Plugging the “Loophole”

Chan Su-Li discusses the proposed amendments to the Listing Requirements on Privatisation of Listed Companies via the Disposal of Assets

 

 

On 19 March 2010, the Securities Commission ("SC") and Bursa Malaysia Securities Berhad ("Bursa Malaysia") issued a joint consultation paper in respect of the proposed amendments to Bursa Malaysia's Listing Requirements ("Listing Requirements") on privatisation of listed companies via a disposal of assets ("CC3/2010").

 

Currently, there is a disparity in the shareholder approval thresholds in respect of the routes available for the privatisation of a listed company. The SC and Bursa Malaysia observed in CC3/2010 that this situation gives rise to the concern that potential acquirers may privatise a listed company via the least stringent mode which, in turn, provides a lesser level of protection to shareholders.

 

The proposed amendments to the Listing Requirements in CC3/2010 are aimed at closing a "loophole" in the law where, under Section 132C of the Companies Act 1965 ("CA"), a company may dispose of all or substantially all of its assets with the approval of a simple majority (i.e. more than 50%) of its shareholders present and voting at the company's general meeting. This is commonly known as the "Asset Disposal" route.

 

The "Asset Disposal" route has been used to privatise and indirectly, take-over a listed company whereby the acquirer, with the approval of the holders of a simple majority of the voting shares of a listed company, acquires the assets of the latter. This is followed by the delisting of the listed company as it no longer has the level of operations to maintain its listing status on Bursa Malaysia.

 

Examples of take-overs and acquisitions that have used the "Asset Disposal" route since 2005 are CIMB Group Holdings Bhd's acquisition of Southern Bank Bhd, MMC Corp Bhd's acquisition of Malakoff Bhd's assets and the Sime Darby merger. The current takeover proposal of EON Capital Bhd by Hong Leong Bank Bhd also uses the "Asset Disposal" route.

 

In contrast, under the Malaysian Code on Take-Overs and Mergers 1998 ("Code"), the threshold to take-over a company and de-list it is higher at 90% acceptance of shares outstanding which are not held by the acquirer, in order for the acquirer to undertake a compulsory acquisition for the remaining voting shares of the target company.

 

This article discusses the impact of the proposed amendments on the take-over of a listed company via the "Asset Disposal" route.

 

 

THE PROPOSED AMENDMENTS

In order to address the disparity in the shareholder approval thresholds discussed above, the SC and Bursa Malaysia have proposed in CC3/2010 that:

 

(a) a disposal of assets via the "Asset Disposal" route must be approved by more than 50% in number and at least 75% in value of the shareholders present and voting either in person or by proxy at the general meeting; and

(b) the shareholders who object to the disposal must not be more than 10% of the value of the shareholders present and voting either in person or by proxy at the general meeting.

 

In addition, the listed company must appoint an independent adviser to advise whether the disposal is fair and reasonable and whether the shareholders should vote in favour of the transaction.

 

The proposed amendments also require a company that is planning to dispose of its assets to concurrently acquire another asset which complies with the relevant SC guidelines and Listing Requirements. If the company does not intend to acquire a new asset, the acquirer is required to make an "exit offer" to acquire all the voting shares in the listed company in accordance with the Code. This exit offer must be made concurrently with the acquirer's offer to acquire the listed company's assets.

 

 

PROTECTION OF MINORITY RIGHTS

The take-over of listed companies via the "Asset Disposal" route have raised concerns that the minority shareholders may be forced to sell-out by a small number of substantial shareholders who hold sufficient shares to attain the simple majority required under Section 132C of the CA even though the prices offered may not be fair or reasonable. Therefore, placing a higher threshold of shareholder approval in respect of an asset disposal may plug the "loophole" in the law and compel the acquirer to offer a price that will be sufficiently attractive to persuade a larger number of shareholders to support the disposal.

 

The proposed amendments have been lauded by the Minority Shareholder Watchdog Group and other players in the Malaysian capital market as the interests of minority shareholders will be better protected.

 

The proposed amendments are in line with several other jurisdictions which have tightened their rules on the "Asset Disposal" route. Thailand and New Zealand have increased the approval threshold for such a transaction to at least 75% of the shareholders present and voting. In addition to the 75% threshold, Hong Kong also requires that votes cast against the disposal must not exceed 10%. It is to be noted that none of these jurisdictions have included the requirement for approval of at least 50% in number of shareholders present and voting, as proposed in CC3/2010.

 

 

ARGUMENTS AGAINST THE PROPOSED AMENDMENTS

There are several arguments against the proposed amendments, one of which is that value creating mergers and acquisitions will be prevented, to the detriment of the Malaysian capital market. Take-overs via the "Asset Disposal" route is said to be in line with the principle of shareholder democracy, and has resulted in the creation of bigger (and arguably, better) companies.

 

It is also argued that providing minorities with the right to veto an asset disposal will allow incumbents or those who can acquire a veto-block of shares to hold the rest of the shareholders to ransom. This would result in the opposite of shareholder democracy, with the minority controlling the majority.

 

In addition, various common law jurisdictions such as Singapore, London and Australia, still permit the disposal of assets via the "Asset Disposal" route to be effected by a simple majority vote. Therefore, it is argued that there should not be an impetus to streamline Malaysia's rules to be in line with jurisdictions that have chosen to tighten their rules.

 

 

CONCLUSION

 

The proposed amendments aimed at closing off the "loophole" in the law created by Section 132C of the CA is a step in the right direction by the SC and Bursa Malaysia towards promoting a healthier capital market. While these amendments may require some further modifications to ensure that it is not too onerous for value creating deals to be carried out, the change should be welcomed by many as it affords better protection of minority interests.

 

 

CHAN SU-LI ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 

 
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