Financial sponsors have been very active in the Malaysian market in recent years with interest concentrated primarily in the consumer-focused sectors (such as retail, healthcare and education), digital infrastructure and industrials. For example, 2 of the largest announced deals in Q4 of 2023 in Malaysia are sponsor backed namely the US$1.3bn acquisition of Ramsay Sime Darby Healthcare by TPG-backed Columbia Asia Healthcare and KKR’s US$400mn investment into OMS Group, a Malaysian subsea cable installer. Other notable large-cap sponsor backed deals in the last 24 months (as reported by Mergermarket) include Digital Bridge’s US$438mn acquisition of a majority stake in AIMS Asia Group, a Malaysian data center operator, CVC’s acquisition of asset manager Affin Hwang Asset Management for US$367mn and the secondaries transaction between a consortium led by TPG’s Rise Fund and KV Asia Capital for the sale of the APIIT Education Group.

De-risking is a key priority in a deal where a financial sponsor is a seller. It is increasingly common for deals are typically structured at the outset on a nil recourse basis with W&I stapled with the aim to provide the financial sponsor with as clean an exit as possible. There is also a greater emphasis on deal certainty and deal execution resulting in very limited conditionality or exit rights in favour of the buyer. Consideration mechanisms are also typically more complex compared to deals involving trade sellers with PE sellers favouring locked-box mechanisms where appropriate for pricing certainty.

A transfer of shares of a Malaysian company must be effected through a statutory share transfer from which is typically delivered by the seller to the buyer on completion of the SPA. A person can only be entered into the register of members of a Malaysian company upon presentation of a duly stamped and executed share transfer form.

Stamp duty is payable on the share transfer form at a rate of 0.3% of the consideration price or market value of the shares (calculated based on the net tangible assets value). Post-completion, the share transfer form must be submitted to the stamp office for adjudication and assessment of stamp duty. The stamp duty must be paid within 30 days from the date of the notice of assessment issued by the stamp office. This process typically takes between 4-6 weeks.

In respect of shares listed on Bursa Malaysia Securities Berhad (the Malaysian stock exchange), the stamp duty is RM1.50 for every RM1,000 or any fraction thereof based on the transaction value.  However, stamp duty in excess of 0.1% is remitted for instruments of contract notes executed on or before 13 July 2023 until 12 July 2028, with maximum stamp duty payable of RM1,000 per contract note.

Based on the draft Finance Bill (which has yet to be passed as of 28 November 2023), a new capital gains tax (“CGT“) will be imposed from 1 January 2024 on any gains or profits form the disposal of a capital asset situated in Malaysia which includes the disposal of unlisted shares of a Malaysian company or the shares of a controlled company incorporated outside of Malaysia where more than 75% of the value of the foreign company’s total tangible assets comprise of real property situated in Malaysia or shares of another controlled company. The CGT rate for capital assets acquired prior to 1 January 2024 is either 10% of the chargeable income from the disposal of the capital asset or 2% of the gross on the disposal price of the capital asset. For capital assets acquired after 1 January 2024, the CGT rate is 10% of the chargeable income from the disposal of the capital asset or 2% of the gross on the disposal price of the capital asset.

PE buyers are typically not able to provide any form of fund guarantees. It is therefore common for a PE buyer to provide an equity commitment letter (ECL) to provide assurance to the seller that the purchasing entity will be funded. If the purchase price is being funded through a combination of equity and debt financing, then the ECL will typically be accompanied by an executed debt commitment letter (DCL) from the purchasing entity’s financiers.

Locked box pricing mechanisms are less common than conventional purchase price true-up mechanisms but are sometimes used (particularly by financial sponsors) if the transaction is not in a regulated industry and the period from signing to closing is relatively short. It is common in the Malaysian context for deals in regulated sectors (such as retail, education, financial services) to have a substantial period between signing and closing (between 3 – 9 months) to account for the need to obtain regulatory approvals. Depending on the nature of the target’s business and the deal structure, a locked box mechanism may also not be appropriate. For example, if there is a lack of reliable financial history of the target for verifying assumptions in the locked box accounts or if the transaction requires a reorganisation or is part of a carve-out after the locked box date.

A locked box is most likely to be used in an auction process and generally only by financial sponsor led deals as a means to offer sellers greater certainty over the equity value. In particular, in an auction process, a locked box mechanism allows greater comparability of bids because each bidder would be required to submit the equity price it is ultimately willing to pay, with no uncertainty arising in terms of having to make post-completion adjustments.

Business operational risk is typically allocated between a buyer and seller through pre-completion covenants, warranties and indemnities (backed by W&I). Specific indemnities for known issues are common but typically only accepted for material issues and materiality is commonly tied to the de minimis or basket thresholds.

Common deal execution risk mechanisms relate to availability of walk-away rights such as conditions precedents (CPs), material adverse change (MAC) clauses and material breach clauses. It is increasingly uncommon to see aggressive walk-away rights such as MACs or operational CPs in competitive processes apart from the requirement for mandatory regulatory approvals or rectification of ESG related issues.

W&I is commonly used in the financial sponsor backed exits and this trend is increasingly adopted by corporate sellers to facilitate a clean exit. This trend has been accelerated by the entry of new insurers to the Malaysian market and decreasing premiums over the past 5 years. Key issues are the availability of cover for small-cap deals and jurisdiction specific exclusions.

It is common for most auctions processes to have W&I stapled at the outset through the “sell-buy-flip” process (i.e. where the seller initially engages a W&I broker to procure indicative pricing and coverage terms which is then flipped to the preferred bidder) and consequently premiums are priced in upfront. We also see an increasing interest in specific tax insurance and pre-closing breach cover.

Take-private activity involving financial sponsors is generally tepid in the Malaysian market and the majority of recent privatization exercises have been undertaken by Malaysian corporates or Government-linked companies. Notable and recent take-privates in Malaysia involving financial sponsors include the privatisation of food producer and distributor Yee Lee Corp. Bhd. led by Dymon Asia Private Equity.

There is no single overriding legislation or regulation, nor regulatory body that oversees or imposes foreign investment screening procedures or restrictions in Malaysia. The investment landscape in Malaysia is generally open to foreign investment, save and except for certain sectors and/or industries. Accordingly, foreign investment restrictions and/or requirements are generally sector-specific, regulated through regulatory licences, registrations, approvals and/or permits issued or administered by the relevant sectoral regulators or governmental agencies.

The regulatory oversight over M&A activities in these sectors where foreign investment restrictions apply, are typically triggered by the following circumstances with respect to the M&A target holding the licence(s) / approval(s) issued by the regulators:

• Direct and/or indirect majority share transfer;
• Direct and/or indirect minority share transfer;
• Asset / business transfer;
• Change of composition / control of the board of directors of the target.

At present, there is no merger control regime for general M&A activities in Malaysia, save and except for specific industries (i.e. aviation service industry, and the telecommunications industry). The regulator, the Malaysian Competition Commission (MyCC), are in the process of undertaking and completing public consultation on proposed amendments to the Malaysian Competition Act, to introduce and include a merger control regime, and to increase MyCC’s investigation and enforcement powers. The proposed amendments will need to be finalised and proposed to the Parliament, and subject to the Parliament passing the proposed amendments, the merger control regime will come into effect, with a one year transition period.

For deals which require foreign merger control filings, these are typically dealt with as a condition precedent to closing but it is increasingly common for  Sellers to ask for ‘hell or high water’ obligations (i.e. a divestiture obligation financial sponsor’s portfolio and the target group) from buyers to ensure deal certainty.

Minority growth investments are increasingly common, typically structured as pre-IPO investments with an investment timeline of 2-3 years. In Malaysia, there are securities restrictions and obligations on the use of pure debt-type instruments so these investments tend to take the form of a equity or quasi-equity instruments with debt features.

Continuation fund transaction involving for Malaysian GPs are not common but are being increasingly considered in light of the tight funding and exit environment.

The most common type of management inventive scheme are employee share option schemes where share options are granted to senior management subject to key performance indicators being met. These schemes can take the form of actual shares or phantom equity (where participants enjoy the economic benefits equivalent to a shareholder) depending on tax structuring considerations. Vesting periods commonly spread out over the investment period or in some instances, vesting is only achieved at the point of exit for the financial sponsor. Participants will be subject to good leaver and bad leaver provisions. Transfers of shares are restricted and the financial sponsor will have full drag rights on exit.

The level of equity ownership granted to a management team will vary based on the size of the portfolio company, industry, role of the management team, financial sponsor’s strategy and negotiation between the parties. In general, management team will typically receive a minority equity stake in the range of 5-10%. The stake might increase depending on the achievement of specific financial or performance targets of the portfolio company over time.

The focus of tax structuring would predominantly center around the classification of the share options as either capital or income for the participants. Generally, income tax is assessable (at an individual marginal tax rate of up to 30%) at the point where the share options are exercised and will be based on the market value of the shares. Future disposals will also be subject to the new capital gains regime from 1 January 2024.

Restrictive covenants such as non-compete and non-solicitation of employee provisions are fairly common and typically imposed on management shareholders. Such provisions are usually featured in Shareholders Agreements and/or Employment Agreements. However post-termination non-compete provisions (i.e. after the management shareholder has exited the portfolio company via the sale of his shares in the company and resignation from his executive role in the company) are generally not enforceable in Malaysia.

If the financial sponsor is the majority shareholder, it will typically have control over the board of directors and operational decisions. It is also common to have formal delegation of authority (typically in the form of a board resolution) from the board to management. Any minority rights will be set out in a shareholders’ agreement.

If the financial sponsor is a significant minority shareholder, it will have board representation and extensive reserve matter rights over matters such as key management appointments, the annual budget, major acquisitions etc.. The shareholders’ agreement will also set out clear plans for exit and control/influence rights for the financial sponsor in this regard.

Management pooling vehicles are not uncommon if there will be a large number of employee shareholders and is typically preferred to allow for ease of exit/rollover.

Small and medium financings are typically structured with equity funding from shareholders and such financing would typically be in the form of bilateral facility granted by a single lender.

Large financings would typically involve senior secured debt comprising syndicated financing facilities to the acquiring vehicle to finance the acquisition and working capital facilities to the target company and/or its operating companies. Quite commonly, due to timing and deal confidentiality reasons, a bridging loan is put into place which is then refinanced by a longer term syndication financing after the completion of the acquisition.

The Malaysian Companies Act prohibits a company from giving any financial assistance, whether directly or indirectly for the purpose of or in connection with a purchase or subscription of any shares in the company or its holding company.

There are ‘whitewash’ procedures that can be undertaken in accordance with the Malaysian Companies Act to facilitate debt financing arrangements but one of the conditions to the procedures is that the financial assistance that has not been repaid does not exceed 10% of the aggregate amount received by the company in respect of the issue of shares and reserves of the company (i.e. shareholders’ funds) based on the most recent financial statements of the company. The quantum of the threshold to a large extent negates the commercial value of the financial assistance provided.

With such financial assistance prohibition, no security can be provided by the target company or any of its subsidiaries to secure the acquisition financing. The banks would usually be secured against security provided by the acquiring vehicle which includes the shares of the target company and sponsor credit support.

There is no standard form of credit agreement but it is common for the form of facilities agreements published by the Asia Pacific Loan Market Association is adopted as the base. The level of negotiation involved would depend on the parties involved vis a vis the identity of the borrower and its sponsors, the number of lenders and their respective requirements, and the complexity of the financing.

The key areas of negotiation are typically centred around flexibility given to the target and its group to continue its business operations, financial covenants, the potential expansion and future investments requirements, transferability of loan participation by the lenders and permitted carve outs on restrictions imposed.

There continues to be interest from debt funds but in view of the strict restrictions on unlicensed money lending activities, debt funds lending at the senior level is uncommon for high profile large-cap transactions.