Use the Lexology Getting The Deal Through tool to compare the answers in this article with those from other jurisdictions.

Structure and process, legal regulation and consents

Structure

How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?

An acquisition is commonly structured by way of:

  • an acquisition of shares in a company; or
  • an acquisition of business or assets from a company.

Typically, the process for an acquisition involves:

  • execution of preliminary agreements (eg, a memorandum of understanding, exclusivity agreement and confidentiality agreement) outlining the parties’ understanding and principal terms of the transaction;
  • conduct of legal, financial and tax due diligence exercise by the buyer over the target company;
  • drafting and negotiation of definitive transaction documents;
  • execution of definitive transaction documents; and
  • satisfaction of conditions precedent and in some cases, an updated due diligence and completion of the acquisition.

In general, an acquisition may take three to six months to complete. Notwithstanding, the length of time required to complete an acquisition may vary depending on factors such as the size of the target company, complexity of the transaction and time taken for the fulfilment of conditions precedent especially where Malaysian regulatory approvals are required for the acquisition.

In the case of an acquisition of real estate or property, the time period required may take one to three months from the time of submission to the state authority for consent to transfer (if required) and the presentation of the memorandum of transfer to the relevant land office. The time period may also vary for land authorities in different states or federal territories.

In addition, mergers and acquisition can also be structured by way of a scheme of arrangement under section 366 of the Malaysian Companies Act, 2016 (the Companies Act). Such a scheme requires the relevant companies to apply and obtain an order from court to convene a shareholders’ meeting and approval from 75 per cent of the shareholders presenting and voting either in person or by proxy at the meeting.

Legal regulation

Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?

The relevant statutes governing private acquisitions and disposals in Malaysia include the following:

  • the Companies Act 2016 for transfer of shares;
  • the National Land Code for transfer of real estates;
  • the Road Transport Act 1987 for the transfer of motor vehicles including commercial vehicles, such as, trailers and prime movers;
  • the Copyright Act 1987, Trademark Act 1976, Patent Act 1983 and Industrial Design Act 1996 for the assignment or transmission of intellectual property rights;
  • the Factories and Machinery Act 1967 for the transfer of machinery, such as hoisting machinery; and
  • the Capital Market and Services Act 2007, Main Market Listing Requirements and Security Industry (Central Depositories) Act 1991 for transfer of listed shares.

The parties are free to decide on the governing law of the transaction documents. However, the legal formalities and procedures for the transfer of shares, business or assets will still be subject to Malaysian law.

Legal title

What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?

In respect of share acquisition, Section 101 of the Companies Act provides that in the absence of evidence to the contrary, the entry of a person’s name in the register of members of a company as a shareholder constitutes prima facie evidence that legal title to shares is vested in that person.

In the case of a business or asset acquisition, title to assets (including plant, equipment and machinery) is transferred by delivery and in accordance with the terms of assets purchase agreement. Typically, an asset purchase agreement will include an ownership clause where legal and beneficial ownership of the business assets shall be deemed to have been transferred to the buyer by delivery on completion. Ancillary documents in support of ownership (such as bill of sales) will also be provided.

If the assets involve land, endorsement of the name of the buyer on the register document of title constitutes conclusive evidence that title to the land is vested in the buyer as proprietor. The register document of title held by the land registries or land offices is available for inspection by way of a public search.

There are distinctions between legal and beneficial title. A registered shareholder is deemed as the legal owner of the shares registered under its name, but it may be holding such shares for the interest and benefit of a beneficial owner pursuant to a trust or nominee arrangement. However, the constitution of most companies would provide that except as required by law, no person shall be recognised by the company as holding any share upon any trust, and the company shall not be bound by or be compelled in any way to recognise any equitable, contingent, future or partial interest in any share or any other rights in respect of any share.

Multiple sellers

Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?

If the constitution or articles of association of a company or the shareholders’ agreement entered into among the shareholders provides for ‘drag-along’ provisions (if any), then in such event, the minority shareholders may be compelled to sell together with an existing shareholder.

If an acquisition is structured as a scheme of arrangement under section 366 of the Companies Act and if the scheme is agreed by a majority of 75 per cent of the total value of the members or class of members present and voting (in person or by proxy) at the meeting ordered by the court, the scheme shall be binding on all the members or class of members, including the 25 per cent shareholders.

Section 371 of the Companies Act provides for a compulsory acquisition exercise of the remainder of shares in a company where there is a transfer of shares involving the holders of not less than 90 per cent of the shares in the same company.

Similar compulsory acquisition rules apply under the Capital Markets and Services Act, 2007 (CMSA), the Malaysian Code on Take-overs and Mergers, 2016 (the Code) and the Rules on Take-overs, Mergers and Compulsory Acquisitions, 2016 (the Rules). The Code and the Rules must be read together with Division 2 (Take-overs, Mergers and Compulsory Acquisitions), Part VI of the CMSA. The Code and the Rules apply to Malaysian public companies, listed on Bursa Malaysia or otherwise. Section 222 of the CMSA provides that where a takeover offer has been made for all the shares or all the shares in any particular class in an offeree and has received acceptances of not less than 90 per cent of the shares not already held by the offeror and the persons acting in concert, the offeror may compulsorily acquire the remaining shares from the minority shareholders within four months of the date of the take-over offer, by issuing a notice in the form and manner prescribed by the Rules.

Exclusion of assets or liabilities

Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?

In Malaysia, a buyer of assets or business can generally choose or select the assets or liabilities to be acquired and this will be specifically set out in the definitive transaction documents.

Consents from or notification to the following are commonly required:

  • landlords;
  • bankers or financiers with respect to any negative pledges or financing covenants;
  • counterparties for novation of contracts; and
  • regulatory authorities.

Consents

Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?

There are restrictions in certain industries that require the licence holder to maintain a specific percentage of Malaysian or Bumiputera shareholding. For example:

  • logistics industry - the licensed operator for carrier ‘A’ licence is required to maintain at least 51 per cent Malaysian shareholding of which 30 per cent are held by Bumiputera;
  • oil and gas industry - companies that carry out business of marketing or distribution of petroleum or petroleum products is required to maintain at least 70 per cent Malaysian shareholding of which 30 per cent are held by Bumiputera;
  • retail trade - hypermarket operators are required to maintain at least 30 per cent Bumiputera shareholding;
  • tourism industry - companies that carry out overseas tour operating business is required to maintain 100 per cent Malaysian shareholding; and
  • insurance industry - insurance companies and takaful operators shall maintain at least 30 per cent Malaysian shareholding.

The above list is intended to provide general guidance and is not meant to be exhaustive.

Section 24(e) of the Contracts Act 1950 provides that if the Malaysian courts regard the object or consideration of an agreement as immoral or opposed to public policy, such agreement shall be void.

Are any other third-party consents commonly required?

See question 5.

Regulatory filings

Must regulatory filings be made or registration fees paid to acquire shares in a company, a business or assets in your jurisdiction?

The requirements for regulatory filings and registration fees vary depending on the subject matter. For example:

  • Transfer of shares in a company: the following forms to be filed with the relevant regulators:
  • section 105 of Form of Transfer of Securities to be executed and stamped. The stamp duty is computed based on 0.3 per cent of the purchase price or book value of the shares, whichever is higher;
  • section 51 of Notification of Change in the Register of Members to be filed with the Companies Commission of Malaysia together with the filing fees of 100 Malaysian ringgit;
  • Form CKHT 1B to be filed by the transferor or vendor with the Inland Revenue Board of Malaysia (IRB) (if the target company is a real property company); and
  • Form CKHT 2A to be filed by the transferee or purchaser with the IRB (if the target company is a real property company).
  • For the transfer of shares in a real property company, the vendor is required to pay real property gain tax (RPGT) after assessment by the IRB. The computation on the RPGT is based on the disposal period and the entity of the vendor (eg, company or individual).
  • Transfer of property: the following forms to be filed with the relevant regulators:
  • Form 14A to be stamped and filed with the relevant land authority. The stamp duty for Form 14A is computed based on the value of the property;
  • Form CKHT 1A to be filed by the transferor or vendor with the IRB; and
  • Form CKHT 2A to be filed by the transferee or purchaser with the IRB.

The vendor is required to pay RPGT after assessment by the IRB based on the above.

Advisers, negotiation and documentation

Appointed advisers

In addition to external lawyers, which advisers might a buyer or a seller customarily appoint to assist with a transaction? Are there any typical terms of appointment of such advisers?

In addition to legal advisers, parties customarily appoint the following:

  • financial advisers which may comprise of accountants or merchant bankers to undertake a valuation and financial due diligence;
  • investment bankers, where applicable, to submit applications to Bursa Malaysia Securities Berhad or Securities Commission Malaysia and advise on regulatory matters; and
  • tax advisers to advise on tax matters.

The typical terms of appointment of such advisers usually include scope of work, fees and expenses, confidentiality and conflicts of interest.

Duty of good faith

Is there a duty to negotiate in good faith? Are the parties subject to any other duties when negotiating a transaction?

With respect to any counterparty, there is no duty to negotiate in good faith under Malaysian law.

Directors of a company do owe both statutory and fiduciary duties to the company under the Companies Act and this includes the duty to exercise the powers with reasonable care, skill and diligence for a proper purpose and in good faith in the best interest of the company at all times.

Documentation

What documentation do buyers and sellers customarily enter into when acquiring shares or a business or assets? Are there differences between the documents used for acquiring shares as opposed to a business or assets?

During the preliminary stage of an acquisition of shares or a business or assets, parties will commonly enter into the following preliminary agreements:

  • a memorandum of understanding, letter of intent or term sheet outlining the parties’ understanding and principal terms of the transaction;
  • an exclusivity agreement prohibiting the seller from negotiating with a third party to sell or deal with the subject matter of the sale; and
  • a confidentiality or non-disclosure agreement restricting the disclosure of certain confidential information.

Following the completion of the due diligence exercise and at the conclusion of negotiation, parties will commonly enter into the following definitive transaction documents:

  • acquisition of shares:
  • a share sale agreement setting out the definitive terms under which the sale will occur;
  • a disclosure letter qualifying warranties given by the seller; and
  • a shareholders’ agreement governing the shareholders’ rights and obligations (in the event a buyer is not acquiring 100 per cent of the equity in the target company);
  • acquisition of business or assets:
  • an assets purchase agreement setting out the definitive terms under which the sale will occur, including provisions as to the scope of the assets, liabilities, contracts and employees being transferred to the buyer, and mechanisms for the transfer and delivery of assets and liabilities;
  • a disclosure letter qualifying warranties given by the seller;
  • assignment or novation agreements for the transfer of the existing third-party contracts; and
  • notices of termination or letters of appointment in relation to the employees of the target company.

Are there formalities for executing documents? Are digital signatures enforceable?

Generally, there are legal formalities for the execution of certain documents or instruments.

In the case of companies, a document or instrument may be executed by a company in the following manner:

  • by affixation of the common seal in accordance with its constitution; or
  • by signature on behalf of the company by:
  • either at least two authorised officers, one of whom shall be a director; or
  • in the case of a sole director, by that director in the presence of a witness who attests the signature.

In addition, any instruments purporting to create a power of attorney has to be duly executed and authenticated in accordance to section 3 of the Powers of Attorney Act 1949. Generally, if the instrument is executed within Peninsular Malaysia, it will be authenticated by a notary public, a commissioner for oaths or an advocate and solicitors. If the instrument is executed outside Peninsular Malaysia, it will be authenticated by a notary public, a commissioner for oaths, any Consular Officer of Malaysia or in the case of an instrument executed in Singapore, an advocate and solicitor of the Supreme Court of Singapore.

Digital signatures are governed by the Digital Signature Act 1997 (DSA). Documents or instruments signed with a digital signature in accordance with the DSA are deemed enforceable and legally binding as a document or instrument signed with a handwritten signature.

Notwithstanding, digital signatures have not been commonly used to execute any documents or instruments. While it is not widely used, it is, however, gaining popularity and traction in the peer-to-peer online funding sphere.

Due diligence and disclosure

Scope of due diligence

What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?

Typically, the scope of legal due diligence covers the following items but may vary depending on factors such as the industry in which the target company operates, the size of the acquisition, the buyer’s budget restriction, as well as time constraints:

  • corporate information;
  • licences, permits and regulatory approvals;
  • material contracts;
  • banking and finance;
  • assets including real properties owned, held on lease or occupied by the target company;
  • labour and employment;
  • insurance;
  • intellectual property;
  • environmental issues; and
  • litigation.

In Malaysia, it is not common for a seller to prepare and provide a vendor due diligence report to be relied on by the prospective buyers. Instead, prospective buyers will normally be given the right to conduct their own due diligence on the target company. However, in the case of an acquisition through an auction process where multiple bidders are involved, the seller may provide an information memorandum (with appropriate disclaimers) to the potential bidders. In such instance, parties are generally free to negotiate and determine the degree and limitation of reliance on the information memorandum. In the event the information memorandum is not sufficiently comprehensive or where more information is required, the bidder may engage its own adviser to advise on the matter or to make further enquiries.

Liability for statements

Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?

A seller may be liable for pre-contractual or misleading statements (such as negligent misstatement) under the law of tort. Under the Malaysian Sale of Goods Act, 1957 (SOGA), there are implied conditions and warranties as to title and quality or fitness in respect of goods, which includes movable property and shares and a seller needs to be aware of this.

The implied conditions and warranties under the SOGA may be diluted in writing under the sale and purchase agreement. In negotiating the sale and purchase agreement, the parties are free to set out or limit the representations and warranties to be provided by the seller. Further, the representations and warranties made by the seller may also be qualified by disclosures made by the seller to the buyer in writing. The parties would usually limit the extent of the seller’s liability to claims for breach of contract and exclude liability for pre-contractual matters such as statements or representations made prior to the signing of the agreement.

It is customary for the buyer to confirm that it has not relied on any representations outside of the contract and it is usually expressed as such in boilerplate clauses concerning the written agreement being the only and entire agreement between the parties. This has the effect of superseding or supplanting all previous negotiation, discussion or agreements with respect to the said subject matter.

Publicly available information

What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?

A buyer would typically carry out searches of publicly available information from the relevant government agencies or search companies as set out below:

  • the Companies Commission of Malaysia: to provide corporate information, details of directors and shareholders, particulars of share capital, company charges, summary of financial information as disclosed in the annual return, certificates of incorporation and registration, copies of constitution and memorandum and articles of association;
  • the Malaysian Department of Insolvency: to provide information on the insolvency status of the target company and individuals;
  • the Land Office: to provide information on the particulars of the land, ownership, dimensions and area, status of the land (ie, freehold or leasehold) and its encumbrances;
  • the Intellectual Property Corporation of Malaysia: to provide information on the filing or application date, applicant name and address, legal status, grant or registered date, certification issuance date, expiry date, class and specification of goods and services of the relevant trademark, patent, industrial design or geographical indication; and
  • a credit tip-off service (CTOS) credit report assessment: to provide corporate information and litigation status of the target company and individuals.

In Malaysia, there is no public search available for the public to conduct litigation a search on a particular company. Generally, a buyer will rely on a CTOS, a private credit reporting agency, to determine the litigation status of the target company.

Impact of deemed or actual knowledge

What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?

Generally, parties will negotiate and set out in the definitive transaction documents the representations and warranties given by the seller, which are usually qualified by a disclosure letter entered into between the parties. Such a disclosure letter will set out matters that have been disclosed by the seller to the buyer during the due diligence exercise, and parties are generally free to negotiate the extent and scope of the disclosure letter. The buyer will generally be restricted from bringing a claim against the seller in relation to matters that have been sufficiently disclosed in a disclosure letter as the buyer is deemed to have acquired actual knowledge for matters disclosed therein.

Pricing, consideration and financing

Determing pricing

How is pricing customarily determined? Is the use of closing accounts or a locked-box structure more common?

In Malaysia, it is usual for a seller and buyer to agree on a purchase price for a going concern based on multiple of earnings before interest, taxes, depreciation or amortisation (EBITDA) of the target company which may itself be subject to further adjustments, such as cash at completion, net debt or working capitals with reference to the balance sheet as at completion (closing account mechanism).

This would be different to a locked-box structure where the parties would agree on a fixed price under the locked-box mechanism with the equity value of the target company being computed based on a defined historical balance sheet date agreed by the parties and this is not subject to any post-completion adjustment (other than permitted leakages as may be agreed by the parties).

The closing account mechanism which can take into account and cater to various changes is preferred by the buyer and seller in Malaysia as compared to the locked-box mechanism, which is better suited to a transaction that has greater certainty and less variable elements.

Form of consideration

What form does consideration normally take? Is there any overriding obligation to pay multiple sellers the same consideration?

Consideration can be in the form of cash, assets or shares and cash is the most common form of consideration.

In general, multiple sellers expect the same consideration or the same basis for determining the purchase consideration to be paid to them and if required, pro rata payments are made therefrom. Notwithstanding, where there is a major shareholder who holds a controlling stake in a company, the major shareholder can expect a premium to be paid for his stake.

Earn-outs, deposits and escrows

Are earn-outs, deposits and escrows used?

Earn-outs are usually paid to the seller if the target company achieves certain targeted profits that are pre-agreed between the buyer and seller or if there is potential increment on the valuation of the target company. Earn-outs are usually addressed as profit guarantees in Malaysia.

Deposits are regularly used in Malaysia where 10 per cent of the purchase price is normally paid by the seller to the buyer on signing of the transaction documents and this may be refundable or forfeitable in certain circumstances. The seller will usually refund the deposit to the buyer if both the seller and buyer mutually agree not to proceed with the transaction or in the event the conditions precedent are not satisfied within the agreed time period. On the other hand, the deposit may be forfeited in favour of the seller in the event the buyer unilaterally does not wish to proceed with the transaction or a material breach has occurred on the part of the buyer prior to closing.

Financing

How are acquisitions financed? How is assurance provided that financing will be available?

Acquisitions are usually financed via cash reserves, share swaps or loans from financiers, or a combination thereof.

It is not usual for (i) the fulfilment of all conditions precedent required by the financier or financiers or (ii) a confirmation of drawdown by the financier or financiers to make conditions precedent in a sale and purchase agreement (SPA).

In most cases, the buyer assumes the risk of financing on signing of the SPA and the seller mitigates this risk by ensuring that the aforementioned deposit is made available.

Limitations on financing structure

Are there any limitations that impact the financing structure? Is a seller restricted from giving financial assistance to a buyer in connection with a transaction?

Section 123(1) of the Companies Act prohibits, inter alia, a company giving any financial assistance, whether directly or indirectly and whether by means of a loan, guarantee or provision of security or otherwise, for the purpose of or in connection with the purchase or subscription of any shares in the company, unless it falls under the exception under section 125 of the Companies Act. The exception applies, inter alia, if the lending of money is part of the ordinary business of a company; if the financial assistance is for a trust scheme for employees; if the financial assistance is given to employees for their own benefit; and if the company is regulated by written laws relating to a bank, insurance or takaful or which are subject to the supervision of the Securities Commission of Malaysia.

Section 123(2) of the Companies Act further provides that, unless a company falls under the exception under section 125 of the Act, it shall not give financial assistance directly or indirectly for the purpose of reducing or discharging the liability, if a person has acquired shares in the company or its holding company; and the liability has been incurred by any person for the purpose of the acquisition of the shares.

In light of the above, the assets of the Malaysian incorporated target company cannot be used as security for the liability incurred in the acquisition of shares in the Malaysia incorporated target company, unless it falls within the exceptions under section 125 of the Companies Act.

Financing provided by a seller to a buyer is not prohibited in Malaysia.

Conditions, pre-closing covenants and termination rights

Closing conditions

Are transactions normally subject to closing conditions? Describe those closing conditions that are customarily acceptable to a seller and any other conditions a buyer may seek to include in the agreement.

Yes. Generally, closing conditions that are required to be fulfilled by the seller includes, providing title documents (eg, the share certificates or certificates of title for real estate) and duly executed instruments of transfer (eg, for shares in private companies, share transfer forms, board resolutions approving the transfer of shares and in the case of real estate transactions, the prescribed memorandum of transfer for the real estate).

Other closing conditions may include the release of personal guarantee (if any) given by the seller or waiver of any intercompany or related-party loans or advance.

What typical obligations are placed on a buyer or a seller to satisfy closing conditions? Does the strength of these obligations customarily vary depending on the subject matter of the condition?

Strict obligation is usually imposed on the buyer and the seller to satisfy the closing conditions involving the payment of the purchase consideration and the delivery of the title documents. As mentioned, other closing conditions may include the release and removal of any personal guarantee given by the seller but, if this cannot be satisfied on time at completion, this obligation can be supplemented by an indemnity given by the buyer to cover the seller’s personal guarantee, pending the removal and release, which would take place at a later date.

Pre-closing covenants

Are pre-closing covenants normally agreed by parties? If so, what is the usual scope of those covenants and the remedy for any breach?

Yes. For example, the most common pre-closing covenants are as follows:

  • the seller must operate the target company’s business in the ordinary course of business;
  • the seller must maintain the share capital or preserve the properties or assets of the target company;
  • the seller must provide access to all the target company’s records (ie, statutory books, licences, contracts and accounts), assets and facilities; and
  • the seller must not, without the consent of the buyer, inter alia, alter the share capital or the Constitution of the target company, enter into new agreements, declare dividends, obtain any financing or borrowings and enter into any related-party transactions.

Breach of pre-closing covenants by the seller would entitle the buyer to the claim for monetary damages or an appropriate adjustment to the purchase price. The buyer may also terminate the transaction in the event the breach of the pre-closing covenants is material.

Termination rights

Can the parties typically terminate the transaction after signing? If so, in what circumstances?

Yes. Either party to a transaction is entitled to terminate the transaction if there is a breach of any of the material obligations by the other party.

Another situation where a transaction may be aborted after signing is where any of the specified conditions precedent is not fulfilled. As an illustration, this would take place where the requisite regulatory approvals in connection with the transaction have not been obtained. In this instance, it is common for the parties to abort the transaction, refund the deposit, with no claims against each other save for any antecedent breaches or matters.

Are break-up fees and reverse break-up fees common in your jurisdiction? If so, what are the typical terms? Are there any applicable restrictions on paying break-up fees?

Break-up fees are common in Malaysia, but reverse break-up fees are not.

Break-up fees are usually expressed as a deposit, payable on signing of a transaction agreement. This deposit may be refundable or forfeited under certain circumstances. Usually, a potential buyer would pay a deposit of 10 per cent of the total purchase price upon signing of the sale and purchase agreement and the same will be forfeited if the potential buyer does not honour the deal or breaches the agreement or fails to complete the transaction by not paying the balance purchase price. It is also common for the forfeiture of the deposit to be agreed or expressed as the full compensation payable to the seller.

Representations, warranties, indemnities and post-closing covenants

Scope of representations, warranties and indemnities

Does a seller typically give representations, warranties and indemnities to a buyer? If so, what is the usual scope of those representations, warranties and indemnities? Are there legal distinctions between representations, warranties and indemnities?

Yes, the seller typically gives representations, warranties and indemnities to the buyer.

The usual scope of the representation and warranties provided by the seller is as follows:

  • title and ownership of the subject matter of the sale and purchase;
  • licences and approvals;
  • assets and liabilities;
  • tax;
  • financial records and accounts;
  • operational matters; and
  • litigation.

The terms ‘representations’ and ‘warranties’ are generally interchangeable and have the same effect. Any breach of representations and warranties will give rise to a buyer’s entitlement to claim for damages. The principles of causation, remoteness and mitigation will apply for a claim under damages.

Indemnities are promises and undertakings to provide monetary compensation for the damage or losses suffered or to be incurred by the buyer upon the occurrence of a specified event.

A claim under an indemnity is not necessarily bound by the same limitation or restriction applicable for a claim under a representation or warranty. An indemnity will be valid and payable so long as the terms of the written indemnity are fulfilled or complied.

Limitations on liability

What are the customary limitations on a seller’s liability under a sale and purchase agreement?

The seller’s liability under a sale and purchase agreement can be limited by the de minimis threshold on a negotiated basis.

Examples are as follows:

(i) each single claim has to exceed a certain monetary threshold;

(ii) aggregate claims have to exceed a certain monetary threshold;

(iii) the maximum amount of liability that the seller is exposed to;

(iv) limitation period as to when the buyer can make a claim against the seller; and

(v) limitation period for the buyer to serve a notice to the seller for each specific claim.

If the limitation period in relation to item (iii) is not specified in the sale and purchase agreement, the statutory limitation period will apply. The statutory limitation period to bring an action founded on contract is six years from the date on which the cause of action accrued and the statutory limitation period for income tax liability claim will be seven years from the year of assessment (inclusive).

Transaction insurance

Is transaction insurance in respect of representation, warranty and indemnity claims common in your jurisdiction? If so, does a buyer or a seller customarily put the insurance in place and what are the customary terms?

Transaction insurance is not common in Malaysia.

Post-closing covenants

Do parties typically agree to post-closing covenants? If so, what is the usual scope of such covenants?

Post-closing covenants that parties usually agree to are confidentiality provisions, non-compete and non-solicitation of the employees, suppliers and customers. This is normally expressed by reference to a specified territory and a limitation period.

Tax

Transfer taxes

Are transfer taxes payable on the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?

Stamp duty is a form of transfer tax which is payable by the transferee on the instruments of transfer of shares in a company, a business and assets. As at July 2018, the rates of such stamp duties are set out as follows:

  • in respect of the instruments for the transfer of any stock, shares or marketable securities to be calculated on the price or value thereof on the date of transfer, whichever is higher, 3 ringgit is payable for every 1,000 ringgit or fractional part of 1,000 ringgit of the price or value; and
  • in respect of the instruments for the transfer of any property (except stock shares, marketable securities and account receivables), for every 100 ringgit or fractional part of 100 ringgit of the amount of the money value of the consideration or the market value of the property on the date as determined in accordance with section 12A of the Stamp Act 1949, whichever is higher:
  • 1 ringgit is payable on the first 100,000 ringgit;
  • 2 ringgit is payable on any amount in excess of 100,000 ringgit but not exceeding 500,000 ringgit; and
  • 3 ringgit is payable on any amount in excess of 500,000 ringgit.

This applies to transfers involving real estate.

Pursuant to section 15 and 15A of the Stamp Act 1949, stamp duty may not be chargeable on instruments for the transfer of shares of a company, a business or assets in relation to a scheme of reconstructions or amalgamations of companies or if the transfer is between associated companies, provided that the conditions set out thereof are met.

Corporate and other taxes

Are corporate taxes or other taxes payable on transactions involving the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?

As at July 2018, the rate for corporate income tax is as follows:

  • in respect of a company with a paid-up capital of not more than 2.5 million ringgit:
  • 18 per cent on the first 500,000 ringgit;
  • 24 per cent for the subsequent balance; and
  • 24 per cent for a company with a paid-up capital more than 2.5 million ringgit.

To date, there is no broad-based capital gains tax in Malaysia save for RPGT.

RPGT is the only form of capital gains tax that may be chargeable when there is a gain for the disposal of real property or shares of a real property company. RPGT is payable by the transferor of the real property or the shares of a real property company.

As at July 2018, the rate for RPGT after the date of acquisition of real property or shares of a real property company is as follows:

  • 30 per cent payable on disposals within three years (chargeable assets);
  • 20 per cent payable on disposals in the fourth year;
  • 15 per cent payable on disposals in the fifth year; and
  • 5 per cent payable on disposals in the sixth year.

Pursuant to paragraph 34A of Schedule 2 of the Real Property Gains Tax Act 1976, a ‘real property company’ is defined as follows:

  • a controlled company that owns real property or shares or both, the defined value of which is not less than 75 per cent of the value of its total tangible assets; or
  • a controlled company to which paragraph 34(a) above is not applicable, but which acquires real property or shares or both whereby the defined value of real property or shares or both owned at that date is not less than 75 per cent of the value of its total tangible assets.

Employees, pensions and benefits

Transfer of employees

Are the employees of a target company automatically transferred when a buyer acquires the shares in the target company? Is the same true when a buyer acquires a business or assets from the target company?

In respect of acquisition of shares transactions, the employees remain in the employment of the target company after the acquisition.

In respect of acquisition of business or assets transactions, employees are not automatically transferred after an acquisition of business or assets, they remain in the employment of the target company after the acquisition.

The Employment Act 1955 (EA 1955) applies to employees:

  • whose monthly salary does not exceed 2,000 ringgit; or
  • regardless of the amount of salary, employees,
  • who are engaged in manual labour;
  • who are engaged in the operation or maintenance of any mechanically propelled vehicle operated for the transportation purposes;
  • who supervise or oversee other employees engaged in manual labour;
  • who are engaged in any capacity on a vessel subject to certain conditions; or
  • who are engaged as a ‘domestic servants’ (EA employees).

Regulation 8 of the Employment (Termination and Lay-off Benefits) Regulations 1980 states that, where there is a change of ownership ,and within seven days of the change of ownership, the buyer does not offer to continue to employ the EA employees under terms and conditions of employment not less favourable than he or she was previously entitled to, the contract of service of the EA employees shall be deemed to have been terminated, and the seller shall be liable for the payment of termination benefits.

If the offer by the buyer to continue to employ the EA employees is accepted by such employee, the change of employer shall not constitute a break in the continuity of the period of the employment.

For employees who are not governed under the EA 1955, there are no requirements for them to comply with the provisions of the EA 1955. Their employment would depend on the terms of their contract or collective agreements (if any).

Notification and consultation of employees

Are there obligations to notify or consult with employees or employee representatives in connection with an acquisition of shares in a company, a business or assets?

In respect of acquisition of shares, business or assets transactions, there are no obligations to notify or consult with the employees or employee representatives under Malaysian law.

However, the Code of Conduct for Industrial Harmony 1975 (the ‘Code’) provides guidelines on retrenchment exercises. Clause 21 of the Code states that, before any decision on reduction is taken, there should be consultation with the workers or their trade union representatives on the reduction.

The Code is binding on the signatories and has no legal force on any other party. Nonetheless, section 30(5) of the Industrial Relations Act 1967 requires the Industrial Court to take the Code into consideration when determining the employer’s conduct.

Transfer of pensions and benefits

Do pensions and other benefits automatically transfer with the employees of a target company? Must filings be made or consent obtained relating to employee benefits where there is the acquisition of a company or business?

In respect of acquisition of shares transactions, the employees remain in the employment of the target company after the acquisition and any pensions or benefits that the employees are entitled to will continue to remain as the responsibility of the target company.

In respect of acquisition of business or assets transactions, there is no requirement for pensions and benefits to be transferred upon change of employer. Instead, there will be a notification to the pension authorities (such as Employment Provident Fund and Social Security Organisation) on the change of employment of the employee and this would take place on closing or completion of the transaction.

In addition, if the seller intends to dismiss the employees after the acquisition by reason of redundancy, he is required to submit an employment retrenchment notification form to the Department of Labour at least 30 days before the date of retrenchment.

Update and trends

Key developments

What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?

One notable development is the introduction of the new sales and service tax, which will come into effect in Malaysia on 1 September 2018.

This development is relevant to businesses in Malaysia as it will replace the goods and services tax (GST). From the perspective of real property transactions, acquisition of commercial properties will not attract sales tax. Previously, under the GST regime, acquisition of commercial properties attracted 6 per cent GST.