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Wednesday, 9 October 2013

Amendments To Practice Note 15 Of The Malaysian Code On Take-Overs And Mergers 2010

by Hung Kian Hoong

In This Article, Hung Kian Hoong Discusses The Amendments To Practice Note 15 Of The Malaysian Code On Take-Overs And Mergers 2010.

In September 2012, the Securities Commission (“SC”) issued an expanded Practice Note 15 (“Expanded PN15”) of the Malaysian Code on Take-overs and Mergers 2010 (“Code”) by inserting new paragraphs 3.1 to 3.28. These amendments, which came into effect on 1 November 2012, provide further guidance and requirements to be complied with by the independent advisers in making recommendations to the shareholders of a company that is subject to a take-over offer.

Currently, a company that is subject to a take-over offer is required to appoint an independent adviser to provide comments, opinions, information and recommendation on the take-over offer in an independent advice circular.[1] The independent advice circular is subject to the SC’s review and has to be cleared by the SC before it can be issued and despatched to the offeree shareholders.[2] With the Expanded PN15 taking effect, the independent adviser will have to undertake sufficient analysis and review of a take-over offer in accordance with the Expanded PN15 before reaching its conclusion.

Fair and reasonable

Under the Code, the independent advice circular shall include comments and advice from the independent adviser on the reasonableness of the take-over offer.[3] In this regard, the independent advisers have an important role to play as they are required to advise the offeree shareholders who are faced with the decision of whether to accept the take-over offer, that is whether to sell or retain their shares in the company.

As a matter of convention, the independent advisers will satisfy this requirement by evaluating  whether the offer is “fair and reasonable”. The adoption of such convention has been allowed by the SC for consistency reasons although there is no requirement to use the standard of “fair and reasonable”.[4] In the Consultation Paper[5] issued by the SC in year 2010, it was noted that the SC was concerned that the term “fair and reasonable” is not clearly defined in certain situations and the lack of a precise definition has given rise to the term being interpreted in different ways.

Pursuant to the Expanded PN15, in relation to a take-over offer, the independent advisers are required to analyse the term “fair and reasonable” as two distinct criteria, ie, whether the offer is “fair” and whether the offer is “reasonable”, rather than as a composite term.[6]

“Fair”

In analysing whether a take-over offer is fair, the independent adviser is to consider the quantitative aspect. Under the Expanded PN15, the general criteria for a take-over offer to be considered “fair” would be based on the following:

(a) if the offer price (or value of consideration) is equal to or higher than the market price and is also equal to or higher than the value of the securities of the offeree, the take-over offer is considered as “fair”; and

(b) if the offer price (or value of consideration) is equal to or higher than the market price, but is lower than the value of the securities of the offeree, the take-over offer is considered as “not fair”.[7]

“Reasonable”

In evaluating whether a take-over offer is “reasonable”, the Expanded PN15 requires the independent advisers to take into consideration all relevant factors (other than the valuation of the securities that are the subject of the take-over offer) including but not limited to the following:

(a) the existing shareholding of the offeror and persons acting in concert with the offeror in the offeree and their ability to pass special resolutions or control the assets of the offeree;

(b) any other significant shareholding in the offeree (other than (a) above);

 (c) the liquidity of the market in the offeree’s securities;

(d) the expected market price if the take-over offer is unsuccessful;

(e) the likelihood and value of alternative offers or competing offers before the close of the take-over offer.[8]

Not fair but reasonable

The Expanded PN15 provides that a take-over offer would generally be considered “reasonable” if it is “fair”, but an independent adviser may also recommend for shareholders to accept the take-over offer despite it being “not fair”, if the independent adviser is of the view that there are sufficiently strong reasons to accept the offer in the absence of a higher bid and such reasons should be clearly explained.[9]

Pursuant to the Expanded PN15, in the event that the independent adviser concludes that a take-over offer is “not fair but reasonable”, the independent adviser must clearly explain what is meant by “not fair but reasonable”, how the conclusion has been reached, and the course of action that the shareholders are recommended to take pursuant to the conclusion.[10] The take-over offer of Bandar Raya Development Berhad by its major shareholder is an example of a take-over where the independent adviser in the independent advice circular dated 18 September 2012 concluded its opinion that the offer was “not fair but reasonable” and recommended the shareholders of that company to accept the offer.[11]

Valuation methodology

In addition, the Expanded PN15 requires independent advisers to exercise due care, skill and professional judgment in selecting the most appropriate valuation methodology or methodologies (relevant guidance is provided) to be used in assessing the fairness and reasonableness of a take-over offer and this must be supported by reasonable grounds and logical assumptions.[12]

Assumptions

The Expanded PN15 also sets out the criteria in relation to the assumptions on which the  independent adviser’s recommendation is based. These include:
• that the assumptions should be reasonable;[13]

• that all material assumptions are to be disclosed;[14]

• that the assumptions should be specific and clear;[15] and

• that, where possible, the reasons for adopting the assumptions should be explained and general assumptions that are not relevant to the subject of valuation should be excluded.[16]

Conclusion

The Expanded PN15 was introduced pursuant to the positive feedback on the Consultation Paper[17] issued by the SC in year 2010[18] wherein the SC noted from their review that the quality of the independent advice circulars could be improved[19] The Expanded PN15 is viewed as a step implemented by the SC to enhance offeree shareholders’ protection by ensuring that adequate, meaningful and useful information is made available in the independent advice circulars that are issued to offeree shareholders to ensure that they will be well-equipped to make an informed decision as to the merits of a take-over offer.
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* Published with kind permission of M/s Shearn Delamore & Co.

Endnotes:
[1] Paragraph 15(1) of the Code.
[2] Paragraph 15(7) of the Code.
[3] Paragraph 4 of the Second Schedule of the Code.
[4] Paragraph 3.1.2 of the Public Consultation Paper 2/2010 - Proposed Updates to Guidelines on Offer Documentation of the Malaysian Code on Take-Overs and
Mergers 1998.
[5] Public Consultation Paper 2/2010 - Proposed Updates to Guidelines on Offer Documentation of the Malaysian Code on Take-Overs and Mergers 1998.
[6] Paragraph 3.1(a) of PN 15.
[7] Paragraph 3.2 of PN 15.
[8] Paragraph 3.5 of PN 15.
[9] Paragraph 3.4 of PN 15.
[10] Paragraph 3.6 of PN 15.
[11] Bandar Raya Development Berhad’s announcement dated 18 September 2012 via Bursa Malaysia (Reference No BR-120918-31724).
[12] Paragraph 3.14 of PN 15.
[13] Paragraph 3.16 of PN 15.
[14] Paragraph 3.17 of PN 15.
[15] Paragraph 3.18 of PN 15.
[16] Paragraph 3.18 of PN 15.
[17] Public Consultation Paper 2/2010 - Proposed Updates to Guidelines on Offer Documentation of the Malaysian Code on Take-Overs and Mergers 1998.
[18] The SC’s Press Release dated 25 September 2012.
[19] Paragraph 2.1.1 of the Public Consultation Paper 2/2010 - Proposed Updates to Guidelines on Offer Documentation of the Malaysian Code on Take-Overs and Mergers 1998.

(Disclaimer: This article is presented for information purpose only and covers legal issues in a general way. The contents are not intended to constitute advice on any specific matter and should not be relied upon as a substitute for detailed legal advice. © 2013 Shearn Delamore & Co. All rights reserved.)

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