Introduction
Mergers and Acquisitions (“M&A”) are strategic mechanisms by companies to achieve resource integration, market expansion, operational efficiency and enhanced competitiveness through consolidation or acquisition. From both legal and commercial perspectives, M&A generally takes two primary forms: mergers and acquisitions.
A merger – involves the amalgamation of two or more companies into a single new legal entity, resulting in the dissolution of the constituent entities.
An acquisition – entails the purchase of shares or assets of a target company with the objective of obtaining control, while the target generally retains its legal identity.
In Malaysia, the most prevalent form of corporate mergers and acquisitions is the acquisition of shares. By purchasing the shares, the acquirer obtains direct control over the management and operations of the target company and thereby assuming its business activities, customer base and workforce.
Pursuant to the Companies Act 2016, transactions of this nature generally entail the transfer of equity interests, restructuring of the board of directors and alterations in shareholder rights, all of which must adhere to applicable corporate governance requirements. Compared to asset acquisitions, share acquisitions involve a relatively streamlined legal process, rendering them especially advantageous for local enterprises aiming to expedite the integration of the target company and facilitate accelerated market expansion.
In practice, horizontal mergers and acquisitions are especially common across several Malaysian industries, including construction, retail, food and beverage and manufacturing. Through the acquisition of industry peers, enterprises can effectuate a rapid expansion of market share, strengthen their pricing power and secure strategic advantages amidst intense domestic competition.
Regulatory Pitfalls: The Hidden Line Between Deal Success and Failure
The structuring of a merger and acquisition transaction is often determinative of its success, as it directly affects control arrangements over the target company’s contractual rights and regulatory licenses. Where the transaction constitutes a “change of control”, it may trigger restrictive clauses related to change of control in existing agreements between the target company and third parties or invoke approval or renewal requirements for specific licenses or permits. In such circumstances, obtaining the prior written consent from the relevant contractual counterparties or securing approval or exemption from regulatory authorities is typically necessary to facilitate the smooth progression of the transaction.
Accordingly, in structuring the deal and determining the acquisition stake, the acquirer must give primary consideration to whether the target company’s business is subject to foreign equity restrictions or local shareholder and Bumiputera ownership requirements. Such restrictions are particularly stringent in certain regulated sectors, including education, insurance, telecommunications, oil and gas and logistics. Failure to adequately address these regulatory considerations at the outset not only risks frustrating completion of the transaction but may also significantly elevate post-completion compliance obligations and expose the acquirer to potential legal and financial liabilities.
If You Are the Seller, Be Alert – Key Considerations in Share-Based M&A Transactions
In mergers and acquisitions in Malaysia, where the purchaser offers its own company shares as consideration, the seller must exercise heightened vigilance in assessing the transaction value and addressing key legal and practical issues. Unlike straightforward cash deals, such arrangements introduce additional risks that warrant closer scrutiny.
First, the seller should conduct assessment on the buyer, evaluating its financial stability, operational viability and regulatory compliance. Pursuant to the Companies Act 2016, the seller should also review the buyer’s corporate information, including the company’s statutory filings, background of its directors and shareholder structure, to determine whether the equity offered carries genuine and sustainable value.
Second, share-based consideration typically necessitates more extensive representations and warranties from the purchaser, covering matters such as business continuity, asset condition, tax compliance, and the absence of undisclosed liabilities. While these protections safeguard the seller’s interests, they often prolong negotiations and significantly increase transaction costs in terms of legal and financial advisory fees.
Lastly, in the event of a breach by the purchaser or if any of its representations are found to be untrue, the seller will have become a shareholder of the purchaser, may face conflicts of interest that could restrict the ability to pursue indemnification or initiate a claims process. As such, prior to accepting shares as consideration, the seller should carefully evaluate the transaction structure, assess potential legal risks, and consider implementing appropriate protection mechanisms, such as the establishment of an escrow account, the imposition of payment conditions, or the inclusion of indemnity clauses, to ensure that its interests are adequately safeguarded.
If You Are the Buyer, Pay Attention—Key Considerations in Malaysian M&A Transactions
Before entering into a merger or acquisition transaction, the buyer should conduct a comprehensive assessment of the legal, financial and commercial viability of the deal to minimize potential risks and ensure smooth post-acquisition integration. In accordance with the Companies Act 2016, the Contracts Act 1950 and other applicable sectoral regulations in Malaysia, the buyer should pay particular attention to the following key considerations: –
First, a thorough legal due diligence exercise should be undertaken on the target company, covering matters such as corporate compliance, constitutional documents, shareholding structure, material contracts, ongoing or potential litigation, intellectual property, financials, and tax obligations. Where the target operates in a regulated industry, it is also critical to verify the validity of licences and determine whether any change-of-control approvals are required from the relevant regulatory authorities.
Second, the buyer should assess whether the proposed transaction raises potential issues under the Competition Act 2010, particularly in the context of horizontal mergers (i.e., acquisitions of direct competitors). Such transactions may lead to increased market concentration and could trigger notification requirements or investigations by the Malaysia Competition Commission (MyCC).
Third, the buyer should require the target company to provide comprehensive representations and warranties confirming that there are no material issues relating to its assets, liabilities, tax affairs, or regulatory compliance. To safeguard post-completion recourse rights, the buyer may also consider implementing mechanisms such as an escrow account, deferred payment arrangements or indemnity provisions.
Legal Prudence and Risk Management are in Parallel
It is strongly recommended that the buyers engage experienced legal and financial advisors to assist in negotiations, document review, transaction structuring and the drafting of agreements. Such guidance is essential not only to ensure compliance with all applicable Malaysian laws and regulations but also to mitigate the risk of future disputes.
Conclusion
In conclusion, mergers and acquisitions in Malaysia may present to be strategic opportunities for corporate expansion and transformation, they often involve in complex legal and commercial considerations which behind the scenes. No matter the transaction involves a share acquisition, asset acquisition, or a horizontal or vertical integration, both parties must carefully navigate deal structuring, consideration mechanisms and regulatory compliance risks. For sellers accepting shares as consideration, a thorough assessment of the buyer’s value and legal protections is indispensable. Conversely, buyers must conduct comprehensive due diligence to identify potential liabilities, licensing constraints and competition law concerns. In all cases, prudent planning and sound advisory support are the twin pillars of a successful transaction.
The views expressed herein are those of the author and do not necessarily reflect the views of the firm. Should you have any legal queries, corporate or otherwise, please feel free to reach out to the firm for further assistance.
Authored by: Wong Kang Xian (Partner)
For further legal advice on Mergers and Acquisitions (“M&A”) , please contact us, Y Kong, Wong & Partners