And Two Or More Shall Become One

Rachel Ng makes a case for incorporation of statutory amalgamations to the Companies Act 1965

Mergers and acquisitions have become a common area of practice for most corporate lawyers these days.


MERGERS IN MALAYSIA

As in most common law jurisdictions, mergers and acquisition transactions in Malaysia are usually effected through a shares purchase or an assets purchase. A shares purchase doe not achieve full integration as the entities involved remain in existence and continue with their respective businesses.

An assets purchase is document intensive process which entails, among others, applications for new licences that were held by the seller of the assets, the transfer of employees and of contractual rights and obligations, the latter of which require approval of the affected counter-parties.

Alternatively, a company may undertake a merger through a scheme of arrangement under Section 176 of the Companies Act 1965 (“Companies Act”). As such a scheme is a long-drawn process that requires court sanction as well as the approval of the creditors of the company or business to be acquired; it is usually resorted to only if there are no other practicable means of effecting a merger.


MERGERS IN CIVIL LAW JURISDICTIONS

Mergers by operation of law have long since existed in civil law countries such as the Netherlands and Germany.

In essence, such a merger automatically vests the assets and liabilities of the entities in one entity, often described as the surviving entity. The remaining entities will cease to exist upon the merger taking effect.

The most attractive feature of the civil law merger process is the simplicity of the process by which the surviving entity assumes the rights and obligations of the other entities and the seamless manner by which it is achieved.


AMALGAMATIONS IN COMMON LAW JURISDICTIONS

Taking the cue from civil law jurisdictions, several common law jurisdictions have already adopted this form of merger, which we will refer to in this article as "amalgamations".

In 1994, New Zealand amended their Companies Act 1993 No. 105 to facilitate amalgamations whilst Singapore incorporated this procedure into the Singapore Companies Act (Cap 50) in 2006. The Singapore model is based substantially on the New Zealand model.

The Singapore and New Zealand models offer two forms of amalgamation procedures which are free from judicial oversight, namely a "short form amalgamation" and a "long form amalgamation".

A short form amalgamation may be used when the holding company merges with one or more of its wholly-owned subsidiaries or when two or more wholly-owned subsidiaries of the same holding company merge with each another. The merger of companies that do not satisfy either of the foregoing criteria is effected by a long form amalgamation.

Long form amalgamation

A long form amalgamation is initiated with the preparation of an amalgamation proposal which sets out the detailed terms of the transaction. The board of directors of each amalgamating company is required to pass a resolution to confirm that the amalgamation is in the interest of the relevant company. Each director who votes in favour of the resolution is also required to sign a declaration to confirm that the relevant requirements under the legislation have been satisfied.

The Singapore model goes further to require each director to make a solvency statement in relation to the amalgamating company on whose board he serves.

To protect the rights of the members of the amalgamating companies, the amalgamation proposal and all information that is necessary to assist in the understanding of the nature and impact of the proposed amalgamation must be provided to the members of each amalgamating company. The amalgamation proposal must also be sent to all secured creditors.

The amalgamation proposal must then be approved by a special resolution of members in general meeting of each amalgamating company. Creditors or members may apply to the court for relief in the event that they are being unfairly prejudiced.

Interestingly, the long form amalgamation procedure in New Zealand also confers a right on each member who votes against the amalgamation proposal to be bought-out.

Upon the approval by the members of all the amalgamating companies being obtained, the amalgamation proposal will be lodged with the Registrar of Companies together with the other documents and fees prescribed under the legislation. The Registrar will thereafter issue a notice of amalgamation and, where the amalgamated company is a new company, a notice of incorporation. The amalgamation takes effect from the date stated in the notice of amalgamation and vests all properties, rights, obligations and liabilities of the amalgamating companies in the amalgamated company.

Short form amalgamation

The procedures for a short form amalgamation are substantially similar to the long form amalgamation. However, it dispenses with certain formal procedures required for a long form amalgamation, such as the requirement for a formal amalgamation proposal.

In Singapore, a short form amalgamation must still be approved by a special resolution of the members of each amalgamating company. A solvency statement must still be made by each director who approves the resolution.

The New Zealand legislation only requires a short form amalgamation to be approved by a board resolution of each amalgamating company. The directors who voted in favour of the resolution are required to sign a certificate stating that the amalgamated company will satisfy the solvency test after the amalgamation.


AMALGAMATIONS IN TAX HAVEN JURISDICTIONS

A codified framework for amalgamations is not new to Malaysia. The amendments to the Labuan Companies Act 1990 (“LCA”) that came into force on 11 February 2010 introduced a framework for such amalgamations.

The LCA provides for three forms of amalgamations in Sections 118A, 118B and 118C.

Section 118A allows two or more Labuan companies to amalgamate. This form of amalgamation creates a new Labuan entity which must be registered with the Labuan Financial Services and Securities Authority (“LFSA”).

The procedures under Section 118A are substantially similar to a Singapore long form amalgamation in that the amalgamating entities are required to prepare an amalgamation proposal and to issue the same to the members and secured creditors of each amalgamating company. The amalgamation proposal is to be approved by special resolution of each amalgamating company. As in the Singapore model, the directors of each amalgamating company are required to make solvency declarations in relation to that amalgamating company.

Section 118C of the LCA provides for a short form amalgamation for amalgamations between a holding company and one or more of its wholly-owned subsidiaries or between two or more wholly-owned subsidiaries of the same corporation.

For short form amalgamations, it is not essential for a new Labuan company to be created. Where the amalgamation involves a holding company, that company must continue as the amalgamated company. In a short form amalgamation of wholly-owned subsidiaries of the same corporation, any of the subsidiaries can be the amalgamated company.

As in Singapore, the LCA requires a short form amalgamation to be approved by special resolution of each of the amalgamating companies.

Certain procedures are dispensed with in a short form amalgamation, thereby reducing the cost and time for effecting such amalgamations. For example, there is no requirement to prepare an amalgamation proposal and the resolutions passed by the amalgamating companies are deemed to be the amalgamation proposal.

For both of the aforementioned forms of amalgamation under the LCA, a certificate issued by the LFSA is conclusive evidence of compliance with all the requirements of the LCA and of the vesting of the assets of the amalgamating companies in the amalgamated company.

Section 118B of the LCA enables a Labuan company to amalgamate with a foreign Labuan company or a corporation provided that the Labuan company continues as the amalgamated company. A foreign Labuan company or corporation is required to obtain all necessary authorisations under the laws of the jurisdiction of its incorporation and to provide the LFSA with documentary proof of such authorisations.

The provisions of Section 118A apply mutatis mutandis to an amalgamation under Section 118B. Section 118B is an interesting provision in that it enables cross-border amalgamations to be effected provided that a Labuan company continues as the amalgamated company.

It must be noted that an entity which holds a licence under the Labuan Financial Services and Securities Act 2010 or the Labuan Islamic Financial Services and Securities Act 2010 is not permitted to be involved in any of the three forms of amalgamations under the LCA.

Another tax haven which has recently adopted this court-free procedure into its legal framework is the Cayman Islands. In May 2009, their law was amended to provide for companies to amalgamate by way of merger or consolidation.


CROSS-BORDER AMALGAMATIONS

On 26 October 2005, the European Parliament issued a directive (Directive 2005/56/EC) to facilitate cross-border mergers between limited liability companies that originate from different Member States of the European Union (“EU”).

The merging companies are required to draw-up common draft terms that contain prescribed information. The common draft terms provide information of the transaction to enable members to make an informed decision on the proposed merger. These terms are published at least one month before the date of the general meeting of the merging companies to decide on the merger.

An independent expert report is to be issued to the members of the merging companies at least one month before the general meeting to assist them to make an informed decision at the general meeting.

Finally, the laws of the EU Member State country in which the merged entity will exist apply to effect the merger. A pre-merger certificate has to be granted by a designated court of each Member State to scrutinise the legality of the cross-border merger. This certificate will conclusively attest to the proper completion of the pre-merger acts and formalities.

The directive also provides for a simplified process where the merger is carried out by a company which holds all the shares of the target company.


CONCLUSION

As it can be seen from the above, the codified procedures for amalgamations simplify the amalgamation process.

In the Review of the Companies Act 1965 Final Report, the Corporate Law Reform Committee had recommended that extensive reforms be made to the Companies Act. However, the Committee did not make any recommendation that a statutory framework be adopted in relation to amalgamations.

As mergers and acquisitions are a daily occurrence in the Malaysian corporate sector, it is proposed that the Government should introduce a statutory framework for amalgamations in the forthcoming amendments to the Companies Act. This will not be a ground-breaking move as this framework already exists in the LCA.

As cross-border mergers and acquisitions are becoming more common these days, it may one day be appropriate for ASEAN to adopt a cross-border amalgamation framework that is similar to the EU's Directive 2005/56/EC.

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