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Chapter Objectives After the completion of this chapter you should be able to understand amongst other things: what is a take over? objectives of the takeover application of the takeover code exemptions from the takeover code procedure for takeover what is compulsory takeover and partial takeover what is the prohibited conduct under the takeover code

What is a Takeover?
1.1 A takeover involves a change of control of a company. This occurs when existing shareholders of a large company transfer sufficient shares to an offeror so as to confer on the offeror control of the voting power attaching to the target company's share capital. 1.2 This will be the case where an offeror acquires all or over 50 per cent of the voting shares in the target company. 1.3 Effective control may also be achieved with a lesser shareholding depending on the nature of the shareholding structure.

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Takeovers 1.4 In the case of large companies with thousands of shareholders, many may not actually vote at general meetings so that even a shareholding well below 50 per cent may allow de facto control. 1.5 Takeovers of target companies are usually conducted in one of the following modes: through private treaty or on market share purchases or by a combination of the two; and 1.6 by a general offer to all of the shareholders of the target company.

The consideration for an acquisition of shares sufficient to gain control of the target company is usually cash, but the consideration may comprise shares or debentures in the offeror company or a mixture of cash, shares and debentures.

Sources of Law 1.7 The Malaysian Code on Takeovers and Mergers 1998, enacted under s.33 of the Securities Commission Act 1993 (hereinafter referred to as the SCA) is the principal regulatory framework which lays down the commercial rules and morality in this sphere. 1.8 The Malaysian Code, hereafter "the Takeovers Code", is not legally enforceable but emphasises the spirit of its rules. This raises several contentious issues of policy and the regulations must be seen in the context of the economic and social functions performed by takeovers. 1.9 Takeovers are also regulated by Part IV Division 2 of the SCA, the Takeover Code, Practice Notes, the Guidelines on the Regulation of Acquisition of Assets,

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Takeovers Mergers and Takeovers, or better known as the Foreign Investment Committee Guidelines, hereafter "the FIC Guidelines", and the Listing Requirements of the Kuala Lumpur Stock Exchange, hereafter "the KLSE", where the proposal calls for the takeover of a company which is listed on the KLSE.

Role of the Securities Commission 1.10 The Malaysian Panel on Takeovers and Mergers administered the Takeovers Code until he establishment of the Securities Commission, hereafter "the Commission", in March 1993 under the SCA. In the discharge of its duties, the Commission is guided by the Practice Notes issued by the Panel on Takeovers and Mergers, hereafter "Practice Notes", which sets out how it will exercise its discretion and interpretation of the Takeovers Code, up to the date of the dissolution of the latter


2.1 The Takeovers Code does not aim to prevent takeovers from taking place. The decision on whether or not a bid is accepted is left to the determination of the shareholders of the target company. The purpose of these regulations is to ensure that takeover bids are conducted fairly.


3.1 Section 15(1)(d) of the SCA empowers the Commission "to regulate the takeovers and mergers of companies" and s 33(1) defines a takeover as an acquisition of

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Takeovers shares in a company which, when aggregated with shares already held by the acquirer, would give the acquirer the right to exercise or control the exercise of more than 33 per cent of the voting right of that company. 3.2 The acquirer is defined as the person making the takeover offer whether by himself or herself or through his or her agents, or in concert with others. 3.3 Section 33(1) only applies to the takeover of public companies, whether or not these are listed, although the Commission may, at its discretion, include such private companies as it may determine. 3.4 Notwithstanding the above, Practice Note No 1.2 specifies that the Takeovers Code will be applicable where the target is a private company having shareholders funds or paid up capital in excess of RM10 million, and the purchase consideration is more than RM20 million. 3.5 The Takeovers Code aims to regulate acquisitions of shares in a target company, which effect a change in its control. 3.6 It does this through Code 6 which calls for the making of a mandatory general offer to all shareholders of the company where: an acquirer who has obtained control in a company; an acquirer acquires more than two per cent of the voting shares in a target company within a six month period when such a person already holds more than 33 per cent but less than 50 per cent of the voting rights in that target company. provision. This is often referred to as the "creeping takeover"

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Takeovers 3.7 Section 33(1) of the SCA defines an acquirer as either a person or two or more persons acting in concert with another, who acquire or propose to acquire control in a company whether the acquisition is affected by the person(s) or an agent or two. 3.8 The term "acting in concert" is defined widely in s.33(2) SCA to comprise "persons who, pursuant to an agreement, arrangement or understanding cooperate, through the acquisition by any of them of voting shares in a company or to act for the purposes to obtain or exercise control over that company". 3.9 This definition raises a rebuttable presumption that persons acting in concert may be categorised as: a company, its parent, subsidiaries and associate companies; a related company through common directorships or close relatives and related trusts; a company with any of its pension funds; a person with any investment company, unit trust or other fund whose investments such person manages on a discretionary basis; and a financial adviser, who manages funds on a discretionary basis, with its clients where the aggregate shareholding exceeds 10 per cent the capital of the latter. 3.10 The threshold is set at 33 per cent on the assumption that persons who hold less than this percentage cannot control the affairs of a target company.

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Takeovers 3.11 To lower the threshold would extend the operation of the Takeovers Code to situations where a takeover may only be a remote possibility and regulation would be inappropriate. In NCSC v Consolidated Gold Mining Areas NL


4.1 The Commission is empowered pursuant to s 33C of SCA to grant certain exemptions and waivers, upon the application of the relevant parties, from the obligatory requirement to make a mandatory offer pursuant to section 6 of the Code. 4.2 These circumstances have been clarified through Practice Notes released by the Securities Commission pursuant to s 33A(4) and are generally technical exemptions and waivers, which are based on the assumption that it would not assist the objectives of the Takeovers Code by requiring compliance.

Practice Note No 2.9.1 provides for exemptions if transactions involve new securities 4.3 Exemptions if transactions involve new securities: the issue of new voting shares as consideration for the sale of assets and/or interests would result in the vendor or vendors incurring an obligation to make a mandatory offer for the acquiring company; a person incurs an obligation to make a mandatory offer as a result of cash subscription for new voting shares in a company; or

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Takeovers an underwriter for the issue of new voting shares by a company incurs a mandatory offer obligation as a result of his underwriting obligation; or a person incurs an obligation to make a mandatory offer as a result of acquiring newly issued voting shares for the purpose of restoring his/her voting shares to its previous level and the acquisition of the newly acquired voting shares was from persons who were allotted the voting shares as consideration for the sale of assets by that person. 4.4 Such exemption represent an exercise of discretion on the part of the Commission and will generally not be granted unless the applicant meets the conditions precedent as set out Practise Note 2.9.1(5) which essentially require: that there has been no disqualifying transaction by the person or group of persons acting in concer; and that approval be obtained from the independent shareholders of the target company by way of a poll at a duly convened general meeting. To ensure that the interests of these independent shareholders are protected, and that their votes are cast on an informed basis, the board of the target company is required to appoint an independent adviser to prepare and circularise competent advice to these shareholders in the form as required pursuant to the Practise Note. Both the adviser and the circular must be approved by the Commission.

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Takeovers Practice Note 2.9.2 provides for an exemption if convertible securities are exercised Exemption if convertible securities are exercised: by a person who hold a convertible securities in an offeree, and who has not exercised his right of conversion in relation to the convertible securities, whether in part or otherwise, when he intends to exercise such conversion rights in order to maintain his previous level of voting shares of the offeree which has been diluted as a result of the exercise of conversion by other holders of convertible securities. Such convertible securities held by the person were previously obtained through a rights issue entitlement; The person has not acquired such convertible securities other than by way of his rights issue entitlement; The person and his advisers give a written confirmation to the Commission that the first two requirements have been complied with and the purpose of exercising such conversion is so as to maintain the previous level of voting shares of the offeree.

Practice Note 2.9.3 provides for an exemption if it is a rescue operation 4.5 A person may apply for an exemption where the objective of the acquisition is to rescue the company whose shares are being acquired. 4.6 While the Commission is not bound by any specific criteria and will look at the merits of each individual application in making its determination, the general guidelines would include companies:

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Takeovers the net tangible assets per voting share of the offeree is less than 50% of its par value; the offeree has a gearing ratio which exceeds 3:1; where any rights issue would usually have been under-subscribed; and where the rescue operation is being conducted for the benefit of the offeree. 4.7 To ensure that the case is bona fide, the Commission may require the applicant to establish the above guidelines and the seriousness of the financial position of the company by appointing a competent individual person to compile a report, which is to be attached to the application. The contents of the report are set out in Practise Note 2.9.3(6).

Practice Note 2.9.4 provides for an exemption arising from foreclosure of voting shares 4.8 This exemption deals with instances where a lender to the company has foreclosed on a loan, which is secured, whether in part or otherwise, by shares with voting rights in the company. In such circumstances the Commission would normally grant a waiver should all of the following criteria be met: that the voting shares were not pledged under situations where the lender had reason to believe that foreclosure would be likely; that the lender is able to justify to the Commission that the foreclosure is necessary; and

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Takeovers that the lender undertakes to place voting shares in excess of 33 per cent of the voting shares of the company within a period of six months.

Practice Note 2.9.5 provides for an exemption from a general offer involving placement of securities having voting shares 4.9 This exemption envisages the situation, which arises from the placement of securities having voting rights. 4.10 This may be the result of a corporate restructuring exercise or where the consideration for an acquisition involves the issue of new securities. 4.11 The criteria for a exemption under such circumstances are that the applicant meet all of the following: that the acquisition in excess of 33 per cent is through the issue of new securities; that a firm arrangement, or a firm undertaking in exceptional circumstances, has been effected for the placement of such voting rights in excess of 33 per cent to other non-related parties; and that the deemed offeror declares that he or she is not acting in concert with any of the parties to the proposed transaction. 4.12 Underwriters who end up with securities as a result of a less than fully subscribed public offering are also excluded from the requirement of making a mandatory offer where: their main business is that of underwriting; and

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they undertake to place the securities within a period of six months.

However, the subsequent acquisition of the securities from the underwriter will be subject to s 6 of the Takeover Code.

Practice Note 2.9.6 provides for an exemption if the remaining holders of voting shares of a company have given written undertakings not to accept an offer 4.14 A person may apply for an exemption on the grounds that there are written undertakings by the remaining shareholders of the target company not to accept the offer. 4.15 This would negate the need for the making of a mandatory offer pursuant to s 6 of the Takeover Code but the Commission is only inclined to consider such an application where: The company is an unlisted company; and Where the person holds more than 50% of the voting shares of the company, all the remaining holders of voting shares have provided an undertaking in writing that they do not wish to accept a take-over offer; and Where the person holds less than 50% of the voting shares of the company, the remaining holders of more than 50% of the voting shares of the company, have provided an undertaking in writing that they do not wish to accept a take-over offer; and

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Takeovers Practise Note 2.9.7 provides for an exemption in transactions involving acquisition of additional voting shares by members of a group acting in concert 4.16 This examines transactions where s 6 of the Takeover Code is triggered as a result of the acquisition of additional voting rights by members of a group acting in concert. 4.17 Waivers are unlikely to be granted by the Commission if one or more of the members within that group acting in concert increase their voting rights to more than 50 per cent in the target company. 4.18 In any other circumstance a waiver may be granted after due consideration of:: whether the leader of the group or the largest individual shareholding had changed and whether the balance between the shareholdings in the group had changed significantly; the price paid for the voting rights acquired amounted to a significant premium or not; and the relationship between the persons acting in concert and the duration or period for which they had been so acting.

Practise Note 2.9.8 provides for an exemption in compulsory acquisition 4.19 A person may apply for an exemption from an obligation where the person intends to proceed with compulsory acquisition pursuant to s 180 of the Companies Act.

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Takeovers 4.20 The Commission will only consider such an application where there is a written undertaking given to them that the person would implement a compulsory acquisition under s 180 of the Companies Act.

Practise Note 2.9.9 provides for an exemption based on national policy 4.21 A person may apply for an exemption where the acquisition has been approved by the Foreign Investment Committee (FIC) based on national policy. 4.22 The Commission may grant an exemption for such an application where: approval has been obtained by the FIC prior consultation has been held on the matter with the Commission.

Practise Note 2.9.10 provides for an exemption for holders of voting shares, directors and persons acting in concert when company purchases its own voting shares 4.23 A holder of voting shares who, as a result of a reduction of the voting shares of the company through a buy-back scheme under the Companies Act, has increased his holding of voting shares to more than 33% or, if his existing holding of voting shares is more than 33% but less than 50%, by more than 2% in any 6 month period, will be exempted if the increase in is inadvertent. 4.24 The Commission may grant an exemption if the following procedures have been observed; the holders of the relevant class of voting shares of the offeree must have been provided with competent independent advice regarding the proposal;

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Takeovers the independent advisers circular to holders of the relevant class of voting shares setting out details of the proposal must be consented by the Commission; interested parties must have abstained from voting at that meeting; prior consultation should have been held on the matter with the Commission.


Practise Note 4.6 provides exemption from the full provisions of the Takeover Code 5.1 This Practice Note sets out the mechanism that allows the offeror to seek an exemption from having to comply with the full provisions as set out in the Takeover Code. The Commission will consider the application where: the offer is not regarded as hostile; the application is submitted to the Commission before incurring a general offer obligation; the remaining shareholders are less than 30 in number and carry less than 33% per cent of the voting shares in the offeree company; and the value of the remaining voting rights based on the offer price is less than RM10 million. 5.2 If the Commission agrees to the exemption from the formal offer procedure, the offeror need only undertake the takeover offer through the issue of offer letters that must first be vetted and approved by the Commission.
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Once the Commission gives an exemption, the offeror must post the offer letter to the remaining holders of voting shares of the offeree within 14 days of incurring the takeover obligation.


An exemption under this note does not exempt the offeror from the requirement to appoint an independent adviser in accordance with s 15 of the Takeover Code unless such an exemption has also been granted.


Additional requirements are imposed by the MSEB LR for companies which are listed on the KLSE. These include: the recognition of the importance of maintaining strict and absolute secrecy in order to avoid disturbances in the price level of the shares: s 128; a duty on the part of the board of directors of the target company to notify the KLSE immediately upon the receipt of notice of intention to make a takeover bid: s 129; the requirement to circularise a copy of all documents required by law to an holders of shares subject to the takeover offer: s 130; in the event of an extension of time for the takeover offer, the announcement of the percentage of shares for which the offeror has received acceptances: s 131; the provision to the KLSE of all pertinent information if the result of the takeover is likely to facilitate a "backdoor listing" for the unlisted company: s 132; the submission to the KLSE of a schedule of the company's securities upon completion of the takeover: s 134; and the notification to the KLSE of the offeror's plans and intentions for the target company when the level of acceptances reach 50 per cent: s 135.

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Takeovers 5.6 In order to prevent discrimination between shareholders, takeover offers must be made to each member holding the class of shares sought whether the bidder proposes to acquire all or only a proportion of the shares in the target company. All offers must contain the same terms and conditions and each shareholder must receive a copy of the offer. These principles of equality in the treatment of, and the provision of information to, all shareholders reflect s 13 and 14 of the Takeovers Code. 5.7 Section13(1) of the Takeover Code states that the offeror shall submit the offer document and other information in relation to the take-over offer in such form and manner as the Commission may require for its consent within four days from the date of sending of the written notice. 5.8 Also, the offeror shall disclose in the offer document all such information as the offeree shareholders and their professional advisers would reasonably require, and would reasonably expect to find, in an offer document or for the purpose of making an informed assessment as to the merits of accepting or rejecting the takeover offer and the extent of the risks involved in doing so: s 13(2) of the Takeover Code

6.1 A bidder who becomes entitled to 90 per cent of the shares in a target company may compulsorily acquire the remainder of the shares pursuant to the procedure set out in s 34 SCA. In particular, the offeror must have become entitled to at least 90 per cent of the shares in the company or in the particular class which is the subject of the takeover offer. The offeror must then within two months give prescribed notice of its wish to acquire the outstanding shares held by the dissenting minority shareholder: s 34(1) SCA.

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Where the offeror has given notice to any dissenting shareholder that it desires to acquire his/her shares, the dissenting shareholder may within one month from the date the notice was given, require the offeror to supply him with the names and addresses of all the dissenting shareholders.


The offeror shall not be entitled to acquire the shares of the dissenting shareholders until fourteen days after the posting of the statement of those names and addresses to the dissenting shareholder.


General 7.1 Sections 34 37 of the Takeover Code are of particular significance in the determination of the standards expected of the directors of the offeree company in the course of a takeover. The s 35 states that no action which may lead to the frustration of an offer may be taken by the board where a bona fide offer has been communicated to the company or where it has reason to believe that a bona fide offer is imminent. 7.2 Section 34 of the Takeover Code states that the Board of Directors of the offeree shall give any information provided to the offeror to any other bona fide potential offeror upon request. 7.3 Section 35(1) of the Takeover Code also states that if the board of directors of the offeree has reason to believe that a bona fide takeover offer might be imminent, they shall not without the consent of the shareholders at the general meeting :

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Takeovers issue any authorised but unissued shares of the offeree; issue or grant options in respect any unissued shares of the offeree; create or issue or permit the creation or subscription of any shares of the offeree; sell, dispose of or acquire or agree to sell, dispose of or acquire assets of the offeree of a material amount; or enter into or allow contracts for or on behalf of the offeree to be entered into otherwise than in the ordinary course of business of the offeree. 7.4 However, s 35(2) of the Takeover Code provides an exemption where the same was done pursuant to a bona fide contract entered into prior to an obligation under subsection (1) arising and was not to frustrate a takeover offer or pursuant to some other obligation or special circumstances which the Commission may approve in writing. 7.5 The directors of the offeree company are, at minimum, required to be honest and not to mislead their shareholders in the course of a takeover. 7.6 Expenses may be incurred in the course of a takeover and where the offer is not friendly or solicited, such expenditure may be fairly considerable as the directors implement measures to ward off the takeover bid. Such expenses are regarded as bona fide corporate expenses if the directors are of the opinion that these were necessarily incurred in the interests of the company: Peel v London and North Western Railway Co [1907] 1 Ch 5.

Appointment of independent advisers 7.7 The board of the offeree company must obtain competent independent advice on any offer and the substance of such objective advice must be made available to its shareholders: s 15 of the Takeover Code. Persons who are qualified to provide

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Takeovers such competent advice are either merchant bankers or approved company auditors. 7.8 However, persons who are faced with actual or potential conflicts of interest are deemed inappropriate to tender such advice as they are not regarded as being independent. Section 15(8) of the Takeover Code and Practice Note No 4.3 clarifies the position with respect to such advisers and specifically requires the offeree company to have the appointment of their independent advisers confirmed by the Commission prior to their assuming office.

Preparation of documents 7.9 Section 12(1)of the Takeover Code states that a person who intends or proposes to make a take-over offer for the voting shares of a company shall immediately announce the fact of the proposed offer by a press notice. 7.10 In the case of a voluntary offer, the person referred to in section12 (1) of the Takeover Code and an acquirer who has obtained control in a company, or an acquirer who holds more than 33% but less than 50% of the voting rights of a company who has acquired in any period of six months more than 2% of the voting shares of the company shall send a written notice to the board of directors of the company or an adviser designated by the board of directors of the company; the relevant stock exchange, if the securities of the company or the voting shares are listed on the relevant stock exchange; and the Commission.

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Takeovers 7.11 Section 38 of the Takeover Code states that no person shall: provide false or misleading information;or provide or cause to be provided any document which contains a material omission; or engage in misleading or deceptive conduct, to the holders of voting shares or their professional advisers. 7.12 It is a defence if the person had: reasonable grounds to believe and did believe that the information was true and not misleading or the omission was not material or contains no material omission or the conduct in question was not misleading or deceptive; or when the person became aware of the false or misleading statement or the material omission or contains a material omission or the conduct in question was deceptive immediately disclosed the fact to the Commission, stock exchange if listed and make an announcement by way of a press notice containing such matters as are necessary to correct the false or misleading matter, the omission or conduct as the case may be. 7.13 The key requirement is that the information, whether in the form of facts stated or opinions expressed, be fair and accurate and include all material facts to enable the shareholders to make an informed decision as to whether or not to accept the offer. 7.14 The directors are under a duty to take reasonable care to ensure that this is achieved whether the same is completed by himself or herself, or by his or her authorised representatives.

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8.1 Offerors may not always want to acquire all the shares of the target company but may seek to acquire only a sufficient proportion of the offeree company's shares to enable them to gain control. 8.2 For example, an offeror may seek to acquire only 51 per cent or perhaps a lesser percentage of shares. This type of bid is called a partial takeover. From the offeror's point of view a partial takeover presents an important advantage in that the offeror gains control of the target company while having to outlay an amount considerably less than would be the case with a full takeover. 8.3 A partial takeover can only occur with the express consent of the Commission: s 11(1) of the Takeover Code. 8.4 Section 11(2) of the Takeover Code allows the offeror to bid for a percentage of the offeree company's shares with the consent of the Commission. 8.5 Each shareholder must be allowed to accept in full for the relevant proportion of his or her shareholding and where the number of shares tendered exceeds this proportion, they must be scaled down rateably. 8.6 The Commission has imposed stringent conditions for partial offers, probably as an indication of its aversion to the same, and explains why such offers are uncommon. The conditions differ and depend on the possible result of the partial offers: 8.7 An offeror in a partial offer who has obtained the level of acceptances specified in the take-over offer or any person acting in concert with such offeror shall not acquire any voting shares that had been the subject of the take-over offer during the period of twelve months beginning from the end of the offer period unless

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Takeovers otherwise approved by the Commission in writing: section 11(6) of the Takeover Code. 8.8 However, where the result would be the offeror holding more than 33 per cent but less than 100 per cent of any class of voting shares of the offeree, the offeror shall in addition to the requirements of section11 (7) Takeover Code, ensure that the offer document contains a condition that the offeror shall not make a declaration that the take-over offer is successful unless the offeror has received a vote of approval of the take-over offer by offeree shareholders holding more than 50% of such class of voting shares of the offeree: s 11(8) Takeover Code. 8.9 However, the Commission may exempt any person from the requirement under s 11(8) Takeover Code if one offeree shareholder holding more than 50% of such class of voting shares has accepted the take-over offer: s 11(9) Takeover Code.


9.1 Section 35 of the Takeover Code sets out certain actions which the board of the offeree company may not undertake of its own volition without the prior approval of the shareholders at a general meeting when it is in receipt of a takeover offer, or where it has reason to believe that such an offer is imminent or during the course of the offer. These prohibitions are aimed at preventing the board from unilaterally frustrating the offer and include: the issue of any authorised but unissued shares; the issue or grants of options in respect of unissued shares; the creation or issue or the permission for the creation or issue of any securities carrying the right of conversion into or subscription for shares of the company;
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the entry into contracts other than in the ordinary course of business; and the sale, disposal or acquisition, or an agreement thereto, of assets of material amount.


In examining various defensive schemes, the NCSC Report distinguished between defensive tactics and defensive strategies. Tactics are measures adopted to While takeovers are not as combat a hostile bid which has been made or is thought imminent. Strategies are intended to discourage bids being made at all. tactics: Branding the bid inadequate Criticising the offeror common in Malaysia, the following are some of the more common defensive


Offeree company directors should ensure that their criticism does not involve a misleading statement. This is reflected in part by s 38 of the Takeover Code. Releasing favourable information


This may breach s 16 of the Takeover Code where it constitutes a profit forecast or revaluation of assets without undertaking the proper procedures. The release of such information may have adverse results later for offeree company directors where shareholders' expectations are raised and these ultimately prove to be unfounded. This may increase the likelihood of a successful, later bid. Bonus issues and higher dividends


The threat of takeover has often caused companies to declare higher dividends as a means of increasing shareholder loyalty. While this may not be for the longterm benefit of the company, it is a management decision that shareholders may

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Takeovers take into account in their judgment of the directors. It is generally inappropriate for the courts or the Commission to interfere with such decisions.

"Friendly" takeover 9.6 The offeree company directors may actively foster an auction in the face of a hostile bid or the first bid may attract a rival bidder, which the directors regard as more attractive. This may be of benefit to shareholders, especially where they receive a higher price from a "white knight".


10.1 The importance of the Foreign Investment Committee, hereafter "the FIC" is highlighted in Part III, Rule 9.1(a) of the Takeovers Code which states: " Where an offer comes within the 'Guidelines for the Regulation of Acquisition of Assets, Mergers and Takeovers' it should be a condition of the offer that it should lapse in the event of the FIC not giving its approval." 10.2 While the government actively pursues and recognises the role of private foreign investment in the development of Malaysia, it is nonetheless conscious of the need to preserve national interests. To this end, the government formulated and released the guidelines referred to in Rule 9.1(a) above, better known as "the FIC Guidelines", in 1974 10.3 The principal concern of the government at that time was that unregulated takeovers would result in greater concentration of wealth in the hands of a minority and the increased imbalance in ownership and control.

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