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Takeovers and Mergers

1. Overview
1.1 Meaning of Takeovers and Mergers

involves a change of control of a company.

Acquisition of sufficient voting shares in a target company (offeree) by an
offeror to give the offeror control of the target company.
Voting shares

Offeror / Bidder

offeree / Target company



involves the acquisition of assets and liabilities of one company by another

company - a restructuring of 2 companies through a specific arrangement
or combination of the assets of both companies under an existing or a new

1.2. Difference between Merger and Takeover


Outcome: combination of 2 companies to create 1 legal entity.

Goal: to improve companys performance and shareholder value over the
long-term, greater sales revenue and market share in its market.


Purchaser of a smaller company by a much larger one combination of


Not necessarily a mutual decision. A larger company can initiate a hostile

takeover of a smaller company.

Acquirer usually offers a cash price per share to the target company.

Eg 2006 wait Disney Corporation bought Pixar Animation Studios

friendly takeover Pixers shareholders all approved the decision to be


Mutual decision made by 2 relatively equals companies to combine and

become one entity with the goal of producing a company that is worth
more than the sum of its parts.

Shareholders usually have their shares in the old company exchanged for
an equal number of shares in the merged entity.
Eg 1998

Daimler Benz

Daimler Chryster

1.3. Sources of law regulating takeovers and mergers

Takeovers in Malaysia are regulated by:
- Capital Markets and Services Act 2007 (CMSA), Part VI, Division 2 (w.e.f.
- Malaysian Code on Takeovers and Mergers 2010 (w.e.f. 15/12/2010)(the Code)
- Practice Notes of the Code issued by SC (issued on 15/12/2010)
- Cross refer Companies Act 1965 (CA) for the meaning of voting shares
- Guidelines on Contents of Applications Relating to Takeovers and Mergers
Note: if involved public listed companies, listing requirements of Bursa Malaysia
Berhad must be complied with.
1.4. Role of SC in regulating takeovers and mergers

See ss 217(4) and 220 CMSA.

SC administers the Code
- empowered by CMSA to issue rulings relevant to takeovers;
to initiate actions against persons who do not comply with the Code
and its rulings

2. The Code

enacted under s 217 CMSA

principal source of rules regulating takeovers and mergers in Malaysia.
s 218(1) CMSA
s 218(4) CMSA

2.1 Objectives of the Code

s 217(5) CMSA
efficient, competitive and informed market

2.2. Application of the Code

s 15(1)(d) Securities Commission Act 1993 (SCA) empowers SC to

regulate the takeovers and mergers of companies.

s 217(3) CMSA.

See s 216(1) CMSA for the meaning of company

applies to all types of public companies (listed /unlisted on stock

exchange), foreign listed companies which are listed on stock exchange in
Malaysia and holders of Malaysian listed real estate investment (REIT).

The entities prescribed in the Code are:
(a) a company that is incorporated outside of Malaysia but listed on any
stock exchange in
Malaysia; and
(b) a real estate investment trust that is listed on any stock exchange in
* As compared to the 1998 Code, the 2010 Code widens its jurisdiction to
cover foreign
incorporated companies and real estate investment trusts (REITs) that are
listed on Bursa

2.3 Practice Notes

s 217(4) CMSA
Rulings = set out in the form of Practice Notes.

2.4. Regulatory Trigger

s 218(1), (2), (3) CMSA

2.5 conduct of persons involved in takeover offer, merger or compulsory


conduct required of offerors, advisers and boards of offerees

- observing good standards of commercial behaviour
- provinging information to shareholders to enable them to make informed
- applying high standards of care to documents and information provided
to shareholders

- prohibiting activities that distort transparency and orderliness in the

market, ensuring takeover offers are undertaken in accordance with time

lines and prohibiting actions that could frustrate an offer.

See S 8 of the Code

3. Types of Acquisitions

3 types of acquisitions are regulated by the Code:

(a) Mandatory offer
(b) Voluntary offer
(c)Partial offer

3.1. Mandatory Offers (Mandatory General Offer)

3.1.1. The Mandatory Bid Rule
Acquisition of voting shares exceeds the statutory threshold for control
acquirer has to make a Mandatory General Offer
3.1.2. The rationale of the Mandatory Bid Rule
a) To achieve equity between the remaining shareholders of the offeree/
target company and those shareholders from whom the acquirer had
purchased the shares.
b) It gives the remaining shareholders an opportunity make an exit from the
company or to remain in the company with the new controller.
3.1.3. s 216(1) CMSA for the meaning of control.

The trigger point for having to extend a mandatory offer is >33% of the
voting rights i.e. threshold where acquirer obtains control of a company

s 218(2) CMSA an acquirer who has obtained control in a company shall make
a take-over offer, other than in respect of voting shares of the company or voting
rights which at the date of the offer are already held by the acquirer or which the
acquirer is entitled to exercise.
s 218(3) CMSA - an acquirer who has obtained control shall not acquire any
additional voting shares in that company or voting rights.
s 9(1) of the Code.
(a) control (threshold)
(b)consolidate control
Chin Yew Loy Holdings Sdn Bhd v AU Metalvest (M) Sdn Bhd
Once the 33% threshold is passed, acquirer is obliged to execute a Mandatory
General Offer immediately after the acquisition no discretion.

Petaling Tin Bhd v Lee Kian Chan &Ors

Held: A public censure issued by the Panel on Takeovers and Mergers did not
have the automatic effect of releasing the concert parties from the obligation
imposed upon them under the Code to make a mandatory offer.

Aun Huat & Brothers Sdn Bhd & Ors v Sime Darby Bhd & Anor
Followed Petaling Tin Bhd although the acquisition by D1 of UMBC had been
disallowed by Bank Negara under the provisions of BAFIA, this did not adsolve D1
from its obligations arising from the MGO to the minority shareholders of UMBC.
Securities Commission v Up & Famous Sdn Bhd & Ors [2010] 7 MLJ 701
Initially, D1-D7 combined holding = 49.3% (>33% and <50%), out of which D1
held 41.93%
On 17/1/2002, D1 purchased 2m shares in Takaso increased its stake in the
paid-up share capital or Takaso from 41.93% to 50.54%.
D2,D3,D4,D5 = directors of Takaso
D5 = D4s wife
D4, D6 and D7 = children of D2 and D3
Every D = person acting in concert with each other within the meaning of S 33(2)
and (3) SCA (now s 216 CMSA)
The increase was deemed under SCA to have been combined with the
shareholdings of D2-D7 increased the collective interest of all Ds to 57.91%.
Held : Under s33B SCA (now s 2189(3) CMSA read together with s 6(1)(b) and s
6(4) of the Malaysian Code on Takeovers and Mergers 1998 (now s 9 of the 2010
Code) and Practice Note 2.3(2), Ds were obliged to make a Mandatory General
Offer to the offer existing shareholders of Takaso.
3.1.4. Other instances where a mandatory offer is required to be made:
Practice Note 9, para 4.1 and 5.1.
3.1.5. Vendor selling part of his controlling voting shares or voting
See: Practice Note 9, para 6.1 and 6.2.
3.1.6. Special features of the Mandatory Offer
(a) Consideration for offer
ss 21(1), 22(2) of the Code.
(b) Offer to be conditional upon acceptances (Conditional Bid)

ss 17(1), (2), (3) of the Code.

Note: acquirer is required to condition the success of its bid to acceptances
constituting >50% of the voting shares of the target company.
(c) Management of the affairs of an offeree
s 13(2) of the Code.
(d) Acquirer is responsible for making or implementing mandatory offer
See: s 218 CMSA.
Meaning of acquirer: s 216(1) CMSA.
(e) Persons acting in concert: s 216(2) CMSA.
Who are presumed to be persons acting in concert: s 216(2) CMSA.
Persons prescribed to be person acting in concert according to s 216(3) CMSA
See s 4(1) of the Code.
A set of criteria for rebutting the person acting in concert presumption is
introduced, see s 4(3) of the Code.
3.1.7. Exemptions of the provisions of Division 2, Part VI of the CMSA,
the Code and any rulings made by SC.
The SCs power to grant exemptions - s 219 CMSA.
- in considering the granting of an exemption, SC must have regard to the
principles and objectives specified in s 217(5) CMSA
See also: PN 3, para 1.2; PN 9, para15.1-15.9
Exemptions are set out in Practice Notes. See: PN 9, para16-24.
3.2 Voluntary Offers
3.2.1. Meaning of voluntary offer: s 2(1) of the Code.
3.2.2. Voluntary offers must also be made in compliance with the requirements of
CMSA and the Code.
3.2.3. Main difference:
Mandatory Offer
- may only be conditional upon the offeror having received acceptances
which would result in the offeror and persons acting in concert with the
offeror holding >50% of the oting shares of the target company : s 17(2)
of the Code
Voluntary offer offeror may specify other conditions: s 17(4) & (5) of the

3.2.4 However, A voluntary takeover offer shall not be subject to a defeating

condition: s 18(1) of the Code.
Such defeating condition made in contravention of s 18(1) of the Code shall be
void: s 18(2) of the Code.
3.2.5. Consideration: s 22(3) of the Code.
3.3 Partial Offers
3.3.1 Partial offer = voluntary offer made by offeror for a fixed percentage but
less than all of the target company shares that carry voting rights (an offer
<100% of the issued equity shares of the target company).
3.3.2 Can only be made with SCs prior written approval: s 10(1) of the Code
3.3.3 See also s 10(2) , (3) of the Code
3.3.4 Three (3) separate scenarios with respect to partial offers that are
expressly regulated under the Code: s 10(6), (7) and (9) of the Code.
3.3.5 Dealings in securities

S 10(4) of the Code

S 39 of the Code

4. Procedures for Takeovers

4.1 Announcement
4.1.1. If there is untoward movement or increase in the volume of share turnover
of an offeree potential offeror to make announcement whether any takeover
or possible takeover: s 11(1) of the Code.
4.1.2. After being approached by potential offeror, board of directors to make
announcement - whether there is takeover offer or possible takeover offer obligated to keep a close watch on its share price and volume of share turnover:
s 11(2) of the Code.
4.1.3. Until a firm announcement of the takeover exercise is made, both the
potential offeror and offeree are required to make brief announcements that
negotiations are taking place: s 11(4) of the Code.
4.1.4. Premature or inappropriate announcement of takeoveroffer and no further
announcement within one month, a potential offeror or offeree is required to
make a monthly announcement setting out the progress of negotiations until a
takeover announcement is made or the negotiations are terminated: s 11(5) of
the Code.
4.1.5. A potential offeror who announces that he does not intend to make a
takeover offer is prohibited from announcing a takeover offer for six months after
making such an announcement: s 11(6) of the Code.

4.1.6. Offeror announced proposed offer by way of a press notice: s 11(7) of the
Information in the press notice as set out in s 11(9) of the Code.
4.1.7. After the announcement, the offeror must send a written notice of his
intended/proposed intention to the board of directors (BOD) or adviser of the
company, the SC and the stock exchange: s 11(8) of the Code.
4.1.8. BOD must make an announcement by way of press notice of the proposed
offer within 24 hours which sets out the information disclosed by the proposed
offeror to the company and a statement as to whether the BOD is seeking an
alternative person to make a takeover offer of its voting shares. BOD must also
post such notification to all offeree shareholders within 7 days. See: s 11(10),
(11) of the Code.
4.1.9. At the same time must send written notice of his proposed. Under the
new Code 2010, a potential offeror is required to announce possible offers where
there is untoward movement or increase in the volume of share turnover of an
offeree. Potential offerors will be prohibited from making a takeover offer within a
period of 6 months should they deny making an offer. See s 11(1), (6) of the

4.2 Offer document

4.2.1 Principle in s 217(5) CMSA.
4.2.2 General rule: s 12(4) of the Code.
4.2.3 The information which must be included in the offer document: s 12(5) of
the Code.
4.2.3. Schedule 1 of the Code sets out an extensive list of matters which must be
stated in the offer document. See also SCs Guidelines on Offer Documentation
which sets out the regulators expectations relating to offer documents,
independent advice circulars and profit forecasts.
Ampolex Ltd v Mobil Exploration & Producing Australia Pty Ltd
Held: The offeror had not discharged its duties to provide sufficient information
to shareholders of Ampolex in accordance with the statutory standard.
Pancontinental Mining Ltd v Goldfields Ltd
The court highlighted what is material in a takeover scheme is a matter for
judgment and assessment in light of all the evidence, facts and circumstances in
each particular takeover context and will necessarily differ from case to case.

4.3 False or Misleading Statements

4.3.1. See s 221(1) CMSA

4.3.2. Contravention of s 221(1) CMSA = offence: s 221(3) CMSA.

4.3.3. Defence: Due diligence s 221(2) CMSA
4.3.4 see s 38(1) and 38(2) of the Code for the similar prohibition and defence of
due diligence.
4.3.5 What if the person making the disclosure was of the opinion that certain
information was accurate at the time of disclosure but subsequently became
aware that the disclosure was defective? See s 38(3) of the Code.
4.4. Offeree Board Circulars
4.4.1. Board of Directors (BOD) of the offeree is to issue its comments, opinion
and information on the takeover offer to every offeree shareholders, including
any other form of consideration offered by the offeror, in a form of a circular to
every offeree shareholders within 10 days from the date that the offer document
was dispatched to the offeree shareholders: s 14(1) of the Code.
4.4.2. Contents of the board circular: see s 14(2), (3), (5) of the Code.

4.5 Independent Advice Circular

4.5.1. Section 15(1) of the Code requires the BOD of the offeree to appoint an
independent adviser to provide comments, opinions, information and
recommendation on a takeover offer in an independent advice circular.
4.5.2. Appointment of the independent adviser by the board of the offeree no
need SCs approval.
4.5.3. An independent adviser appointed by the board of directors of the offeree
shall declare its independence from any conflict of interest or potential conflict of
interest to SC within 3 days of its appointment: s 15(11) of the Code.
4.5.4. The independent adviser shall issue the independent advice circular to the
board of the offeree, offeree shareholders and holders of convertible securities of
the offeree within 10 days from the date the offer document was dispatched to
the offeree shareholders: s 15(2) of the Code.
4.5.5. The independent advice circular to the board of the offeree and offeree
shareholders must be approved by the SC with regard to its contents: s 15(7) of
the Code.

5. Compulsory Acquisitions
5.1 Section 222 CMSA confers on the offeror the right to make a compulsory
acquisition of the shares of the dissenting shareholders. [squeeze-out right]
Pre-requisites for making a compulsory acquisition under s 122(1) CMSA
The 90% threshold.
Procedure to compulsorily acquire the remainder of shares:

ss 222(1), (2), (7), (8) CMSA

5.2. Right of dissenting shareholder
5.2.1. Section 223 CMSA provides a corresponding right to dissenting
shareholders to require an offeror who has made a takeover offer to acquire their
shares where the offeror does not exercise a right of compulsory acquisition
which is allowed in s 222 CMSA. [sell-out right]
See: s 223(1), (2) CMSA.

5.3. Application to Court

5.3.1. Section 224 CMSA provides for the courts role in 2 specific situations
where the threshold of 90% shareholding has been achieved by the offeror.
1st situation - where the offeror who has met the 90% threshold in s 222(1)
CMSA wishes to compulsorily acquire the remaining shares and issues a notice to
the dissenting shareholders to that effect. The dissenting shareholders may
apply to the court for an order that the offeror shall not be entitled and shall not
be bound to acquire the dissenting shareholders shares or for an order that
specifies terms of the acquisition from the dissenting shareholder that are
different from the terms of the takeover offer. See s 224(1) CMSA.
2nd scenario - the offeror has achieved the 90% threshold but has not acquired
the remaining shares from the minority shareholders, who then require the
offeror under s 223 CMSA to acquire their shares and whereby the offeror is
bound to acquire those shares on the terms of the takeover offer or such other
terms as may be agreed Court has power to order the terms on which the
offeror shall acquire the shares from the minority shareholder.
5.3.2. See also PN 32 of the Code.
6. Consequences of Breaches of the provisions relating to Takeovers
6.1. Criminal sanctions: s 218(4) CMSA
6.2. Administrative sanctions: s 220 CMSA.
Petaling Tin Bhd v Lee Kian Chan & Ors
Held: A public censure issued by the Panel on Takeovers and Mergers did not
have the automatic effect of releasing the concert parties from the obligation
imposed upon them under the Code to make a mandatory offer.
6.3. Civil liability: s 357 CMSA.
7. Defensive Tactics and Strategies
7.1. Meaning of hostile takeover


- a takeover offer which is opposed by the target companys incumbent directors

and managent .
7.2. Distinction between defensive tactics and strategies.
Tactics = measures adopted to combat a hostile bid which has been made or is
thought imminent.
Strategies = intended to discourage bids from being made at all
7.3. Defensive tactics
(a) Branding the bid inadequate / Inadequacy of the offer
- most common defensivetactic
- reject offer on the grounds that the price does not reflect the underlying
financial standing of the company
(b) Criticising the offeror
Objective : dissuade shareholders from accepting the offer.
(c) Bonus issues and higher dividend
- companies to declare higher dividends as a means of increasing shareholder
(d) Friendly takeover or white knight (issuing shares to friendly shareholders)
- company can issue a significance number of shares to a person who or a
company which was perceived as friendly.
Malaysia unless shareholders give consent , tactical share allotment will
constitute frustration of the offer under S35 of the Code.
(e) Differential voting right
- a company may adopt a voting structure which could enable the directors and
other insiders to own a small number of shares but have a disproportionately
large number of votes.
- more difficult for outsider to acquire sufficient shares to achieve control
(f) Appeal to the courts and regulatory bodies
- delay a take over and thereby lessen the momentum of an offeror and reduce
the likelihood of its success
7.4. Long-Term Defensive Strategies
7.4.1. Defensive strategies may be adopted by companies in an attempt to
make themselves takeover proof or at least difficult to takeover.
(a) Golden parachute
- company may enter into service or employment agreements which officer of
the company provides for a significant termination payment on the event of

losing their position to a successful offeror increases the costs of acquiring full
control of the company.
(b) Employee stock ownership schemes
- placing large blocks of shares in the hands of employees through an
employees trust fund.
(c) Share buy-back
Share repurchases can divert shares away from a hostile bidder.
Malaysia share buy-back may be exercised by virtue of s 67A of the Companies
Act 1965