Mergers and Acquisitions: Trends in Asia
Despite the general slowdown in economies in the United States and Europe, South East Asia has remained relatively active in terms of mergers and acquisitions. We comment on those trends, looking across the region at the sectors with greatest deal flow in recent times.
In 2012, the amount of inbound merger activity for South East Asia was numbered at 344 deals worth US$91 billion, half of which can be attributed to merger activity in the consumer sector. Much of this growth is said to be linked to the emerging middle class in these markets and the growing capacity for discretionary consumption.
Singapore, being the traditional gateway to South East Asia, saw a four-fold increase in the value of deals from US$10.2 billion in 2011 to US$45.5 billion in 2012.1 Food and beverage deals featured heavily, notably Heineken N.V.'s acquisition of Asia Pacific Breweries Limited, followed by TCC Assets Limited's (an entity controlled by Thai billionaire, Charoen Sirivadhanabhakdi) acquisition of food and beverage giant Fraser & Neave, Limited ("F&N"). The latter transaction also sparked a high profile bidding war between TCC Assets Limited and OUE Baytown Pte. Ltd., a special purpose vehicle controlled by Indonesian property conglomerate, Lippo Group. The F&N transaction is one of a number of deal examples of South East Asian inter-regional M&A.
The appetite for mergers and acquisitions in the consumer goods industry is also increasing elsewhere in Asia. In the most recent quarter, Chinese property group Dalian Wanda acquired one of Britain's largest luxury yacht manufacturers, Sunseeker. Dalian Wanda had agreed to pay approximately US$794.3 million for privately-owned Sunseeker.
Statistics show that Indonesia as well saw burgeoning activity. The total value of the announced deals in Indonesia in 2012 was approximately US$15 billion,1 more than half of which was concentrated in the financial services and consumer goods industries.
Merger activity in South East Asia is not confined to inbound investments into South East Asia. The slowdown in other markets has also seen outbound investment opportunities from South East Asia to the rest of the world. In 2012, the number of outbound investments from South East Asia totalled 105 deals with a deal value of US$32.7 billion. In the first half of 2013, there have been 47 such transactions, suggesting that the outbound acquisition potential for South East Asia will continue.
Proposed Changes to the Singapore Companies Act: Impact on Mergers and Acquisitions in Singapore
A number of changes are proposed to provisions in the Companies Act, Chapter 50 of Singapore (the "Companies Act"), in particular in connection with financial assistance, schemes of arrangement and compulsory acquisitions.
A key amendment proposed is the abolition of the restriction on financial assistance by private companies in connection with acquisitions of their own shares. The restriction will be retained for public companies and their subsidiary companies but a new exception will be introduced to permit financial assistance by a public company if there is no material prejudice and the giving of the assistance is approved by the board.
It is common for a Singapore-incorporated target company to charge its assets to secure any borrowings the bidder company may obtain to facilitate the acquisition of the target company. This would constitute unlawful financial assistance under Singapore law which would require the bidder to expend costs and resources to "whitewash" the unlawful financial assistance. The proposed abolition would result in significant savings in costs for takeovers of private companies incorporated in Singapore (unless the private company is a subsidiary of a public company, in which case, the restriction on financial assistance will still apply).
The suggested new exception for public companies is worded broadly and does not require the directors of the relevant public company to make solvency statements in relation to the giving of the financial assistance.
Schemes of Arrangement
One of the proposed amendments to the Companies Act provisions relating to schemes of arrangement deals with the issue of "share-splitting". The shareholder resolution needed to approve a scheme of arrangement must be passed by a majority in number representing three-fourths in value of the creditors or class of creditors or members or class of members present and voting either in person or by proxy at the scheme meeting. This means that the result of a resolution proposed to approve a scheme of arrangement can be affected if individual shareholders seek to influence the result by "share-splitting". "Share-splitting" involves one or more members transferring small parcels of shares to a large number of other persons who are willing to vote in accordance with the transferors' instructions. The proposed amendment would allow the court latitude to decide who the members are in a particular case.
Another proposed amendment relating to the number of proxies seeks to address a lacuna in the law. Currently, the Companies Act does not specify how the votes of a member who is represented by more than one proxy are counted in relation to a resolution proposing a scheme of arrangement. It has been proposed to only allow each member to appoint one proxy for the purposes of voting for a scheme of arrangement, unless the Court orders otherwise.
The proposed changes, particularly in relation to "share-splitting", clarify the law in relation to schemes of arrangement but may negatively impact on acquisitions in Singapore. A number of companies incorporated in Singapore and listed on the Singapore Stock Exchange are family-run companies, with a single majority shareholder with a good spread of mom-and-pop investors. It may no longer be sufficient for a bidder to acquire control of such companies via a scheme of arrangement by obtaining the support of the majority shareholder who can ensure a favourable outcome on the vote by "share-splitting" since dissatisfied minorities will more easily be able to outvote a scheme of arrangement based on numbers.
A number of changes have been proposed in respect of the compulsory acquisition provisions in the Companies Act, which facilitate a potential bidder obtaining 100% of the target:
- extension of the compulsory acquisition process to units of a company's shares (for example, options in shares);
- an individual offeror (as opposed to companies) can avail himself of the compulsory acquisition provisions;
- where a takeover offer is made jointly by more than one person, all the joint offerors would have the same legal obligations in respect of compulsory acquisition;
- where the terms of the offer give the shareholders a choice of consideration, the shareholder should be given time to elect his choice of consideration and the offeror shall state which of those terms is to apply where a dissenting shareholder fails to make an election; and
- the fact that overseas shareholders are not served with a takeover offer does not render the compulsory acquisition process inapplicable as long as service would have been unduly onerous or would contravene foreign law.
It is anticipated that the consultation conclusions are to be published in the last quarter of 2013 with the amendments introduced in early 2014. After the business community and practitioners have had time to adapt to the changes, it is understood that the Companies Act will be rewritten to rationalise the provisions and improve the clarity of the legislation.
Indonesia: New BKPM Regulations and Effect on Foreign Controllers of Indonesian Public Companies
Indonesia's Investment Coordinating Board (known as "BKPM" in Indonesia) has recently issued a new regulation ("Regulation 5/2013") which imposes a new approval requirement for foreign investors looking to take a majority stake in listed companies.
Regulation 5/2013 provides that Indonesian public companies with a foreign controller 2 will be "categorised" as a foreign capital investment (or using its Indonesian acronym, "PMA") company and such company must apply for and obtain prior BKPM approval for any change of its "controller". One of the main implications of being "categorised" as a PMA company is the application of the Investment Law and Negative List (containing the restrictions on foreign investment in certain sectors), which set out the underlying law and regulation that is administered by BKPM in relation to PMA companies.
Early feedback from BKPM suggests that Regulation 5/2013 will not be applied retrospectively, and hence our current view is that, in practice, the new requirement of "categorising" a public company as a PMA company in circumstances where it has a foreign "controller" is more likely to be triggered where there is a subsequent change of "controller" of the public company. These scenarios will need to be looked at carefully on a case-by-case basis going forward.
Another key effect of Regulation 5/2013 is the requirement for a domestic capital investment company (or using its Indonesian acronym "PMDN"), which is converting to PMA status, pursuant to a change in share ownership resulting in some or all of its shares being owned by foreigners to also list out and eventually convert all of its subsidiaries to PMA status.
There are currently many uncertainties surrounding how Regulation 5/2013 will be implemented in practice and it remains to be seen how it will be interpreted by BKPM and the effect this will have on foreign investment in Indonesia. However, it is likely that the new regulation may result in an increased involvement of the target company in Indonesian public company deals and this should be factored into the timing of implementing such deals. It is also possible that the new regulation may result in an increased number of offshore deals or acquisitions of minority stakes with limited obvious control rights involving public companies to avoid triggering a "change of control". These are trends we have been seeing more of in relation to Indonesian public companies in any event.