When structuring a merger or acquisition (M&A) deal, it is important to take into account the laws pertaining to financial assistance, as they can affect the financing of the transaction. The following is a summary of the laws in Malaysia concerning financial assistance.
A seller is permitted to provide financing to a buyer.
The assets of a target company incorporated in Malaysia cannot be used as collateral for the liability incurred in acquiring shares in the target company, unless it falls within the exceptions specified in section 125 of the Companies Act 2016.
If the buyer is a corporation listed on Bursa Malaysia (referred to as a "listed corporation") or an unlisted subsidiary, compliance with the requirements related to financial assistance (if applicable) outlined in Paragraph 8.23 of the Main Market Listing Requirements or Rule 8.25 of the ACE Market Listing Requirements is necessary.
The elaborated write up, as follows:
Prohibitions under the Companies Act 2016
Under the Companies Act 2016, there are certain prohibitions that should be noted:
A company is prohibited from giving any financial assistance, whether directly or indirectly and whether by means of a loan, guarantee or provision of security or otherwise, to any person to purchase or subscribe for any shares in the company or its holding company. (Section 123(1), Companies Act 2016).
A company is further prohibited from giving financial assistance directly or indirectly for the purpose of reducing or discharging any liability of a person who has acquired shares in the company or in its holding company where the liability has been incurred for the purpose of the acquisition of the shares. (Section 123(2) of the Companies Act 2016).
Exception under s.125
The prohibitions stated above do not apply under the following circumstances:
If the lending of money is a regular part of a company's ordinary business.
The financial assistance is provided for a trust scheme intended for employees. This includes the company providing funds, according to an existing scheme, for the purchase or subscription of fully-paid shares in the company or its holding company. The purchase or subscription is carried out by trustees on behalf of or for the benefit of employees, including any director who holds a salaried position or office within the company or its subsidiary.
The company gives financial assistance to individuals, other than directors, who are genuinely employed by the company or its subsidiary, with the aim of enabling them to acquire fully-paid shares in the company or its holding company for their beneficial ownership.
The company provides a loan, guarantee, or security in relation to a loan(s) as part of its regular business operations, provided that the company's activities are regulated by specific laws governing banking, insurance, takaful, or are subject to the supervision of the Securities Commission. Furthermore, the loan(s) or guarantees/security must be provided within the scope of these regulated activities, and any loans made by the company, or guarantees/security provided for a loan, must adhere to standard commercial terms regarding interest rates, repayment terms, and interest/returns payments.
Restrictions on listed corporations or its subsidiaries
Unless otherwise prohibited by laws, a listed corporation or its unlisted subsidiaries are permitted to engage in the following activities, known as "provision of financial assistance," limited to:
Lending or advancing money.
Guaranteeing, indemnifying, or providing collateral for a debt.
This provision of financial assistance is restricted to the following:
Directors or employees of the listed corporation or its subsidiaries.
Individuals to whom the provision of financial assistance is necessary to facilitate the normal course of business of the listed corporation or its subsidiaries or is pursuant to their ordinary business operations. Examples include providing advances to subcontractors or clients in the normal course of moneylending business.
Subsidiaries, associated companies, or joint arrangements of the listed corporation, or the listed corporation itself (in the case of subsidiaries providing the financial assistance), provided that the immediate holding company is listed. The term "joint arrangement" has the definition ascribed to it in the approved accounting standards.
For the purposes of subparagraph (iii) above, the term "joint arrangement" refers to the meaning defined in the approved accounting standards.
In cases where a listed corporation or its subsidiaries provide financial assistance:
a. The board of directors of the listed corporation must ensure that the provision of financial assistance is fair and reasonable to the listed corporation, and it does not harm the listed corporation or its shareholders.
b. If the financial assistance is provided to an associated company or joint arrangement of the listed corporation, and the aggregate amount provided or to be provided at any given time to each associated company or joint arrangement exceeds 5% of the net tangible assets of the group, the listed corporation must issue a circular to its shareholders and obtain shareholder approval in a general meeting for the provision of financial assistance. However, if the listed corporation complies with the requirements stated in subparagraph (7)(ii) above, the obligation to issue a circular and seek shareholder approval is waived.
c. When shareholder approval is required according to subparagraph (b) above, the listed corporation must specify in the circular the proposed utilization of the financial assistance amount.
The restrictions and obligations outlined in paragraphs 7 and 8 above have exceptions and do not apply in the following cases:
Any provision of financial assistance that is provided to or in favor of the listed corporation or its wholly owned subsidiaries.
A corporation whose activities fall under the regulation of specific laws governing banking, finance corporations, or insurance, and are supervised by Bank Negara Malaysia or an equivalent foreign regulatory authority deemed appropriate by Bursa Malaysia.
Share financing or share margin financing conducted by a listed corporation or its unlisted subsidiary, which is a Participating Organization.
(Based on Bursa Main Market Listing Requirements, paragraph 8.23(1); Bursa ACE Market Listing Requirements, Rule 8.25)
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