offer would be required if acquisitions by the
to no more than 45 business days (except in the event of a offeror exceed one of the trigger thresholds.
competing offer).
What documentation is involved in the process?
Satisfying offer conditions
Press announcement
If the offeror has announced an intention to make a tender offer
subject to certain pre-conditions, the offeror is not required to Upon submission of the offer document to the SEC, the offeror
submit a statement of intention to make a tender offer in Form must advertise the making of the tender offer in at least two
247-3 to the SEC until those pre-conditions have been satisfied. daily Thai language newspapers and one daily English language
newspaper for at least three consecutive business days following
In the case of non-satisfaction of the pre-conditions or upon the the date on which the offer document has been submitted to the
expiration of one year from the announcement, the offeror must SEC.
submit a statement declining to make a tender offer in Form
247-5 to the SEC within three business days from the date of Offer document
non-satisfaction of such pre-conditions or the last day of such
one-year period, whichever comes earlier. The offer must be made in a Form 247-4 prescribed by the SEC
and, among other things, must include:
Offer unconditional - payment
„„ the purpose of the offer and the bidder’s proposals concerning
Settlement and payment terms must be included in the offer the future operation of the target’s businesses;
document and published. Whilst the SEC sets out a prescribed „„ any conditions attaching to the offer;
form for these, there are no specific legal requirements they must „„ information about the bidder, including its business, share

112
capital and its 10 largest major shareholders (a “major” What are the practices relating to break fees and lock-out?
shareholder anyone holding 10 per cent or more in the
company) and the same information for each major shareholder There are no prohibitions on “lock-out” agreements, which prevent
of the bidder that is a company; the target from negotiating with other parties during an agreed
„„ the bidder’s existing shareholding in the target; period and these agreements are increasingly common; however,
„„ the bidder’s source of funds; the directors must take care to comply with their duty to act in the
„„ the name of the bidder’s financial adviser; interests of the company.
„„ proposals in relation to the target after closing of the offer,
including any intention to delist; and Provisions for payment of break fees by a party in default are not
„„ relationships (including prior transactions, loans etc.) between yet common and may meet resistance from the Thai authorities.
the bidder and (a) the target, (b) the target’s major shareholders Enforcement of a pre-agreed payment by a party in default to
(as defined above) and (c) the target’s directors. cover expenses incurred in breach of a lock-out agreement
would be subject to the Thai legal principle that the courts will not
If the consideration is all or partly shares in the bidder, a enforce payment of a “penalty” that is excessive in relation to the
prospectus may need to be prepared in accordance with the loss suffered.
requirements of the Securities Act.
What are the rules on information gathering/provision?
Target documentation
It is a basic principle of the Takeover Rules that all shareholders in
When a target receives a tender offer, it must appoint an a target should enjoy equal access to information but there are no
independent financial adviser to prepare a recommendation (in provisions concerning equality of information between competing
conjunction with the board’s recommendation) to shareholders bidders.
with respect to the offer (Form 250-2) and send it to shareholders
within 15 business days. If there is an amendment to the offer, Public information concerning the target can be obtained from the
the target must prepare a new recommendation with respect to Commercial Registry and, for a listed company, from the SET.
the amended offer (Form 250-2 Gor) and send it to shareholders
within five business days. In addition, the target’s board may be prepared to provide
confidential information to the bidder and any competing bidders
Responsibility statements with a view to maximising the offer to shareholders. Doing so
would be in line with the directors’ general obligations under the
The form containing the formal offer submitted to the SEC is Public Limited Companies Act to act in the best interests of the
required to be signed by authorised director(s) of the bidder company. Moreover, such disclosures may be made despite
who must certify that the information given is true and that no the restrictions in both the Securities Act and the SET’s Rules
information is omitted that might affect the decisions of investors regarding the disclosure of price sensitive or “insider” information.
in relation to the offer. However, the following factors would need to be carefully
considered when determining what information to disclose:
The bidder’s financial adviser is required to review the terms
and conditions of the offer as well as the information given in „„ whether the information and timing of its release is market
connection with the offer and certify that: sensitive such that its disclosure might result in criminal
offences under Thailand’s insider trading laws (e.g. if the bidder
„„ it has verified the accuracy of the information given in the offer subsequently buys shares from directors or makes an offer in
and it is satisfied that the information given is true; reliance on this information);
„„ it is “confident” that no information has been omitted that might „„ whether the information is commercially sensitive; and
affect the decisions of investors in relation to the offer; „„ whether such information would normally be disclosed only
„„ the bidder has the financial resources required to proceed with on a confidential basis to persons with whom the target is
the offer; negotiating and who have signed confidentiality undertakings.
„„ the offer price is not less than the required minimum price; and
„„ the bidder’s proposals for the future operation of the target’s What is the position regarding insider trading?
business are reasonably based.
The Securities Act prohibits a person from either buying or selling,
or offering to buy or sell, directly or indirectly, listed securities
in such a way as to take advantage of other persons using
information material to the price or value of the securities which

113
has not yet been disclosed to the public (insider information) cent of the total number of voting rights of the relevant PCL
and to which that person has access by virtue of his office or (e.g. from 13 per cent to 9 per cent); and
“position” (insider trading). It similarly prohibits dealings on behalf „„ if the PCL has share warrants, derivative warrants or
of others by a person possessing insider information and the convertible debentures, the buyer’s shareholding of any
disclosure of insider information for any benefit to be received particular class of warrant, derivative warrant or convertible
from a third party who will deal in listed securities. debenture reaching any multiple of 5 per cent of the total
number of voting rights of each type of warrant, derivative
The Securities Act specifically states that, inter alia, directors and warrant or debenture if the conversion occurs.
shareholders with shareholdings exceeding 5 per cent (a 5 per
cent shareholder) of a PCL’s issued share capital have a “position” The report must be on the Form 246-2 prescribed by the SEC
that gives them access to insider information. and if the relevant PCL is listed on the SET or MAI, a copy of the
report must also be sent to the SET. Similarly, if the securities of
In relation to listed companies and their directors, the provisions of the relevant PCL are traded through an over-the-counter dealing
the Securities Act are supplemented by guidelines on preventing system, a copy of the report must be sent to the operator of that
insider trading, namely, the SET’s Guidelines on Disclosure of system.
Information of Listed Companies. These guidelines, although they
do not have force of law, are likely to be regarded as authoritative The Form 246-2 must be filed with the SEC (and the SET or other
by the Thai courts for most purposes. They confirm that insider dealing system if required) by no later than the business day
trading may occur if an “insider” (e.g. a director) discloses insider following the relevant acquisition or disposal. For this purpose
information to another party (e.g. a bidder) who relies on that “business day” means a day on which the SET is open for trading.
information when buying or selling shares. The offence arises if Failure to submit a report in the required form by the due date
the director has any beneficial interest, direct or indirect, in the renders the buyer liable to a fine of up to THB500,000 and also a
trading by the other party. further fine of THB10,000 per day

Apart from insider trading, it is an offence under the Securities Act The securities holdings of “related parties” must be aggregated for
for (amongst others) a person interested in securities to disclose disclosure purposes.
market sensitive information unless that information has been
reported to the SET. The concept of “acting in concert” with other persons to
gain control over a listed company has been reintroduced by
The sanctions for use of insider information in securities dealings amendments to the Securities Act that became effective in 2008.
are: This concept results in the aggregation of the shareholdings in the
relevant PCL held by a buyer and others persons acting in concert
„„ the office of the SEC may require an offender to pay over all with him. The CMSB issued a Notification, which became effective
financial benefits received from the insider trading within six on 1 August 2009, that specifies which features of relationships or
months after acquiring the insider information; and actions can be considered as acting in concert.
„„ insider trading is a criminal offence punishable by (i) a fine of
not less than THB500,000 and up to twice the amount of Does a memorandum of understanding (MoU) need to be
monetary benefit received (or which was expected to have disclosed?
been received) and/or (ii) imprisonment for up to two years.
The need for disclosure of a MoU will depend on the type of
What are the public disclosure requirements in a takeover acquisition, the parties involved and the terms of the MoU. In
scenario? general, the SET regulations stipulate that a listed company must
disclose information that:
Disclosure issues for bidder and target
„„ is necessary to avoid the establishment of a false market in its
Under the Securities Act, any acquisition or disposal of shares in securities; or
any PCL (whether listed or not) must be reported to the SEC by „„ is likely to have a material effect on the price or value of
the buyer if it results in: securities of that company.

„„ the buyer’s aggregate shareholding, including the shareholding Where a reasonable person would not expect the information to
of his “related parties” and others persons acting in concert be disclosed, the information is confidential, or the information
with him, reaching any multiple of 5 per cent of the total concerns an incomplete proposal or negotiation, an exception
number of voting rights of the relevant PCL, and conversely, may apply to the disclosure requirement depending on the
its aggregate shareholding decreasing by any multiple of 5 per circumstances.

114
Limitations to stakebuilding

5 per cent Allows a shareholder to require the board of directors to include items in the agenda for a shareholders meeting.
Allows a shareholder to file, on behalf of the company, a claim to regain illegal benefits obtained by directors or
executives in relation to a PCL.

Triggers the requirement to report acquisitions to the SEC (and SET, if the target is listed).

25 per cent Constitutes (conclusively) a blocking minority in relation to special resolutions in a company whose shares all confer
the same voting rights.

Triggers an obligation to make a mandatory tender offer in relation to a PCL.

50 per cent Confers control for most purposes (but not the ability to pass special resolutions) of a company whose shares all
confer the same voting rights.

Triggers an obligation to make a mandatory tender offer in relation to a PCL.

75 per Confers full control (allowing special resolutions to be passed) in a company whose shares all confer the same
cent voting rights.

Triggers an obligation to make a mandatory tender offer in relation to a PCL.

What are the limitations to stakebuilding? the above thresholds are exceeded because of an acquisition of
shares due to:
The limitations to stakebuilding are summarised in the table above.
„„ inheritance;
Is there a requirement to make a mandatory offer? „„ rights offer; or
„„ stock dividend.
A mandatory tender offer is triggered in relation to all outstanding
shares and (with exceptions) warrants, derivative warrants or A mandatory offer may not be required if a voluntary tender offer
convertible bonds of a listed PCL by an acquisition that results in results in an acquisition of more than 25 per cent but less than 50
the buyer, together with any parties related to the buyer or with per cent of the voting rights in the target company.
whom it is acting in concert:
For a shareholder who exceeds the 25 per cent threshold (but not
„„ holding 25 per cent or more; a higher one) through the acquisition of newly issued shares, the
„„ holding 50 per cent or more; or requirement for a mandatory offer can be waived by a simple majority
„„ holding 75 per cent or more; vote at a shareholders meeting, subject to approval by the SEC.

of the total voting rights attached to the shares in the PCL. These The concept of “acting in concert” mentioned on page 116
are three percentage levels that are most significant in terms of applies to mandatory tender offers.
control of a PCL (please see the table above).
The SEC may grant an exemption waiving the mandatory offer
A mandatory offer will also be triggered if there is an indirect requirement but only in respect of an acquisition of newly issued
change of control in a listed company (i.e. there is a change in shares as part of a rights issue and only if:
control in a listed company’s shareholders) which results in any
of the above thresholds being reached by combining direct and „„ an independent financial adviser to the other shareholders has
indirect shareholdings throughout the chain. been appointed by the target;
„„ the 50 per cent threshold has not been exceeded; and
A mandatory offer will not be triggered if a listed company buys back „„ no further shares have been acquired since the date on which
its own shares resulting in any shareholder reaching the trigger point, the company resolved to issue the shares.
unless such a shareholder subsequently acquires further shares.
A mandatory offer is not required to be made in situations where

115
The SEC also has discretion to grant a waiver if: In relation to a tender offer, the SEC’s rules require the directors of
the bidder to ensure that all information in the form containing the
„„ the crossing of a threshold does not result in a change of formal offer is true and no information is omitted that might affect
control; or the decisions of investors in relation to the offer.
„„ the acquisition is of newly issued shares in order to recapitalise
the company. Target

When a threshold is inadvertently exceeded, the mandatory offer The board of the target must:
requirement may be avoided by disposing of the excess shares
within seven business days. „„ notify all known shareholders of the receipt of the offer and its
terms;
What defences are available to a target company during the „„ give its opinions on:
stages of an offer? i. the status of the company’s business and a forecast of the
future results of its operations (disclosing the assumptions
To date, the Thai authorities have not issued any rules proscribing on which the forecast is made);
the use of “poison pills” (defences that are available before a ii. the accuracy of the information concerning the company’s
takeover offer is made). However, the obligation imposed on business given in the offer;
the target’s directors (see under Target on this page) to provide „„ disclose any relationship or agreements between any director
information and a recommendation to shareholders applies of the target and the bidder;
separately in respect of each offer, and the directors are under a „„ recommend whether shareholders should accept or reject the
general duty to act in the best interests of the company. offer. If the board’s recommendation is not unanimous, the
recommendation of each director must be given separately;
In the defence document, the target’s board will usually seek to „„ appoint an independent financial adviser to advise the
persuade the target’s shareholders to reject an offer on the basis shareholders on the terms of the offer and whether to accept
that the board does not believe that acceptance of the offer is in or reject it. The adviser is required to give its recommendation
the best interests of the target or its shareholders. “with due care in accordance with professional standards,
taking account of the interests of the minority shareholders”.
The use of “poison pills” is almost unknown in Thailand, as most
takeovers usually have the support of the target company’s board What is the procedure for a squeeze-out of the minority?
of directors. PCLs, meanwhile, are prohibited from restricting the
transferability of their shares although they are allowed to impose There are no provisions for the compulsory acquisition of shares
such restrictions as are necessary to ensure compliance with any of minority shareholders in Thailand. In practice, after successful
foreign ownership restrictions to which they may be subject. It completion of a tender offer, there are usually a number of
would, however, be possible for the board of directors of a target shareholders who cannot be contacted or who have declined
company either to adopt the “pac-man” defence of making a to sell. So long as these persons remain shareholders, the basic
counter-offer for the bidder or to solicit a higher offer from a “white rights of these shareholders (including to receive notice of, and
knight”. Such measures would have to be consistent with the to attend, speak and vote at shareholders’ meetings) must be
board of directors’ general duty to act in the best interests of the respected.
company.
If a resolution to delist the target is passed following completion
What obligations are the directors of the bidder and target of a general tender offer, this resolution triggers the making of a
under? mandatory offer to the dissenting minority shareholders.

Bidder 7. Overview of a private company acquisition

The directors of the bidder owe a general duty to the company Timing
and the company’s shareholders to act in their collective best
interest. Specifically, the Public Limited Companies Act and the The timing of a private acquisition depends on the co-operation
Securities Act require directors to act in a “loyal, honest, careful between the parties and the progress of negotiations and other
manner and in the interests of the company”. The directors are matters specific to the transaction.
liable to the company for any loss resulting from their failure to
meet such standards.

116
Steps No requirements exist concerning the prior approval of foreign
investments in Thailand or the inward remittance of investment
Pre-acquisition stage funds (whether as equity or debt). Nor is there any direct
requirement for the purchase price to be paid within Thailand.
During the pre-acquisition stage of negotiations the parties usually However, not to do so may have adverse tax and foreign
sign heads of agreement or an equivalent document that outlines exchange control consequences. Evidence of the notification
the basic terms of the proposed transaction. This document is to the BoT of inward remittances is required to ensure that
non-binding except for provisions concerning the confidentiality of consent for the repatriation of funds will be given. The notification
information disclosed to one another and any terms concerning is normally handled by the Thai bank that receives an inward
the exclusivity of negotiations. This paves the way for the potential remittance. This bank will issue the requisite evidence to the
buyer to conduct a due diligence review. recipient on the BoT’s behalf.

The pre-acquisition stage typically takes one to two months to 8. What tax issues should be considered?
complete.
Capital gains
Acquisition stage
Capital gains of a foreign entity on the sale of shares in a Thai
At this stage the parties: company that are derived from or in Thailand are subject to a
withholding tax of 15 per cent unless exempted by a double tax
„„ negotiate the terms of the transaction documents; agreement. Gains realised by individuals on the sale of shares of
„„ sign the transaction agreement(s) and/or other related companies listed on the SET or the MAI are exempt from tax.
documents;
„„ fulfil any conditions precedent; and Transfer taxes
„„ obtain regulatory approvals as required.
Ad valorem stamp duty of 0.1 per cent is payable on the transfer
Depending on the complexity of the transaction and of the of shares.
business being acquired, this stage typically takes a further one or
two months but if regulatory approvals or consents are required Transfers of shares listed on the SET or the MAI or registered with
(e.g. approval from the BoI or IEAT or any ministry because of the TSD, regardless of whether the trades are done on-market,
special regulatory requirements for the business sector) the are exempt from stamp duty.
timetable could be extended by a month or more.
On-market trades are conducted in paper-less form with the
Closing stage transfer being electronically processed between the broker and
the TSD.
An acquisition agreement will often contain conditions precedent
to be fulfilled before the acquisition can be completed. Upon Thin capitalisation/interest deductions
satisfaction of these conditions precedent, including obtaining any
requisite approvals, the parties would arrange for legal transfer Interest paid to a lender for the purpose of a company’s business
of the shares or assets and any necessary registrations of the can be used as a deductible expense of the company for the
transfers with the relevant public registries, including the Land purpose of calculating the company’s taxable profit, subject to the
Department, Machinery Registry of the Ministry of Industry (if application of transfer pricing rules if the lender and company are
machinery has been mortgaged or released from mortgage) and associated.
the Patent and Trade Mark Registries at the MoC.
Thailand does not have special legislation regulating thin
Certain notifications may also be required; e.g. to the BoI if the capitalisation. However, a specified level of paid-in share capital
promotion status of the company is conditional on certain levels of or the maintenance of a stipulated debt to equity ratio is often
foreign ownership. imposed by the BoI as a condition of granting investment
incentives for companies whose activities are promoted by the BoI
As Thai law does not distinguish between legal and beneficial and by the MoC when a Foreign Business Licence is granted.
ownership, it is only at closing of an acquisition that a buyer
acquires any legal interest in the target.

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Withholding tax

Payments of certain types of assessable income to a resident


individual or legal entity are subject to withholding tax at varying
rates. The rates range from 1 per cent to 15 per cent depending
upon the nature of the assessable income. For payments
regarding employment, certain services or capital gains to a
resident individual, the rates range from 5 per cent to 37 per cent.
Interest income is subject to a 15 per cent withholding tax if
payment is made by a financial institution to a resident individual.
Dividend income paid to a resident individual is subject to a 10 per
cent withholding tax.

Repatriation of assessable income from Thailand to a non-


resident foreign corporation is subject to withholding tax at a rate
of 10 per cent on dividends, 15 per cent on interest and 15 per
cent on commercial royalties. This, however, may be subject to
reductions under various bilateral tax treaties Thailand has with
other countries.

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Schedule 1: Foreign ownership restrictions in Thailand

This table sets out a summary of some of the foreign ownership restrictions in Thailand on only some of the industries.

Business/Property Minority foreign ownership Majority foreign ownership

Businesses listed in the Annex No permission required Not possible


1 of the Foreign Business
Operations Act consisting of,
amongst other things, newspaper
publication, radio broadcasting
station or radio/television
business, forestry and timber
conversion from natural forests
and trading in land

Banking/finance business Foreigners may own in aggregate up to 25% of Foreigners may own more than 49%
a Thai bank or financial institution, which may be of a Thai bank or financial institution
increased up to 49% by the Bank of Thailand only with approval from the Ministry of
Finance, following a recommendation
by the Bank of Thailand

Insurance business (life/casualty) Foreign ownership is limited to an aggregate of The Finance Minister, following a
25% and 75% of the directors must be Thai. The recommendation from the Insurance
Insurance Commission has power to permit up Commission, has discretion to permit
to 49% foreign ownership, and allow up to 50% greater foreign ownership and allow a
of the directors to be foreign majority of foreign directors

Marine transportation business Foreign ownership up to 30% permitted Not possible

Air transportation business Foreign ownership up to 49% is permitted Not possible

Telecommunications business For Type 2 and 3 telecommunications business For Type 1 telecommunications
licences under the Telecommunications Act, business licences under the
foreign ownership up to 49% is permitted Telecommunications Act, foreign
ownership up to 100%

Tour agency business Foreign ownership up to 49% is permitted Not possible

Employment agency business Foreign ownership up to 49% of the total shares Not possible
(domestic employment) is permitted

Employment agency business Foreign ownership up to 25% of the total shares Not possible
(employment abroad) and 25% of the total number of shareholders is
permitted

Land Foreigners generally cannot own land in -


Thailand unless under a treaty or there is special
permission allowing such ownership

Condominiums Foreign ownership of up to an aggregate of 49% -


of the floor area in a condominium project is
permitted

119
re s
W -
L O

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Vietnam

1. What are the forms of business entity in Vietnam? The LLC’s structure is likely to be the preferred structure as long
as the LLC is wholly foreign-owned. The owner has complete
Common forms of entity control of the LLC and is therefore not subject to rules governing
business relationships with partners, quorums and majority voting.
„„ Limited liability companies (LLC) Even if not wholly foreign-owned, an LLC may be preferable for
„„ Joint stock companies (JSC) foreign investors entering into joint ventures with Vietnamese
„„ Incorporated partnerships parties. In an LLC, the foreign member may choose his partners,
„„ Private enterprises (i.e. sole proprietorships) rather than in a JSC where the public has the right to purchase
shares. The foreign member of an LLC can also agree with the
Less common forms of entity local partner that in the event the local partner wants to sell its
capital in the LLC, the foreign partner has pre-emptive rights of
„„ Business cooperation (similar to an unincorporated joint purchase.
venture)
Further, the Law on Enterprises provides for enterprises to
Choosing between an LLC and a JSC convert from one form to another. The law allows an LLC
to be transformed into a JSC and vice versa (subject to the
An LLC or a JSC is likely to be the most appropriate structure for requirements for the converted enterprise). It is also possible for a
foreign investors who want to set up a joint venture company or a single-member LLC to transform to a two or more member LLC.
wholly foreign-owned company in Vietnam. These transformations are subject to the various requirements
under the Law on Enterprises.
LLC: There are two types of LLC, a one-member LLC and a two
or more-member LLC. A one-member LLC is a company owned 2. How is a company managed?
by one organisation or individual. A two or more-member
LLC is a company owned by at least two, but no more than 50, The basic management structure
individuals and/or organisations. An LLC has “charter capital”
which is the amount of capital that the members contribute and is What form does the management structure take?
stated in the charter of the LLC. The charter capital is not divided
into shares. For a one-member LLC, the owner has complete control. For
a two or more member LLC, the members run the company
JSC: A JSC is a company in which charter capital is divided into via a members’ council, which is the highest decision making
shares. A JSC must have a minimum of three shareholders, there body in an LLC. Each member of the LLC may participate in the
is no maximum number of shareholders. members’ council or appoint their authorised representative to
be a member of the members’ council. Each member, or their
Section 2 describes some of the differences between the structure authorised representative, possesses a number of votes pro rata
of an LLC and a JSC. When choosing a structure for their foreign to his/her capital contribution.
investment, investors should be aware that an LLC and a JSC
both have advantages and disadvantages. A director or general director can be appointed by the company
and is responsible for the daily operation of the LLC. Directors or
For a JSC, one advantage is that a foreign shareholder is general directors are personally responsible for their performance
permitted to sell shares to raise capital. The foreign shareholder to the member’s council. In practice, only one director or
can also be issued preferential shares in order to achieve a general director is appointed. However deputy directors may be
quorum in a meeting and to control voting. appointed and, depending on the nature of their appointment,
may attract liability similar to that of a director.
The JSC’s structure may be preferable for a minority foreign
shareholder interested in testing the market before fully The management structure of a JSC normally includes a
establishing themselves in Vietnam. A minority shareholder can shareholders’ general meeting, a control board, a board of
easily increase its ownership in the JSC by purchasing shares management (board) and director or general director. The JSC
from other shareholders. A foreign shareholder can easily exit its must have a control board when it has more than 11 individual
investment in the JSC by selling its shares to others. However shareholders or one organisation shareholder holding more than
a founding shareholder is not permitted to transfer his shares to 50 per cent of its total shares.
non-founding, shareholders without the resolution of a general
shareholders meeting within three years of incorporation of a JSC.

121
How are directors appointed to and removed from office? What duties do directors owe?

LLC (two or more-member LLC): Each member of the Overview


LLC may participate in the members’ council or appoint their
authorised representative to be a member of the members’ Unlike other jurisdictions that tend to have company or
council. A director or general director is appointed and dismissed corporation legislation that embodies a defined set of rules relating
by a resolution of the members’ council. to corporate governance, the concept of corporate governance is
still a developing area of law in Vietnam.
JSC: Each shareholder is entitled to attend or be represented
at the shareholders’ general meeting. The board comprises Obligations and duties relating to corporate governance are
between three to 11 members (unless otherwise provided for in evident in laws such as the Law on Enterprises and the Civil
the charter) elected by the shareholders at a shareholders’ general Code, which contain certain rights and obligations pertaining to
meeting. A director or general director is appointed by the board office bearers. However, Vietnam is a civil law jurisdiction and as
and is responsible for the daily operation of the JSC. such there is no system of precedent available to assist in defining
areas of corporate governance not stated in the law.
What powers does the board have?
Duty to the company
In an LLC, the members’ council makes all of the decisions
relating to the company. A resolution of the members will be The directors and members of an LLC must:
passed at a meeting if it is approved by the members or their
authorised representatives representing at least 65 per cent of the „„ exercise their rights and obligations in a trustful, careful and
capital contribution of all attending members. There are higher best manner;
thresholds for certain resolutions. The scope of the resolutions „„ be loyal to the benefits (which may broadly be interpreted
that the member’s council is able to pass is broad and contained to mean the well-being of the company) and owner of the
in the law and the company’s charter. company;
„„ not mis-use confidential information; and
A JSC’s powers are divided between: „„ provide information in a timely fashion with regard to related
persons or enterprises.
„„ a board, whose powers are governed by the charter of the
company. Although it is responsible for managing the company, The board and directors of a JSC must:
there may be certain matters that are set aside for vote at a
shareholders’ general meeting; and „„ exercise the rights and obligations assigned to them in
„„ a director or general director who is responsible for the daily accordance with the law, the charter, the decisions of the
operation of the JSC. shareholders, and the shareholders’ general meeting in an
honest, diligent and best manner to protect the interests of the
Are there any residency requirements for directors? company and its shareholders;
„„ be loyal to the benefits and owner of the company;
In an LLC, there is no requirement for the members of the „„ not mis-use confidential information; and
members’ council or the directors to be resident in Vietnam. „„ provide information in a timely fashion with regard to related
In practice, it is a requirement of the authorities that if a general persons or enterprises.
director is appointed they must be resident in Vietnam.
Duty to the shareholders
The Enterprise Law only requires the CEO to be resident
in Vietnam. Board members may be subject to residency In an LLC company, directors are directly responsible for their actions
requirements imposed by the company’s charter. to the members’ council. Each member has the right under the
law to lodge a “complaint” or initiate a proceeding against a director
Is there any requirement for directors to hold shares? or general director who causes loss/damage to the company or
members. Depending upon the actions of the directors, there may
If a director is a member of an LLC, they are required to hold at also be rights of recourse under legislation such as the Civil Code.
least 10 per cent of the charter capital of the company. There is
no such requirement for a director of a JSC. In a JSC, the board and each director must comply with the law,
the charter of the company and shareholder resolutions. Each

122
member of the board is liable to the company for any losses „„ failing to exercise delegated rights and perform delegated
resulting from such a breach. duties honestly, prudently and to the best of their ability in the
maximum lawful interest of the company and shareholders;
Duty to creditors „„ failing to be loyal to the interests of the company and the
shareholders of the company;
A company enters a state of bankruptcy when it is incapable of „„ misusing information, secrets or business opportunities of the
repaying its debts when due at a creditor’s request. The Law company; and
on Bankruptcy places certain obligations on directors in order to „„ abusing his position and powers or the assets of the company
protect a creditor’s interests, such as the ability for creditors to file for his personal benefit or for the benefit of other organisations
a petition for bankruptcy. or individuals.

A company (including its directors) is prohibited from disposing If the board of a JSC passes a resolution that is contrary to law
of its assets for the three-month period prior to the filing of a or contrary to the provisions of the charter of the company, and
petition. The law is unclear in this respect and assumes a degree thereby causes damage to the company, the board members who
of knowledge (constructive or actual) that a petition is to be filed. agreed to pass such a resolution are personally jointly liable for
It is broad enough to allow a court the power to invalidate all the resolution and they must compensate the company for such
transactions relating to assets (within the three-month threshold) damages. Any board member who opposed the passing of such
made prior to the petition being filed. resolution is exempt from liability.

Duty to employees The directors of a JSC are responsible for breach and any
damage caused to the company if they fail to manage the day-to-
There is no express duty owed by directors to employees. Under day business operations of the company in strict accordance with
Vietnamese labour law, a duty to the employees is owed only by the law, the charter of the company, their employment contract
the company itself. with the company and the resolutions of the board.

What types of liability can directors incur? What are the auditing requirements for companies?

In an LLC where there are two or more members, each member is The Enterprise Law requires a company to conduct an audit in the
personally liable to the company for: following circumstances:

„„ any violation of the law; „„ if an LLC reduces its charter capital, and that company has
„„ any business or transactions that are not for the benefit of the more than 50 per cent foreign-owned capital, the financial
company which cause damage; and statements required to be submitted to the relevant authority
„„ the payment of company debts if the company is in financial must be certified by an independent auditor; and
trouble. „„ in some cases, the law requires a JSC to be audited; therefore
the annual financial statements of the shareholding company
Where an LLC has a single member, the member is liable for must be audited before they are submitted to the general
the debts and other liabilities of the company. Such liability is meeting of shareholders for consideration and approval.
restricted to the amount of its charter capital. The charter capital
of a company is the amount each party to an LLC commits to Under the circulars for the implementation of auditing standards:
or contributes to a company (this can be in the form of cash or
other contributions). Prior to any transfer of capital, the member „„ annual financial reports of enterprises and organisations
is “jointly” liable for all debts and “other property” liabilities of the with foreign-owned capital must be audited by an auditing
company. enterprise lawfully operating in Vietnam prior to submission to
the competent state body. The state encourages enterprises
In a JSC, members of the control board are individually and jointly and organisations with foreign-owned capital to audit their
responsible for compensating the company for any loss caused financial reports for tax purposes.
by: „„ enterprises and organisations with foreign-owned capital must
submit their audited annual financial reports to the local tax
„„ failing to comply with the law, the charter of the company, division, the body which issued their investment licence or
resolutions of the general meeting of shareholders, or operating licence, the statistics department, the Ministry of
professional ethics in the exercise of delegated rights and Finance, and the Vietnamese capital contributing parties (if any).
duties; If the enterprise or organisation has a head office in an export

123
processing zone, industrial zone or high-tech zone, it must, if Amalgamations
requested, submit its financial reports to the management board
of the export processing zone, industrial zone or high-tech zone. Two or more local companies of the same type may, in
accordance with the Law on Enterprises, consolidate or merge
The Decree on Independent Auditing makes the auditing of annual to form a new company, by transferring all of their legal assets,
financial statements compulsory for the following: rights, liabilities and interests.

„„ enterprises with foreign-owned capital; The process involves preparation of a consolidation contract.
„„ organisations with credit, banking and development assistance Members, owners or shareholders of the companies being
funds; consolidated must approve the consolidation contract and the
„„ finance and insurance organisations; and charter of the consolidated company. They must also elect or
„„ companies listed on the stock exchange. appoint the chairman of the members’ council, chairman of
the company, the board and the director or general director
3. What are the most common types of M&A transaction? of the consolidated company and register the business of the
consolidated company. The business registration document must
Private companies include the consolidation contract. The consolidation contract
must also be sent to all creditors and notified to employees within
Share acquisitions 15 days from the date of its approval.

An LLC with two or more members is able to issue shares. A If the consolidated company holds a market share of between
member of an LLC can transfer all or part of its capital contribution 30 per cent and 50 per cent of the relevant market, the legal
in the company to another entity. However, existing members of representative of the company must notify the competition
the LLC have a pre-emptive right. managing body before carrying out the consolidation. If the
resultant market share is 50 per cent or more of the relevant
If a single-member LLC company transfers part of its capital to market then the consolidation is prohibited.
another member, it must convert to a two or more member LLC.
A JSC company can issue various types of shares with different rights Joint ventures
attached. The most common are ordinary shares with full voting
rights and preference shares (which can have voting rights attached). Unincorporated joint ventures are not common in Vietnam.

A buyer can purchase shares in a JSC company and, generally, by Demerger


acquiring shares in such a company, the buyer acquires all voting
rights attached to such shares. However, a founding shareholder An LLC or a JSC is able to demerge by either transferring part of
cannot transfer its shares (other than to another founding the assets of the existing company to establish one or more new
shareholder) within three years of their issue. Any proposed transfer companies of the same type or by transferring a part of the rights
is subject to agreement at a general shareholders’ meeting. and obligations of the company without terminating the existence
of the company being separated.
For private companies, whether foreign-invested or domestic, a
takeover is achieved by obtaining all of the shares in the company The process requires the members’ council, the company owner
by agreement with all shareholders of the target. or a general meeting of shareholders of the company to pass
a resolution on the separation of the company. The resolution
Schedule 1 provides an overview of the different compulsory on separation of the company must be sent to all creditors and
notification, approval and reporting requirements for the notified to employees within 15 days from the date of its passing.
acquisition of private companies.
After business registration, the company being separated and
Business/asset acquisitions the separate company(ies) are jointly liable for unpaid debts,
labour contracts and other property obligations of the company
A buyer can also purchase the business and assets of a company. being separated, unless otherwise agreed amongst the company
Each asset must be transferred subject to the particular required being separated, the newly-established companies, creditors,
formalities. For some classes of assets, this simply means customers and employees.
handing over the asset (i.e. physical delivery), whereas others
require transfer documents (e.g. real property).

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Public companies There is no statutory concept of lock-out and break fees. Parties
may enter into heads of agreement containing such provisions,
Takeovers (see section 6 for a more detailed summary of public but it is uncertain whether such provisions will be legally
takeovers) enforceable.

A public company is defined to mean one of the following: (i) a 4. What percentage shareholding is required to achieve
company which has already made a public offer of shares; (ii) a effective control of a company?
company that has shares listed on a stock exchange; and (iii) a
company that has shares owned by at least 100 investors (but The law is not altogether clear on this point and varies according
excluding professional securities investors) and a paid-up charter to the industry sector. Under the Investment and Enterprise
capital amount of VND10 billion or more. Laws a 65-75 per cent shareholding will secure a resolution at
a shareholders’ general meeting. However as stated this will
Vietnam has no specific law relating to takeovers of public depend upon the industry and those matters specifically stated in
companies. Invariably it is governed by a number of different a company’s charter.
laws, including the Law on Enterprise and Law on Securities.
Following Vietnam’s accession to the World Trade Organisation
There are various government authorities that regulate takeovers. (WTO), the charter of a JVC (between local and foreign partners)
For example the State Securities Commission (SSC) is responsible can stipulate that a 51 per cent majority is required to pass
for takeovers involving listed companies. decisions. However, this is limited to companies that fall under
service sectors. A greater majority is required in restricted
Schedule 1 provides an overview of various compulsory sectors, such as the telecoms industry where the majority
notification, approval and reporting requriements for the ownership and thus control of the enterprise (i.e. control over
acquisition of public companies. voting at the board level) is maintained by the state (pursuant to its
WTO commitments).
Schemes of arrangement
5. Regulation, consents and foreign investment restrictions
Under Vietnamese law, there is no concept of a scheme of
arrangement. Are there any regulated industries?

Amalgamations Under the Investment Law, investors may invest in any sector
not prohibited by law. Areas prohibited by law include: (i) those
See the section on Amalgamations of private companies on page that are detrimental to national defence, security and the public
124. interest; (ii) the treating of toxic waste imported to Vietnam; and (iii)
projects detrimental to historical and cultural traditions.
Joint ventures
Vietnam also has “conditional sectors” in which investment is
See the section on Joint ventures of private companies on page restricted. These include the tobacco industry, banking and
124. finance, public health, education, culture and information, mining
of natural resources, real estate, and entertainment.
Public-to-private acquisitions (P2Ps)
Are there any restrictions on the foreign ownership of
P2Ps are regulated by both the Law on Securities, the listing rules shares in a Vietnamese company?
and the Law on Enterprises (and various subordinate legislation).
The process would involve either withdrawing a public bid of Schedule 2 summarises restrictions on foreign ownership of
shares or delisting the company (see section 5). shares in some of the main industries. As the restrictions are fairly
extensive under Vietnamese law, Schedule 1 only lists foreign
Do the parties have an obligation to negotiate in good faith ownership restrictions on some of the major industries.
to one another in M&A transactions?
On 1 June 2009, the Prime Minister of Vietnam issued a decision
Whilst the Civil Code does recognise the concept of good faith (a that restricts foreign investors from purchasing 49 per cent of the
concept applicable to all transactions), it is unclear how that concept total number of shares in a public shareholding company on either
is applied in practice. The Civil Code broadly states that all persons stock exchange. It is not yet clear what impact this will have on
(including legal entities) must act with “goodwill and honesty”. the M&A process in Vietnam.

125
Are there any foreign exchange and investment controls? the amount of total capital resources (which is equal to the total
value of assets of such enterprise) or the annual average number
The Ordinance on Foreign Exchange Controls (and related of employees.
subordinate legislation), controls all manner of foreign exchange
including: The Competition Law is applicable to “foreign companies
operating in Vietnam”. In the absence of detailed guidance from
„„ current/capital transactions; the Vietnamese authorities, it is not entirely clear if the Competition
„„ the opening of a “Capital Contribution Share Purchase Account Law is applicable to an offshore merger transaction.
in Vietnamese Dong” which must be opened with a commercial
bank in Vietnam for the foreign investor to convert USD into Vietnamese competition regulatory authorities consist of the
Vietnamese Dong (VND) for any acquisition and which must be Vietnam Competition Administration Department and the Vietnam
registered with the State Bank of Vietnam; and Competition Counsel.
„„ breaches relating to such laws.
What are the employee issues?
Is there any merger control?
Are works councils/consultation common?
The Competition Law deals with two specific issues: unfair
competitive practices and practices in restraint of competition. In case of a merger or transfer of ownership of a company,
It applies to organisations and individuals conducting business, including the right to use the assets of the company, the parties
including enterprises engaged in the production or supply of to the transactions are not required to consult employees and the
products or services, enterprises conducting business in state company’s trade union before the merger or transfer.
monopolised industries and sectors, and overseas enterprises
operating in Vietnam. However, it is difficult to determine which However, if all existing employees are unable to be utilised, the
overseas entities are subject to the Competition Law because employer must prepare a plan for labour usage and the trade
the Competition Law does not clarify what kinds of operations in union is required to participate in its preparation. The plan for
Vietnam are required. labour usage contains the following information:

In a merger scenario, the Competition Law provisions relating „„ the number of employees who will continue to be employed;
to activities in restraint of competition are relevant. These are „„ the number of employees who will be re-trained in order to
defined as those which will reduce, deviate or restrain competition continue their employment;
in the market. „„ the number of employees who will retire; and
„„ the number of employees whose labour contracts will be
Enterprises are restrained from entering into agreements in terminated.
restraint of trade which restrict the entry or development of other
businesses. The former employer and the continuing employer shall be
responsible for resolving the rights of employees, including
Mergers that result in a “monopolistic or dominant market specifying responsibility for funding of training and for loss of
position” are prohibited (a market share of 30 per cent or more is work allowances for employees whose labour contracts must be
deemed to be capable of significantly restricting competition). terminated.

When a merger, consolidation, acquisition or joint venture Are any actions required prior to or upon an acquisition for
results in a combined market share which does not lead to a employees?
“monopolistic or dominant market position” of 30-50 per cent (an
economic concentration) the Vietnam Competition Administration If an acquisition does not result in a change of ownership of the
Department must be notified. If the result is a combined market enterprise and termination of employees, no actions are required
share of 50 per cent or more then it is prohibited. prior to or upon such an acquisition in relation to employees.

An exception to both of these situations is where the economic Where there is a change in ownership, the succeeding owner/
concentration results in a small or medium enterprise. The phrase employer is responsible for continuing the performance of the
“small to medium enterprise” is not specifically defined in the labour contract of the employees. Although in practice the labour
Competition Law; however under a decree issued regarding “small contracts of employees with the old owner/employer continue
to medium enterprises”, it comprises three kinds of enterprise: to be implemented, the succeeding owner/employer may re-
super small, small and medium, which is determined according to negotiate its terms and/or sign a new labour contract.

126
Where a new labour contract with the succeeding owner/ stocks on the stock exchange must have conducted a profitable
employer is signed, the labour contract with the old owner/ business operation for two consecutive years immediately
employer is terminated and a severance allowance equivalent preceding the year of listing registration.
to half of one month’s salary for each year of employment plus
salary allowances (if any) is payable to an employee who has been However, a company wishing to list stocks at a securities trading
regularly employed by the company for at least 12 months. centre need only have conducted a profitable business operation
for one year immediately preceding the year of listing registration.
A labour usage plan is required if all existing employees are unable
to be utilised after a merger or transfer of ownership of a company, How does a company delist its share capital?
including the right to use the assets of the company. Employees that
have been employed by the company for 12 months or more and When a company voluntarily delists its shares, it is required under
whose contracts are terminated are entitled to an allowance for loss of the Securities Law to submit a delisting dossier which includes:
work equivalent to one month’s salary for each year of employment,
but not less than two months’ salary. „„ a written request for delisting; and
„„ an approval from the following (as the case may be):
The provincial-level Department of Labour, Invalids and Social
Affairs must be notified when a labour usage plan is implemented. • the shareholders’ general meeting approving the stock
delisting;
For foreign employees with a work permit, there is no provision • the board of directors approving the bond delisting;
under the law for amendment of the work permit. It is advisable • the shareholders’ general meeting approving the convertible
that the succeeding owner/employer apply for a new work permit bond delisting (for a JSC);
for the foreign employees. • the members’ council approving the bond delisting (for an
LLC with two or more members) or the company’s owner
Are there any notification obligations for employees prior to or upon (for a one-member LLC) or the representative of the capital
an acquisition? owner (for state enterprises);
• the investors’ congress approving the securities investment
If an acquisition does not result in both a change of ownership of fund certificate delisting; or
the enterprise and the termination of employees, no notification is • the shareholders’ general meeting of the securities
required to employees prior to or upon such an acquisition. investment company approving the stock delisting.
Where there is a change in ownership, if all existing employees are
unable to be utilised in case of a merger or a transfer of ownership Where a company voluntarily delists from the Ho Chi Minh Stock
of the company, the labour laws are silent as to the notice period Exchange, the Listing Rules state that the enterprise:
required prior to the termination of the employee contracts.
In the case of a merger, the merger contract is required to „„ must obtain an approval from:
be notified to all employees within 15 days from the date of
its approval by the members, owners, or shareholders of the • the general meeting of shareholders with a minimum of 65 per
companies. cent of the votes of all attending shareholders (or 75 per cent in
the case of written resolutions) to delist its shares;
With which stock exchange requirements must listed • the board (in the case of a shareholding company);
companies comply? • the members’ council (in the case of an LLC);
• the owner (in the case of a single member LLC);
What rules generally govern listed companies? • an authorised body (in the case of a state enterprise) in
respect of delisting bonds; or
In Vietnam, there are two types of centralised securities market: • the general meeting of investors in respect of delisting fund
stock exchanges and securities trading centres. Ho Chi Minh certificates;
City market has been designated as a stock exchange and Hanoi
as a securities trading centre. However, the market in Hanoi is „„ must discharge all obligations in accordance with current law
also expected to be converted to a stock exchange later in 2009. before requesting delisting; and
Different listing rules apply to each securities market. „„ must lodge an application file for delisting with the Listing and
Examination Department of the stock exchange.
There are different listing requirements for companies depending
on whether they wish to be listed on a securities trading centre The stock exchange must consider approving or refusing the
or a stock exchange. For instance, a company wishing to list delisting of securities within 30 days from the date of receipt of a

127
complete and valid file. In a case of refusal to approve, the stock There are limited circumstances where a “public bid” may be
exchange must provide a document specifying its reasons. triggered. The Law on Securities provides that a “public bid” is
triggered:
Under the Listing Rules of the Hanoi Stock Exchange:
„„ when a bid is made to purchase voting shares of the target and
„„ the enterprise must obtain an approval from the general the proposed purchase would result in the acquirer owning at
meeting of shareholders with a minimum of 65 per cent of the least 25 per cent or more of the entire issued share capital of
votes of all attending shareholders (or 75 per cent in the case the target; and
of obtaining written opinions from shareholders) to delist the „„ when the bid compels shareholders to sell their stock.
shares;
„„ the enterprise must obtain approval from the board (in the case There is no form of hostile takeover in Vietnam. Given the legal
of a shareholding company) or from the members’ council (in framework, it is doubtful that an attempt to conduct a hostile
the case of an LLC); takeover would work.
„„ the enterprise must obtain approval from the owner (in the case
of a single member LLC); What is the regulatory framework for a public bid?
„„ the enterprise must obtain approval from an authorised body
(in the case of a state enterprise) if delisting bonds; The Law on Securities (No. 70/2006/QH11)
„„ the enterprise must lodge an application file for delisting with
the Listing Management Division under the trading centre; The Law on Securities is augmented by several decrees, circulars
„„ the trading centre (within three working days) must disclose the and letters that assist with the interpretation of its provisions. In
receipt of the file on its “disclosure media”; and addition, the various listing rules may be applicable to certain
„„ the trading centre must consider approving or refusing to acquisitions.
approve the delisting of securities within 30 days from the
date of receipt of a complete and valid file. In a case of refusal Application of the Law on Securities
to approve, the stock exchange shall provide a document
specifying its reasons. The Law on Securities (and its subordinate legislation) provides
for public offerings of securities, securities listing, trading and
Is financial assistance prohibited? investment, and provision of securities and securities market
services. The Law on Securities (and its subordinate legislation)
There is no prohibition on financial assistance in Vietnam. applies to Vietnamese and foreign organisations and individuals
engaged in securities investment and operating in Vietnam’s
6. Public takeovers securities market.

What are the forms of a public bid? When a treaty to which the Socialist Republic of Vietnam is a
contracting party contains provisions different from the Law
Takeovers of public companies typically take the form of an on Securities (and its subordinate legislation which comprises
acquisition of share capital of the target company (the target). decrees, circulars and listing rules), the provisions of that treaty
However, there are several restrictions on foreign investors prevail.
conducting a takeover of a Vietnamese registered company. A
proposed acquirer may be prevented from making an acquisition What are the main bid terms?
of all of the issued share capital, with a partial offer potentially not
giving the acquirer control or a majority share of the enterprise. Minimum price requirements

The term “public offer” under the Law on Securities is defined Vietnamese law does not require a minimum price.
as an offering of securities and primarily relates to initial and
additional public offerings of shares by a public company. Cash/non-cash terms

However, the phrase “public offer to purchase shares” is used in This is not addressed under Vietnamese law.
a circular interpreting the law relating to “public bids” in the Law
on Securities. Although the law appears to be contradictory, Cash consideration
the term “public bid” in practice would refer to “a public offer to
purchase shares”. This is not addressed under Vietnamese law.

128
Non-cash consideration Announcements

This is not addressed under Vietnamese law. In the case of a public bid, once SSC approval is obtained for the
bid, an announcement is made in the mass media. The law is not
Conditions clear as to the timing of such an announcement other than it must
be made in advance of the bid.
Vietnamese law does not set out any mandatory conditions.
The announcement must be made in three consecutive issues of
Funding the acquisition a central newspaper and a local newspaper of the locality in which
the head office of the company whose shares are to be purchased
This is not addressed under Vietnamese law. is located. Where the company whose shares are offered for
purchase is a listed company, the announcement must be made
What is the timing of a public bid and what is the procedure on the media of the stock exchange or securities trading centre at
to be followed? which the company is listed.

Simplified offer timetable

Whilst Vietnamese law does not specifically set out the detail of an
offer timetable, in cases that result in a “public bid” for securities
the following timetable is relevant:

Date/Time period Events

Day 0 (D) (Date prior to the date The bidder prepares registration documents for its public bid to purchase shares.
of the public bid) The bidder must appoint a securities company as its agent to make the offer.
The bidder deposits in escrow a sum equal to 100 per cent of the value of the shares
registered for the offer, calculated on the price offered.

D+1 The bidder sends the bid registration documents to the SSC for approval and at the
same time sends the registration documents to the target.

D+8 Last date for SSC to reply giving approval or disapproval (including reasons why).

Last date for target to notify the SSC and its shareholders of its opinion as to whether or
not to accept the offer for purchase.

D+9 Bid is announced in the mass media.


(assuming bid is announced next
day, however there is no legal
requirement for this)

D+39 The law states that the duration for conducting a public bid is between 30 and 60 days
after the announcement of the public bid. This includes any adjustment to the bid.

D+69 Last day for conducting the bid.

D+76 The bidder’s designated agent must transfer the proceeds to the shareholders selling
their shares.

D+79 Last date reporting the result of the bid to the SSC.

129
Acceptance period „„ the projected number of stocks subject to the bid;
„„ the bid duration;
This is not directly addressed by Vietnamese law; however in the „„ the bid price;
case of a public bid, the bid must be concluded between 30 and „„ the bid conditions;
60 days after the announcement of the bid. „„ audited financial statements of the last year for the legal
entities, or a bank’s confirmation of financial ability of
Satisfying offer conditions individuals;
„„ written agreement with members of the board of management
This is not addressed by Vietnamese law. and major shareholders of the public company whose shares
are offered for purchase in the case where there is a prior
Offer unconditional - payment agreement between the two parties;
„„ name of the securities company as the agent delivering the
This is not addressed by Vietnamese law. offer for purchase; and
„„ documents proving that the company satisfies all conditions for
Competing bids redemption of shares stipulated in the law in the case where a
public company redeems its own shares by way of making a
This is not addressed by Vietnamese law. public offer to purchase.

Failed bids and further offers Target documentation

This is not addressed by Vietnamese law; however, in the event Other than the written opinion of the Board recommending to
of a bid being rejected by the SSC (or the target) there seems to shareholders whether they should accept or refuse the offer
be no restriction on a bidder resubmitting the bid for approval as for purchase, there are no specific documentary requirements
long as the issues raised by the SSC (or the target) have been relating to the Target. See under Target on page 131 for details
addressed. regarding the requirements of the written opinion.

What documentation is involved in the process? Responsibility statements

Press announcement The Law on Securities places general obligations on enterprises


involved in “securities activities”, which include an obligation not
Any disclosure of information must concurrently be reported to the to disclose misleading information. The term “securities activities”
SSC. Information can be disclosed in mass media, publications of is not defined in the Law on Securities but, in practice, would
organisations, and the communication media of the relevant stock include public bids.
exchange or trading centre. (Please see under Announcements on
page 131). What are the practices relating to break fees and lock-out?

The contents of the information to be disclosed are subject to those The concept of break fees is not common practice in Vietnam.
specifications issued by the Ministry of Finance from time to time. Lock-outs are generally a product of the contractual relationship
between the parties.
Offer document
What are the rules on information gathering/provision?
A public bid (or public offer to purchase shares) requires the
bidder to submit a bid registration documents to the SSC and the This is not addressed under Vietnamese law.
target. These documents comprise the offer.
What is the position regarding insider trading?
Bid registration documents must include:
The Securities Law does not deal with insider trading in detail.
„„ an application for registration of a public offer for purchase in The law prohibits a person to use inside information to buy or
accordance with the law; sell securities for themselves or for others. Such persons are
„„ name and address of the bid-making organisation or individual; also prohibited from disclosing or supplying inside information
„„ type of stock subject to bid; or advising others to buy or sell securities based on inside
„„ the number of stocks subject to bid and currently held by such information.
organisation or individual;

130
Under the Securities Law, certain classes of people are deemed What are the limitations to stakebuilding?
to have insider information. These include members of the board
of directors, the control board, the director or the general director, Acquisition of 80 per cent or more of the entire share capital of
the deputy directors or the deputy general directors of the public the target will usually trigger a mandatory offer (see Mandatory
company; members of the representative committee of the public offers below).
fund; and majority shareholders of the public company or the
public fund. Majority shareholders are required to disclose further share
acquisitions.
Inside information is defined as undisclosed information on a
public company or a public fund, which may, once disclosed, Certain industry sectors limit foreign ownership; for example, in the
greatly affect the price of securities of such public company or telecom industry (facilities based enterprises) foreign ownership is
public fund. limited to 49 per cent (see page 127 and Schedule 2).

What are the public disclosure requirements in a takeover After a successful public bid for purchase of shares, the offeror is
scenario? not allowed to sell the purchased shares within six months from
the expiration of the public bid.
Bidder
Is there a requirement to make a mandatory offer?
The bidder must send a notice of public bid to the SSC for approval
and make an announcement (as described on page 131). If an acquirer acquires 80 per cent or more of the entire share
During the SSC approval process, the bidder is required to capital of the target, they are obliged within 30 days to acquire
include in its bid registration documents (as described under Offer the balance of the share capital (if requested by shareholders) at
document on page 132) the number of shares currently held in the announced bid price.
the target.
What defences are available to a target company during the
If the bidder is to become a majority shareholder it is also required stages of an offer?
to report such ownership to the SSC and the relevant stock
exchange. This is not specifically addressed in Vietnamese law.

See Schedule 1 for other disclosures. What obligations are the directors of the bidder and target under?

The bidder must report to the SSC within 10 days after Bidder
completion of the acquisition.
Vietnamese law does not place specific obligations on directors in
Target these circumstances.

Within seven days from the date of receipt of the documents for Target
registration of an offer for purchase, the public company whose
shares are offered for purchase must provide the SSC with, and Vietnamese law does not place specific obligations on directors in
notify all shareholders of, its opinion on whether or not to accept these circumstances.
the offer for purchase.
What is the procedure for a squeeze-out of the minority?
The opinion must be in writing, signed by at least two-thirds of
the total number of the members of the board, and must evaluate This is not a concept familiar to Vietnamese law.
the offer and recommend to the shareholders whether they
should accept or refuse the offer. Where the offer is refused, the 7. Overview of a private company acquisition
company must specify its reasons.
Timing
Does a memorandum of understanding (MoU) need to be
disclosed? It is not possible to give a clear understanding of the timing
for private acquisitions, as these are largely dependent upon
There is no requirement under Vietnamese law for disclosure of the nature of the transaction and the parties. This is further
the MoU. complicated where approvals are needed from government
authorities, as there is no accurate way to predict these timings.
131
Steps Transferor being an individual resident

The usual steps are as follows: A transferor that is an individual “resident” in Vietnam is liable
to pay a personal income tax (PIT) of 20 per cent of the gains
„„ due diligence; realised. If the assets transferred are securities and the transferor
„„ execution of agreements; cannot account for the net gains, the PIT is imposed at 0.1 per
„„ completion of conditions precedent including all licensing, cent of the gross transfer price.
approval and registration requirements under law; and
„„ completion. In order for the tax rate of 20 per cent to apply, the individual tax
resident is required to register to pay the PIT on the net gains,
8. What tax issues should be considered? obtain a tax code number, and implement the accounting regime
of invoices and vouchers in accordance with Vietnamese tax
Capital gains regulations.

The transferor of a capital interest or securities is subject to capital A individual tax resident is defined as one who stays in Vietnam
gains tax. Capital gains tax in Vietnam is a form of income tax for 183 days or longer within a calendar year or within a period
imposed on capital gains (or premium) realised by the transferor of 12 consecutive months from his/her arrival in Vietnam or has a
from the transfer of its capital interests or securities in a company registered permanent residence in Vietnam or has a house rented
located in Vietnam. in Vietnam under a lease contract of a term of at least 90 days in
a tax year.
For the purposes of capital gains tax, capital gain from a transfer
of a capital interest or securities means the price of the transfer Transferor being an individual non-resident
less (i) the previous purchase price of the capital interest or
securities (or value of the capital interest at the time of capital A transferor who is an individual “non-resident” is liable to pay
contribution) and (ii) any transfer transaction expenses. Securities a PIT of 0.1 per cent of the gross transfer price, irrespective of
are shares, bonds and other types of securities issued by public whether there is any capital gain. This rate applies to both a
JSCs. transfer of a capital interest and a transfer of securities.

Transfer taxes Thin capitalisation/interest deductions

Transferor being a company The thin capitalisation rule (with a charter capital minimum of
30 per cent of total investment capital) has been repealed. In
A corporate transferor of a capital interest or securities is liable practice, if the charter capital is unreasonably small compared
to pay a corporate income tax (CIT) of 25 per cent of the capital with the proposed loan capital, the investment application may
gains realised on the transfer of the capital interest or securities, be questioned by authorities, which may jeopardise such an
regardless of whether the transferor is incorporated in Vietnam application.
or offshore. If the assets transferred are securities, however, the
offshore transferor is subject to CIT at 0.1 per cent of the gross Withholding tax
transfer price. The transferor is not subject to value added tax.
This does not apply to acquisitions in Vietnam.

132
Schedule 1: Compulsory notification, approval and reporting requirements

Private companies Public companies

The following compulsory notifications, reports and approvals are The following compulsory notifications, reports and approvals are
required for the merger or acquisition of shares/equity interests in required for mergers or acquisitions of shares/equity interest in
private companies incorporated in Vietnam: public companies incorporated in Vietnam:

i. any acquisition of shares from a founding shareholder i. any acquisition of shares in a public company under
in a JSC, or any acquisition of 5 per cent or more of private placements of shares, which results in a
the total shares of a JSC must be reported to and, shareholder becoming a “major shareholder” (i.e. who
with respect to the founding shareholder, recorded in directly or indirectly owns at least 5 per cent or more
the business licence issued by the licensing authority of voting shares of the relevant public company) must,
(which is the business registration office for purely under the Law on Securities, be reported to the SSC
domestic companies or the Department of Planning and and the relevant stock exchange where the shares of
Investment for foreign-invested companies); the public company are listed;

ii. any acquisition of the equity interest (or “charter ii. any acquisition of shares in a public company under a
capital” as the term used by the Law on Enterprises) private placement of shares, which results in a group of
in an LLC must be reported to, and recorded in the “affiliated persons” holding 5 per cent or more of voting
business licence issued by, the licensing authority shares in the relevant company, must also be reported
(which is the Business Registration Office for purely to the SSC and the relevant stock exchange where the
domestic companies or the Department of Planning shares of the company is listed;
and Investment for foreign-invested companies) and the
relevant specialised authorities, such as the State Bank
of Vietnam, the Ministry of Finance or the SSC. if the iii. any acquisition of shares from a major shareholder in
acquisition occurs among banks, insurance companies a public company, which amounts to more than 1 per
or securities and fund management companies, cent of shares in any single class of shares in circulation
respectively; of that public company, must be reported to the SSC
and the relevant stock exchange where the shares of
iii. any acquisition of shares in JSCs or equity interest in the public company are listed within seven days from
LLCs by foreign investors must be carried out through the date of such change;
a “capital contribution share purchase account in
Vietnamese dong,” which needs to be opened in
a commercial bank in Vietnam and which must be iv. any intended acquisition of shares in a public company
registered with the State Bank of Vietnam1; and which may result in the acquirer owning at least 25 per
cent or more of the entire shares of the public company
iv. any merger in Vietnam must be approved by, and must be approved by the public company and the
recorded in the business licence issued by the licensing approval (or even the disapproval) must be notified to
authority (which is the provincial Business Registration the SSC within seven days after it receives the proposed
Office for purely domestic companies or the Department acquisition2; and
of Planning and Investment for foreign-invested
companies) and the relevant specialised authorities,
such as the State Bank of Vietnam, the Ministry of v. in the case of an acquisition of shares owned by the
Finance or the SSC. if the acquisition occurs among state in a public company, whether unlisted or listed, the
banks, insurance companies or securities and fund acquisition must be conducted through a price auction
management companies, respectively. of which the procedure and result must be registered
with the SSC3.

1
Under Article 14.1 of Decree 160/2006/ND-CP dated 28 December 2008 of the Government implementing the Ordinance on Foreign Exchange Management.
2
Pursuant to Item III.2 of Circular 18/2007/TT-BTC dated 13 March 2007 issued by the Ministry of Finance.
3
Pursuant to section 1.3, Chapter III of Circular 33 of the MOF dated 29 April 2005 (“Circular 33”) and Decree 109 of the Government dated 26 June 2007 (“Decree 109”).

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Schedule 2: Restrictions on the foreign ownership of shares in a Vietnamese company

The following chart sets out only some of the foreign ownership restrictions for some of the major industries.

Industry/sector Foreign ownership limits

Telecoms sector Facilities based (i.e. development of infrastructure plus services): the state must be the majority
shareholder (51%).

Non-facilities based telecom services:

• Facilities-based services: 49% (for basic services) and 50% (for value-added services).
• Non-facilities-based services: 51% (before 2010 and 65% after).

Service industry It depends on the type of services. For example, if the foreign investor is involved in rendering
primary logistic services then it is limited to 49% ownership.

Aviation industry Airlines are permitted (without limitation) to provide services in Vietnam through their ticketing offices
or agents in Vietnam.

For maintenance and repair of aircraft, joint ventures are permitted with the foreign limitation not
exceeding 51%. As from 2011, 100% foreign invested enterprises will be allowed.

Manufacturing At present, only joint ventures with foreign capital contributions not exceeding 50% are permitted.

From 1 January 2011, 100% foreign-invested enterprises will be permitted.

Marine and shipbuilding 49%, 50%, 51% or 100% depending on the type of services.

Oil and gas The investment must be in accordance with the master plan for oil and gas development; or
otherwise it must obtain in-principle approval from the Prime Minister.

Power For Projects where the investment capital is greater than VND1.5 billion, in-principle approval of the
Prime Minister must be obtained.

Mass media Foreign investors can cooperate with Vietnamese partners in the form of a business cooperation
contract or a joint venture in order to trade in the publishing industry.

Professions (e.g. lawyers, No foreign ownership limit.


doctors, accountants)

Mining Foreign ownership limit: 51%.

As from 2011: no limitation.

Fishing and agriculture Generally there must be a joint venture and the foreign ownership must not exceed 51% of that
joint venture.

134
Industry/sector Foreign ownership limits

Advertising 99% foreign ownership is allowed provided that the foreign investor is in a joint venture with a
domestic entity.

Defence This is a restricted sector and not open to foreign investment.

Education Secondary education: it is not clear under the law but it is likely that there is no limitation for foreign
ownership.

Higher education services, adult education and other education services including foreign language
training: 100% foreign-invested education entities are permitted.

Pharmaceutical Foreign investors are not allowed to distribute medicines.


manufacture and
distribution

Finance and investment The total equity held by foreign institutions and individuals in each of Vietnam’s joint stock
sector commercial banks may not exceed 30% of the bank’s chartered capital.

Foreign securities service suppliers are permitted to establish representative offices and joint
ventures with Vietnamese partners in which the foreign capital contribution may not exceed 49%.

However, as from 2012:

• 100% foreign-owned securities service suppliers will be allowed; and


• some branches of foreign securities companies will also be permitted to have 100% foreign-
invested capital.

135
136
Clifford Chance AZB & Partners Chooi & Company

Singapore Mumbai Chennai Kuala Lumpar


One George Street Express Towers, 23rd floor Amble Side Level 23, Menara Dion
19th Floor Nariman Point No.8 Khader 27, Jalan Sultan Ismail
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Tel: +65 6410 2200 India Nungambakkam Malaysia
Fax: +65 6410 2288 Tel: + 91 22 6639 6880 Chennai 600006 Tel: +60 3 2055 3808
Fax: + 91 22 6639 6888 India Fax: +60 3 2055 3884
Contact mumbai@azbpartners.com Tel: +91 44 4356 1453
Philip Rapp Fax: +91 44 4356 1853 Contact
philip.rapp@cliffordchance.com Contact chennai@azbpartners.com Moy Pui Yee
Tel: +65 6410 2252 Zia Mody puiyeemoy@chooi.com.my
zia.mody@azbpartners.com Contact
Lee Taylor Anup Shah www.chooi.com.my
lee.taylor@cliffordchance.com Bahram Vakil anup.shah@azbpartners.com
Tel: +65 6410 2290 bahram.n.vakil@azbpartners.com
Hyderabad
Bangkok Delhi 302 6-3-1219/24, Ujwal Bhavishya
Sindhorn Building Tower 3 AZB House Uma Nagar, Begumpet.
21st Floor, 130-132 Wireless Road Plot No. A8, Sector 4 Hyderabad 500016 Mochtar Karuwin Komar
Pathumwan Noida 201301 India
Bangkok 10330 India Tel: +91 40 2341 8798 Jakarta
Thailand Tel: + 91 120 4179999 Fax: +91 40 2341 2207 14th Floor, Wisma Metropolitan II
Tel: +66 2 401 8800 Fax: + 91 120 4179900 hyderabad@azbpartners.com Jl. Jenderal Sudirman Kav. 31
Fax: +66 2 401 8801 delhi@azbpartners.com Jakarta 12920
Contact Indonesia
Contact Contact Anup Shah Tel: +62 21 5711130
Andrew Matthews Ajay Bahl anup.shah@azbpartners.com Fax: +62 21 5711162
andrew.matthews@ ajay.bahl@azbpartners.com
cliffordchance.com Contact
Tel: +66 2401 8822 Bangalore Emir Kusumaatmadja
AZB House ek@mkklaw.net
Clifford Chance also has offices in 67-4 4th Cross
Beijing, Hong Kong, Shanghai and Lavelle Road Castillo Laman Tan Pantaleon & Miranti Malikus-Ramadhani
Tokyo and works across the Asia Bangalore 560001 San Jose mirantimr@mkklaw.net
region. India
Tel: + 91 80 4240 0500 Manila www.mkklaw.net
www.cliffordchance.com Fax: + 91 80 2221 3947 The Valero Tower
bangalore@azbpartners.com 2nd, 3rd, 4th, 5th and 9th floors
122 Valero Street, Salcedo Village
Contact Makati City, 1227 Vilaf
Anup Shah Philippines
anup.shah@azbpartners.com Tel: +(632) 817 6791 to 95 Ho Chi Minh City
+(632) 810 4371 to 73 Suite 505-507 Saigon Tower
Pune Fax: +(632) 819 2724; 29 Le Duan Street, District 1
IT Tower, Ground floor +(632) 819-2725 Ho Chi Minh City
12A, Kalyani Nagar counsel@cltpsj.com.ph Vietnam
Pune 411006 Tel: +84 8 38 277300
India Contact Fax: +84 8 38 277303
Tel: +91 20 4004 5870 Joseph Gregson A. Castillo (Tax)
Fax: +91 20 4004 6241 Delfin P. Angcao (Corporate; private Hanoi
pune@azbpartners.com and public companies) Suite 603, HCO Building (Melia)
Regina Gamboa-Pimentel (Labour) 448 Ly Thuong Kiet Street
Contact Teodulo G. San Juan, Jr Hanoi
Percis Anklesaria (Corporate; mergers & acquisitions) Vietnam
percis.anklesaria@azbpartners.com Ana Maria Katigbak-Lim Tel: +84 4 39 348530
(Corporate; private and public Fax: +84 4 39 348531
companies; securities)
Contact
www.cltpsh.com.ph thanh@vilaf.com.vn

www.vilaf.com.vn

Clifford Chance has a “best friends” relationship with AZB & Partners

137
Clifford Chance is one of the world’s leading law firms, helping
clients achieve their goals by combining the highest global
standards with local expertise.

The firm has unrivalled scale and depth of legal resources across
the four key markets of the Americas, Asia, Europe and the Middle
East, and focuses on the core areas of commercial activity: capital
markets; corporate and M&A; finance and banking; real estate;
tax; pensions and employment; litigation and dispute resolution.
Clifford Chance has 29 offices in 20 countries with 3,800 legal
advisers and also operates a “best friends” arrangement with AZB
& Partners in India and with Lakatos, Köves & Partners in Hungary,
and a co-operation agreement with Al-Jadaan & Partners Law
Firm in Saudi Arabia.

The firm operates across Asia, with offices in Bangkok, Beijing,


Hong Kong, Shanghai, Singapore and Tokyo, and secondees
on the ground in Ho Chi Minh City and Jakarta. With over 350
lawyers in Asia alone, it is one of the largest international firms in
the region, enjoying a market leading reputation across a number
of practices.

© Clifford Chance Pte. Limited, September 2009.


www.cliffordchance.com One George Street, 19th Floor, Singapore 049145

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