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Mergers and Acquisitions in Malaysia – Surge in interest from Asia countries

Malaysia has seen an increasing trend of international players looking towards acquisitions as a possible option to complement their expan¬sion activities. In recent years Mergers and Acquisitions (M&A) transactions is no longer limited to investors from America, Europe, Japan, Singapore and Australia, but there has been a surge in interest from China, Taiwan, Hong Kong, Indonesia and the CMLV quartet (Cambodia, Myanmar, Laos and Vietnam); and similar outbound activities to these jurisdictions.

Geographically, Malaysia lies near the center of the ASEAN region, and is along the faster developing corridor starting with Indonesia at the south, and then northwards to Thailand and Vietnam. Her colonial past under the British occupation provides a long held relative advantage of having an English speaking urban population. As such, it is a natural bridge between Asia and the West. The other beneficial colonial legacy is the system of corporate and commercial law and a largely intact common law based system of judicial adjudication of disputes. For investors well versed with English law and its judicial system, this is a welcome familiarity.

Every country in the region is looking at its own advantage(s) to attract investments, and is competing on varying fronts such as availability and access to productive human capital, good governance, adequate infrastructure and/or natural resources. However, given the historical context and recent regional developments, a case can be made that Malaysia remains one of the better investment destinations, and with that, M&A activities are expected to continue.

This is especially true now – as the USD has gained against the Ringgit by approximately 25% in the last year, good corporate targets are even better value for money. In the first half of 2016 alone, there are meaningful inbound investments in financial services sector, followed by energy, construction and consumer sectors. At the heart of Malaysia’s economic activities would be the Greater Klang Valley region. Most transactions in Malaysia, especially more complex ones, take place here as it has the concentration of banks, financial advisers, investment banks, accounting firms, law firms, valuers and appraisers and other consultants.

Domestic regulatory framework – protects interest of parties to M&A

In recent times, a major reform of the Companies Act 1965 has taken place, facilitating ease of doing business and corporate accountability, and is awaiting coming into force. In addition, securities and financial services law undergo regular changes to keep up with global progress and investor expectations. 

On the other hand, the Kuala Lumpur Regional Centre for Arbitration (KLRCA) is gaining traction as a competent alternative dispute resolution center, and cost-wise compares favourably with Hong Kong International Arbitration Centre and Singapore International Arbitration Centre. KLRCA was established in 1978 and was the first regional arbitration centre established in the Asia-Pacific region under Asian African Legal Consultative Organisation (AALCO), an inter-government organisation established in 1956. KLRCA has developed new rules to cater to the growing demands of the global business community such as the KLRCA i-Arbitration Rules, the KLRCA Fast Track Rules as well as the Mediation and Conciliation Rules. With KLRCA’s Fast Track Rules, some cases could be settled in less than six months. 

M&A transactions – a need to structure the right deal

M&A transactions can take various forms such as an outright acquisition, a partial acquisition resulting in the acquirer becoming a majority shareholder, or a partial acquisition resulting in the acquirer becoming a minority shareholder. In the last two cases, acquisitions can also be effected by subscription of shares in the enlarged share capital of the target company, according to the largest and full service law firm in Malaysia, Zaid Ibrahim & Co that has been instrumental in advising on M&A transactions. 

What form of acquisition can be legally effected may depend on other considerations such as equity restrictions imposed to protect certain segments of economy. Malaysia has done away with many foreign equity restrictions over the years, and economic sectors that have been liberalised tend to stay so, notwithstanding minor adjustments in the policy from time to time. 

Some protections are found in statute, while others take the form of ministerial guidelines which, while not having force of law, requires compliance in practice as it may impact other application processes based on legal requirements. Some equity restrictions remain in tourism industry, distributive trade, and in the oil & gas sector involving dealings with the Malaysia’s national petroleum company PETRONAS. Certain strategic industries have higher barrier of entry and stringent licensing requirements such as telecommunications, power, aviation, financial services and securities industries but is otherwise neutral with regards to treatment of foreign interest versus local interest.

Malaysian tax law is fairly developed and not too complicated. Malaysia has also adopted the international financial reporting standards (IFRS). Financial classifications, share capital classifications and tax implications are oftentimes the driving force behind structuring considerations, which makes it natural for most law firms to work with accounting firms on a transaction. For funds remitted from out of Malaysia, or in anticipation of investors lending to a Malaysian entity, one would need to be mindful of exchange control policies. Generally there is no restriction on repatriation on capital or dividends, although in practice, this may need to be done in a foreign currency equivalent as the Ringgit somewhat restricted offshore. Other taxes that may be imposed in relation to an M&A transaction would include stamp duty, real property gains tax as well as goods and services tax.

Preparing for M&A

As part of the preparation, the parties may wish to take into account any communication plans, regulatory announcements and filings, or even regulatory approvals that may be required. In more regulated sectors, such as the financial services sector, the approval of the Central Bank is required even before the seller commences negotiations. 

Interaction with authorities and pre-consultations are fairly common in Malaysia and most agencies are responsive to queries. This is especially important not only to understand if in a certain type of investment, approval from the relevant authority is required or otherwise; but also to know unique processes and timing for obtaining approval. Such processes and timing can change from time to time.

At times, there may also be internal policies not made known to the public, hence, an engagement with the relevant authorities would help investors understand any unwritten considerations and to structure the transaction accordingly. Where the target company has a regional presence, the issue of processes and timing has even far greater impact as the investor (and also seller) manages different bureaucratic cultures.

Apart from considerations of timing required for regulatory approval(s) and any compulsory internal processes of the investor and other parties (for example, obtaining approval of the investment committee, board of directors or even shareholders), the pace of a corporate M&A, just like in most other countries, is market driven. Is there an internal deadline to meet? Must the transaction take place by a certain time to catch the relevant economic/industrial cycle? Those would be relevant considerations.

On the seller side, it is helpful to conduct valuation and internal due diligence where necessary. There are established market processes to effect a tender process in order for the seller to obtain the best value for its assets.

For the preparation of due diligence, physical data room is still fairly normal in this region, but virtual data room is slowly gaining popularity.

It would also be helpful for either party to consider if M&A insurance is required. M&A insurance has yet to be extensively used in this region but is slowly being accepted by transacting parties.

Many companies have regional presence, which makes it imperative for there to be a lead/coordinating counsel to take charge of instructing and working with various law firms in the region for, essentially, due diligence, general advice and sometimes review or preparation of transactional documents. Zaid Ibrahim & Co shared that based on their experience, an early engagement with the lead counsel will provide a sufficient time to appoint (and negotiate with) the other local counsels in other jurisdictions applicable to the M&A and could result in better coordination and economy for the investor/seller.

Negotiation, signing and closing

As discussed above, significant preparation would have been made before heading into negotiation.
It is helpful for parties to consider as many issues as possible before drafting the term sheet or letter of offer (on buyer side), and just as helpful if as many commercial issues and risk allocation issues are discussed and agreed in principle upfront. It will help reduce the time and cost of negotiation and drafting the agreements ad and other transaction documents.

Once the agreement is signed, the seller is usually tasked with the responsibility of obtaining any discharge of existing encumbrances, as well as engaging third party customers or suppliers whose consent may be required. These could potentially be time consuming and the parties should ideally work together to approach those whose consent is sought.

Other things to line up for completion:

(1) If the target does not have fully in-house company secretarial or information technology support, parties should consider having a transition services arrangement.

(2) Remittance of purchase consideration into Malaysia and regulatory approval, if any, should be taken into consideration in timing completion.

(3) It is not uncommon to have a “dry run” to ascertain that all completion documentation, processes, filings etc. are standing by and ready to be implemented, especially over large and/or complicated transactions.

(4) Communicating with employees of the target company after closing can be equally important as some employees are material to the success of the transaction.

A successful deal 

M&A deals, especially one involving multiple jurisdictions, can be fraught with various challenges and pitfalls. The above are just a few of the practical considerations in an M&A transaction, and are by no means an attempt to address transaction-specific needs.  It is always useful to anticipate in advance all potential issues, and certainly firms with regional presence help tremendously in this regard.
Source: Zaid Ibrahim & Co, 25 October 2016.  For more information visitwww.zicolaw.com/our-network/malaysia-our-network/