Chapter 10:
Company Transformation
•Scheme of Compromise or Arrangement
•Mergers and Acquisitions
•Types of Mergers and Acquisitions
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1.0 Scheme of Compromise or
Arrangement
Companies with viable businesses may sometimes find
themselves in financial trouble when they are burdened with
large debts.
In such a situation, they may be insolvent at that particular
point of time. However, their businesses may still be viable, if
the debts owed could be restructured and an arrangement
entered into with all their creditors.
Under Division 7, Sub-division 2 on Arrangements and
Reconstructions in the new Companies Act 2016, there are
provisions by which the Malaysian Court may assist companies
to restructure their financial affairs.
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1.0 Scheme of Compromise or
Arrangement
The CA 2016 does not define the word ‘compromise’.
Section 365 defines the word ‘arrangement’ (refer CA)
Scheme means a plan or system for doing or organizing
something. (Oxford Advanced Learner’s Dictionary)
Compromise refers to a settlement of a dispute which involves
each side making concessions or according some form of give
and take.
Arrangement; does not require any element of dispute. Any
arrangement which touches the rights and obligations of the
company or its members or creditors (Negeri Selangor v
Worldwide Holdings Bhd (Shoptra Jaya (M) Sdn Bhd
intervener)[2007] 4 CLJ 596.
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Scheme of Compromise or Arrangement
•A scheme of arrangement is an agreement made between a company in
financial distress and its creditors on a debt-restructuring exercise to assist
the company in paying its debts.
•It is one of the corporate rescue mechanisms provided under the
Companies Act 2016.
•A Scheme of arrangement is a court-sanctioned process governed by
Sections 366 and 368 of the Companies Act 2016.
•Some of the objectives of a scheme of arrangement are:
I. To revive a financially distressed company as a going concern;
II. To avoid the prospect of liquidation and to restrain proceedings against
an insolvent or a barely solvent company;
III. To secure the payments of the creditors’ debts or secure better
repayment arrangements.
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Scheme of Compromise or Arrangement
Scheme of Compromise or Arrangement is suggested as a way to save
the company from financial or other difficulties, it can be done only
by involving the company, its members and its creditors.
1. Creditors and debenture holders accepting shares in discharge of
their debts;
2. Creditors accepting part shares and part cash in lieu of their
debts;
3. Secured creditors giving up their security or agreeing to forego
their interest;
4. Debenture holders agreeing to forego their interest for a stated
period;
5. This may also cause the shareholders to vary their rights.
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Scheme of Compromise or Arrangement
•if the creditors agree for a deferment of payment of their debts for a
specified period but insist on full payment, it is known as a
moratorium.
•An arrangement is a situation whereby the members’ or the
creditors’ rights are varied or modified for the benefit of the
company as a whole. It may be done by a reorganisation of share
capital, by the division of shares of different classes or by
consolidation of shares of different classes or by both.
•A stand still agreement is an agreement among the creditors with the
company where all parties agree to a fixed time at which all demands
will be settled and that there will be no interest accruing issues, no
inflation or deflation of debts, etc. This is akin to a court-approved
restraining order.
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Scheme of Compromise or Arrangement
Case example:
-Twenty First Century Oils Sdn Bhd v Bank of Commerce (M) Bhd
& 2 Ors [1993] 2 CLJ 677
-RHB Bank Berhad v Gula Perak Berhad, Town Hang Securities Co
Limited (Applicant) [2013] 1 LNS 1409
-Sri Hartamas Development Sdn Bhd v MBf Finance Bhd [1990] 2
MLJ 31
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Procedures
Section 366 to Section 371 of the Companies Act 2016.
1. The directors have to appoint financial and legal advisors who will have to
prepare the necessary draft scheme;
2. The required majority support of the parties concerned must be obtained
and the directors have to prepare the final form of the draft;
3. An explanatory statement which explains the effects of the scheme and
interests affected must be prepared;
4. An application to the court must be made. This could be done by the
company, members or creditors. The court may want to meet the parties
concerned before giving its approval to the scheme.
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Procedures
5. Once the approval is obtained, the directors must convene the necessary
scheme meetings by sending the necessary notices together with the
explanatory statement to the parties concerned.
6. Voting at the meetings must be done to obtain a special majority; a petition
to the court must be made to seek its approval. The court may grant its
approval subject to conditions. Once this is done, the scheme is binding on all
parties.
7. The court order must be lodged with the CCM before it takes effect. Once
this is done, all copies of the constitution must include a copy of the order.
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2.0 Mergers and Acquisitions
•The term of mergers and acquisitions refer to the consolidation of
companies or assets through different transaction types.
•Merger occurs when two entities join together to create a new entity.
•Example: oil and gas sector merger between Kencana Petroleum
Berhad and SapuraCrest Petroleum Berhad Group in 2012, the
result of which is now known as SapuraKencana Petroleum Berhad.
• An acquisition refers to the purchase of one entity by another
entity involving a share purchase exercise for ownership of a
company without the creation of any new entity.
•An example of an acquisition in Malaysia is the acquisition of MBF
Cards (M) Sdn Bhd by AMMB Holdings Bhd
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Types of mergers and acquisitions
1. Consolidation of businesses/ Formation of Joint venture;
- occurs when two entities join together to create a new entity.
2. Acquisition of Business and/or Assets;
-The acquisition of business and/or assets entail the purchasing of a
company’s assets and/or its business without buying over shares in the
company.
-The relevant transfer document or deed is required to successfully
transfer assets from one company to another.
-An acquisition of asset or business sale would include identified assets,
liabilities and contracts of the company by way of sale and purchase
agreements.
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Types of mergers and acquisitions
3. Acquisition of Shares of a Company
-In Malaysia, the most common type of merger and acquisition is that of
acquisition by way of share purchase.
-One of the main advantages of embarking on a merger and acquisition
transaction by way of share purchase in a company is that there is no
need for a transfer of business or assets.
-This may save the buyer money as payment of stamp duty for transfer of
real estate assets attracts a higher stamp duty rate as compared to a
share transfer.
- In this type of acquisition, the buyer essentially acquires the company in
question together with all its movable and immovable assets, employees
and business.
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