2016
ANALYSIS
OF COMPULSORY ACQUISITION OF SHARES LEGAL ISSUES IN MALAYSIA AND UNITED KINGDOM
Asmah Che Wan;
Amirul Aizad Mohd Noor;
Nur Afiqah Azni;
Nur Akmal Adnan;
Wan Nur Fatihah Mukhtar;
Wan Soraya Azmei
LLB (Hons) Students in Universiti Utara
Malaysia
Supervised by Prof. Dr Asmah Laili Binti
Yeon[1]
ABSTRACT
The main objective of this paper is to
analyze the legal issues found in the compulsory acquisition in Malaysia and
the United Kingdom. It consists of several parts in order to achieve the goal
of it. In the introduction part, the authors explain about mergers and
acquisition, how they occur and also provide the readers with statistic of
acquisition in Asia-Pacific and in the United Kingdom. Not only is that, the
meaning of a squeeze-out transaction provided too. Next, there comes the
problem that diverts the compulsory acquisition to be held properly. Following
that is the statutory provision part, where the laws that regulate this
compulsory acquisition as a whole are being elaborated and explained in detail.
Case laws that are relevant to this topic can also be found herein. The laws
between Malaysia and United Kingdom are compared in order to achieve the ends
of this paper, which is to create an analysis of these two countries. After all
has been discussed, here comes the main part of this paper which is the legal
issues. There are three legal issues that the authors have found namely, whether the interest of minority shareholders can be protected, whether
the statute provides adequate procedural guide for compulsory acquisition, and
lastly, whether it is appropriate to use the circumstances of shareholders as a
whole in accessing fairness. It is to be highlighted here that there are three
recommendations that the authors suggest. Firstly, lawyer plays crucial role in protecting the minority
shareholder’s reasonable expectations in a litigation proceeding. Secondly,
minority shareholders are to be given the chance to represent on the board by
way of arrangement of settling disputes. Lastly, by providing more long-term
contracts to the minority customers. The authors hope that by reading this paper,
the readers would have deeper understanding on the topic of compulsory
acquisition.
INTRODUCTION
Mergers and acquisitions are among
the most effective ways to expedite the implementation of a plan to grow
rapidly. Companies in all industries have grown at lightning speed, partly
because of an aggressive merger and acquisition strategy. The impact of
technology and the Internet has only further increased the pace and size of
deals. Buyers of all shapes and sizes have many of the same strategic objectives—to
build long-term shareholder value and take advantage of the synergies that the
combined firms will create—but each industry has its own specific objectives.
Technology companies, in search of new ideas, new products, trained knowledge
workers, strategic relationships and additional market share, have been the
most acquisitive[2].
Deals in the pharmaceutical industry are encouraged by the need to put more
products into development pipelines and achieve certain economies of scale in
combining research and development efforts. Defense industry mergers have been
driven by shrinking federal budgets and the need to win private-sector.
Deregulation in the energy and financial services industries have just begun to
spawn deals driven by the ability to offer a more diversified range of
services.
Merger-and-acquisition
frenzy has created intense competition for the same target companies, where a
premium is placed on price and speed. The fear in many boardrooms is that the
company will be left out or left behind if it does not move quickly to acquire
other businesses. Deals that used to take months to get done now close in a
matter of days, especially if no regulatory approvals need to be obtained and
no shareholder battles will take place as a condition for getting the deal
completed[3]. In this environment,
acquisitions are moving so fast and are being bid up so high that the
likelihood of problems and errors has increased dramatically[4].
The terms "merger" and
"acquisition" are often confused and used interchangeably by business
and financial executives. On the face of it, the difference may not really
matter since the net result is often the same: Two companies (or more) that had
separate ownership are now operating under the same roof, usually to obtain
some strategic or financial objective. However, the strategic, financial, tax
and even cultural impact of the deal may be very different, depending on how
the transaction is structured. Merger refers to two companies joining
(usually through the exchange of shares) to become one. Acquisition
occurs when one company, the buyer, purchases the assets or shares of another
company, the seller, paying in cash, stock or other assets of value to the
seller[5].
Another situation happens when a shareholder (or two
or more shareholders acting together) reaches 90% or more of the shares in the
company they are called a dominant owner[6].
Under the Takeovers Code, a dominant owner has the right, and in some
circumstances the obligation, to buy the remaining shares from the rest of
the shareholders. This is called compulsory acquisition. Acquisitions in Malaysia are primarily regulated under the Capital Markets and Services Act, 2007 (Act 671)[7] (CMSA) and the Malaysian Code on Take-Overs & Mergers 2010 (Code)[8]. The Code contains principles and rules governing the conduct of all persons or parties involved in a takeover. The objective of the regulatory regime of the CMSA is to ensure that the acquisition of voting shares or control of companies takes place in an efficient, competitive and informed market. As in the United Kingdom, all the procedures are stated in the Chapter 3 of Part 28 of the Companies Act 2006[9]. These provisions that govern compulsory acquisition will be thoroughly discussed and compared in the later part of this paper.
the shareholders. This is called compulsory acquisition. Acquisitions in Malaysia are primarily regulated under the Capital Markets and Services Act, 2007 (Act 671)[7] (CMSA) and the Malaysian Code on Take-Overs & Mergers 2010 (Code)[8]. The Code contains principles and rules governing the conduct of all persons or parties involved in a takeover. The objective of the regulatory regime of the CMSA is to ensure that the acquisition of voting shares or control of companies takes place in an efficient, competitive and informed market. As in the United Kingdom, all the procedures are stated in the Chapter 3 of Part 28 of the Companies Act 2006[9]. These provisions that govern compulsory acquisition will be thoroughly discussed and compared in the later part of this paper.
The bar chart above refers to the statistic of
acquisition in Asia-Pacific from the year of 1995 to 2014.
The
bar chart above illustrates the statistic of acquisition transactions in the
United Kingdom from the year of 2011 to 2014.
PROBLEM
Somehow, the problem of dissenting
shareholders is endless debate in the company law. In the situation where a
bidder seeks full control of the company and a takeover bid has received 90 per
cent acceptance, the difficulty arises where a minority is unwilling to part
with its holding. The main objective of the law in this particular area is to
balance the interests of the majority and minority. Subsequently, this will ensure
that the majority commits no fraud on the minority and to empower the majority
where it will is
thwarted by a bloody-minded minority.
ISSUE 1: WHETHER INTEREST OF
MINORITY SHAREHOLDERS CAN BE PROTECTED?
The
laws regarding companies and securities in Malaysia are closely related to
common law or the law in United Kingdom (UK). Therefore in determining issue of
whether interest of minority can be protected, we may see a few similarities
between these two countries. It must be noted that when it comes to compulsory
acquisition of shares, there would be usual cases where minority would not give
up their shares to the bidder and these kind of rule (compulsory acquisition of
shares) may seem like oppression towards minority. However, that is not
entirely true because there are still options under rules and provisions that
can be used by minority to protect their interest. Even though they might not
succeed in protecting their shares, there are some provisions that can be used
to safeguard their rights under Malaysian law and also under UK law.
In
Malaysia, right of minorities is stated under Section 223 of CMSA 2007. Based on this provision, it states that
where a takeover offer has been accepted by holders of not less than 90% in the
nominal value of those shares of that class excluding the shares that already
held at the date of the takeover offer by the offeror and persons acting in
concert, the remaining minority shareholders may within the offer period require
the offeror to acquire its shares on terms of the takeover offer or such other
terms as may be agreed. Here it shows rights of minority over their shares. In
other words, minority may put reasonable conditions for bidder to buy their
shares as agreed by both parties. This provision ensures that minorities would
not feel completely left out by the act of majority and shows that bidder must
still respect them as a holder of a share in the company. This provision also
can be seen in UK, where it is stated under Section 983 of Companies Act 2006, the right to be bought out by
the bidder known as ‘sell-out’. Basically, sell-out rights enable minority shareholders,
in the wake of such bid, to require the majority shareholders to purchase their
shares. Since they involved the compulsory purchase or acquisition of shares
against the will of the holder of the shares or the acquirer, high thresholds
will apply to the exercising of such rights and there are protective rules on
the price that must be paid for the shares concerned (Formacompany, 2016). It
is clear that, based on both provisions that I stated above, right of
minorities can still be protected by allowing them to control the way of how
their shares shall be bought by the bidder.
There
is another provision in Malaysia and also in UK which can be used to protect
the rights of minority shareholders. In Malaysia, under Section 224(5) of CMSA 2007, when the offeror who has not obtained
acceptances made an application to the court, the court may made an order to
authorize the offeror to give notices under subsection 222(1). This subsection
is subject to subsection (6). The court only grant the order if it satisfied
that the failure for the offeror to obtain acceptances was due to the inability
of the offeror to trace one or more of the shareholders after made reasonable
enquiries or the shares which the offeror has acquired or contracted to acquire
by virtue of acceptances of the take-over offer is not less than the 90% in the
nominal value as specified in section 222(1). The court may also grant the
order if it thinks that the consideration offered is fair and reasonable. Based
on Section 222(5) of CMSA 2007, the highlight would be on the last sentence. It
states that ‘the court may grant the
order if it thinks that the consideration offered is fair and reasonable’.
Here it shows that the court would consider the right of minority shareholders
by ensuring that the offer made was fair and reasonable before granting order
of acquisition to the bidder. So the court would have discretion in granting
the order while making sure fairness and justice would be upheld. While in UK,
this kind of provision can be seen in Companies Act 2006 stipulated under Section 986(9). In this provision, a
bidder who fails to meet the 90 per cent threshold due to the existence of
untraceable shareholders can apply to the courts for permission to exercise
squeeze-out rights. However the bidder must satisfy the Court that the
shareholders are untraceable and that the consideration offered is fair and
reasonable. The court must also consider that it is just and equitable to make
the order having regard to the number of shareholders who have been traced but who
have not accepted the offer (Craig Cleaver, 2014). Here we can see that UK law also
put consideration towards dissenting minority shareholders.
In addition to that, we may also see
the other rights of minority shareholders stated in Malaysia and also UK law.
As for in Malaysia, under Malaysian Code
on Take-Overs & Mergers 2010, Rule 22 states about the compulsory
acquisition and the right of minority shareholders. Under paragraph (1), when an offeror makes a take-over offer for more
than one class of shares, the offeror must made a separate offers to each class
of the shares. Meanwhile under paragraph
(6) of the Rule 22, an offeror is required to provide upon any demand made
by the dissenting shareholders in the manner prescribed by the Capital Market
Services Act, a written statement of the names and addresses of other
dissenting shareholders within four market days from the date of receipt the
demand. Based on the rules above, it can be seen that the order to make
separate offers to each class of shares would certainly protect shareholders
rights. It must be noted that there are few types of shares like preference shares,
ordinary shares and others. These shares enable the holder different types of
rights and that is why the price per unit also usually differs. Therefore, rule
to make separate offer to each class of shares depending on the type of share,
shows that Malaysian law did consider the rights of minority shareholder. Apart
from that, paragraph (6) under Rule 22 of the same Code allows minority
shareholder or dissenting shareholder to get the name and addresses of the
other dissenting shareholders. By this way, those minority shareholder would
not be left out and they may perhaps decides their option and discuss over it
regarding acquisition of share. While in UK, although it is a bit different
than Malaysia, however it can still be seen that UK law also put consideration
towards minority shareholders. Under Section
979 of CA 2006, the bidder must exercise his squeeze-out rights by serving
notices within three months beginning on the day after the deadline for
acceptance of the offer. Consideration offered to the minority shareholders
must be the same consideration offered to other shareholders under the original
offer to avoid unfairness and injustice. This provision would prevent minority
shareholder from being oppressed by the act of majority by giving same
consideration to the other shareholders so that fairness can be achieved.
Apart from that, it must be noted
that both Malaysian law and UK law allows minority shareholders who feel
oppressed by the act of majority, particularly in respect of compulsory
acquisition of shares to bring the matter to the court of law. In Malaysia, Section 224 of CMSA stated about
minority’s rights to apply regarding compulsory acquisition to the court. Under
subsection (1), the court may on the
application of any dissenting shareholder order that the offeror is not
entitled and not bound to acquire those shares or the court also can specify
other terms of acquisition from the terms of the take-over offer. So here it
can be seen that the right to be heard did given to minority shareholder. Of
course, minority shareholder must show cause on why compulsory acquisition of
shares should not be given to the offeror. Under Section 33A (5)(d) of Malaysian Code on Takeovers & Mergers 1998,
duty is imposed on Securities Commission to ensure that the directors of both
the acquiring and target companies act in good faith when responding to, or
making recommendations with respect to a take-over offer (Dr Mushera Ambaras,
2005). The right of minorities to be heard can be seen in the case of Amin
Bin Halim & Anor v Tenaga Nasional Berhad and other cases (2016)
where minority who dissented to the compulsory acquisition of shares brought
the case to the court. Even though plaintiffs failed to show a good reason to
deny such acquisition of shares and failed to show that defendants acted in bad
faith, but still it is a good case to show that right to be heard indeed is
given to minority who feel oppressed by the act of majority. While in UK, the
right to be heard by the minority can be seen under Section 979 of CA 2006. Based on this provision, where there is a
case minority feel oppressed by the compulsory acquisition of their shares,
those dissenting shareholders have 6 weeks from receipt of Section 979 notice
to challenge the notice before the Court. The squeeze out rights of the bidders
cannot be exercised until any such application has been disposed of. However, according
to an article in the Thomson Reuters Legal Solution website, dissenting
shareholders will require a compelling argument if they are to persuade Court
that an offer accepted by 90 per cent of shareholders should not be upheld.
Here we can see that right to be heard are given in UK as well for minority who
feel oppressed by the act of majority shareholders. Also, General Principle 3 of City Code (UK) imposes target directors a
series of specific obligations. This is to ensure that the directors would act
in good faith. It must be noted that, also in UK law, the directors of Target
Company, being fiduciary agents of company have duty to act bona fide for
benefit of company as a whole. We can see in case Mills v Mills (1938) where
the court held that powers given to directors cannot exercised in order to gain
some private advantage or for any purpose foreign to the power.
All in all, the rights indeed given
to minority shareholders to protect their rights even though it would be hard
to safeguard their shares, however they would still be given chance to bring
the matters to court in case of oppression.
ISSUE 2:
WHETHER THE STATUTE PROVIDES ADEQUATE PROCEDURAL GUIDE FOR COMPULSORY
ACQUISITION?
In
general, the procedures involved in the compulsory acquisition of shares in
Malaysia are stated in the Capital
Market and Services Act 2012 (CMSA) with further explanation can be found
in the Malaysian Code on Take-over and
Mergers 2010. In cases where the company is a public listed company, cross-reference
must be made to Bursa Malaysia Securities Berhad Listing Requirements.[10] Meanwhile, for the United
Kingdom’s counterpart, the statute used to cover the compulsory acquisition of
shares cases are the Companies Act 2006 and the City Code on Takeovers and
Mergers, which is applicable to the listed companies in the United Kingdom.
These statutes provided rather lucid explanation on the flow of the compulsory
acquisition transaction, from the preliminary requirements and process until
the compulsory acquisition is fully effective.[11]
The preliminary step to the
compulsory acquisition of shares is that the offering company must make a
take-over offer to the target company. According to Section 222(1) of the CMSA, when the target company accepted the
offer, the offeror must ensure the sum of offer which has been accepted formed
at least nine- tenths of the nominal value of the company, excluding any shares
that were held prior to the take-over offer. This acceptance is to be made
within four months after the offer was made.
In two months following the
acceptance, the transferee company may serve a notice expressing its intention
to acquire shares in the target company to the dissenting shareholders in the
prescribed manner. Together with the notice, the transferee company must attach
a statutory declaration as evidence that they had satisfied the conditions to
give out such notice.
Section
222(2) allocates one month to the dissenting shareholders upon service of
the notice, to send a written demand to the offeror, requesting for a statement
containing a list of names and addresses of other dissenting shareholders, as
shown in the register of members. The offeror have to wait for fourteen days
upon the handover of the list before they proceed to the next stage in
acquiring the shares.
Section
222(7) of the CMSA stated on the procedure to finalized the acquisition
transaction where after the expiration of the one month from the service of
notice made or the 14 days, the offeror shall sent the copy of notice along
with the documents of transfer to the offeree. After that, payment shall be
made in consideration to the share units to the offeree. Thereupon, the
transfer of shares will be legalized by registration of the offeror as the new
holder to those shares.
Subsection
(5) to Section 222 of the CMSA serves as a reminder to the offeror. It
stated that if the copy or notice of declaration was not made in the prescribed
manner; or if the notice of declaration or the list of names and addresses is false
or believed to be false, the person who commits such act can be charged for
offence.
Meanwhile under Section 223 of the Act,
it stated about the right of minority shareholders. Where a takeover offer has
been accepted by holders of not less than 90% in the nominal value of those
shares of that class excluding the shares that already held at the date of the
takeover offer by the offeror and person acting in concert, the remaining
minority shareholders may within the offer period require the offeror to
acquire its shares on terms of the takeover offer or such other terms as may be
agreed. Under subsection (2), the offeror must give notice to any shareholder
who has not accepted the take-over offer within one month before the end of the
offer period and if the notice is given before the end of offer period, it
shall state that the take-over offer is still open for acceptance in the
notice.
Should the offeror fails to achieves
the 90% acceptances, compulsory acquisition is still possible through an
application made to the court under Section
224(5) of the CMSA for the authority to compulsory acquire the remaining
shares. But, this is only applicable if the court believes that the offeror had
satisfied three conditions. Firstly, the failure is caused by the inability to
trace any persons who holds relevant shares to the acquisition. Secondly, the
sum of shares, including the percentage holds by the missing shareholder
amounts to 90% or more of the nominal value of the shares and thirdly, the
consideration to the offer is fair and reasonable.
The dissenting shareholder are given
a period of one month after the service of notice to apply to the court that
the application made by the offeror was unnecessary, improper or vexatious.
This is stated under Section 225(4) of
the CMSA. In such situation, if the
court satisfied with the claim, the court may order that the offeror shall be
barred from acquiring the said shares or to specify the terms of acquisition,
if there is deviation from the term in the take –over offer.[12]
The process of compulsory
acquisition of shares in UK is mentioned in Chapter 3 of Part 28 of the Companies Act 2006. Basically, there is
no exact statutory definition for acquisition of share in Companies Act 2006. However,
acquisition can happen when one company decides to take over another one.[13] The acquisition may be
done by way of purchasing either the majority or entirety of the ownership
stake of the company being taken over. It must be noted that acquisition can be
divided two types which are hostile and friendly. A hostile takeover occurs
when a company is bought by another without its consent, usually when the
buying company purchases a majority amount of its shares to get a controlling
stake. On the other hand, when both companies agree to the terms of the
acquisition, it is referred to as a friendly takeover.
Part 28 of the Companies Act 2006
allows an offeror to compulsorily acquire the shares of non-assenting minority
shareholders either by way of ‘squeeze out’ or through a scheme of arrangement.
Under UK law, Section 979 of the
Companies Act 2006 is the relevant "squeeze out" provision. It
gives a takeover offeror who has already acquired 90% of a company's shares the
right to compulsorily buy out the remaining shareholders.
Basically, there are some conditions
where the right to squeeze-out right is available. The first condition is where
there has been a ‘takeover offer’. Under Section
974 of CA 2006, takeover offer means an offer to acquire all shares in the
company or where there is more than one class of shares in a company, all the
shares of one or more classes. Here, where an offeror obtains acceptances of at
least 90% of the shares it is offering to buy in the target company and
acceptances of at least 90% of the voting rights carried by the shares it is
offering to buy, it can require the remaining non-accepting shareholders to
sell their shares on the terms of the offer.
The second condition to exercise
‘squeeze-out’ right is that when the offeror has acquired at least 90 per cent
in value of the shares of any class to which the offer relates, and where the
share of that class are voting shares, not less than 90 per cent of the voting
rights carried by those shares as stated under Section 979(4) of CA 2006.
The third condition to exercise
squeeze out is that through dead register applications. An offeror who fails to
meet the 90 per cent threshold due to the existence of untraceable shareholders
can apply to the courts for permission to exercise squeeze-out rights stated
under Section 986(9) CA 2006.
However, the offeror must satisfy the Court that the shareholders are
untraceable and that the consideration offered is fair and reasonable. The
court must also consider that it is just and equitable to make the order having
regards in particular, to the number of shareholders who have been traced but
who have not accepted the offer.
The last condition for squeeze out
is that offeror must follow the order for notices. Under Section 979 of CA 2006, if the 90 per cent threshold is reached,
the offeror must send out notices to all the relevant minority shareholders
informing them that it will compulsorily acquire their shares. The notices must
be in a prescribed manner as stated under Section
980 of the same Act and must either be served personally or by post. Once a
valid notice has been sent to the relevant minority shareholders, the offeror
is entitled to and is bound to acquire those shares on the terms of the offer.
Should the offeror fail to send a copy of a notice or a statutory declaration,
or if he makes a false declaration, he would be liable for under Section 980(6)
CA 2006.
It is pertinent to note the vitality
of timing in the squeeze out process. The offeror must exercise his squeeze-out
rights by serving the notice expressing his intention to acquire the remaining
shares from the dissenting shareholder within three months from the date after
the deadline for acceptance of the offer. This period is extended to six months
for offers for private companies. Apart from that, six weeks after notice has
been served, the offeror must begin to complete the compulsory acquisition
process by transferring to the target company, the consideration for the shares
to which the offer relates. It must be noted that the consideration offered to
the minority shareholders must be the same consideration offered to other
shareholders under the original offer to avoid unfairness and injustice.
Differences between the laws of
the two countries and suggestion for improvements to the current statute in
Malaysia
In Malaysia, Section 222 of the CMSA
stated that the nine- tenths calculation is made according to the nominal value
of the shares belonging or contracted to be acquire by the offeror himself
alone. But, the CMSA under Section 224 (5) allows the offeror to carry out
compulsory acquisition even though they have not fulfilled the 90% requirement
if the offeror fulfill certain requirements. In contrast, in the United
Kingdom, s 979(6) (b) of the CA 2006 stated that the 90% of the values of the
shares, or in cases of voting shares, 90% of the voting rights is the sum of
shares owned or contracted to be acquire by the offeror and its associates
company, the company where the offeror owns a significant portion of its voting
shares. Therefore, the probability of achieving the 90% requirement is very
high as the financial sources are obtained from many sources.
In addition, Section 222(2) of the
CMSA provides the dissenting shareholders with the right to access the names
and address of other dissenting shareholders and are given 14 days before any
further action can be taken by the offeror to proceed with the acquisition.
This is considered as the right of the minority shareholder in this case. This
right is important to give the dissenting shareholders time to consider whether
it is fair for them let go of their shares. If they thinks that the compulsory
acquisition is done in an unjust way, they may bring the case to the court to
defend their rights. There is no equivalent provision provided in the United
Kingdom’s statute.
In Malaysia, the CMSA never mentions
in clear term on the type and degree of punishment available to the offending
offeror, according to section 223 (5). In the contrary, the United Kingdom’s
counterpart specifically mentions in section 980(8) CA 2006 that the maximum
penalty upon conviction of failure to submit the notice or the statutory
declaration, or fabricating the declaration is 2 years imprisonment, or fine,
or both. It is important to have the sanctions available to be read together
with the offence so that the expectant offender are warned with the possible
punishments awaits him.
Apart from that, the Companies Act
in the United Kingdom comes with a provision that exclusively explains on the
actions of company in dealing with the payment allotment of consideration held
on trust under section 981(9). In contrast, the Malaysia’s statute only
mentions that the consideration will be hold by the offeree in a different
account, in trust of the shareholder. Thus, there seems to be inadequacy to the
current provision that needs to be improvised.
In conclusion, the statutes that
govern both countries are designed to fit the local needs and as a guide to
smoothen the acquisition of shares process. It is therefore unavoidable to have
certain differences between the two acts while covering similar issue. However,
improvement is a must considering the nature of this area of law that is ever-
changing, especially in Malaysia where the Securities law is still new and is
rapidly growing, despite not having many expert in this area. It is naturally
inevitable that inadequacy of law may be faced, so reference should be made to
other countries on this matter to learn from their experience and development
before the local law can be reinforced.
ISSUE 3: WHETHER IT IS APPROPRIATE
TO USE THE CIRCUMSTANCES OF SHAREHOLDERS AS A WHOLE IN ACCESSING FAIRNESS?
In the compulsory acquisition, there
will be an issue of fairness concerning the shareholders, particularly the
minority shareholders. Basically fairness is defined as the quality of treating
people equally or in a way that is right and reasonable. In applying to meaning
of fairness to this issue, any shareholders, regardless whether the majority or
the minority, both parties must be treated equally.
Section 181 of the Companies Act 1965[14]
provides the general protection for the minority shareholders. The subsection
(1)(a) any member or holder of a debenture of the company may made an
application to the Court if the company’s affairs are conducted or the
directors’ power are exercised in a manner oppressive to one or members or
holders of debentures or in disregard of the interests of the members,
shareholders or holders. When oppression is made out, the court may grant
relief if it thinks fit, which including an order to direct or prohibit any
act, cancel or vary any transaction or resolution, regulate the conduct affairs
of the company in the future or provide for the purchase of shares of
debentures of the company by other members or holders of debentures or by the
company itself[15].
The court also may order reduction on the company’s capital or made an order
for the company to be wound up as remedy of oppression against the members of
the company. In Rahya Trading Sdn Bhd v Tong Khin Company Sdn Bhd and another[16], the oppression of a
minority shareholder was proven due to the company’s insistence that the
minority shareholder remains as a shareholder against his wishes even though
the company was no longer involved in any business. As a result, the court
granted the relevant protection.
The
issue of fairness in compulsory acquisition arises in a situation where the
minority is dissatisfied with the offer made by the offeror of takeover as the
minority think that the shares is more valuable compared to the offer. All
minority shareholders in a compulsory acquisition would be entitled to receive
any privately negotiated higher price. However, the compulsory acquisition
procedure does not provide for any higher price determined by the court to pass
on to all the minority shareholders and all minorities will not necessarily receive
the same price per share. The minority might risk receiving a lower price if
they choose to bring an action to the court for the assessment of price. If the
minority being deprived from getting a reasonable and fair assessment
pertaining the true value of the shares this will means that the majority has
deny the minority shareholders the chance of getting profits during the
compulsory acquisition.
In
Amin
Halim Rasip & Anor v Tenaga Nasional Bhd & other case[17], TNB made an offer to acquire all the
remaining shares not already held by TNB in Integrax at an initial offer price
of RM2.75 per share in 2015. Notwithstanding that the offer was “not fair but
reasonable”, the board recommended that the shareholders reject the offer on
the basis that the offer was “not fair” and this outweighed its
“reasonableness”. The offer price was subsequently revised to RM3.25 per share
and ultimately accepted by the shareholders notwithstanding the board
recommending that the shareholders reject the revised offer on the basis that
underlying value of the shares was at a material premium to the revised offer
price.
In
UK, in assessing fairness, the court will consider the whole affected parties
not just the minority. The principles in assessing the element of fairness are
derived from cases that have been decided. In Re Grierson, Oldham and Adam Ltd[18], the dissenting minority
shareholders after receiving a statutory notice acquire the shares applied to
the court that the offer in the notice was unfair on a few grounds. The first
ground is that the price offered for the shared was lower than the market price
of the shares in the previous years and the price offered did not recognize the
advantages to be obtained by the offeror in respect of the acquisition. Other
ground are the offer price compared unfavorably compared to price offers of the
classes of shares and the applicant would be compelled to sell shares at loss
from original investment and would not capable to deduct from capital gains
tax.
The
evidence presented by the applicants was done by an independent expert and was
unchallenged as the respondent company presented no evidence to contrary. The
court thus accepted the evidence on all the above mentioned grounds. It would
seem at this stage on the evidence that the offer price given is unfair to the
dissident minority.
The
principle for the test of fairness is not only on the applicant minority but
upon all affected shareholders including those who did not oppose and accepted
the offer[19].
In re Sussex Brick Co. Ltd[20], the court held that for
the application on the ground unfairness to succeed, the court must satisfied
that the offer to be obviously unfair, patently unfair, unfair to the meanest
intelligence and it is not sufficient to show the offer was not as it might
have been. Thus, the court approach in determining the unfairness is very high.
It
is very clear that in order to prove unfairness is exceptionally difficult,
however, the common law have recognized in some circumstances the presumption
of unfairness. One example of the presumption of unfairness can be seen in the
matter of Re Bugle Press Ltd[21]. In this case, the
transferor company, Bugle Press Ltd, had three shareholders, with the two main
shareholders holding 4500 shares each. The sole minority shareholder held 1000
shares. The two main shareholders, holding 9000 shares, incorporated the
transferee company of which they were the sole directors and shareholders and were
incorporated for the sole purpose to effect the acquisition of the transferor
company. The new company acquired the shareholding of the two main shareholders
and proceeded to squeeze-out the minority shareholder by virtue of having nine
tenths of the total shares in the company. The court found that there are
sufficient grounds to refuse the acquirer to squeeze-out the affected remaining
minority shareholders. It is clear in this situation the two main shareholders
can easily collude and the offer consideration can be manipulated in order to
utilize the squeeze-out on terms that are unfair to the minority shareholder.
RECOMMENDATION
Majority shareholders
escape the hardship of suppression by occupying corporate offices and
compensating themselves handsomely as employees of the corporation. As one
court put it:
“When dissension and agreement arise, the majority attempts to oust the
minority, not only of control, but of a fair return upon the investment.
Instead of treating all the stock alike, and disturbing the profits fairly and
proportionately by way of dividends, the majority first elect themselves as
directors, then as directors, they elect themselves officers, and then
distribute among themselves a substantial part of the profits in the way of
excessive salaries, additional compensation and other devices.”[22]
Often, minority
shareholders may be unable to protect their interest because they are
insufficiently sensitised to questionable business practice of the
shareholders. Under this subtopic, the author will give a few recommendations
for the minority shareholders to protect themselves against compulsory
acquisition on unfair terms. Firstly, minority shareholders may appoint lawyer
to represent them to fight for their rights. The minority shareholders’ lawyer
can take several steps to fight the oppressive action by few steps. First, he
should get information about the corporation who will acquire the compulsory
acquisition, its operation and oppressive action being taken by the majority
shareholders and corporate directors. Some of these information can usually be obtained
by asserting the minority shareholder’s right to inspect corporate books and
records, and, if the minority shareholder is a director of the company, he has
the right to inspect corporate books and record and make on premises
inspections. In litigation, a minority shareholder’s lawyer should request
protection of the minority shareholder’s reasonable expectations. The
reasonable expectations of the shareholders, as they exist at the inception of
the enterprise and as they develop thereafter through a course of dealing
concurred in by all of the shareholders is perhaps the most reliable guide to a
just solution of a dispute among shareholders in the typical close corporation.
Another way of giving minority shareholder in regards on the
representation on the board is by way of arrangement of settling disputes. A
squeeze-play can be avoided by setting up in advance charter, or by-law
provision or by shareholder’s agreement in matter of arrangement to resolve
whatever policy disagreements or other disputes which may arise from time to
time among the participants in an enterprise. After doing some research, the
author has found out that there are at least two approaches which seemingly
promising. The first one is arrangement by which impartial outsiders will be
brought in to manage the business until the parties have resolved their
differences. Another approach is to provide in advance, for an agreement to
arbitrate future disputes. This matter should also include disputes on
management and policy question and it should be enforced. This is because, in
my opinion, arbitration has great potential for settling disputes in small
business quickly and satisfactorily, and thus a long, drawn-out dissension that
can leads to squeeze-plays can be avoided.
The author also believed
that a long-term employment contracts between shareholders and corporation
should be effective in order to protect the right of the shareholders,
especially for those minority shareholders. This is because, it can be
understood that persons organizing a small business corporation who invest
practically all of their money and assets in the enterprise may expect to
receive benefit from the trading. Therefore, minority shareholders will need
assurance that they will be retained the company’s employment. A minority
shareholder may protect himself against being deprived of employment with the
company by insisting on a long-term employment contract. It is to be noted that
the agreement stated here is not an agreement among the shareholders, but it is
a contract between the corporation and a particular shareholder-employee.
Therefore, in the author’s opinion, to guard against the possibility that the
corporations will grow and the salaries for majority shareholders become
prosperous without a proportionate increase in the minority shareholder’s
compensation, he may insist that his employment contract include, a basic
salary, some provision for contingent compensation,[23]
or an arrangement under which his salary will be increased in a fixed
proportion with salaries of designated corporate officers. Other than that, he
may insist upon including in the contract provision for severance pay or
liquidated damages in the event that the corporation breaches the contract.
In Malaysia, the take-over of listed companies via the Asset Disposal
route have raised concerns that the minority shareholders may be forced to
sell-out by a small number of substantial shareholders who hold majority shares
to attain simple majority required under Section 132C of the Companies Act
1965, even though the prices offered may not be fair or reasonable. Therefore,
in order to prevent this from happening, it may be feasible to providing a veto
over officer action. This means that, as the principal corporate offices will
usually be held by majority shareholders, a minority shareholder will want to
be in a position to prevent an action by those officers which would be
prejudicial to his interest. Therefore, in the author’s opinion, to decrease
the chance of unfavourable officer action, the by-laws might define the duties
and powers of the officers in narrow terms in order to prohibit the delegation
of any important work of the board of directors to officers or committees.
CONCLUSION
In
conclusion, it is noticeable that the laws regarding companies and securities
in Malaysia are closely related to common law or the law in United Kingdom
(UK). However, the fact that the remedies in order to give rise to claims for
minority shareholder’s oppression are as limitless as the human capacity for
greed and fraud is also noticeable. Fortunately, the judicial system has
responded with equal creativity where they provided and recognized the limited
protections for minority shareholders as stated in Capital Market Services Act 2007 (CMSA) and Malaysian Code on Take-Overs & Mergers 2010 in Malaysia. The Capital Market and Services
(Amendment) Act 2015 ("CMSA Amendment") which came into effect on 15
September 2015 introduces various amendments to the CMSA which gives an impact
on Code Takeovers. The CMSA Amendment provides enhanced protection to the
offeree shareholders as the SC is empowered to appoint an independent adviser
if the offeree company fails to do as required under the Code. The compulsory
acquisition provisions under the CMSA has also been extended to cover
convertible securities and thus, providing greater certainty for an offeror
participating in a take-over offer.[24] By recognizing the
limited protection for the minority shareholders in a typical corporation under
majority rule, it has given rights for the minority shareholders against
oppression. Therefore, whether representing majority or minority shareholders,
the attorneys have to do well to think creatively about a resolution that will
effectively preserve maximum value for their clients and take advantage of the
tools available to them.
REFERENCES
Author,
A. A., & Author, B. B. (Date of publication). Title of article. Title of
Online Periodical, volume number (issue number if available). Retrieved from
http://www.someaddress.com/full/url/
N.A. (2016). Public Mergers & Acquisitions
in Malaysia. Retrieved from http://www.christopherleeong.com/our-work/publications/public-mergers-acquisitions-in- malaysia
N.A.
( 2014). Malaysia Takeover Guide. Retrieved from http://www.rahmatlim.com/SitePages/Publication/PublicationByYear.aspx?Year=2014
Goodman,
D. (2014). A guide to compulsory acquisition in the absence of a takeover bid retrieved from http://www.gadens.com/publications/Pages/A-guide-to-compulsory- acquisition-in-the-absence-of-a-takeover-bid.aspx
REFERENCES BARU
(n.a.).
(n.d.). Companies Act 2006. Retrieved
on November 22, 2016, from http://www.formacompany.com/en/uk/uk-companies-act-2006/companies-act-2006-notes-969-973.php
Dr
Mushera Ambaras. (2005). Defensive tactics and strategies in companies
takeovers. Malayan Law Journal, 4(iii).
Retrieved on November 22, 2016 from www.lexisnexis.com
Cleaver, C. (2014). Squeeze-out Guide.
Retrieved on November 22, from file:///C:/Users/HP%2014/Downloads/IBA%20SQOut%20UK%202014%20(vfp)%20(1).pdf
(n.a.). (n.d.). Compulsory
acquisition. Retrieved on November 22, 2016, from http://uk.practicallaw.com/2-107-5970?service=corporate
Cases
Amin
Bin Halim & Anor v Tenaga Nasional Berhad and other cases [2016] MLJU 283
Mills
v Mill[1938] HCA 4
[1] Prof. Madya, UUM College of Law, Government and International
Studies,Universiti Utara Malaysia; Ph.D in Law,
Securities Industry, University of Aberdeen, UK, Master of Comparative Laws
(MCL), Land Law, International Islamic University of Malaysia., LL.B (Hons),
International Islamic University of Malaysia; Assoc. Prof., Universiti Utara
Malaysia, 2001- present.
[2] Kauffman, E. M.
(2001, April 30). Mergers and acquisitions: An introduction. Retrieved November
26, 2016, from http://www.entrepreneurship.org/resource-center/mergers-and-acquisitions-an-introduction.aspx
[3] The Malaysian
code on Take-Overs and mergers 2010 (2010 code) and practice note (PN) 2010 –
frequently-asked QuestionsSecurities commission Malaysia. (1993). Retrieved
November 26, 2016, from https://www.sc.com.my/the-malaysian-code-on-take-overs-and-mergers-2010-2010-code-and-practice-note-pn-2010-frequently-asked-questions/
[4] PLC, E. I. I.
(2016). 2015 mergers and acquisitions report: Malaysia. Retrieved November 26,
2016, from http://www.iflr.com/Article/3439983/2015-Mergers-and-Acquisitions-Report-Malaysia.html
[5] Kauffman, E. M.
(2001, April 30). Mergers and acquisitions: An introduction. Retrieved November
26, 2016, from http://www.entrepreneurship.org/resource-center/mergers-and-acquisitions-an-introduction.aspx
[6] The Malaysian
code on Take-Overs and mergers 2010 (2010 code) and practice note (PN) 2010 –
frequently-asked QuestionsSecurities commission Malaysia. (1993). Retrieved
November 26, 2016, from https://www.sc.com.my/the-malaysian-code-on-take-overs-and-mergers-2010-2010-code-and-practice-note-pn-2010-frequently-asked-questions/
[7] Capital Markets
and Services Act, 2007 (Act 671)
[8] Malaysian Code
on Take-Overs & Mergers 2010 (Code)
[9] Chapter 3 of
Part 28 of the Companies Act 2006
[10] Public Mergers
& Acquisitions in Malaysia Christopher & Lee Ong
http://www.christopherleeong.com/our-work/publications/public-mergers-acquisitions-in-malaysia
[11] Malaysia
Takeover Guide Rahmat Lim & Partners
http://www.rahmatlim.com/SitePages/Publication/PublicationByYear.aspx?Year=2014
[12] Section 224 (1)
Capital Market and Services Act
[13] A guide to
compulsory acquisition in the absence of a takeover bid Doug Goodman 11/06/2014
http://www.gadens.com/publications/Pages/A-guide-to-compulsory-acquisition-in-the-absence-of-a-takeover-bid.aspx
[14] Companies Act
1965 (Act 125).
[15] Section 181(2) of
Companies Act 1965 (Act 125).
[16] [2014] 5 CLJ 726.
[17] [2016] 1 LNS 591.
[18] [1968] 1 Ch 17.
[19]Smit, Albertus
Ebenhaezer. "Compulsory Acquisition of Minority Shareholders: A Critical
Analysis." Accessed November 25, 2016. https://open.uct.ac.za/bitstream/item/22703/thesis_law_2015_smit_albertus_ebenhaezer.pdf?sequence=1.
[20] [1961] Ch 289n.
[21] [1961] 1 Ch. 67
CA
[22] . Carr v. Kimball, 153 App. Div. 825, 834,
139 N.Y. Supp. 253, 259
(1912), alffd mem., 215 N.Y. 634, 109 N.E. 1068 (1915).
[23]
e.g. a percentage of profits
[24]
O.Lee & Christopher. “Public Merger & Acquistion in Malaysia.” Accessed
December 5th, 2016.
http://www.christopherleeong.com/media/2407/160307-public-ma-in-malaysia-march-vf.pdf
No comments:
Post a Comment