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28 October, 2017
Introduction
Take-overs in Malaysia are presently regulated under Division 2 of Part VI of the Capital Markets and Services Act 2007 (“CMSA”), the Malaysian Code on Take-overs and Mergers 2016 (“2016 Code”) and the Rules on Take-overs, Mergers and Compulsory Acquisitions (“2016 Rules”) collectively. With effect from 15 August 2016, the 2016 Code and 2016 Rules replace the Malaysian Code on Take-overs and Mergers 2010 (“2010 Code”) and its Practice Notes.
Application of the 2016 Code and 2016 Rules
In contrast to the 2010 Code, the 2016 Code is simplified and sets out 12 general principles to be observed and complied with by all persons engaged in any take-over or merger transaction. Comprehensive operational and conduct requirements in relation to take-overs are now encapsulated in the 2016 Rules which contain explanatory notes providing guidance on their application. Several general principles in the 2016 Code make reference to the requirement for persons involved in take-overs to observe guidelines issued by the Securities Commission Malaysia (“SCM”) in good faith[1] and acknowledges that such guidelines may restrict their conduct[2].
The 2016 Rules are the SCM guidelines. As before, the 2016 Code and 2016 Rules apply to listed corporations and do not apply to private companies. A change under the new take-overs framework is that the 2016 Code and 2016 Rules now apply to sizeable unlisted public companies with more than 50 shareholders and net assets of RM15 million or more[3]. A further change is that the 2016 Code and 2016 Rules are expressly extended to business trusts listed in Malaysia[4].
Triggering a Mandatory Offer (“MO”): creeping provision and netting off
As before, a MO shall apply where the acquirer has obtained control in a company or where the acquirer has triggered the creeping threshold. An offeror triggers the creeping threshold by acquiring more than 2% of the voting rights of a target in any period of six months where the offeror’s holding was more than 33% but less than 50% of the voting rights in the target.
The 2016 Rules now expressly provide that, in that situation, a person or persons acting in concert are free to acquire and dispose of further voting shares within the 2% band without triggering a MO. Within this 2% band, dispositions of voting rights may now be netted off against acquisitions[5]. An example of this is where a person who holds more than 33% voting shares in a company acquires a further 1.5% shares and subsequently disposes of 0.5%. Netting off will result in that person having acquired 1% voting shares in the company. That person will then be able to acquire up to a further 1.0% in the company to keep within the 2% band without triggering a MO.
Under the 2010 Code where netting off was not permitted[6], the person would be deemed to have acquired 1.5% in the shares and would only be able to acquire up to a further 0.5% in keeping within the 2% band.
Triggering a MO: acquisition of 50%+1 share in an upstream company
Under the 2016 Rules, a MO may apply to a person acquiring more than 50% of an upstream entity (which need not be a company to which the 2016 Rules and 2016 Code apply) thereby consolidating control in a downstream company[7]. This 50% threshold was not present in the 2010 Code as the threshold stated there was more general, namely where a person obtains “control” in the upstream entity[8]. Whether the upstream company has consolidated control in the downstream company, the test under the 2016 Rules is whether securing control in the downstream company is a “significant purpose”[9], rather than the “main purpose”[10] as used under the 2010 Code of acquiring statutory control of the upstream entity.
Triggering a MO: abolishment of 20% to 30% quantitative range and revised SCM considerations in assessing control
Under the 2010 Code, an acquirer acquiring 20% to 30% of the voting shares from a controlling vendor may have obtained control of a company[11]. The 2016 Rules have abolished this quantitative range and acknowledge the general situation whereby the acquirer acquires shares carrying “just under 33%” of the voting shares in the target thereby triggering a MO.
Under the 2016 Rules, the SCM will consider whether the vendor is acting in concert with the purchaser and/or has effectively allowed the purchaser to acquire a significant degree of control over the shares such that the purchaser should be treated as having acquired an interest in them. In determining whether such significant degree of control exists, the SCM will have regard to, among others, the following:
- there might be less likelihood of a significant degree of control over retained shares if the vendor was not an insider;
- payment of a very high price for the shares may suggest that control over the entire holding was being secured;
- where the retained shares are in themselves a significant part of the company’s capital, a greater element of independence may be presumed; and
- it is natural for a vendor to select a purchaser whose ideas on the way to direct the company are compatible and it is natural for a purchaser of a substantial holding to press for board representation, in which case the SCM will not conclude that a MO is triggered[12].
Timing for disclosure
It is a general principle under the 2016 Code that all parties involved in a take-over or merger transaction shall make full and prompt disclosure of all relevant information[13]. Under the 2016 Rules, an offeror who has a firm intention to make a take-over offer shall make an immediate announcement (“Offeror’s Announcement”) and the board of the target shall make an immediate announcement of the receipt of written notice (“Offeree’s Announcement”). Both the Offeror’s Announcement and the Offeree’s Announcement should be made within one hour of incurring an obligation to make an offer, otherwise a request should be made to the stock exchange for a temporary halt in trading of the offeree shares[14]. This signifies a move towards stricter disclosure requirements.
Enhanced take-overs framework facilitative to commercial realities
In formulating this enhanced take-overs framework in the 2016 Code and 2016 Rules, the SCM has worked with market practitioners and investors for the incorporation of the market’s view in a fast-changing environment. The SCM in its media release stated that the changes will be meant to be facilitative to commercial realities while providing protection to shareholders where required[15]. The enhanced take-overs framework is seen as a progressive step and is welcomed for its flexibility in the commercial sphere.
[1] General Principle 2, Malaysian Code on Take-overs and Mergers 2016 (“2016 Code”)
[2] General Principle 9, 2016 Code
[3] Paragraph 1.08(a), Rules on Take-overs, Mergers and Compulsory Acquisitions issued on 15 August 2016 (“2016 Rules”)
[4] Paragraph 1.08(b), 2016 Rules
[5] Note 7 to paragraph 4.01, 2016 Rules
[6] Practice Note 9, Paragraph 8.1, Malaysian Code on Take-overs and Mergers 2010 (“2010 Code”)
[7] Note 3 to Paragraph 4.01, 2016 Rules
[8] Practice Note 9, 2010 Code
[9] Note 3 to Paragraph 4.01, 2016 Rules
[10] Practice Note 9, Paragraph 4.2(c), 2010 Code
[11] Practice Note 9, Paragraph 6.1, 2010 Code
[12] Note 5 to paragraph 4.01, 2016 Rules
[13] General Principle 5, 2016 Code
[14] Note 14 to Rule 9, 2016 Rules
[15] See more at www.sc.com.my/post_archive/sc-introduces-rule-book-in-revised-framework-on-takeovers-and-mergers/.
For further information, please contact:
Datin Grace C. G. Yeoh, Partner, Shearn Delamore & Co
gcgyeoh@shearndelamore.com
