Malaysia: Changing the landscape

Author: | Published: 1 Apr 2012
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The Malaysian government has made tremendous progress since the unveiling of Malaysia's Economic Transformation Programme in 2010, which was a 10-year roadmap aimed at enabling Malaysia to triple its gross national income from RM660 billion ($219.3 billion) (in 2009) to RM1.7 trillion in 2020. This is supported by the fact that, to date, based on projections by Performance Management and Delivery Unit in the recent Investment Performance 2011 Report from the Malaysian Investment Development Authority, the country needs RM1.31 trillion in investments to become a high-income economy by 2020.

Last year, RM148.6 billion of investments were approved by the Malaysian government – well above the annual target of RM115 billion set under its Tenth Malaysian Plan. Investment generated last year created around 150,000 job opportunities from almost 5,000 projects.

Malaysia's investments continue to be externally oriented. Both primary and manufacturing sectors corresponded highly with Malaysian trade composition while contributions from foreign investors in these sectors outstripped their local counterparts. The largest contributors of foreign investment were Japan, South Korea, the United States and Singapore, with whom Malaysia had bilateral and regional free trade arrangements.

Part of this next level of investment also involves improving the stock of talents in Malaysia, deepening capital and improving productivity. To assist Malaysia in achieving the objectives of the Economic Transformation Programme, the government has announced a large number of incentives and liberalisation efforts to boost the economy. Several new guidelines have been introduced, new laws have been passed and rules and regulations have been relaxed or abolished altogether.

A significant revamp in the corporate regulatory framework is the Malaysian Code on Takeovers and Mergers 2010 introducing key changes to the old regime designed to provide for a more transparent and effective M&A process. The introduction of the Competition Act 2010, which came into effect on January 1 2012, also sought to allow greater competitiveness in the Malaysian corporate landscape. Since the changes came into effect, several prominent transactions have been subjected to the new rules testing corporate Malaysia's resilience and flexibility in adapting to the changes.

Takeovers and mergers

With effect from December 15 2010, the existing Malaysian Code on Take-Overs and Mergers 1998 was superseded by the new Malaysian Code on Take-Overs and Mergers 2010. Key changes arising from the implementation of the new Code include:

(i) potential offerors or offerees are required to make an announcement on possible offers which might result in unusual share movements or increase in the volume of share turnover of the offerees. A potential offeror is not allowed to undertake a second takeover offer within six months of any announcement that the said offeror is not undertaking a potential takeover offer;

(ii) the following two new categories of "persons acting in concert" have been added to the new Code:

(a) a company, the directors of the company, and shareholders of the company where there is an agreement, arrangement or understanding between the company or directors of the company, and shareholders of the company which restricts the director or the shareholder from offering or accepting a takeover offer, or increasing/reducing his shareholdings in the company;

(b) a partner who is a partner of a partnership;

(iii) the new Code explicitly allows companies to undertake voluntary offers with a higher acceptance threshold. Pursuant to the old Code, a voluntary offer would normally have been conditional upon the offeror having received acceptances which would result in the offeror holding more than 50% of the voting shares of the offeree. Under the new Code, offerors are entitled to make a voluntary offer conditional upon receiving acceptances which would result in the offeror holding in aggregate more than 90% of the voting shares of the offeree. This particular change in the new Code would appear to be significant as it erodes the justification used by parties who prefer to use the less onerous assets and liabilities takeover route on the basis that it offers additional certainty that the transaction can be completed;

(iv) if material changes occur after the dispatch of documents, such as a circular to shareholders, the Securities Commission must be notified immediately. For instance, during a takeover or privatisation exercise, if the promoters are undertaking other negotiations pertaining to the asset that is to be privatised, they have to inform the Securities Commission. This is to ensure shareholders are well informed of any developments;

(v) companies that are incorporated outside Malaysia but listed on Bursa Malaysia Securities, and listed real estate investment trusts, are now subject to the new Code;

(vi) the new Code has reduced the payment period in a takeover offer from 21 days to 10 days for payment of cash consideration. In cases where the consideration involves only securities or a combination of cash and securities, the payment period has been reduced from 21 days to 14 days;

(vii) the new Code would apply to any person who undertakes a takeover offer, howsoever effected, by way of a scheme of arrangement, compromise, amalgamation or selective capital reduction; and

(viii) the conduct of all parties, namely offerors, advisers and the boards of offerees are codified. These parties, especially the independent directors of the board are required to give timely disclosure to shareholders and are prohibited from undertaking actions that could frustrate an offer. This effectively means that independent directors are required to ensure that any offer for the company should be put before shareholders for them to decide on.

Where a takeover offer is effected by way of a scheme of arrangement, compromise, amalgamation or selective capital reduction, it is required that the scheme is approved by at least 50% in number of shareholders and 75% in value to the votes attached to the disinterested shares that are cast either in person or by proxy at a duly convened meeting of the holders of the disinterested shares. The value of votes cast against the resolution to approve the scheme at such meeting must not be more than 10% of the votes attaching to all disinterested shares of the total voting shares of the offeree.

An example of a takeover offer which was effected by way of a selective capital reduction and repayment was the major shareholders of Mamee-Double Decker (M) (MDD) privatising MDD by undergoing a capital reduction and repayment exercise under Section 64 of the Companies Act, 1965. Under the privatisation plan, the major shareholders of MDD who control the company would repay RM179.8 million (RM4.39 for each share) to minority shareholders. Hence, privatisation of a public listed company effected by way of a selective capital reduction and repayment would assist to resolve the valuation issue for the major shareholders and would permit minority shareholders to exit the company at a premium to the market price.

Where an offeror has been granted an exemption by the Securities Commission but is unable to implement the scheme of arrangement, compromise, amalgamation or selective capital reduction within 12 months from the date of the exemption, the offeror and all persons acting in concert with the offeror must not within 12 months from the date of the announcement that the offeror is unable to implement the scheme of arrangement, compromise, amalgamation or selective capital reduction:

(i) make a takeover offer for the voting shares or voting rights that had been the subject of the previous takeover offer;

(ii) acquire any voting shares or voting rights of the offeree if the offeror would thereby become obliged to make a mandatory offer;

(iii) acquire any voting shares or voting rights of the offeree if the offeror holds voting shares or voting rights carrying over 48% but not more than 50% of the class of voting shares or voting rights that had been the subject of the previous takeover offer; or

(iv) acquire any interest in the voting shares or voting rights of the offeree on more favourable terms than those made available under its lapsed offer where the lapsed offer is one of two or more competing offers until each of the competing offers has been declared unconditional in all respect or has lapsed.

In light of the above changes, the new Code highlights the Securities Commission's continuous efforts to enhance investor protection and transparency and to establish higher standards of governance in takeover and merger activities in Malaysia.

Another revamp to the regulatory framework, jointly announced by both the Securities Commission and Bursa Malaysia Securities on January 28 2011, is that the threshold for shareholder approval relating to a listed company disposing all, or substantially all, of its assets resulting in it being no longer suitable for continued listing on Bursa Malaysia Securities Berhad (Asset Disposal) is raised to 75% and this threshold would apply to all new Asset Disposals announced on or after January 28 2011.

This will ensure that shareholders of listed companies will receive the same degree of protection regardless of the route that is chosen to privatise the company. Previous asset disposal exercises only require a simple majority approval from shareholders of the listed company. In addition, companies undertaking an asset disposal are now required to provide their shareholders with independent advice and detailed disclosure on the utilisation of proceeds from the asset disposal. This will increase transparency and ensure shareholders are equipped with adequate information for decision making.

The Securities Commission has also proposed that the standard of "fair and reasonable" be interpreted as two distinct terms ("fair" and "reasonable") as opposed to an interpretation as a composite term. This is to ensure that the independent advisers examine both quantitative (or valuation) aspects as well as other matters in providing their advice. The decoupling of the terms will ensure that the independent advice circular can be easily understood, is transparent and provides a clear basis to justify the independent advisers' recommendation. Accordingly, the Securities Commission will also provide guidance on the interpretation of the standard of fair and reasonable that is applied by independent advisers in assessing takeover offers.

One of the landmark takeover transactions is the takeover of Plus Expressways by the joint efforts of a government-linked company, UEM, and Malaysia's employment provident fund (EPF). Plus is a toll operator which has several highway concessions with the government and controls the nation's longest highway, the North-South Expressway, which spans the entire length of Peninsular Malaysia. It is also the largest toll operator in Southeast Asia. Under its concession contracts with the government, it is allowed to increase the toll rates every three years, failing which the government will compensate Plus according to a set formula. Plus is considered a cash-cow and is known to be consistent in paying out dividends to its shareholders.

The Plus acquisition was announced just before the new Code was to be effective. The Plus acquisition was conducted by way of the disposal of the assets and liabilities route, hence, when the takeover announcement was made by UEM-EPF, the shareholders' approval required to approve the acquisition of Plus was still 50% plus one vote. More interestingly, during the bidding stage, there were at least five parties who have publicly expressed interest in taking over Plus including public listed MMC Corporation and little known Asas Serba which is said to be linked to several corporate heavyweights. One of the terms of the offer was the imposition of a RM50 million deposit to ensure that the offerors would have sufficient funds and credibility to undertake the acquisition. The offer also allows for the Board of Plus to consider competing bids if any. The transaction was eventually won by UEM-EPF and has since been completed.

Another issue arising under the new Code was the purchase of 30% equity interest of Eastern & Oriental (E&O) by Sime Darby from three of E&O's substantial shareholders. The purchase was made at a 59% premium from E&O's share price at that time. Since the stake acquired was only 30%, it did not trigger the mandatory takeover offer. However, certain parties have argued that since the three substantial shareholders still remain in E&O with reduced shareholdings, and a hefty premium was attached to the purchase price, the substantial shareholders should be considered to be "parties acting in concert" with Sime Darby and thus triggering the mandatory takeover offer to be made by Sime Darby and the three substantial shareholders. Additionally, the premium paid by Sime Darby is deemed to be the price paid for assuming control of E&O.

The Securities Commission established a task force and conducted an investigation into the E&O deal to determine whether Sime Darby had triggered the takeover rules under the new Code after a series of public debates. Six weeks after the E&O acquisition, the Commission decided that Sime Darby did not trigger the takeover rules under the new Code prompting a minority shareholder of E&O to file a claim against the Commission for failing to compel Sime Darby from undertaking a general offer on the rest of E&O's shares. The case is still ongoing in the Malaysia courts. It will be interesting to see the decision of the court in this case and whether the court could determine with certainty the definition of "parties acting in concert" under the new Code.

Competition law

With the recent promulgation of the Competition Act 2010 on January 1 2012, Malaysia became the latest country to implement anti-monopoly or antitrust legislation. The Act should result in significant changes to commercial activities in Malaysia as it is aimed at restricting monopolies and cartel activities in the Malaysian economy.

The changes brought about by the Act would impact any commercial entity carrying out commercial activities involving goods and/or services in Malaysia, and even extends to foreign entities operating in Malaysia. However, the Act also provides for exceptions where certain entities such as local government bodies and certain practices would not fall within the scope of its ambit.

The Act focuses on two main areas: anti-competitive agreements and abuse of dominant position. In short, it contains provisions restricting horizontal or vertical agreements between enterprises that would prevent, restrict or distort competition in any market for goods and services. In addition, the Act prohibits enterprises from engaging either independently or collectively in any abuse of a dominant position in the market. Therefore, an enterprise is prohibited from entering into agreements or arrangements that restrict competition or engaging in practices that exerts its influence in a dominant manner to the detriment of the minority market players.

A Competition Commission will be set up pursuant to the Competition Commission Act 2010 to regulate enforcement of the Act. The main functions of the Commission are to investigate where the Commission believes or suspects there has been an infringement, and give directions in relation to any infringements under the Act.

In the event the Competition Commission finds that there has indeed been an infringement within the scope of the Act, it is empowered to take various actions such as requiring that the infringement be ceased immediately, specify steps which are to be taken by the infringing enterprise, impose a financial penalty or give any other direction as it may deem appropriate in the circumstances. Nevertheless, enterprises may apply for exemptions and avoid potential liability if they are able to establish that the benefits of their actions outweigh any anti-competitive conduct. The Commission is also empowered to grant conditioned or unconditioned exemptions.

It appears that the Act will apply to most commercial activities in Malaysia regardless of the industry or business activities. Therefore, businesses should take immediate steps to examine their existing structure, operations and practices to ensure there are no anti-competitive or abusive elements and to take positive steps to ensure compliance under the Act.

Recently, the Commission requested information from both Malaysia Airlines (MAS) and AirAsia to determine whether their share swap deal and collaborative agreement would put travellers at a disadvantage and breach some provisions under the Act. Under the share-swap deal, AirAsia's major shareholder Tune Air now holds a 20.5% stake in MAS, while MAS' major shareholder Khazanah Nasional holds a 10% stake in AirAsia. Under the collaborative agreement, both parties would cooperate in the areas of ground handling, training and engineering, among others. It would be interesting to note how the Commission will make its findings and whether its enforcement powers are adequate under the Act.

Khairul Ismail
  Khairul Ismail was called to the Malaysian Bar in September 2000. He holds an LLB (2.1) from King’s College, London and a Certificate in Legal Practice (CLP) from the Legal Profession Qualifying Board of Malaysia. He is head of the corporate and commercial practice group in Naqiz & Partners. He comes with a wealth of experience especially in matters relating to mergers and acquisitions, projects and infrastructure, banking, privatisation and industrial relation matters.

Some of Khairul’s notable transactions include: handling a RM3.8 billion syndicated loan in relation to a defence contract; the main legal representative in a construction and development of the RM2 billion flood mitigation project which combines a highway within a storm water tunnel; acting as solicitors for an expressway concessionaire client in relation to its financing facilities in the aggregate amount of about RM1.1billion under the principle of Istisna; and assisting clients in their proposed initial public offering of their Company on Bursa Securities Malaysia.

Ismail has been nominated as a leading lawyer for capital markets and Islamic finance in Malaysia by international publications. He is also a licensed company secretary and therefore has extensive knowledge of corporate governance and various other company-related issues such as corporate disclosure policies, code of ethics, conduct of meetings and related party transactions.

Naqiz & Partners
42A, Lorong Dungun
Damansara Heights
50490 Kuala Lumpur

Tel: +(603) 2081 7888
Fax: +(603) 2081 7886

Lim Wei Chien
  Lim Wei Chien was called to the Malaysian Bar in August 2003. He holds an LLB (Hons) and Bachelor of Commerce from Australia. He is a partner in the corporate and commercial practice group and specialises in fund and asset management and capital markets transactions. He has advised clients on a wide range of issues in relation to mergers and acquisitions, equity capital markets, reverse take-overs, listing exercises and private placements.

Some of Lim’s notable transactions include: acting for and advising a local Malaysian Bank on the listing of Malaysia’s first listed equity exchange traded fund; acting for and advising investment banks in Malaysia on proposed issuance of structured warrants; shariah-compliant exchange traded funds; unit trusts and transferable term loan facilities; and acting for and advising on the acquisitions of Malaysian investment and asset management companies including the licensing requirements thereof.

Naqiz & Partners
42A, Lorong Dungun
Damansara Heights
50490 Kuala Lumpur

Tel: +(603) 2081 7888
Fax: +(603) 2081 7886