The Malaysian Code on Take-Overs and Mergers 1998 (the Code)

Application of Sections 32 and 36 of the Malaysian code on Take-overs and Mergers 1998 (the Code) on nominee companies

1)

Would the SC consider exempting a nominee company who acts as mere bare trustee of a pool of beneficial owners of shares in a particular company, from the definition of a “substantial shareholder” for the purpose of disclosure requirements under Sections 32 and 36 of the Code?

The SC would consider the above on a case-to-case basis. As a matter of policy, only authorised nominees under the Securities Industry (Central Depositories) Act, 1991, who merely act as bare trustees of a pool of beneficial owners of shares in a particular company, and who do not have any direct discretionary dealings of such shares under its accounts, could be exempted from the definition of “substantial shareholder” under Sections 32 and 36 of the Code and, accordingly, from the disclosure requirements under the above-said sections thereof, in a particular take-over offer. The above, nevertheless, would not apply should the nominee’s own beneficial interests, if any, in the company exceed the substantial shareholding threshold.  

2)

Is the SC’s approval required for the above-mentioned exemption?

Yes. Authorised-nominee-companies are required to submit their applications for the SC’s consideration and approval before they can be exempted from the definition of “substantial shareholder” under Sections 32 and 36 of the Code, and, accordingly, from the disclosure requirements under the same sections thereof. The SC’s approval, if granted, would only be in respect of the particular take-over offer concerned. 

3)

Would the SC’s new policy on the application of the definition “substantial shareholder” on nominee companies, negate the obligation of the ultimate beneficial owners of shares under the accounts of the nominee companies who act as mere bare trustees, from the disclosure requirements under the Code?

The SC’s new policy would not negate the obligation of the ultimate beneficial owners of shares under the accounts of the bare trustees, to comply with the relevant disclosure requirements under the Code, should their direct interests in the company concerned arising from their dealings in the company’s shares during the offer period, exceed the substantial shareholding threshold. 

4)

What is the substantial-shareholding threshold for the purpose of disclosure requirements under Sections 32 and 36 of the Code?

The substantial-shareholding threshold for the purpose of the disclosure requirements under Sections 32 and 36 of the Code has been fixed at 5% or more interests in a company.

 

“Disqualifying transaction” under Practice Note (PN) 2.9.1 of the code

5)

Would purchase/acquisition of voting shares which has been previously exempted from a mandatory offer (MO) obligation under the Code (the first exempted transaction), amount to a “disqualifying transaction” in the consideration of a subsequent application for exemption under PN2.9.1 of the Code, which arises from a transaction that follows shortly after the first-exempted transaction ?

a)

The first exempted transaction as referred to above, would not amount to a “disqualifying transaction” for the purpose of PN2.9.1 of the Code. As an exemption has already been granted for the acquirer from having to carry out an MO pursuant to the first transaction, such transaction would not amount to a “disqualifying transaction” in our consideration of a subsequent application by the same acquirer, for an exemption under PN2.9.1 of the Code from an MO obligation arising from a transaction that follows shortly after the first-exempted transaction.  

b)

An example to the above situation would be as follows:

(i)

Co. X proposed a rights issue exercise. A, being the substantial shareholder of Co. X, undertook to subscribe for all rights shares that were not taken up by the minority shareholders. Assuming that all minority shareholders did not subscribe for their rights shares, A’s shareholding in Co. X would potentially increase from the existing 30%, to 40%. Pursuant to Part II of the Code, A would be obliged to carry out an MO for the remaining voting shares in Co. X not already owned by him; 

(ii)

A applied for an exemption from the MO obligation under PN2.9.1 of the Code. Exemption was subsequently granted to A; 

(iii)

The proposed rights issue was implemented on 2.1.2002 and A ended up with total shareholding of 34% in Co. X pursuant to his subscription of rights shares that were not taken up by some of the minority shareholders; and  

(iv)

On 1.3.2002, Co. X proposed to acquire an asset from A by way of issuance of new Co. X shares as consideration for the acquisition. The proposed acquisition would result in A’s shareholding in Co. X being increase from the existing 34%, to 40%, thereby triggering the MO obligation pursuant to Part II of the Code. A applied for an exemption from such MO obligation under PN2.9.1 of the Code. 

c)

In the consideration of A’s application for the exemption, his subscription of the rights shares in Co. X two months prior to the proposed acquisition by Co. X on 1.3.2002, would not amount to a disqualifying transaction, given that A was previously granted an exemption from having to extend an MO pursuant to the said subscription.  

The application of Practice Note 2.2 of the Code

6)

How does the requirements under Practice Note (PN) 2.2 of the Code apply?

a)

PN 2.2 is intended to capture situations where a change in control in an upstream company would lead to an effective change of control in a downstream company to which the Code would otherwise not apply.  

b)

There are 2 pre-requisites to the application of PN 2.2, namely:

i)

a person obtains or intends to obtain control in an upstream company; and 

ii)

the upstream company controls or is entitled to control more than 33% of a downstream company, to which it has a significant degree of influence. In ascertaining on whether the upstream entity has a significant degree of influence in the downstream entity, the Commission would need to be satisfied that: 

a)

the acquisition of the upstream entity, to which the Code does not apply, is an artificial device to acquire control in the downstream entity to which the Code applies, without having to undertake a mandatory offer in the downstream entity under Part II of the Code; or 

b)

the control in the downstream entity constitutes a substantial part of the assets of the upstream entity. For this purpose, as a guideline, the Commission would deem the control in the downstream entity as substantial, if it represents 50% or more of the relative values of the upstream entity; or 

c)

one of the main purposes of acquiring control in the upstream entity was to control the downstream entity. 

c)

In circumstances where the 2 pre-requisites are met, such person would be obliged to undertake a mandatory offer for the remaining voting shares in both the upstream and downstream entity, unless exempted by the SC. 

d)

An example to the above situation would be as follows:

Mr A acquires 34% of voting shares in Company X. Company X, in turn holds 45% interest in Company Y. The net assets of Company Y contribute 55% to the total assets of Company X. Under this scenario, both limbs of PN 2.2 are satisfied. Therefore, as a result of the acquisition of the 34% equity interest in Company X, Mr A would be subject to the provision of PN 2.2, wherein he would be required to undertake a mandatory offer for the remaining voting shares in Company X and Company Y. 

   

7)

Would PN 2.2 be applicable to a person, whom already having effective control in an upstream entity, further acquires voting shares in such upstream entity?

a)

Mr A acquires 34% of voting shares in Company X. Company X, in turn holds 45% interest in Company Y. The net assets of Company Y contribute 55% to the total assets of Company X. Under this scenario, both limbs of PN 2.2 are satisfied. Therefore, as a result of the acquisition of the 34% equity interest in Company X, Mr A would be subject to the provision of PN 2.2, wherein he would be required to undertake a mandatory offer for the remaining voting shares in Company X and Company Y. 

b)

An example to the above situation would be as follows:

Mr A currently holds 70% of voting shares in Company X. Company X, in turn, holds 34% in Company Y. Mr A then increases his shareholding in Company X to 100%. As a result of this, the effective interest of Mr A in Company Y increases from 23.8% to 34%. The first limb of PN 2.2 (i.e. a person obtains or intends to obtain control in an upstream company) is not applicable as Mr A already has effective control over Company X. Consequently, PN 2.2 would not apply to Mr A. However, it is important to note that, if Mr A directly acquires voting shares in Company Y of more than 33%, he would, on his own accord, incur an obligation to undertake a mandatory offer for the remaining shares in Company Y. 

8)

Would MO obligation apply to a person in both upstream and downstream companies arising from him acquiring control in the upstream company, a private company that does not fall within PN 1.2 of the Code but has a controlling stake in the downstream company?

In this circumstance, the MO obligation would fall only on the downstream company. Nevertheless, if both upstream and downstream companies are public companies and/or private companies that fall within PN 1.2 of the Code, MO obligation would apply to such person on both upstream and downstream companies. However, application to the SC could be sought to exempt such person from undertaking an MO in one of the companies if it is burdensome for such person to undertake MO in both companies.

Example:
Mr A currently holds an interest of 24% in company X. Mr A proposes to acquire 50% interest in company Y (an upstream company) which in turn has 40% interest in company X (a downstream company). The acquisition of company Y by Mr A would result in him increasing his interest in company X to beyond 33%. If both companies X and Y are private companies that fall within PN 1.2 of the Code, this will result in Mr A having MO obligations in both company X and company Y. However, application to dispense Mr A from undertaking an MO in one of the companies, either company X or Y, could be made to the SC.

On the other hand, if company Y is a private company that does not fall within PN 1.2 of the Code, Mr A would only incur an MO obligation in company X. There will not be any MO obligation for Mr A on company Y. 

The scope of the disapplication of the mandatory offer provisions under subsection 6(2)(a) of the Code

9)

Would the disapplication of the mandatory offer provisions under subsection 6(2)(a) of the Malaysian Code on Take-overs and Mergers 1998 (Code) apply to a situation where promoters/substantial shareholders intend to consolidate their shareholding of more than 33% of voting shares into a holding company, prior to the issuance of a prospectus for an initial public offer of voting shares whereby the shares were initially allotted to the promoters/substantial shareholders in accordance with a proposal pursuant to a listing exercise?

a)

According to subsection 6(2)(a) of the Code, the acquisition of more than 33% voting shares in a company would not attract the mandatory offer provisions where it is made pursuant to an allotment to a promoter of a company in accordance with a proposal in respect of an initial public offering, provided that the effect of the acquisition on the promoter’s voting power in the company has been disclosed in the prospectus.  

b)

An example of the above situation would be as follows:

i)

XY Berhad is a company involved in a listing exercise. A and B are the promoters of XY Berhad. As part of the listing exercise, A and B have been issued shares of XY Berhad which would result in them collectively holding 56.0% equity interest in XY Berhad; 

ii)

Prior to the completion of the listing exercise, A and B propose to transfer their shareholding in XY Berhad to Keluarga Sdn Bhd, an investment holding company owned by them, for a cash consideration of RM1.00, for the purpose of consolidating their interest in XY Berhad under one company; and 

iii)

The proposed transfer of XY shares by A and B into Keluarga Sdn Bhd will result in Keluarga Sdn Bhd holding 56% equity interest in XY Berhad, i.e. more than 33%, which would technically trigger the mandatory offer obligation under the Code. 

c)

A diagrammatical illustration of the shareholding structure of XY Berhad, before and after the consolidation of A and B’s interest into Keluarga Sdn Bhd, is as follows:

Before consolidation:

After consolidation:

d)

It is hereby confirmed that the said disapplication of the mandatory offer provisions under subsection 6(2)(a) of the Code would extend to a situation where the promoters/substantial shareholders of a company consolidate their individual shareholdings, amounting to more than 33%, into a holding company, whereby the shares were allotted to the promoters in respect of a proposal pursuant to a listing exercise, subject to proper disclosure of the effects of the consolidation of shareholding on the promoter’s voting power in the company is made in the prospectus. The rationale for this is that there is essentially no change in the substantial shareholders and consequently, no change in control of the company.  

10)

What information should be included in the undertaking letter from the remaining shareholders of an acquiree company, to be submitted by an applicant, for the purpose of an application for exemption from the mandatory offer (MO) obligation under Practice Note (PN) 2.9.6 of the Malaysian Code on Take-overs and Mergers 1998 (Code)?

An exemption from the mandatory offer obligation is allowed under PN 2.9.6 of the Code where the remaining holders of voting shares in a company have given written undertakings not to accept an offer, if such an offer is made to them. In considering an application for exemption under the said practice note, the Commission must be satisfied, inter-alia, that the remaining shareholders in a company have agreed, through the submission of written undertakings, that they would not accept the offer, if made in accordance with the provisions of the Code.

The undertaking letters should contain sufficient information to reflect that the remaining shareholders have understood the waiving of their rights, which are protected under the Code. The remaining shareholders must not only have sufficient information vis-à-vis the transaction leading to the mandatory offer, but must also demonstrate that they have understood the legal, practical and financial implications of rejecting the offer. Therefore, the written undertaking should include a full disclosure on the background information of the acquirer and acquiree, the details of the transaction leading to the mandatory offer and the implications of the Code on the transaction.

A copy of the pro forma letter of undertaking is attached in Appendix VI of the Format and Contents of Applications 

Exemption from mandatory offer obligation arising from the exercise / conversion of convertibles in the indefinite future

11)

Would SC consider, in advance, an application for exemption from a mandatory offer obligation arising from the exercise / conversion of convertibles in the indefinite future?

In the case of a mandatory offer (MO) obligation arising from the exercise of conversion rights over convertibles, it is stated under Practice Note (PN) 2.8 of the Malaysian Code on Take-Overs and Mergers 1998 (the Code) that any holder of such conversion rights who intends to exercise such conversion rights and as a result would hold more than 33% of the voting shares of the company, or if he holds more than 33% but less than 50% of the voting shares of the company, would increase his holding by more than 2% in any 6 month period, must consult the Commission before doing so to determine whether an MO obligation under Part II of the Code would arise and if so at what price. In the past, an application for exemption from the MO obligation arising from exercise / conversion of convertibles, if required, should be made just before the intended conversion date. In this regard, an application for exemption, if made, may be considered under PN2.9.1 or PN2.9.2 of the Code, whichever is relevant.

Notwithstanding this, in the case of an application for exemption made under PN2.9.1 only, the Commission may grant an exemption arising from the exercise of convertibles for a longer validity period up to the expiry date of the convertibles, subject to the following:  

(a)

Disclosure on the validity of the exemption, that if granted, would mean that no subsequent shareholder approval would need to be sought in the independent advice circular;  

(b)

For so long as the convertibles remain outstanding, the offeree must disclose in its annual and interim accounts and any public document, including annual reports, prospectuses and circulars, the following:

(i) 

the time period for which the exemption has been granted;  

(ii)  

the number and percentage of voting shares or voting rights in the offeree, and the number of convertibles held by offeror and persons acting in concert as at the latest practicable date prior to disclosure;  

(iii)  

the maximum potential voting shares or voting rights of the offeror and persons acting in concert in the offeree, assuming only offeror and persons acting in concert (but not other shareholders) exercise the convertibles in full;  

(iv) 

no take-over offer would arise on full conversion; and 

(c)

There is no acquisition of offeree shares, convertibles and other convertibles (excluding issuance of new offeree shares pursuant to exercise of the convertibles, or where all offeree shareholders are entitled to new offeree shares or rights or convertibles on a pro-rata basis) by the offeror and persons acting in concert throughout the tenure of the approval for the exemption .

Clarification on the application of Section 6(2)(a) of the Malaysian Code on Takeovers and Mergers 1998 (the Code)

Section 6(2)(a) of the Code, in essence, disapplies the application of section 6(1) to any person who acquires or holds more than 33% of the voting shares of the company by an allotment made in accordance of a proposal of which the particulars were set out in the prospectus for an initial public offering where the prospectus is registered with the Securities Commission under Section 42 of the Securities Commission Act 1993. The provision is catered mainly for situations involving floatation exercise where the scheme would typically involve a listing vehicle acquiring the operating company from the promoters by way of allotment of the listing vehicle’s shares to the said promoters. The promoters, in essence are merely shifting their shareholding in the operating company to the listing vehicle, where the exercise is not expected to result in any change in their controlling position in the company.

(i)

Allotment of Shares

The Code does not limit the act of allotment of shares to acquiree companies. The act of allotment under the provision includes allotment of shares as consideration for the acquisitions to the promoters of the companies.

(ii)

Registration of Prospectus

The requirement for the prospectus to be registered is to ensure that the proposals form part of the listing scheme of which a prospectus is required to be registered with the relevant authorities before the proposals can be implemented. The fact that the prospectus would not have been registered yet when the acquisitions are completed, does not preclude the application of Section 6(2)(a) of the Code so long as the acquisitions form part of the listing scheme where the prospectus will eventually be registered.

(iii)

Application of Section 6(2)(a) when Acquisition is Not Conditional upon the Implementation of a Listing Scheme

ection 6(2)(a) does not apply to acquisition that is not conditional upon the implementation of a listing scheme, in lieu of the possibility of the listing scheme not being implemented.  

Further flexibility to the application of section 20(5) of the Take-overs Code, in respect of settlement period of offer consideration.

To address certain practical and administration problems offerors may face in this respect, the Commission allows the following settlement period to be adopted, which takes into consideration the point in time when valid acceptances to the offer are received, as follows:

  • Where the valid acceptances are received during the period when the offer is still conditional, the offeror shall post the consideration within 21 days from the date the offer becomes or is declared unconditional; or
  • Where the valid acceptances are received during the period when the offer has become or has been declared unconditional, settlement shall be within 21 days from the date of the valid acceptances.

Advisers are required to inform the Commission if this timeframe is adopted and there must be a clear disclosure of the timeframe for settlement in the offer document.