1. The focus of the presentation is on the guidelines and other regulatory measures imposed by the Securities Commission (SC) on listed companies, especially those under distress, in the undertaking of restructuring proposals.
2. It should be highlighted that there is no prescribed definition of restructuring proposals although when one mentions the word “restructuring”, the understanding that comes to mind is that it is an exercise to resolve financial and operational problems or to further maximise business performance.
3. Companies that are in distress are of relevance to the issues under consideration. The SC defines what constitute “distressed listed companies” and this includes those under Practice Note 4 of KLSE (PN4 companies), those under the purview of Danaharta and those under section 176 of the Companies Act 1965, to the extent that they are insolvent or where a restraining order has been granted.
Source of the SC’s authority4. The authority of the SC in considering restructuring proposals of listed companies is derived from the Securities Commission Act 1993 (SCA), in particular, section 32 of the SCA. Specifically,-
- Section 32(2)(a) of the SCA requires the prior approval of the SC for any person intending “to make available, offer for subscription or purchase, or issue an invitation to subscribe for or purchase securities in Malaysia ” unless exempted by the First Schedule of the Act.
- Section 32(2)(g) of the SCA requires the prior approval of the SC for any person who proposes to “acquire or dispose assets (whether or not by way of issue of securities) which results in a significant change in the business direction of a listed company ”.
5. Since the restructuring of listed companies would normally involve the issuance of new securities (for instance, to creditors as part of a debt settlement scheme or to the vendors of white knights as consideration) and acquisition of new core assets or business, the listed company would therefore need to obtain the approval of the SC for the restructuring proposals.
Regulatory Principles Adopted by the SC
6. The pre-requisites and salient requirements which need to be satisfied by listed companies that proposes to undergo a restructuring scheme are dealt with in the SC’s “Policies and Guidelines on Issue/Offer of Securities” or more popularly known as the Issues Guidelines.
7. Particular attention is accorded by the SC on restructuring proposals by distressed listed companies, as the SC would want to see that they are able to resuscitate themselves, for the broader benefit of the economy. Generally, a well-formulated restructuring proposal which could rescue a distressed listed company, resolve its financial predicaments and enable it to emerge on a stranger footing, would be favourably considered by the SC.
8. In considering restructuring proposals by distressed listed companies, the SC places importance to adherence of certain principles and requirements and these are summarised as follows:-
(i) The restructuring proposal must demonstrate to the SC’s satisfaction that the proposal is comprehensive and capable of resolving all the financial problems faced by the listed company.
- This is to ensure that the restructuring proposal addresses the encompassing problems faced by the distressed listed company, including income and cash flow generation and restructuring of all liabilities, rather than one which provides only a piece-meal solution.
- The restructuring proposal must not represent a short-term measure or one where the listed company is likely to need subsequent rescue or “blood transfusion” in the immediate future.
- Another aspect of this principle is the SC’s expectation that the pro-forma net-tangible-asset (NTA)-position of the distressed listed company should be positive and be at least 33% of the par value of its ordinary shares immediately on implementation of the restructuring proposal. Bearing in mind that many of these distressed listed companies have negative NTA per share, this would necessitate that the asset to be injected must be of a certain size and quality.
(ii) Where new assets are to be injected as part of the restructuring proposal, these assets must be of a reasonable quality and be able to provide immediate and sustainable contributions to the listed company’s profit and cash flow. This is to ensure that post-restructuring, the listed company will have a viable business which could generate certain form of returns to shareholders.
- One aspect of this principle is that, at a minimum, the asset to be injected must have at least 1 year of after-tax profit based on the latest audited accounts, or one year of revenue which is verified by an independent firm of public accountants. Of course, the assets would need to have good prospects of strong profits and cash flow which will be beneficial to the listed company.
- However, where the assets to be injected are in the property development and construction sectors, the assets must have a minimum historical aggregate after-tax profit of RM30 million over a period of not more than 5 years. Property development and construction assets which have an aggregate after-tax profit of at least 21 million over 5 years can still be accepted provided that these have on-going projects to meet the balance of the requisite RM30 million after-tax profit in the current or next financial year.
(iii) The promoters, including the white knights, where applicable, must have a proven track record of good corporate governance.
- A very important overriding criteria, this seeks to ensure that our listed companies are managed under the stewardship of senior management who possess high standards of corporate governance.
- An illustration of this principle is that directors and proposed directors of the distressed listed company should not have been charged, convicted or compounded for any offence under the securities laws, corporations laws or any other laws involving fraud or dishonesty in a court of law.
(iv)The SC must be satisfied that the restructuring proposal is fair to all parties concerned and does not unduly compromise or adversely affect the interests of shareholders, particularly minority shareholders with lesser bargaining power.
- For example, where a restructuring proposal involves a substantial capital reduction, the SC may require some sort of offering to minority shareholders of the listed company, for the purpose of enabling them to participate in the proposal, and at the same time, partly restore their equity position.
(v) The substantial shareholders or those deemed to be responsible for the downfall of the listed company must not benefit in an unfair manner as a result of the restructuring proposal.
- Irresponsible parties should not continue to play a role in the restructuring proposal and, hence, in the restructured company’s future.
- The SC, in approving the restructuring of a distressed listed company, would also impose a condition that investigative audits be conducted on the previous affairs of the PN4 companies by a firm of independent public accountants. The role of the investigative audit is to identify the causes that led companies to their distressed financial state, and serve as a basis for further action by the companies to recover their losses.
(vi) There must be demonstrable benefits resulting from implementation of the restructuring proposal, especially for the shareholders, employees and other stakeholders.
; and finally:
(vii) The SC must be satisfied that the restructuring proposal does not have an adverse impact on the capital market in general, either immediately or over the long term.
Relationship between taxation and the re-organisation and restructuring of companies under the SC’s consideration
9. What, if any, is the relationship between taxation and SC’s consideration of restructuring proposals? There are various tax implications in the restructuring of a distressed listed company.
10. For instance, where a white knight is being injected into a distressed listed company, the transfer of the white knight shares may attract real property gains tax (RPGT) and this affects the vendors of the white knight. The transfer of the white knight shares would attract stamp duty charges. Additionally, where novated debts are being waived, this may attract income tax affecting the listed companies. The professional advisers of the distressed listed company should be able to address all these issues.
11. What is therefore the role of the SC? As a regulator of the capital market, one can possibly argue that the SC has no business to look into tax matters. One can also possibly ask, what does taxes have anything to do with investor protection?
12. Nevertheless, this is not the position that the SC has taken. The SC is of the view that not settling taxes when these are due is an indication of poor corporate governance. It also hints at other possible misfeasance. This also extends to those in control of the listed companies, for example the directors of the company. If a director of a listed company is not capable of managing his personal finance properly, how can he be expected to manage other people’s money properly?
13. Thus, in considering as to whether or not to approve a restructuring proposal, an applicant would have to demonstrate to the SC that the submission of their tax returns and/or settlement of tax liabilities with the Inland Revenue Board are up to date.
14. This requirement is imposed on the following persons/entities:-
- The applicant (the distressed listed company/new company set up to take over the listing status of the distressed listed company);
- The directors and proposed directors of the applicant; and
- Any Malaysian-incorporated subsidiaries of the applicant.
15. If it is found that any of these persons/entities have not updated their tax returns or settle their tax liabilities, the SC may reject the proposal or impose appropriate conditions.
Asset Securitisation
16. Finally, since we are on the subject of restructurings, allow me to briefly touch on the issue of asset securitisation. Asset securitisation provides companies with a possibility of a more efficient and lower cost source of financing in comparison with other bank and capital market financing alternatives. Asset securitisation is therefore a potentially useful tool for companies undertaking restructurings.
17. Essentially, asset securitisation provides a vehicle for transforming relatively illiquid individual financial assets into liquid and tradable capital market instruments. Through securitisation, a company can replenish its sources of funds, which can then be used for additional origination activities.
18. I would like to add, however, that there is currently no specific tax legislation that deals with asset securitisation. In the absence of tax incentives for asset securitisation, the importance of tax neutrality cannot be over-emphasised. Without tax neutrality, securitisation may lead to additional tax burdens for originators. If that happens, the desire of originators to enter into such transactions will be greatly curtailed. The main tax considerations pertinent to the originator for transfer of assets under securitisation transactions include:
- Determining the disposal price and gain or loss on the sale of receivables (and other assets) to special purpose vehicles (SPV); and
- The treatment of lump sum receipts from sale of future receivables (and other assets).
19. In this respect, the SC, together with the Ministry of Finance’s Tax Division and the Inland Revenue Board are currently in discussions to formulate a set of tax treatments that would promote a tax neutrality framework for asset securitisation transactions.
Conclusion
20. I hope that I have managed to shed some light on the guidelines and other regulatory measures which have been adopted by the SC on restructuring proposals. As you would appreciate by now, the focus of the SC in the review and approval of such proposals is to ensure that they are viable and that good corporate governance and investor protection are emphasised.
