Thursday 28 Mar 2024
By
main news image
This article first appeared in Corporate, The Edge Malaysia Weekly, on August 22 - 28, 2016.

 

REVISIONS to the Securities Commission Malaysia’s rules relating to takeovers, mergers and compulsory acquisitions, which came into force last week, are good news for minority shareholders as they are accorded a stronger degree of protection.

But this also means that the initiators of such deals — and by extension their advisors, bankers and lawyers — are under even more pressure now as they are required to provide a higher standard of disclosure and perform much more detailed due diligence, which critics say can sometimes be onerous.

Will this suppress takeover deals? Law firm Wong & Partners thinks not. It believes the amended rules help facilitate rather than restrict deals, and that they may even prompt a new wave of privatisation activity in the market, lawyers Brian Chia and Sue Wan Wong, both partners in the firm, tell The Edge.

The SC’s Rules on Takeovers, Mergers and Compulsory Acquisitions 2016 came into force on Aug 15, the same day the revised Malaysian Code on Takeovers and Mergers 2016 — which sets out broad principles that parties involved in any takeover or merger transaction must heed — came into effect.

The Minister of Finance has revoked the earlier Malaysian Code on Takeovers and Mergers 2010.

The changes in the SC’s takeover rules reflect the regulator’s desire to move towards a “proportionate” regulatory regime, Wong & Partners notes. It includes, among others, the principle that all shareholders must be treated equally in any takeover transaction and should not be disadvantaged by the treatment or conduct of any relevant party in a takeover.

“On the one hand, changes have been made to facilitate takeovers, such as the abolishment of the requirement for an offeror and persons acting in concert (PAC) to hold more than 50% of the voting shares of the offeree before undertaking a takeover by way of a scheme. However, the changes also provide a higher degree of protection to offeree shareholders in the form of enhanced disclosure requirements and the enhanced role and obligation of independent advisers,” the law firm says in an email to clients on Aug 17.

“These changes are welcomed and have brought Malaysia’s takeover regime closer to other mature jurisdictions such as the UK and Hong Kong,” it adds.

Under the new rules, shareholders owning 33% to 50% of a company can undertake a scheme of arrangement (SoA). “Or, you don’t even necessarily have to own shares ... you can start from ground zero, provided that the scheme brings you up to the control threshold, that is 33%,” Wong tells The Edge in a joint telephone interview with Chia.

A SoA is one of the methods to effect a takeover — it involves the promoter of the scheme making a court application for the company to embark, typically, on a selective capital reduction, which would result in the cancellation of all shares except the promoter’s, who would end up owning 100% of the company.

Chia, one of the country’s leading lawyers in the corporate and merger-and-acqusition scene, says the new rules are actually designed to facilitate M&A and privatisations.

“I do not think it would be the case that deals that were done in the past cannot happen now simply because of the new rules. Actually, I think it is the other way around — it is actually designed to faciliate deals, and a very good example would be that now, unlike before, you do not need to hold 50% to undertake a scheme. So it actually gives you more flexibility [to do a deal] ... and, therefore, you will see that it is actually designed to faciliate rather than restrict,” he says.

He notes that the SC can afford to do away with the 50% threshold because there are already other checks and balances in place under various other rules — like Bursa Malaysia’s listing requirements and the Companies Act — that ensure that interested parties cannot vote, thereby ensuring protection for minorities.

“I know we have had situations in the past where clients have wanted to do a scheme but were put off by this 50% rule and so those deals never proceeded because [the rule] was too restrictive,” he adds.

But with the liberalisation to that rule now, there is an additional avenue available for any offerer to take undervalued companies private.

“I think it would [prompt a new wave of privatisations] because it would jolt the market into considering such deals,” Wong remarks. She adds that the firm is already seeing an uptick in calls from people enquiring how this new regime works.

Chia acknowledges, however, that the new takeover rules do require a lot more rigour in disclosure. There are changes that entail a higher degree of disclosure to the minimum content requirements in an offer document meant for shareholders.

This includes, for example, requiring the disclosure of all substantial shareholders of the offeror and PACs and tracing the ultimate controlling shareholders. The rules now require disclosure of the directors of the ultimate parent companies. 

This, the lawyers say, represents a shift towards transparency in the identity of not only the offeror, but also any other person who is driving the general offer process.

Offerors making submissions to the SC are now also required to provide information pertaining to the chronology of events leading to the offer being made, and the steps taken to safeguard the interest of the independent shareholders, as well as a description of the financing arrangements for the proposed transaction.

These enhanced requirements will lead to a more informed market and protect minority shareholders.

But this means that there is always going to be so-called “tension” between offerors and minorities, Chia points out.

“The higher the disclosure requirements, and therefore the higher the due diligence standard, the harder it will be, or rather, the more hurdles an offeror will have to jump over, right? You give more rights to minorities, something has got to give, in the form of higher standards for the offeror. There is always going to be this tension,” he remarks.

Nevertheless, he feels none of the new rules are, in actual fact, too difficult to comply with.

“Nothing is intrinsically difficult or impossible (to comply with), but because of the tension I referred to earlier, due diligence now has to take a higher standard. There needs to be more rigour in disclosure ... so, a little bit more legwork is required for the offeror. But it is all designed to protect minority investors,” he says.

Among other interesting changes to the takeover rules is a requirement that the offeror present the offer to the board of directors even before triggering a takeover offer and announcing it to the public. This ensures that the board is given advance notice that a takeover is imminent.

The board can then, under the rules, make enquirities to satisfy itself that the offeror will be able to implement the deal. The rules are, however, silent on what actions the board can take if it is not satisfied on that matter. “Presumably, it can either reject the offer or seek a competing offer,” Wong says.

An offeror and PACS cannot acquire additional shares in the company until the takeover is announced. “These new requirements ... ensure that full information is disseminated to the offeree shareholders promptly. It also reduces the risk of the minority shareholders being disadvantaged by trading in those shares without knowledge of the takeover offer,” she adds.

The new takeover rules now apply also to business trusts that are listed in Malaysia. As for unlisted public companies, now, only those with more than 50 shareholders and net assets of at least RM15 million come under the scope of the rules.

“The enhancements seek to ensure that the takeover framework will be facilitative to commercial realities, while providing protection to shareholders where required,” the SC says in a statement.

 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share