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Recent changes to the code on takeovers and mergers

Koh Poi San

The Securities Commission of Malaysia has introduced the new Code on Takeovers and Mergers 2010, Practice Notes for the 2010 Code and Guidelines on Contents of Applications relating to Takeovers and Mergers. They came into force on December 15 2010 and replaced the Code on Takeovers and Mergers 1998 along with the practice notes that interpreted it and the Guidelines on Offer Documentation and the Format and Contents of Applications, respectively.

The 2010 Code widens its jurisdiction to encompass foreign incorporated companies and real estate investment trusts (Reits) which are listed on a Malaysian stock exchange. With this change, Malaysian-listed Reits' unit-holders and foreign incorporated companies' shareholders are given the same protection as shareholders of Malaysian public companies.

Two additional categories of persons acting in concert (PACs) are introduced. The first category covers a company, its directors and shareholders as PACs where there is an agreement, arrangement or understanding between them which restricts the director or shareholder from offering or accepting a takeover offer, or from changing its shareholdings in the company. The second covers a person who is a partner of a partnership. A set of criteria for rebutting the PAC presumption is introduced and persons who are not in fact acting in concert can present evidence to rebut the presumption.

The requirement for the Securities Commission to approve the appointment of an independent adviser for the offeree has now been dispensed with. However, an independent adviser will need to declare its independence from any conflict of interest to the Securities Commission within three days of its appointment.

The settlement period for acceptances under a takeover offer has been reduced from 21 days to 10 days for cash consideration and from 21 days to 14 days for consideration consisting of securities.

To preclude the creation of false markets in the securities of the offeree, potential offerors are now obliged to make an announcement as to whether there is a takeover offer or possible takeover offer where there are any unusual changes to the offeree's share price and volume of share turnover. If a potential offeror or its PACs, deny the intention to make a takeover offer, it is then prohibited from undertaking a takeover for that offeree, for up to six months after announcing such denial.

The principles of conduct required of all parties in the takeover process, namely the offeror, advisers and the board of the offeree, are now codified. All parties are required to observe good standards of commercial behaviour to ensure that minority shareholders are given a fair and equal opportunity to consider the merits and demerits of a takeover offer; provide fair and equal treatment to all shareholders and ensure that information is not furnished to shareholders on a selective basis. Additionally, if material changes or developments occur after the dispatch of documents, the Securities Commission must be notified immediately and such material developments are to be announced to the public and the stock exchange to ensure that shareholders receive information which is pertinent to their investment decision.

In relation to voluntary offers, the Securities Commission may allow such offers to be conditional on a higher acceptance threshold provided the offeror can prove that it is acting in good faith in imposing such high acceptance thresholds. This means that voluntary offers can be conditional on achieving 90% acceptances thereby providing the offeror with greater certainty and control over the takeover process, as an offeror with 90% acceptances can then compulsorily acquire the remaining offeree shares.

The Securities Commission now regulates schemes of arrangement, compromise and amalgamation; and selective capital reduction exercises which are treated as takeover offers and the 2010 Code imposes higher shareholders' approval thresholds than that previously imposed under the Companies Act, wherein approval for the scheme or exercise now requires an affirmative vote of at least 50% in number and 75% in value of votes attached to the disinterested shares and not more than 10% of votes cast against such resolution.

In recent years, purchasing assets and liabilities of a company has become a preferred method of taking a company private, due to the lower approval threshold requiring only a simple majority. Notably, takeovers using this route remain outside the ambit of the 2010 Code and instead are addressed in amendments to Bursa Malaysia's Listing Requirements whereby transactions involving significant asset disposals require the seller to secure at least 75% shareholders' approval.

The 2010 Code introduces changes to the takeover regime which are comparable with that of other regional markets and sets the parameters for greater shareholder protection while enhancing transparency in the takeover process. These elements are necessary for promoting investor confidence and maintaining a fair and orderly market.

Koh Poi San

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