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M&A transactions in Malaysia: Versatile growth market in a prime location

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published on 24 February 2021 | reading time approx. 6 minutes


Malaysia has shown an impressive economic growth since the 1990s; recent (pre-covid) growth rates of 4 to 5 per cent show that the country has by now developed a more mature economy of a considerable size. Together with Singapore, Thailand and Indonesia it is one of the leaders in the ASEAN region. Besides the traditional production of crude oil, gas and palm oil, Malaysia has by now a well-established manufacturing sector, including electronics, pharmaceuticals and telecommunication. Competitive businesses operate in the services sector including outsourcing and – due to the country’s strategic location – also logistics.


The current M&A market in Malaysia appears to be optimistic and is driven by inbound foreign investments. The weakening Malaysian Ringgit continues to make valuation of Malaysian companies interesting to investors. The government plans to increase public investment in particular into infrastructure in order to support an economy facing covid-related challenges, but concerns in respect of private consumption, traditionally a big driver of the Malaysian economy, remain valid particularly in the light of fluctuating oil prices.

Nevertheless, there is continuing interest in investments into insurance and financial services, education, logistics and healthcare. The market may also benefit from available corporate restructuring legislation, and enable investors to consider structured takeovers of companies in financial difficulties.

   

What are the common deal structures in Malaysia?

Corporate deals in Malaysia can have the structure of a share deal (acquisition of a company) or asset deal (acquisition of a business as a going concern or specific assets).

Currently there is no legal framework in Malaysia governing mergers beyond the already mentioned asset deal in the form of an acquisition of a business as a going concern. Companies in financial difficulties may also be purchased out of a scheme of arrangement by way of a takeover, which means that only the consent of 75 per cent of the shareholders is required for such transaction. Additional regulations apply to deals involving public companies.


How is a share transaction structured in Malaysia?

As Malaysia is a Common Law jurisdiction, the structure of a “share deal” follows the pattern known from England, Singapore and other Common Law countries.

At the beginning of the process, there is usually some preliminary valuation followed by commercial discussions resulting in a Confidentiality and Exclusivity Agreement, followed by a non-binding Term Sheet. The following corporate due diligence usually covers legal, compliance, tax and financial matters. On the basis of the due diligence report, the purchase price is firmed-up and the Share Purchase Agreement (SPA) as well as any ancillary documents negotiated. The SPA is then executed (signing) and – upon satisfaction of any conditions precedent – the shares in the target transferred (completion) followed by the relevant registrations with the Companies Commission of Malaysia.


What are the main tax drivers to be considered?

There is no statutory concept of a merger in Malaysia, and a merger typically involves an acquisition of a business, i.e. its assets and liabilities. When structuring a transfer of business or transfer of assets, from a tax perspective, Income Tax, Capital Gains Tax and Stamp Duty implications should be considered.

The pros and cons of structuring a transaction as a transfer of business or transfer of assets depends on various factors including the tax risks and tax attributes of the target entity. In a transfer of shares, the acquirer may be exposed to the inherent tax liabilities and tax risks of the target. However, in a transfer of business, such tax risks should not exist. In addition, in a transfer of shares, the tax attributes, i.e. unabsorbed tax losses, unutilised tax depreciation, and tax incentives of the target entity will remain with the target entity. In a transfer of business, the tax attributes remain with the target entity and will not be transferred to the acquirer.

Malaysia does not have a comprehensive form of capital gains tax. As such, the transfer of assets and shares can generally be done with minimal tax exposure. However, Malaysia does have a limited form of capital gains tax, known as Real Property Gains Tax (“RPGT”), which is charged on gains arising from the sale of real property, i.e. land and buildings situated in Malaysia or shares in a real property company (“RPC”).

Stamp duty in Malaysia is chargeable based on the instruments executed in a transaction. In a share transfer, stamp duty is payable at the rate of 0.3 per cent on the higher of the consideration paid or market value of the shares. However, in a business transfer, stamp duty ranges from 1 to 3 per cent on the market value of the dutiable property transferred under the instrument.

For the acquirer, transaction costs incurred during the transaction are generally not tax deductible, unless the expenses are incurred for the purchase of trading stock. It is important, where possible, to quantify the tax costs that could be incurred and to minimize any potential tax exposure.


Are there restrictions for foreign direct investment?

Foreign direct investment legislation is generally considered liberal in Malaysia as compared to other countries in Southeast Asia. Restrictions mainly exist in areas considered strategic such as defense, oil and gas or energy. Beyond these areas, restrictions are usually enforced by way of imposing local or “Bumiputera” (Malays or the indigenous people of Malaysia) equity requirements as conditions for licenses required to operate in certain industries.

Main examples here are tour operators, oil and gas, construction, retail and distribution, logistics and certain insurance providers. Local content requirements are also present in public renewable energy tenders. Finally, suppliers of government linked companies are also frequently bound by a qualification procedure which requires Bumiputera equity participation.


Common risks and opportunities when entering the Malaysian market via M&A

Due to the comparatively liberal FDI environment, Malaysia offers plenty of M&A opportunities. Logistics, healthcare and electronics manufacturing are sectors traditionally of interest for foreign investors wishing to acquire a business or company rather than setting up a greenfield investment. Currently, the ongoing Covid-19 pandemic results in valuations being adjusted upwards and downwards, offering opportunities for buyers and sellers alike.

As one can expect, there are also areas to be observed with due caution: real property acquisitions may be subject to state consents, a change of ownership of company may affect the validity of license conditions. The effect of an M&A transaction on financings granted by banks also needs to be considered carefully, as Malaysian banks tend to adopt a comparatively conservative approach to financing risks, in particular when foreign ownership is involved.


Which valuation methods are commonly utilised in the market?

Commonly, depending on the transaction, its size and the relevant industry, three main valuation methods are applied to companies:

  • Market Valuation: This method compares the target company to similar companies that have been sold recently. This method only provides an estimate and a very rough pricing of a company. This method may not be available to smaller businesses and businesses which lack comparative figures.
  • Net Assets Valuation: This valuation method refers to the figures contained in the historical financial statements of the target company. Commonly, the assumptions are verified through the following financial due diligence exercise.
  • Return Of Investment Valuation: This valuation approach is based on the assumptions done in view of potential future profits and market conditions using qualitative measurements like for example the “SWOT Analysis”. Similarly, the Discounted Cash Flow method looks into future cash-flows subject to relevant adjustments.

  

Have any M&A related investment or tax facilitations been enacted in your jurisdiction in light of the current pandemic?

To spur economic recovery through investments, a special tax incentive has been introduced for new companies and existing companies which relocate or set up their manufacturing operations in Malaysia, as well as companies operating in selected services sectors, i.e. companies adapting IR4.0 and digitalisation technology with investments that contribute a significant multiplier effect. Companies meeting the qualifying conditions will be eligible for a 0 to 10 per cent corporate income tax rate for up to 10 years (new companies); or 10 per cent corporate income tax rate for up to 10 years (existing companies with new services segment).

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