Corporate M&A 2022 Comparisons

In 2021 Malaysia saw a recovery in M&A activity after a decline in 2020 due to the COVID-19 pandemic. Based on data published by Kroll (previously known as Duff and Phelps), a total of 254 M&A activities reportedly took place in 2020, representing a value of USD5.3 billion, whereas 2021 saw a total of 384 M&A transactions take place, representing a value of approximately USD21.1 billion. 

Malaysia’s M&A transactions in 2021 were headlined by the USD12 billion merger deal between DiGi.Com Bhd and Celcom Axiata Bhd (the “DiGi-Celcom Merger”). As at February 2022, the proposed merger is still pending evaluation by the Malaysian Communications and Multimedia Commission (MCMC). 

If this transaction is considered as an outlier and it is excluded from this analysis, M&A transactions in 2021 still represent a value of approximately USD9.1 billion, which compares favourably with the 2019 pre-pandemic transaction value of USD8.9 billion, suggesting that Malaysia’s M&A market is in recovery. 

Notwithstanding the recovery, transactions have been observed to require a longer gestation period as well as a longer period to execute and complete.

ComparingM&A data for 2020 and 2021, notable upward trends can be observed for the materials (eg, chemicals, gases and metals) and agriculture sector. The aforementioned DiGi-Celcom Merger also single-handedly made the telecommunications sector the sector with the biggest M&A deal value for 2021. However, a deal of this size is unlikely to happen with regularity. 

On the other hand, there was a general slowdown in transactions in the real estate, retail, industrials (eg, capital goods and electronics) and energy sectors, with an uptake in certain specific industries. 

The telecommunications industry contributed to 59% of Malaysia’s M&A deal value in 2021 (USD12.45 billion). However, as previously alluded, the DiGi-Celcom Merger alone contributed almost that entire value, and therefore this may not be the most accurate representation of Malaysian M&A trends. The materials (8%), industrials (7%), and agriculture (6%) industries were the other major contributors by value to Malaysia’s M&A. 

E-Commerce 

The COVID-19 pandemic led to a significant increase in e-commerce transactions. This is shown in the jump of 17.1% year-on-year in the third quarter of 2021 in terms of e-commerce income amounting to a total of RM279 billion. This increase in e-commerce transactions may be attributed to the adoption of digital payments, prolonged movement restrictions and consumer concerns about safety and hygiene at physical retail outlets. 

With an increasingly competitive market, some industry players have been quick to adapt to consumer demands and business requirements. Seeking to accelerate the growth of its on-demand grocery delivery services, Grab Holdings Limited (“Grab”), South-East Asia’s largest mobile technology company, acquired a majority stake in local supermarket chain, Jaya Grocer Sdn Bhd (“Jaya Grocer”) for a reported sum of up to RM1.8 billion. The transaction looks to combine Grab’s on-demand delivery fleet and capabilities with Jaya Grocer’s retail presence and supplier network.  

Industries Impacted by the COVID-19 Pandemic 

According to the Ministry of International Trade Industry, the manufacturing sector was the industrial sector most affected by the COVID-19 pandemic in 2021. The Industrial Production Index for the manufacturing sector declined by 1.1% in the third quarter of 2021 despite recording a growth of 22.6% in the second quarter of 2021. This decline was primarily due to the implementation of the Movement Control Order in May 2021, which, among other things, prohibited certain sectors, such as automotive, iron, and clothing, from operating for extended periods of time. While Malaysia’s rubber glove industry enjoyed extraordinary growth during the onset of the COVID-19 pandemic, the earnings of glovemakers slowed down starting from late 2020 due in particular to the entrance of new glovemakers, lower average selling prices, and the normalising demand which was not matched by a corresponding reduction in raw material prices.  

Following the easing of movement restrictions and the re-opening of business sectors, the manufacturing sector recovered in the fourth quarter of 2021 and demonstrated an annual performance which outperformed its pre-pandemic level. 

The services sector also recorded an improved performance in the fourth quarter of 2021 driven by, among other things, the wholesale and retail trade, and the food and beverages segment. Even though the pandemic has adversely affected the retail industry, the performance of the department-store-cum-supermarket subsector remained strong with the pandemic boosting the sales of grocery retailers. Perhaps unsurprisingly, this resilience has led to increased interest in the subsector, with several industry players reportedly seeking buyers. Examples of deals in 2021 include the proposed acquisition of ten grocery businesses by Mercurius Capital Investment Limited (a real-estate investment holding company listed on Singapore’s Catalist stock exchange), and the aforesaid majority stake acquisition of Jaya Grocer by Grab. 

The two primary means for acquiring a company in Malaysia are by way of: (i) share acquisition; and (ii) asset/business acquisition. 

Share Acquisition 

Shares in private companies are generally acquired through a share purchase agreement and a transfer of shares in accordance with the Companies Act 2016 (CA). Some sectors, particularly those requiring licences to operate, may be subject to further approval requirements by the relevant authorities. 

Share acquisitions in public companies are made via open market transactions on the stock exchange. Such acquisitions are however subject to the Malaysian Code on Take-over and Mergers 2010 (the “Take-over Code”), which should be read together with the relevant guidelines issued by the Securities Commission of Malaysia (SC), most notably the Equity Guidelines (the “Guidelines”), which applies to, inter alia, issues and offerings of equity securities and any proposal which results in a significant change in the business direction or policy of a listed company. The Take-over Code applies to:

• a corporation listed on a stock exchange;
• an unlisted public company with more than 50 shareholders and net assets of RM15 million or more;
• a business trust listed in Malaysia; or
• a real estate investment trust listed in Malaysia. 

In addition, where transactions relate to a target company that is publicly listed on the stock exchange of Bursa Malaysia Securities Berhad (“Bursa Malaysia”), companies listed on Bursa Malaysia are required to comply with Bursa Malaysia rules and listing requirements and applicable guidelines issued by the SC, which include the requirement to obtain shareholders’ approvals in certain circumstances.  

Asset/Business Acquisition 

Alternatively, an acquisition may be made via the purchase of a company’s assets and/or its business without purchasing shares in the company. An acquisition of assets or business transaction will typically include the transfer of identified assets, contracts and employees of the target company by way of an asset/business transfer agreement.  

Stamp Duty 

Please note that varying stamp duty rates will be applicable depending on the means of acquisition: 

• transfer of assets: up to 4% of the consideration or market value (whichever is greater); 
• transfer of shares in a non-listed company: 0.3% of the consideration of market value (whichever is greater); and 
• transfer of shares in a listed company: 0.15% of the consideration value. 

In Malaysia, the primary regulators for M&A activity are: 

• the SC, which regulates the Malaysian capital markets and enforces securities laws and regulations; 
• Bursa Malaysia, which administers and regulates Malaysia’s stock exchange; and 
• the Companies Commission of Malaysia (CCM), which administers and enforces the rules and regulations under the CA. 

In addition, please note that some industries, particularly those which require licences to operate businesses, may require approvals or consents from their regulators before an M&A deal can be completed. With respect to real estate-related M&A, approval or consent from the land office/state authorities may also be required. 

In general, there are no restrictions on foreign investment participation in Malaysian companies. However, some sector regulators may impose foreign investment restrictions which mandate a certain percentage of shares to be held by either Malaysian or Bumiputera interests.  

For clarity, “Bumiputera interests” means: 

• a Bumiputera individual;  
• a Bumiputera institution or trust agency; and/or  
• a locally incorporated company or institution where the persons listed above hold more than 50% of the voting rights in the entity. 

“Bumiputera” means a Malay, Aborigine, or native of the states of Sabah and Sarawak as defined under Malaysia’s Federal Constitution.  

Such sectors include the telecommunications sector regulated by the MCMC, the financial services sector regulated by the central bank of Malaysia, Bank Negara Malaysia (BNM), the distributive trade services regulated by the Ministry of Domestic Trade and Consumer Affairs, and the petroleum industry under the purview of Petroliam Nasional Berhad.  

Malaysia’s competition law is enshrined in the Competition Act 2010 (CPTA) overseen by the Malaysia Competition Commission (MyCC), which prohibits anti-competitive practices such as anti-competitive horizontal and vertical agreements and the abuse of dominant positions. 

Please note however that the CPTA does not currently have provisions regulating merger controls. The aviation services sector (regulated under the Malaysian Aviation Commission Act 2010) and the communications sector (regulated under the Communications and Multimedia Act 1998) are notable exceptions, with merger control regimes prescribed by their respective legislation. 

As part of MyCC’s Strategic Plan 2021–25, MyCC has initiated the process of amending the CPTA to introduce merger control regulations but has yet to indicate when this will come into force. The introduction of a merger control regulation would allow MyCC to review proposed transactions and make necessary orders to maintain the competitiveness of the market.  

Labour laws in Malaysia are generally pro-employee. 

Employment Act 1955 

Any party looking to acquire interests in Malaysian companies will need to be aware of the Employment Act 1955 (EA), which provides statutory protection to the rights of certain classes of employees, namely: 

• any employee earning less than RM2,000 in monthly wages; or 
• any employee engaged in a few specified categories of labour. 

Contracts with EA employees which prescribe terms that are less favourable for said employees than corresponding terms prescribed under the EA are automatically voided and replaced with said corresponding terms.  

Employer-employee relationships with employees who do not qualify for statutory protection under the EA are governed by the terms of the employment contract and general tenets of Malaysian contract law.   

Notably, the Employment (Amendment) Bill 2021 was passed by the Malaysian parliament in March 2022 (pending royal assent); it amends the EA to comply with the international standards and practices as required by the Trans-Pacific Partnership Agreement, the Malaysia-United States Labour Consistency Plan, and the International Labour Organization.  

Trade Unions 

Transactions involving businesses with unionised employees will be subject to the terms of the collective bargaining agreements. The following are some of the trade unions in Malaysia: 

• the National Union of Bank Employees; 
• the National Union of the Teaching Profession Malaysia; 
• the Timber Employees Union Peninsular Malaysia; and 
• the National Union of Hotel, Bar and Restaurant Workers Peninsular Malaysia. 

Industrial Relations Act 1967 

Investors will also need to take note of the Industrial Relations Act 1967 (IRA), which regulates the relations between employers and workmen and their trade unions. Notably, the IRA prescribes provisions concerning unjust dismissals and the relevant proceedings.  

Transfer of Employees in an Acquisition 

Where a business is acquired via an asset or business purchase (and not a share purchase), the employees of the acquired business will not be automatically transferred to the acquirer. As a change of employer occurs in such transaction, such transfer can only be effected with the consent of the employees. Where the acquisition is via a share transaction, such consent will not be required as there is no change of employer.  

Occupational Safety and Health 

Employers owe a general duty to their employees to ensure, as far as is practicable, their safety, health and welfare at work. Some examples of the employer’s duty include: 

• providing and maintaining of plants and systems of work that are, so far as is practicable, safe and without risks to health; 
• ensuring, so far as is practicable, the safety and absence of risks to health in connection with the use or operation, handling, storage and transport of plant and substances; and
• providing such information, instruction, training and supervision as is necessary to ensure, so far as is practicable, the safety and health at work of employees. 

This has become of more importance given measures taken to combat COVID-19. 

At present, there is no specific regulator that conducts national security reviews of acquisitions in Malaysia. Nevertheless, respective sector regulators may impose conditions or restrictions, including those related to foreign acquisitions, in order to protect national interests. 

Malaysian Code of Corporate Governance 

First introduced in 2000, the Malaysian Code of Corporate Governance (MCCG) was updated in 2021 and is targeted at listed companies. The MCCG takes an “apply or explain an alternative” approach to corporate governance, where, in the event a company finds itself unable to implement any of the practices set out in the MCCG, it will be required to explain a suitable alternative practice to meet the intended outcome of the best practices set out therein.  

Under the Bursa Malaysia listing requirements, listed companies are required, among other things, to ensure that their boards of directors provide an overview of the application of the principles set out in the MCCG in their annual reports. Listed companies must also disclose the application of each practice set out in the MCCG during the financial year to Bursa Malaysia in their corporate governance reports. While not compulsory for non-listed companies, they are nonetheless encouraged to adopt the practices to enhance their accountability, transparency and sustainability. 

The latest revision introduces best practices and guidance that, among other things, aims to improve board policies and processes, and to strengthen the integration of sustainability considerations in the strategy and operations of companies. The Bursa Corporate Governance Guide 2021 was subsequently issued to provide guidance for adherence to the various recommended practices under the MCCG. 

The MCCG requires, among other things, that: 

• the tenure of an independent director does not exceed a term limit of nine years – this is unless justification is provided, and annual shareholders’ approval has been obtained through a two-tier voting process; and 
• the board of listed companies be comprised of at least 30% women directors. 

Notably, the MCCG also introduces best practices in relation to environmental, social and governance (ESG) risks and opportunities. This is in line with the SC’s push to promote ESG fitness and leadership of boards.  

Rules on Take-overs, Mergers and Compulsory Acquisitions (the "Rules")

The Rules were revised on 28 December 2021. Some key revisions include: 

• the introduction of a list of factors that will be considered by the SC in granting an exemption from a mandatory offer obligation for a rescue proposal; 
• an obligation on the offeror to announce a lapsed or withdrawn take-over offer and to provide an explanation for the lapsed or withdrawn offer; and 
• an obligation on the main adviser to include in the announcement by the board of the target to table the resolution for the scheme to shareholders for approval, a confirmation that resources available to the offeror are sufficient to satisfy full consideration of the scheme. 

Equity Guidelines

The Guidelines were revised on 16 December 2021, with the effective date of revision being 1 January 2022. The revisions were made by the SC to facilitate greater access to fundraising in Malaysia, as part of its efforts to promote the development of the Malaysian capital markets.  

Notably, the definition of “qualifying acquisition” was amended to clarify that a qualifying acquisition may also be in the form of a business combination, including a merger. 

For reference, a “qualifying acquisition” means the initial acquisition of any business by a Special Purpose Acquisition Company (SPAC) which has an aggregate fair market value equal to at least 80% of the aggregate amount in the trust account and is in line with the business strategy disclosed in the prospectus issued. 

A SPAC is defined as a corporation which has no operations or income generating business at the point of initial public offering and has yet to complete a qualifying acquisition with the proceeds of such offering. 

In addition to the changes stated at 3.1 Significant Court Decisions or Legal Developments, MyCC is reportedly in discussions with the government to introduce amendments to the CPTA to introduce merger control provisions. Such amendments are anticipated to be tabled in parliament in 2022, and if passed, will presumably empower MyCC to scrutinise prospective merger transactions and reject proposals which may result in a monopoly or be detrimental to healthy competition. 

While there are no requirements for a bidder to build a stake in the target prior to launching an offer, it is fairly common for bidders to do so.  

A common strategy is for bidders to negotiate and purchase shares from a person holding a management position in the company or a main shareholder and invite such person to be a person acting in concert in the take-over exercise. Such person would continue with or assist with the management of the company on a day-to-day basis for a specified transitionary period following completion of the take-over exercise. This would help ensure a smoother transition. 

Any stakebuilding strategy should also take note of the relevant disclosure thresholds (see 4.2 Material Shareholding Disclosure Threshold) and the mandatory offer threshold (see 6.2 Mandatory Offer Threshold). Prospective bidders may also consider acquiring irrevocable commitments from the selling shareholders (see 6.11 Irrevocable Commitments). 

Under the CA, a shareholder is required to give notice to the company of their interest related to any particular shares of the company (if any) when they first become a substantial shareholder (being any persons holding not less than 5% of the total number of all voting shares of a company), and thereafter, each time their interest in such shares changes.  

Such notice must be given by the substantial shareholder: 

• within three days if the company in question is listed on Bursa Malaysia; or 
• within five days in any other case. 

Generally, companies may introduce higher (but not lower) reporting thresholds in their constitutions as long as it is not inconsistent with the minimum requirements set by law, but it is uncommon for them to do so.  

Other hurdles to stakebuilding include regulatory approval requirements and other conditions imposed by the licences held by the particular company, which will vary depending on the industry in which the company is operating. 

Dealings in derivatives are allowed. However, note that any acquisition of an option or derivative that causes the acquirer to have a long economic exposure (whether absolute or conditional) to changes in the price of securities will be treated as the party having acquired those securities.  

Any person who will acquire control or cross the creeping threshold as a result of such acquisitions must seek prior consultation with the SC to determine whether a mandatory offer is required, and the terms on which such offer ought to be made. In making such a determination, the SC will consider, among other things:

• the time when the option or derivative is entered into;
• the consideration paid for the option or derivative; and
• the relationship and arrangements between the parties to the option or derivative. 

The Capital Markets and Services Act 2007 (CMSA) requires any person dealing in over-the-counter derivatives to report relevant information regarding the transaction, other than those transactions which include BNM or the government of Malaysia as a party, to a trade repository approved by the SC. Any further amendment, modification, variation or changes to the information should also be reported.  

At present, there are no competition laws requiring the filing or reporting of dealings in derivatives. 

In the context of private M&A transactions, shareholders are not required to make known the purpose of their acquisition and their intention regarding control of the company. Public M&A transactions are subject to applicable requirements and guidelines of Bursa Malaysia and SC. 

This is in contrast with public M&A transactions where the Take-over Code applies, where offerors are required by the Rules to disclose in the offer document their intentions regarding, among other things: 

• whether the business of the target will be continued; 
• the major changes that will be introduced into the business;  
• whether the employees of the target will continue to be employed; 
• the offeror’s objective and rationale for the take-over offer; and 
• whether the acquirer will maintain the target’s listing. 

Disclosure by Target  

Once the target’s board has been approached by the offeror, the primary responsibility for making an announcement will normally rest with them.  

Among other things, the Rules also require the target to keep a close watch on its share price and volume, and make an announcement when: 

• the target’s board receives notification of a firm intention to make an offer from the offeror or its advisers; 
• following an approach to the target, the target is the subject of rumour or speculation about a possible offer, or there is undue movement in its share price, or a significant increase in the volume of share turnover;  
• negotiations or discussions between the parties are about to be extended to include more than a very restricted number of people; or 
• the target’s board is aware that there are discussions between a potential offeror and the shareholder(s) holding more than 33% of the voting shares of the target, or when the target’s board is seeking potential offerors, and: 
1. the target is the subject of rumour or speculation about a possible offer, or there is undue movement in its share price or a significant increase in the volume of share turnover; or  
2. more than a very restricted number of potential purchasers or offerors are about to be approached. 

Disclosure by Offeror 

There are circumstances where the offeror is required to make disclosures; these are discussed at 7.1 Making a Bid Public. 

The Rules provide a specific timeline for disclosures to be made, and market practice on the timing of disclosures generally does not deviate from the legal requirements. 

If required, and in the context of a public M&A that falls under the purview of the Rules, the SC has general discretion, on application by an offeror or target, to extend the time for compliance with the disclosure (and other) requirements if it is satisfied that there are mitigating factors that justify such extension. 

Public M&A 

In the context of public M&A transactions, the scope of due diligence in a negotiated business combination is generally restricted to publicly available information. While parties may agree to additional disclosure of information and/or documents, they should be mindful about the information disclosed to avoid falling foul of insider trading laws. Penalties are severe, and on conviction, penalties may include imprisonment for a term not exceeding ten years and/or to a fine of not less than RM1 million. 

If, in the course of due diligence, sensitive information which is not publicly available is inadvertently disclosed, the offeror may be precluded from proceeding with the transaction.  

Private M&A 

Due diligence for private M&A transactions will generally cover at least the following areas: 

• corporate secretarial matters; 
• financing arrangements; 
• material contracts; 
• taxation matters; 
• operational matters; 
• regulatory compliance/licensing; 
• real property and assets; 
• intellectual property; 
• employment matters; and 
• litigation to which the target is subject or a party. 

The above is not exhaustive, and the scope of due diligence may vary depending on the transaction, negotiations and agreement reached between parties, and may cover other areas like insurance or technical matters, where necessary. 

Impact of the Pandemic

As a result of the pandemic, the diligence conducted on health and safety obligations has become more stringent in order to ensure the target company has the requisite protocols and precautions implemented to ensure the safety of its employees and customers. There is also increased scrutiny on contractual termination rights (including force majeure clauses) to address events such as the pandemic and the coverage of insurance policies. 

Generally, standstill agreements are relatively uncommon in Malaysia save in a debt restructuring exercise.  

In contrast, exclusivity arrangements for a prescribed duration are common features in the M&A process, especially in private M&A transactions. 

In the context of private M&A and public M&A transactions generally, it is common for offer terms and conditions to be documented in a definitive agreement that is negotiated between parties.  

In a take-over transaction, the terms of an offer are disclosed as part of the offer document in accordance with the requirements of the Rules, which prescribe the minimum content that must be included in it.  

The offer document should contain, inter alia, the following: 

• the offeror’s intention regarding the target and its employees; 
• the conditions of offer; and 
• the arrangements in connection with the offer. 

It is common, however, that an offeror may enter into an arrangement to acquire certain shares from a major shareholder, which triggers a mandatory general offer obligation. In that context, the definitive agreement will often be a share sale and purchase agreement, which may be conditional on certain agreed terms. 

In the context of public M&A transactions involving a take-over transaction, the timeline is set out in the Rules, with the process taking between four to five months. Where 90% or more of shares in the target have been acquired pursuant to a take-over offer, the time taken to complete the compulsory acquisition of the remaining shares (if pursued) may potentially take longer if the remaining shareholders do not co-operate. 

In other public M&A transactions not involving take-overs, timing will be subject to whether the listed entity is required to obtain approvals, particularly from its shareholders or other third parties, and these would be subject to the guidelines promulgated by the SC and/or Bursa Malaysia. For example, SPACs are required under the Guidelines to complete a qualifying acquisition no later than 36 months from the date of which the SPAC was listed on Bursa Malaysia. 

Private M&A transactions generally require between three to six months depending on the complexity and assuming there are no unforeseen complications. Where there are limited conditions and financing is not an issue, private M&A transactions may be completed in a shorter period. 

Steps taken by the Malaysian government to address the pandemic (eg, reduced working hours and new standard operating procedures which impacted diligence processes and closing mechanics) led to practical delays to the deal-closing process. The situation has improved over time and full-lockdowns are not anticipated in 2022. Nevertheless, with new strains of COVID-19 emerging, parties are advised to pay special attention to timelines for proposed transactions. 

Where the Take-over Code applies, the Rules prescribe a mandatory offer threshold where an acquirer is obligated to make an offer to acquire all the shares in the company upon obtaining control in a company or triggering the creeping threshold. 

Control 

“Control” is defined by the CMSA to mean the acquisition or holding of, or entitlement to exercise or control the exercise of, voting shares or voting rights of more than 33% in a company, however effected.  

Notably, a party who has acquired shares amounting to just under the mandatory offer threshold may also trigger the mandatory offer obligation. The obligation will be triggered in certain circumstances, including where the SC determines that the party is acting in concert with a shareholder(s), therefore allowing them to acquire a significant degree of control over the shares retained by the said vendor.  

Creeping Threshold 

Any party holding more than 33% (but less than 50%) of shares of a company is free to acquire voting shares up to 2% in a six-month period without triggering the mandatory offer obligation. However, an obligation to make a mandatory offer will arise if: 

• the party’s holding is increased by more than 2% in any six-month period; or 
• following a reduction of the party’s holding to 33% or less, it is increased to more than 33% once again. 

Acquisition through an Upstream Entity 

A mandatory offer obligation may also be triggered where the party or persons acting in concert with it acquire more than 50% of a company or upstream entity, thereby acquiring or consolidating control in a second company to which the Rules apply (downstream company). 

Voluntary Offers 

Where an acquirer does not trigger a mandatory threshold it can nonetheless decide to proceed with making a voluntary offer to acquire the voting shares or rights.  

Cash is the most common form of consideration in Malaysian M&A transactions. Shares and securities are sometimes also included in the consideration package, but this is far less common. Parties may also use a mixture of cash and shares. 

For public M&A transactions, the Rules require that the offer price in a take-over offer to be no less than the highest price paid or agreed to be paid by the offeror for any voting shares or rights to which the offer relates during the offer period and within a specified timeframe prior to the beginning of the offer period (three months for voluntary offers and six months for mandatory offers). With respect to voluntary offers, the price offered by an acquirer shall not be substantially below the market price (ie, more than a 50% discount) of the shares in the target without first consulting the SC. 

Where securities in a SPAC are issued as consideration for the qualifying acquisition, the Guidelines state that such securities should generally be subject to a moratorium for at least six months from: 

• the date the securities are listed on Bursa Malaysia; or  
• the date of issue if the securities are not listed. 

In the context of private M&A transactions, some common tools used to bridge valuation gaps include share warrants and price adjustment arrangements, such as completion accounts and earn-outs. 

The Rules restrict the use of conditions in a take-over offer. In the case of a mandatory offer, with the exception of a scheme, it must be conditional upon, and only upon, the offeror having received acceptances which would result in the offeror and persons acting in concert holding in aggregate more than 50% of the voting shares or voting rights of the target. 

A voluntary offer must also be conditional upon the offeror having received acceptances which would result in the offeror holding in aggregate more than 50% of the voting shares or voting rights of the target. This threshold can be set at a higher level (eg, at 90% so as to trigger compulsory acquisition) but may not be less than 50%. A voluntary offer may include other conditions, except for conditions whose fulfilment depend on: 

• the subjective interpretation or judgement of the offeror; or 
• whether or not a particular event happens, being an event that is within the control of the offeror. 

In essence, these exceptions operate to prevent a situation where the offeror can unilaterally decide whether the conditions have been fulfilled. 

As discussed in 6.4 Common Conditions for a Takeover Offer, the Rules restrict the use of conditions for take-over transactions in Malaysia. The acceptance threshold for mandatory offers is 50% of the voting shares or rights of the target, whereas the threshold for voluntary offers can be set at 50% or more. Parties making voluntary offers have slightly more freedom to impose additional conditions. 

Private M&A 

In the context of private M&A transactions, a business combination may be conditional on the bidder obtaining financing or other conditions, based on the agreement reached between the parties. 

Public M&A 

For take-over transactions, a mandatory offer cannot be conditional upon the offeror obtaining financing and the same applies to voluntary offers. The Take-over Code and the Rules require that offerors must satisfy themselves and their financial advisers that they have sufficient financial capabilities to implement the take-over and that each offeree who accepts the offer can be paid in full. Additionally, offerors have to include a confirmation that the resources available to the offeror are sufficient. The SC may require evidence to support that statement.  

Public M&A transactions that are not subject to the Take-over Code may, however, be conditional on the offeror obtaining financing, if parties so agree.  

In the case of a qualifying acquisition by a SPAC, the provisions of the Guidelines allow the SPAC to obtain financing through the issuance of securities provided that the securities are issued by way of a rights issue. The SPAC may however issue securities other than by way of a rights issue or obtain debt financing, provided that: 

• shareholders’ approval of the qualifying acquisition has been obtained; 
• the funds raised will be applied to the financing of the qualifying acquisition, defraying related costs or enhancing the target business; 
• where applicable, such issuance complies with the relevant requirements under the Bursa Malaysia listing requirements; and
• where applicable, the details of the facility shall be disclosed in a circular to shareholders. 

The qualifying acquisition is ultimately subject to shareholder approval. 

For private M&A transactions and public M&A transactions, parties may seek deal security measures such as guarantees, negative covenants, non-solicits, exclusivity or undertakings by shareholders. The type of security measure that is sought will typically vary from deal to deal.  

In relation to take-over transactions, an offeror may obtain irrevocable undertakings from other target shareholders to accept the take-over offer as a form of deal security measure. The offeror will be required to disclose the type and total number of voting shares or voting rights of the target in respect of which the offeror or person acting in concert with it has received an irrevocable undertaking from.  

As a result of the COVID-19 pandemic, there has been an increased focus on the use of Material Adverse Event (MAE) clauses, with acquirers likely to aim and negotiate for greater flexibility and scope with regards to consequences arising from an MAE. It is also common for acquirers to request additional disclosures on the liabilities and impact of COVID-19 on the target. 

In the context of private M&A transactions, a shareholders’ agreement or a direct amendment to the constitution can provide for additional rights (ie, by specifying that certain actions require the agreement of one or more parties, including the acquirer). These “reserved matters” are fairly common. 

In the context of public M&A transactions, generally no additional governance rights can be sought outside of shareholdings. An acquirer may seek to appoint a director of its choosing, but there is no guarantee that their nominated director will be appointed. For completeness, whilst uncommon, it is possible to amend the constitution of a public-listed company to afford additional rights to a particular party. 

In the context of SPACs, where the target is the subject of a qualifying acquisition by way of business combination, the composition of the board of directors or key management of the SPAC can be changed to afford the acquirer additional governance rights, if parties so agree. 

Shareholders can vote by proxy in Malaysia. Under the CA, where a member entitled to vote on a resolution has appointed one or more proxy/proxies, the said proxy/proxies shall be entitled to vote on their behalf. 

Where a take-over offer has been accepted by the holders of not less than 90% in the nominal value of those shares of that class (excluding shares already held at the date of the take-over offer by the offeror or persons acting in concert), the offeror may, within four months after the making of that offer, compulsorily acquire shares from the dissenting shareholders. The offeror’s intention to exercise the compulsory acquisition powers must be included in the offer document. 

The offeror is required to give notice to the dissenting shareholders in the forms stipulated in the Rules within two months from the date on which the 90% acceptance condition has been achieved. This notice is to indicate its desire to acquire shares and should include a copy of a statutory declaration by the offeror that the conditions for the giving of the notice are satisfied. 

It is common for the offeror to seek to obtain irrevocable commitments to tender or vote in favour of an offer by principal shareholders of the target company. Negotiations between the offeror and certain shareholders are commonly undertaken prior to the take-over offer being made, but the parties must take into account the requirements for announcements to be made under the Rules. Irrevocable undertakings obtained are required to be disclosed in the offer document. 

The offeror must be mindful that such irrevocable undertaking could, in certain circumstances, give rise to such shareholders being regarded as a person acting in concert.  

Separately, the general position is that all shareholders should be treated equally. Accordingly, save where written approval has been obtained from the SC, offerors and persons acting in concert with them are prohibited from making any arrangements with favourable conditions in favour of selected shareholders which are not extended to all shareholders. The provision of an out for the principal shareholder if a better offer is made is not common in Malaysia. However, it can nonetheless be done if the parties agree to it and set out the relevant information in the announcement and offer document. 

Announcement upon Firm Intention 

Under the Rules, a bid is generally made public immediately after the offeror has mustered a firm intention to make a take-over offer and has every reason to believe that it can and will continue to be able to implement the offer. Such announcement must include a press notice. The offeror is also required to send a written notice to the target’s board or an adviser designated by the target’s board, the SC and the relevant stock exchange in Malaysia if the target is listed. 

Other Announcements 

Further, in cases where the offeror has yet to approach the target’s board about its offer, the offeror is required to make an announcement: 

• when the target is the subject of rumour or speculation about a possible offer, or there is undue movement in its share price or a significant increase in the volume of share turnover, and there are reasonable grounds for concluding that it is the offeror or potential offeror’s actions which have directly contributed to it;  
• where negotiations or discussions are about to be extended to include more than a very restricted number of people; or 
• upon the signing of the sale and purchase agreement for the voting shares or voting rights of the target which will lead to the offeror triggering the mandatory offer obligation. 

Disclosures by the Target 

Please see 5.1 Requirement to Disclose a Deal for obligations for disclosure by the target. 

In M&A transactions where a listed company issues new shares, the listed company must comply with the relevant disclosure obligations set out in the Bursa Malaysia listing requirements. Among other requirements, the company must announce:

• the number and type of securities to be issued;
• the persons to whom the new issue of securities will be allotted;
• the basis of allotment (where applicable);
• the issue price; and
• the basis of determining and justifying such price.  

Where an M&A transaction involves the issuance of shares by a SPAC, its prospectus must contain sufficient disclosure to investors about the discounts on the securities issued to the management team and the proposed timing of the realisation of their rewards, so that investors may make an informed decision about its appropriateness after taking into account the SPAC’s business strategy and the management team’s contributions. 

In addition, private companies and public companies not listed on Bursa Malaysia that allot new shares will have to lodge a return of allotment of shares with CCM and document such allotment in its register within 14 days from the date of allotment. The return of allotment will include:

• a statement as to the amount of shares comprised in the allotment;
• the amount paid or payable on the allotment of each share;
• the class of shares to which the allotted shares belongs; and
• the full name and address of each allottee and the number and class of shares allotted to them.

In contrast, public-listed companies are not required to comply fully with this, since publicly traded shares are recorded via the central depository (Bursa Malaysia) system.  

In a take-over, the announcement of an offer (discussed in 7.1 Making a Bid Public) should include the following financial information relating to the offeror in the offer document:  

• details, for the last three financial years, of turnover, profit or loss before and after tax, net earnings per share and net dividends per share; 
• statement of assets and liabilities shown in the last published audited financial statements;  
• particulars of all known material changes in the financial position of the company subsequent to the last published audited financial statements or a statement that there are no such known material changes; 
• details relating to the first two items above in respect of any interim statement or preliminary announcement made since the last published audited financial statements; 
• significant accounting policies together with any points from the notes of the accounts which are of major relevance for the interpretation of the accounts; and 
• where, because of a change in accounting policy, figures are not comparable to a material extent, this should be disclosed and the approximate amount of the resultant variation should be stated. 

Reporting Standards 

Larger Malaysian entities (including listed companies) use the Malaysian Financial Reporting Standards (MFRS), which are generally aligned with the International Financial Reporting Standards, while smaller “private entities” use the Malaysian Private Entity Reporting Standards, which are less stringent than the MFRS. 

Private M&A Transactions 

For private M&A transactions, there are generally no requirements to disclose any of the transaction documents in full. 

Public M&A Transactions 

In public M&A transactions involving take-overs, the offeror is required under the Rules to issue and dispatch an offer document to the board, shareholders and holders of convertible securities of the target within 21 days from the date of the written notice. The Rules stipulate the minimum content required in the offer document, some of which has already been discussed at 5.5 Definitive Agreements. 

The offeror must also provide the form of acceptance and transfer for securities of the target and the procedures for acceptance of the take-over offer, together with the offer document.  

Other than that, companies that are listed on Bursa Malaysia should also be mindful of their disclosure obligations under the applicable listing requirements. Material documents are typically required to be made available at the registered office of the company for review by its shareholders. 

General 

Directors owe a fiduciary duty to company shareholders under common law, and have prescribed duties under the CA, CMSA, Bursa Malaysia listing requirements (if the company is listed) and other relevant rules and regulations. Of these, the CA is the primary legislation and it prescribes the statutory duties and responsibilities that must be observed. Specifically, directors owe a duty to the company to exercise their powers for a proper purpose and in good faith in the best interests of the company, and must exercise reasonable care and diligence with all the knowledge, skill, and experience that they factually have, or which may be reasonably expected of them. The Guidelines also require directors to maintain the highest standards of corporate governance, integrity, accountability and responsibility. 

Take-overs 

Under the Rules, directors of an offeror must jointly and severally:

• accept full responsibility for the accuracy of information contained in all documents issued in relation to a take-over offer;
• confirm that the opinions expressed therein were made after careful consideration; and
• confirm that there was no omission of facts that would cause the document to be misleading. 

Separately, directors of a target company are prohibited from: 

• resigning from the target’s board if the offer period has commenced, or if the target’s board has reason to believe that a bona fide offer is imminent (whichever is earlier) – this obligation will persist until the first closing date of the take-over offer or when the take-over offer becomes or is declared wholly unconditional (whichever is later); and 
• undertaking any action or making any decision that would frustrate a bona fide take-over offer or result in the shareholders being denied an opportunity to decide on the merits of a take-over offer, unless the approval of the shareholders is obtained at a general meeting. 

In general, it is uncommon for boards of directors to establish special or ad hoc committees in business combinations.  

In the event that some directors have a conflict of interest, they are required statutorily to disclose their interest to the company. These conflicted directors would then be excluded from any deliberation and voting on such matter. 

Malaysia recognises and provides statutory recognition for the business judgement rule under the CA. 

Under the CA, a director of a company is deemed to have exercised reasonable care, skill and diligence when making a business judgement if the director: 

• makes the business judgement for a proper purpose and in good faith; 
• does not have a material personal interest in the subject matter of the business judgement; 
• is informed about the subject matter of the business judgement to the extent the director reasonably believes to be appropriate under the circumstances; and 
• reasonably believes that the business judgement is in the best interest of the company. 

Reinforcing this, the Malaysian Federal Court had, in the case of Tengku Datu’ Ibrahim Petra Tengku Indra Petra v Petra Perdana Bhd & Another Appeal [2018] 2 CLJ 641, stated that the Malaysian courts will be reluctant to substitute their own decision in place of the business and management decisions of the directors. 

Any person intending to make a take-over offer shall seek advice from a recognised principal adviser (RPA) licensed by the SC. Save where the SC approves otherwise, only RPAs are permitted to submit proposals under the Rules and the Take-over Code. 

The target’s board is required to appoint an independent adviser to provide comments, opinions, information and their recommendation on a take-over offer in the form of an independent advice circular.  

Financial, taxation and legal advisers are commonly appointed by parties. 

Conflicts of interest of directors are not uncommon subjects of judicial scrutiny in Malaysia.  

General 

Directors are required by the CA to disclose their interests in, among other things, shares, debentures and contracts, first upon becoming directors and subsequently when any event giving rise to a change in their interest occurs. Directors are also required to disclose their interest, whether directly or indirectly, in a contract or proposed contract with the company at a meeting of the board of directors. Further, interested directors shall not participate in any discussion or voting on the matters they are interested in. 

Take-overs 

In the context of public M&A transactions subject to the Take-over Code, the SC should be consulted on whether controlling shareholders, directors and their respective persons acting in concert can vote at the shareholders’ meeting, where an actual or potential conflict of interest exists.  

Independent advisers must also declare their independence from any actual or potential conflict of interest to the SC within three days of their appointment by an offeror or an offeree. The independent adviser must remain independent throughout the offer period. 

Public-Listed Companies 

Under the Bursa Malaysia listing requirements, a public-listed company is required to disclose any conflict of interest its directors and key senior management may have with the company in its annual report. Additionally, if advisers to the company in respect of a transaction may potentially, or do in fact, have a conflict of interest with the company, such conflict must also be disclosed in the relevant transaction circulars. Interested parties are not allowed to deliberate and vote on various matters, including related party transactions and approving transactions. 

In the context of SPACs, members of the management team and persons connected to it are prohibited under the Guidelines to vote on a resolution approving the qualifying acquisition. 

While the Rules do not prohibit hostile tender offers, historically it has been uncommon. 

In the context of take-overs, directors are not expressly prohibited under the Rules from employing defensive measures.  

However, as discussed at 8.1 Principal Directors’ Duties, unless approval has been obtained from the shareholders of the target, the target’s board shall not undertake any action or make any decision that could frustrate a bona fide take-over offer or deny shareholders the opportunity to decide on the merits of a take-over offer.  

Actions or defensive measures that could result in such circumstances include: 

• the issuance of any authorised but unissued shares of the target and the selling of treasury shares into the market; 
• the issuance or granting of options in respect of any unissued shares of the target;  
• the sale, disposal of, or acquisition of material assets of the target;  
• the entering into contracts outside the ordinary course of business of the target; and 
• the declaration of dividends outside the normal course or usual quantum. 

As mentioned at 9.2 Directors’ Use of Defensive Measures, directors are generally not allowed to frustrate any bona fide take-over offer. Defensive measures could be construed as a frustration of an offer. Where shareholders’ approval has been obtained, the target company may consider employing defensive measures, such as those listed in 9.2Directors’ Use of Defensive Measures. 

The target’s board is also required under the Rules to provide a firm recommendation on whether the take-over offer should be accepted or rejected. The target’s Board could recommend its shareholders to reject the offer by setting out its justifications, as a kind of defensive measure. 

Shareholders who are against the take-over may also band together and persuade other shareholders to vote against it. 

Impact of the Pandemic on the Prevalence of Defensive Measures 

No change on the prevalence of defensive measures as a result of the pandemic has been observed.  

When enacting defensive measures, directors should be mindful of their duties as discussed at 8.1 Principal Directors’ Duties. In particular, directors should ensure that the enactment of the defensive measures is for a proper purpose, and in good faith in the best interests of the company.  

The directors of a target do not have the liberty to “just say no” and prevent a business combination. As discussed at 8.1 Principal Directors’ Duties, directors are prohibited from undertaking any action or making any decision that would frustrate a bona fide take-over offer or result in the shareholders being denied an opportunity to decide on the merits of a take-over offer, unless the shareholders' approval is obtained at a general meeting. 

Litigation in connection with M&A deals is relatively uncommon in Malaysia. 

Parties may bring forth a claim at any stage during the transaction process, though this will more commonly be in respect of breaches of representations or warranties post-closing. 

As discussed at 6.7 Types of Deal Security Measures, there has been an increased focus on the use of MAE clauses as a result of the COVID-19 pandemic. Parties are advised to give due consideration to the construction of said clauses to ensure their interests are protected and their risks managed. 

To ensure the allocation of risk reflects the parties’ agreed intentions, parties should also be cautious with respect to force majeure clauses and clearly state whether or not said clauses should include pandemics or government-enforced movement restrictions or measures as force majeure events. 

At present, shareholder activism is not seen as an important force in Malaysia.  

However, shareholder activism is expected to play an increasingly important role in Malaysia. As revealed in the SC’s Capital Market Masterplan 3 (2021-25), it intends to continue encouraging meaningful engagements between the board, senior management and shareholders of companies. Greater investor activism and advocacy through investor education is a key priority for the SC, and the SC has indicated its intention to work together with the BNM to elevate financial literacy among Malaysians. The SC is also seeking to enhance the retail shareholder’s awareness and understanding of corporate governance and sustainability issues. 

To date, it has been uncommon for activists to seek and encourage companies to enter into M&A transactions, spin-offs or major divestitures. No impact caused by the pandemic has been observed. 

To date, it has been uncommon for activists to interfere with the completion of announced transactions in Malaysia.