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Malaysia: Regulating SCR privatisations

Samuel Hong
A number of recent privatisations in Malaysia have been proposed to be undertaken through selective capital reduction (SCR) exercises. The most recent example is the proposal by Khazanah Nasional, Malaysia's sovereign wealth fund, to privatise Malaysian Airline System through an SCR.

Under an SCR privatisation, an existing shareholder (acquirer) of a company (target) becomes the sole shareholder of the target under the selective cancellation of shares held by all shareholders other than the acquirer.

Generally, capital reductions through share cancellations are regulated by the Companies Act 1965 (Act), which prescribes only a majority of at least 75% in value of the shareholders of a company to approve such reductions.

However, in the case of public companies, SCR privatisations must also comply with the Malaysian Code on Take-Overs and Mergers 2010 (Code). Apart from the 75% majority prescribed by the Act, the Code also requires that: (i) the SCR must be approved by at least 50% in number and 75% in value of disinterested shareholders; and (ii) the value of votes cast against the SCR must not be more than 10% of all disinterested shares in the target.

Only disinterested shareholders may vote on the SCR. The acquirer and persons acting in concert with it must abstain from such voting.

If certain conditions are met, the Securities Commission (SC) may also grant exemptions for an SCR from some of the more onerous requirements of the Code. Among others, two of the key conditions are that: (i) the acquirer and persons acting in concert with it must collectively hold more than 50% of voting shares of the target; and (ii) all interested parties must abstain from voting on the SCR.

The exemptions that may be granted include exemptions from requirements pertaining to: announcements; offer documents; acceptance and other conditions; nature of the consideration; and, timelines.

Applying the Code to SCR privatisations is intended to enhance protection of minority shareholders in public companies, over and above the prescriptions of the Act.

In particular, the 50% (number) and 75% (value) voting thresholds are similar to those applied in schemes of arrangement, and the 10% votes-against threshold is closer to the 90% threshold required for minority squeeze-outs in conventional take-over offers. However, the additional requirements have clearly not deterred acquirers from adopting the SCR as a privatisation method, when suitable circumstances are present.

Samuel Hong

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