Mergers & Acquisitions Law Guide 2013/14

Mergers & Acquisitions Law Guide 2013/14

from LexisNexisThe 1st Annual Guide to Practicing M&A Law in Asia

Mergers &

Acquisitions Law

Guide 20

13/14

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Mergers & Acquisitions Law Guide 2013/14

from LexisNexisThe 1st Annual Guide to Practicing M&A Law in Asia

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Foreword

On behalf of LexisNexis, it is with great pleasure that we are publishing the Mergers & Acquisitions Law Guide 2013/14. This is not only our inaugural edition on this topic; it is the first in an exciting new series of Law Guides we are commencing this year.

Mergers and acquisitions very often are marked as defining moments in a corporation’s history. Furthermore, mergers and acquisitions are unquestionably on the rise in the Asia-Pacific region, with the volume, size and complexity of the deals increasing substantially in recent years. Knowing the M&A laws and regulations, and their implications, can have a crucial bearing on the success or failure of a merger or acquisition, particularly if they are being undertaken in an unfamiliar jurisdiction. By publishing this Guide, we aim to help legal practitioners and companies preparing for mergers or acquisitions to understand what needs to be done at different stages and to gain control of the process – all in a single source and covering major jurisdictions in the Asia-Pacific region.

The Mergers & Acquisitions Law Guide 2013/14 brings a comprehensive review and analysis on the current laws and regulations that govern mergers and acquisitions across the Asia-Pacific region. We have structured the book into two key sections. The Q&A section of the Guide provides a consistent set of questions and answers about general M&A practices across twelve jurisdictions in the region. The Specialist Articles section includes three articles delving deeper into the issues that Chinese enterprises face as they expand their activities across the globe, recent developments in Japan’s insider trading regulations in the context of M&As, and Switzerland’s growing prospects in Asia.

My thanks to all of the law firms who participated by contributing their excellent and informative chapters for this publication. We look forward to hearing your feedback on this Guide, and bringing you more Law Guides on topics we hope will be equally relevant to your needs in the very near future.

Yours sincerely,

Shawn ClarkCEO Asia, LexisNexis

LexisNexis(A division of Reed Elsevier (Greater China) Ltd)3901, 39/F, Hopewell Centre,183 Queen’s Road East, Hong KongTel: (852) 2965 1400Fax: (852) 2976 0804Website: www.lexisnexis.com.hk

The contents of this publication are for general information purposes only and should not be construed as legal advice.The publishers, editors, contributors and endorsers of this publication each excludes liability for loss suffered by any person resulting in any way from the use of, or reliance on, this publication. The laws and regulations stated in this volume is in general of that in force, unless otherwise stated, on 10 July 2013 and later developments will be noted wherever possible.

LexisNexis, a division of Reed Elsevier (Greater China) Limited, provides authoritative information to legal, corporate, government and academic markets, and publishes legal, tax, regulatory and other information, via online and print formats, conferences and trainings and custom publishing.

Associate Director: Ivan YapHead of Business Development: Vincent LeeManaging Editor: Bruce AndrewsEditors: Chandranie, Wong Yuk YinDesign & Production: Helen NgBusiness Development Manager: Jon MartinTel: (852) 2965 1473 E-mail: [email protected]

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Contents

Specialist Articles

Challenges and Solutions on the Road to the Globalisation of Chinese Multinationals – Towers Watson ......................................................

Growing Asian Prospects – Bär & Karrer AG ................................................

Recent Developments in Japanese Insider Trading Regulations in the Context of M&A – Nagashima Ohno & Tsunematsu .......................................

Q&A Country Chapters

Australia: Corrs Chambers Westgarth ............................................................

China: King & Wood Mallesons .......................................................................

Hong Kong: Winston & Strawn ........................................................................

India: Amarchand & Mangaldas & Suresh A. Shroff & Co. ...............................

Indonesia: Tumbuan & Partners ......................................................................

Japan: Anderson Mori & Tomotsune ................................................................

Korea: Lee & Ko ..............................................................................................

Malaysia: Shearn Delamore & Co. ..................................................................

Myanmar: Kelvin Chia Yangon Ltd. ..................................................................

Taiwan: Baker & McKenzie ..............................................................................

Thailand: Weerawong, Chinnavat & Peangpanor Ltd. ....................................

Vietnam: VB Law .............................................................................................

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Specialist Articles

Largest local legal content collection on a single platform, one-click away.



You need legal information fast and you want the most up-to-date and reliable sources you can get your hands on. Lexis® HK offers the largest collection of legal content in the form of commentaries, cases, legislation and forms covering Hong Kong, as well as key overseas jurisdictions on a single platform. All available in the most intuitive and friendly online environment.

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Lexis HK®

What Lexis HK brings to you:®

Better research empowered by the largest local legal content• Hong Kong cases since 1946, cross-referenced to other authoritative major works by LexisNexis• 24/7 access to the must-have information for your legal research - Halsbury’s Laws of Hong Kong, the Annotated Ordinances of Hong Kong, Atkin’s Court Forms Hong Kong and many more• Parallel citations to other law reports

Faster workflow enabled by smarter search and alert functions• Basic and narrow search query function in English and Chinese• Daily case alert to keep you updated on new cases of your practice area(s)

Streamlined process with more smart tools• Downloadable court-ready documents and law reports with expanded case coverage in PDF format• Advanced hyperlinking within sources• Fillable word forms in electronic format

CaseBase Hong Kong tool• Provides case histories analysis and shortcuts to cases connected by the doctrine of precedent

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SPECIALIST ARTICLEChallenges and Solutions onthe Road to the Globalisation of Chinese MultinationalsTowers Watson

Recently, the United States, Germany and Japan have seen a spate of inbound M&A transactions with most of the buyers being Chinese enterprises in the manufacturing industry, which is in desperate need of upgrading. This phenomenon tells us a few things: First of all, we can assume that global industrial transfer has reached its peak; second, many industries in the US and Europe are hard-pressed for capital following the 2008 financial crisis, leading to numerous opportunities for M&A deals; and lastly, the external appreciation and internal depreciation of the Renminbi has simultaneously put pressure on and empowered Chinese enterprises to expand their businesses overseas.

In this paper, we will discuss the expansion of Chinese companies in more detail, including the challenges they face on the route to globalisation and the learnings they can take away, with a particular focus on human capital.

In our experience, we have found that the importance of the “people” aspect in acquisitions is often underestimated by Asian organisations — and Chinese companies are no different. We have identified the roadblocks that Chinese organisations may face and divided them into eight main headings:

1. Hiring and Retaining Key Talent

2. Underestimating the Importance of HR Due Diligence

3. Differences in Culture/Management Style

4. Differences in National Cultures

5. Power of Overseas Labour Unions

6. Mobility Difficulties

7. Difficulty in Attaining Core Technology

I. The Goals of Chinese Outbound M&AThe challenges faced by Chinese companies as they expand abroad will depend to a large extent on the reasons for expansion. The Towers Watson 2012 Asian Trailblazers study found that the most prevalent reason for Asian expansion (Figure 1 below) was to be close to key markets, cited by 63 per cent of respondents.

LEXISNEXIS MERGERS & ACQUISITIONS LAW GUIDE 2013/14

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In our experience, Chinese companies have three main reasons for expansion:

1. To acquire advanced branding and technology. A common reason for expansion for Chinese organisations is to obtain key technologies and branding resources from targets with a strong industrial foundation and excellent brand image. One example is Shanghai-based Fosun International’s acquisition of the Greek jewellery and luxury goods retailer Folli Follie Group.

2. To facilitate industrial upgrading. While the Chinese government has been pushing for industrial upgrading, the domestic manufacturing industry cannot undergo these processes without external assistance.

3. Secure access to natural resources. This type of M&A often takes place between developing countries and state-owned resource enterprises, such as the China National Offshore Oil Corporation and the China National Petroleum Corporation. People aspects play a lesser role in resource deals and as such they are out of the scope of this discussion.

II. Challenges Chinese Companies Face in Outbound M&A DealsChallenge 1: Hiring and Retaining Key TalentWhatever the goal of a merger or acquisition – whether to tap into global markets or gain access to advanced technologies and management know-how – the success of the deal will depend largely on having experienced professionals with the organisation’s vision in mind to guide it on its way. Acquiring companies overseas is not like setting up new factories in a foreign country, where everything can be built from scratch. In most cases, the target company will have an existing culture and processes that need to be integrated into the new entity. So having experienced management that can handle these delicate issues becomes of great importance, especially for companies in the knowledge industry.

Chinese organisations can face a number of difficulties on this front: China’s current labour market does not provide sufficient numbers of management personnel or professionals experienced in international negotiations and integration. This often means that deal makers do not have the resources to perform thorough pre-

Figure 1. Key reasons for Asian multinationals to enter new markets

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(% of respondents)*

* Responses do not total 100% because some respondents chose multiple categories

0% 10% 20% 30% 40% 50% 60% 70%

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26

28

37

46

To be close to key markets

To remain competitive

Gain expertise and special skills

Access cheap labour

To integrate value chain

Access raw materials

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Source: 2012 Towers Watson Asian Trailblazers survey report.

CHALLENGES AND SOLUTIONS ON THE ROAD TOTHE GLOBALISATION OF CHINESE MULTINATIONALS

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negotiation research and can underestimate the difficulty of a deal. The problem also persists after the deal has closed, as organisations may fall short of the labour needed to run the target company and integrate resources post-deal.

A survey conducted by the China Council of the Promotion of International Trade and Peking University showed that 75 per cent of respondents believe that lack of experienced international talent is the biggest obstacle for their global expansion. When TCL Communication Technology Holdings entered into a joint venture with Alcatel in 2004, company chairman Li Dongsheng launched a global recruitment drive to find an international assistant. However, ultimately, this position could not be filled suitably, paving the way for the failure of the joint venture.

In another example, when acquiring Korean Ssangyong Motors in 2005, SAIC did not have any Korean-speaking personnel. Although SAIC retained the original management team from Ssangyong, there existed a gap in cultural communication between the two sides, which added to the incessant troubles following the acquisition.

If enterprises decide to globalise in the next few years, it is suggested that they learn from other multinational corporations’ best practices, for instance, taking English as a second official language, as Danone, Rakuten and Uniqlo have done. Rakuten’s president Mikitani Hiroshi even declared that if critical position employees can’t speak English after two years on board, they may not work in the organisation long. This might be

a bit difficult for many Chinese companies, but many can take first steps in this direction by asking their employees (at least at the top management level) to work in two languages. In doing so, they may avoid problems associated with ineffective communication during an overseas labour dispute or other conflict.

Other steps to consider to enhance in-house talent include:

■ Developing a global recruitment process for expatriate executives. Some large multinational corporations such as Nissan and Sony develop their global business through recruiting non-Japanese executives.

■ A plan to cultivate the organisation’s talent pool through global rotation schemes and multi-language training. For example, because of its global rotation training scheme, two-thirds of Komatsu’s executives have overseas working experience.

Hiring new employees is one part of the equation. Another, particularly when acquiring a company for its management know-how or technological processes, is to retain the employees of the acquired company. This is also crucial to keep some continuity, so that the deal does not become too disruptive and the new entity can begin to operate normally as soon as possible.

Towers Watson research has found that in successful deals, key talent for retention is identified early in the deal cycle (Figure 2 below).


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Figure 2. Successful companies identify key employees to retain early in the process

23-point spread 13-point spread

* “Successful at retention” is defi ned as those rating their retention agreements highly or mostly effective at retaining employees during an acquisition and retaining all or nearly all of their employees through the retention period in past acquisitions.Source: 2012 Towers Watson M&A Employee Retention Study.

In light of this fi nding, it is troubling to note that Asian employers identify talent to retain later in the life cycle of a deal than do their global counterparts (Figure 3 below). Given the importance of key

talent retention in the success of a deal, this could have the potential to put Asia Pacifi c employers at a signifi cant disadvantage.

Source: 2012 Towers Watson M&A Employee Retention Study.

Figure 3. Stage at which global acquirers identify talent to retain


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In March 2011, China-based Australia Dairy Corp announced it would acquire stakes in Hyproca Dairy, marking the first M&A deal between a Chinese dairy company and a foreign milk powder enterprise. Learning that many employees at Hyproca Dairy intended to resign, Chen Yuanrong, chief executive officer of Australia Dairy, promised them not to change the original management model, not to transfer Chinese employees over and not to close down the factory after the acquisition – the ‘three no’s’ approach. Together with the rollout of an incentive program to provide employee with stock options, the Chinese company successfully retained certain key employees, which helped to smooth over this often turbulent transitional M&A stage.

Towers Watson viewWe recommend the following principles to maximise retention after a deal:

1. Identify retention candidates early. This means at or before due diligence, when feasible.

2. Combine monetary incentives with relationship-building activities.

3. Establish principles to guide deal-related decisions – and adhere to these principles.

4. When it comes to retention, after the key talent to be retained has been identified, the following six steps are recommended:

Table 1. Six steps to an effective talent retention program

Short-term

Step 1:Short-term retention plan

A competitive talent retention plan to retain key talent in the critical first one to three years of the new company can be a strong start, and avoid immediate ‘regret’ turnover.

Step 2:Link to executive contracts

Tie separation clauses and relevant compensation into executive contracts, eg, confidentiality, non-solicitation, non-compete, change-in-control clauses, etc. This may serve the purpose of protecting both the company and individuals.

Medium-term

Step 3:Design organisational structureand new job roles

Design the new organisational structure, and job roles that articulate the responsibilities of each management position, level of autonomy, and influence to the business.

Step 4:New long-term incentive plan

At this stage, design a long-term incentive plan to align top managers’ personal interests with the company’s future success.

Step 5:New reward system

Design a new reward system, to make sure the external market competitiveness as well as the internal business are in alignment.

Long-termStep 6:Development opportunities

Prepare clear career development roadmaps for key talent that match with the company’s business strategy and drivers of the M&A deal.


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Lastly, it’s always important to bear in mind what the deal drivers are when planning retention, eg, if the deal driver is to acquire advanced technology, then retaining R&D people will be critical, and if acquiring brand is the main purpose for this deal, then retaining marketing, customer services, and a sales force will be key, and so on. Of course, top management is normally high on companies’ retention lists as they play important roles in stabilising the workforce, ensuring business continues as usual, and maintaining key customer relationships. However, some companies may consider excluding individuals from this group who opposed the deal, as they may be reluctant to change and become obstacles to the new company’s vision and goals.

Challenge 2: Underestimating the Importance of HR Due DiligenceThe importance of HR is often underestimated by Asian organisations, and Chinese companies are no different. Assessing possible people risks is often thought of as ‘soft’, but a failure to do so could result in a large amount of ‘hard’ financial losses.

An example is TCL’s acquisition of the French electronics firm Thompson. Initially, TCL leadership planned to selectively retain employees according to their M&A goals; however, in France, the law protects the disadvantaged, so that companies cannot easily lay off old, sick or disabled employees. In consequence, TCL would have had to let go mostly young workers – instead, they chose to let go all employees and then hired back those they wanted to retain. TCL paid a total of €270 million in various fees, a majority of which were settlement payments for dismissed employees. This had not been foreseen in the initial stages of the acquisition and so was a completely unexpected cost.

Pension liability is another important area that is often overlooked during the due diligence stage.

Many Western companies often have defined benefit (DB) retirement plans, which promise employees a predefined amount of payments on retirement. These plans are not often seen in Chinese companies, and their risks can easily be underestimated while doing overseas deals. It is essential to first ensure that the company’s accounting books accurately disclose these plans’ future pension obligations, and then to ascertain that there are enough assets set aside to cover these obligations. In many cases, pension liabilities are substantial, and should be taken into pricing considerations. For example, when GM filed Chapter 11 in 2008, its pension liability amounted to US$20 billion.

Total reward is also an important human resource topic to identify early. Western enterprises’ pay philosophy and salary structure can be very different from Chinese buyers. The Lenovo Group’s acquisition of IBM’s personal computer business is a good example: before the acquisition, the base salary of IBM employees was much higher than that of Lenovo employees. Re-levelling would be difficult as a cut in salaries would have retention implications for IBM staff, and raising Lenovo staff salaries would incur enormous labour costs. By better understanding the potential talent risks during the due diligence stage, the acquirer will be in a stronger position to assess financial impact and barriers for future possible integration.

Another example is the ‘change-in-control’ indemnity. Western companies often offer their top executives a ‘change-in-control’ severance agreement so that in case of a major change of controlling power (such as being acquired), those executives may be compensated with a large amount of cash, stock or other related benefits. For many Chinese companies, such a benefit is rare. If these contracts are not thoroughly reviewed at the due diligence stage, the buyer may have to pay a huge amount of severance pay after the acquisition. A good example is when Google acquired Motorola


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Mobility, the ex-CEO Sanjay Jha received compensation amounting to US$66 million.

Towers Watson viewTowers Watson suggests that the HR function should be involved early on in the acquisition process and play a key role in due diligence and integration planning before the deal closes. In particular, companies should conduct a thorough HR due diligence covering the following five risk areas:

1. Compliance risk: to identify whether the target company’s employment contract offering, terms and working conditions, union operations, etc are in full compliance with social security, labour laws, and other related regulations.

2. Financial risk: to calculate the figures that may impact the purchase price, such as change-in-control indemnities, pension deficits or liabilities, cost of non-compliance, potential severance costs, immediate vest of stock or long-term incentive program, unsettled labour lawsuits, etc.

3. Culture risk: to identify whether there are major culture gaps that would make future

collaboration or communication difficult, especially leadership dynamics, and others such as union and employee relationship, level of mutual trust, etc.

4. Talent risk: to identify critical roles, a list of key talent, market competitiveness of executive compensation and general employee salaries, turnover rate, employee engagement levels, attitudes towards the deal, confidentiality agreements, non-compete agreements, etc.

5. HR operational risk: to explore whether there are inconsistent HR systems, incomplete information or record keeping (eg, no onboard date record), poor vendor management, and lack of business-aligned HR policies or programs (eg, job descriptions, job evaluation, salary structure, performance management, employee handbook, code of conduct), etc.

Challenge 3: Differences in Organisational Culture and/or Management StyleCulture is a hot topic when it comes to Asian multinationals expanding globally (Figure 4 below). In the 2012 Asian Trailblazers report, it was the second most cited challenge, coming second only to financial and regulatory factors.

Figure 4. Top globalisation challenges for Asian multinationals

Financialand

regulatoryaspects

Globalmanagement

Culturalunderstanding

Source: 2012 Towers Watson Asian Trailblazers survey report.


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Given the amount of cultural distance between Asia – and in particular China – with most of the rest of the world, this is not surprising. In China, cultural differences make themselves felt strongly at the organisational level: Chinese leaders tend to manage companies through a comparatively rigid, top-down approach. This is in direct contrast to the management style in many Western countries, where the process is more flexible.

As an example, when making decisions at the middle management level, while Western managers focus mainly on financial results, Chinese managers also take into account senior management’s interests. Similarly, during the people selection process for the post-deal entity, Western companies base selections on individual performance and new job requirements, while Chinese companies also take the employee’s age and year of service into consideration.

In addition, Chinese employees’ relationships with their companies are vastly different than the West: in China, one tends to identify one’s relationship with the company from a moral perspective and is likely to develop a sense of commitment and loyalty toward the company. This is particularly noticeable in state-run enterprises.

Most Chinese enterprises that have managed to tap into the international market, whether it be state-run or private, have a belief in national superiority and are unwilling to compromise in the process of cultural integration, transferring their past management model to the bought-out company. For instance, the employees of Alcatel were very dissatisfied with the position arrangement, salary package and sales model following TCL’s acquisition of the company at the end of 2004. The result was that many of the employees left office, putting the Chinese firm in a difficult position.

Towers Watson viewIn order to be effective, cultural alignment should take into account the following stages:

■ Top leadership team to identify the culture gap between the two companies and conceptualise the desired new culture based on the merged company’s business goals. This would include culture as it relates to decision making, communication, degree of autonomy, core values, and so on.

■ Establish a formal team to focus full-time on culture integration tasks. This will facilitate desired behaviours and increase employee engagement and cohesiveness

■ Develop a ‘culture booklet’ to promote role models and demonstrate real case examples to illustrate the new company’s core values to employees

■ Bolster this with effective and on-going communication and training programs

■ Align employee behaviour with an appropriate rewards system and performance management program

Challenge 4: Differences in National CulturesIt is important to note that cultural gaps are not only about organisational culture, but sometimes can include national cultures as well. During many Chinese outbound deals, the employees of a bought-out company, the media and labour unions in the target country sometimes have doubts about the Chinese buyer. They worry that their company’s brand and business might deteriorate following the merger because of their perceptions of low efficiency and poor quality products of Chinese enterprises.

In the example of Zhejiang Geely Holding Group’s acquisition of Volvo, the Swedes had strong national pride about Volvo and fretted that the alliance would diminish its brand image. Magnus


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Sundemo, head of the engineers’ union at Volvo, even co-operated with a local syndicate in Sweden to bid for the sale of Volvo, although it eventually failed to raise enough funds to compete with Geely. But as long as the Chinese national image has yet to be accepted internationally, this situation cannot be avoided.

Towers Watson viewMaintaining and strengthening employees’ engagement during change and uncertainty can be a long-term effort and but very rewarding once it succeeds. It could be achieved through many ways, with some being more effective than others depending on the companies’ characteristics.

Building a strong employer brand and image could bolster the perception of the company in the eyes of both the company workforce as well as the general public. Below are a few examples of possible brand-building exercises:

■ Assess and if necessary refresh the Employee Value Proposition to ensure that it is relevant for the new organisation, and in the new market

■ Invest in Client Service Relationship or other imaging-building activities

■ Define key brand messages clearly and prepare a comprehensive communication plan

■ Sell the company’s products and services internally to employees to improve employee appreciation of the company brand

An effective communication program is essential to improve brand awareness and employee engagement. This can include tactics such as training managers to communicate effectively; highlighting the importance of the employees’ work and ensuring that it is clearly linked to the broader corporate strategy and the company’s overall success.

A stronger leadership that manages employees from both the ‘hard’ and the ‘soft’ sides could also give employees a stronger sense of belonging to the company, therefore, achieving the goal of fostering stronger loyalty.

Challenge 5: Power of Overseas Labour Unions As the Chinese government was established by people in the working class, the role of enterprises and labour unions was established to help organise the production activity of workers and settle labour-management disputes, rather than fight for the interests of workers against the employer or even participate in decision-making on major issues regarding corporate operations.

Among Western enterprises, one recognised management model is that companies are managed by both labour and management. For instance, in France, labour unions have set the rule that a company with over 50 employees must set up a labour union committee, and that the labour union has the right to participate in making and vetoing labour rules. As such, in many countries, the labour union has the power to step in and stop the M&A deal, working on the behalf of employees, through a strike or other disruptive action. For example, there were serious clashes with the police during SAIC’s acquisition of Ssangyong.

As such, Chinese enterprises that do not pay sufficient attention to this issue may face many unforeseen labour conflicts.

Towers Watson viewIt is suggested that Chinese acquirers should develop a specific communication plan to reach out to unions, narrow the distance between them and resolve conflicts early on during a deal. In terms of time, buyers can communicate with labour unions after management and government, and get their consent in accordance with local rules and customs. After the deal, buyers should positively


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and proactively communicate with unions about the direction and policy of HR integration, especially about drawing up collective contracts, compensation and benefit changes, retention agreements, and redundancies in force, if necessary. Challenge 6: Mobility DifficultiesFor many Chinese companies, mobility difficulties generally fall into three areas:

1. A lack of suitable expatriate talent. Much of this stems from cultural issues; for instance, there is an old Chinese saying: ‘No travelling far, while parents are still around’. Thus, Chinese employees, particularly the middle-aged who tend to be the most experienced, are usually reluctant to enter into overseas assignments.

2. Chinese employees tend to struggle with cultural integration, causing weaker performance when compared to that in the home country. This is compounded by inappropriate performance measures and compensation without incentives.

3. Lastly, talent is easily lost after repatriation, because of the lack of suitable positions at home following an international assignment. With valuable overseas experiences, they are easily poached by other globalising companies.

Therefore, it is essential for Chinese globalising companies to build a well-rounded mobility plan for these expatriates. This will enable them to not only respond and adapt better to overseas assignments, but also cause them to be more engaged and help them realise the companies’ strategic goals.

Towers Watson viewTowers Watson suggests a good mobility mechanism should work through the cycle of an international assignment and include the following aspects:

■ Talent assessment and selection

• The filtering process should include a standardised test, 360 degree evaluation, and face-to-face interviews (including family members, if necessary)

• Selection criterion are typically based on three dimensions:

- Business needs: eg, type of assignment (eg, short-term, long-term, project-based, training-oriented, etc), job level needed, and function

- Individual profile: technical background, historical performance record, management skill-set, and/or loyalty to the company

- Global competency: eg, cultural sensitivity, social ability, adaptability to change, language skills, curiosity, communication, emotional stability

■ A comprehensive talent incubation plan

• Starting from self-diagnosis, to a tailored development plan, and a series of training programs and regular effectiveness reviews

• Training programs include EMBA, business English, leadership forums, cross-culture field trips, job rotation, overseas sister-office visits, etc

• Assign a personal mentor to provide timely and individualised consultation

■ Business-oriented performance measurement

• Measurement should reflect the different stages of the business cycle,


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ie, start-up, growth, mature, recession, and re-born stages. For instance, key account acquisition and infrastructure building may be more important than profitability at the start-up stage, and market share metrics more important at the growth stage

■ Well-designed compensation and benefit program, including:

• Statutory benefit, eg, social insurance, pension, health care

• Cost of living adjustment, eg, housing allowance, hardship allowance, tax equalisation

• Relocation support, eg, visa and work permit application, house rental, goods shipment

• Health and wellness, eg, supplementary life, AD&D, and medical insurances. These benefits can also be extended to family members.

• Others, eg, children’s education, home visits, spouse/children benefits, etc

■ Repatriate management

• Pre-contact for next stage: understand career intention and provide home-company related information

• Communication and training: help to quickly adjust to new life and new role

• Repatriate arrangement: new compensation and benefit program adjustment, keeping the same level if possible, arrange knowledge-sharing among home-company managers

Challenge 7: Difficulty in Attaining Core TechnologyOne of the primary purposes of Chinese enterprises’ overseas M&A transactions is to obtain advanced technology and brand management experiences of the target company. In order to retain core personnel, Chinese enterprises often adopt the ‘three no’s’ policy mentioned above (ie, no change of management team, no Chinese expatriate on site, and no shut down of factory). An example is the non-intervention management policy proposed by Geely’s Chairman Li Shufu.

While this approach could ensure the stability of the original team, it can also serve to deepen the distance between the buyer and the target company. Technological integration must be carried out through close co-operation between both sides. If the buyer does not lend a hand in the management of the target firm from beginning to end, it will never attain the desirable technological advantages. In the end, M&A transactions just provide the bought-out company with domestic markets and sales channels at best, and no one talks about the improvement of employee performance and industrial upgrading.

Towers Watson view ■ Towers Watson suggests that Chinese

companies could develop periodical programs after mergers according to their integration capability and degree of mutual trust. At the beginning of an acquisition, in order to reassure the seller’s employees, a non-intervention management policy may be adopted. After a period of time, the Chinese buyer could arrange for business leaders and technical staff to interact through rotation, training, special project assignments, site visits, etc.

■ After Zoomlion’s acquisition of Italian concrete firm CIFA, Zoomlion combined the original concrete firm and CIFA into one international company, and designated


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CIFA R&D Director as the Corporate Chief. Soon after, the new company launched a new concrete pump truck created by the new technical team.

ConclusionDespite many challenges, M&A deals between Chinese and Western companies are going ahead at an unprecedented pace. Any investment made in overcoming those challenges will be rewarding in the long run, helping to support growth, stabilise the organisation, and sustain high levels of key talent engagement and performance in the future.

Chinese enterprises’ global expansion is not easy. Barriers can be encountered during the very first stages, through ‘national security’ concerns of foreign governments, for instance. And even if the deal is approved, it can then be scuppered

by employees, the press, or labour unions that are wary of Chinese enterprise. There may be no quick solution for these biases. While the problem can be addressed by putting in place good global governance processes and policies, a well-developed human resource system, and a strong company and employer brand, these solutions will only bear fruit in the long run.

To change other countries’ misperceptions towards Chinese companies step by step should be the primary mission of outbound Chinese enterprises. The economic slowdown, particularly in the West, can play out in favour of Chinese organisations as it has made Western companies more open to inbound investment from Asia Pacific, and given Chinese companies a greater chance of being able to globalise through M&A.


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JOSEPHINE CHOW M&A Consulting Business Leader, Towers Watson E [email protected] towerswatson.comA Rm 1108, 11 Fl, Kerry Center, 1515 W. Nanjing Road, Shanghai, 20040, ChinaT +86 21 2211 5369 F +86 21 2211 5353

ABOUT THE AUTHOR

Josephine is the business leader of Towers Watson’s China & Taiwan M&A consulting services. Over her 23 years at Towers Watson, she has led many organisational transformation projects, including M&A HR due diligence and post-merger integration. These projects have spanned a variety of functions including compensation structure, working terms & conditions harmonisation, talent management, workforce redundancy, culture diagnosis and alignment, communication and change management, and performance management enhancement.

A sample of the M&A projects that she has worked include: Beijing Shougang Co. Ltd., China Merchant Group, China Seeds & Monsanto JV, Conoco Philips China, Dover China, Eaton China, Huawei Technologies Co., Pernod Ricard Helan Mountain, and Yongda Automobiles Services Ltd.

Josephine is also the leader of the WorkTaiwan™ Employee Attitude Research Centre. She has led numerous project teams and provided employee motivation and engagement-related services to local and multinational companies.

Josephine earned her Masters degree in Actuarial Science from University of Iowa. She is also a Fellow of the Actuarial Institution of the Republic of China and an Associate of the Society of Actuaries in the US.

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Bär & Karrer AG

Swiss Business Environment General Despite a difficult market environment, the Swiss economy has managed to stay in relatively good shape so far with an estimated GDP growth of 1.0 per cent in 2012 and an expected GDP growth of 1.3 per cent in 2013 and 2.1 per cent in 2014 according to the State Secretariat for Economic Affairs (SECO). The Swiss Market Index (SMI), Switzerland’s blue-chip stock market index, meanwhile rose by an impressive 14.9 per cent in 2012. In the first five months of 2013, the SMI has gained another 16 per cent.

This sound performance of the Swiss economy is to a large extent due to a steady increase of Swiss exports to Asian countries: with the economic prospects for many neighbouring countries remaining gloomy, Swiss companies increasingly turned towards Asia in search of growth opportunities. After years with very strong growth of Swiss exports to Asia (+13.4 per cent in 2010 and +9.8 per cent in 2011), Swiss exports to Asia cooled down in the year 2012 (+2.2 per cent), but nevertheless largely outperformed exports to Europe (-0.2 per cent in 2011 and -0.6 per cent in 2012).

Whereas exports to China (including Hong Kong) reached record heights in 2010 and 2011 with growth rates of 28 per cent and 20 per cent, respectively, the year 2012 saw a slight decline of four per cent. Meanwhile, imports from China (including Hong Kong) that now account for around 6.5 per cent of total imports are still growing with a vigorous 50 per cent increase in 2012. It has to be noted in this context that Switzerland is one of very few Western countries to (still) have a positive trade balance with China.

The enactment of a free trade agreement between China and Switzerland is expected to further boost the Sino-Swiss relationship. This agreement, that has been negotiated but not yet enacted, can already now be seen as a major breakthrough, as Switzerland will likely be both the first continental European country and the first country among the world’s 20 largest economies to have such free trade agreement with China, as Li Keqiang, the current Premier of China, told the Neue Zürcher Zeitung, a Swiss newspaper. While the exact contents of the agreement have not yet been made public, it is nevertheless expected to further expand the bilateral trade relations as, according to a Chinese official involved in the negotiations, 99.7 per cent of Chinese exports to Switzerland will then be duty free.

Selected Swiss Industries Watch industryThe Swiss watch industry has emerged from the crisis year 2008 in a vigorous condition, with exports hitting a record 19.3 billion Swiss francs (CHF) in 2011 and a monthly record of CHF 1.97 billion in July 2012. This represents a global market share of over 50 per cent in terms of value. In the high-end sector, the Swiss predominance is even more impressive. Indeed, around 95 per cent of the watches sold with a price tag of over CHF 1,000 are made in Switzerland. The “Swiss made” label is expected to be strenghened further as a new legislation defining the conditions for its use is currently being debated in parliament. The legislation will likely provide that a certain percentage of the production costs has to be incurred in Switzerland. At this stage, it is not yet clear if this percentage will be as high as 60 per cent (or even 80 per cent) as requested by many players in the Swiss watch industry.

Growing Asian Prospects


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During the past years, one of the main success drivers was the growing Asian (and particularly Chinese) demand for Swiss luxury watches. Chinese buyers now account for about a third of watch exports according to the Deloitte Swiss Watch Industry Study 2012. If sales to Chinese tourists abroad (including Hong Kong) are taken into account, this number is even significantly higher.

The appetite of Asian buyers is not limited to individual Swiss watches anymore but has lately expanded to several companies active in the watch sector. A stand-out example is the acquisition of Prothor Holdings SA and its subsidiaries La Joux-Perret SA, a leading manufacturer of mechanical movements, and high-end watch brand Arnold & Son, by the Japanese Citizen Holdings Co Ltd in March 2012. Further examples include the acquisition of Eterna and Corum, two Swiss luxury watch companies, by the Chinese company China Haidian in 2011 and 2013, respectively.

Mechanical and electrical engineering industryThe Swiss mechanical and electrical engineering industry experienced slightly more difficulties than the watch industry mainly as it is under considerable pressure due to the ongoing sovereign debt crisis and the strength of the Swiss franc. While in 2010, the respective exports rose by 8 per cent, 2011 already indicated the beginning of a downward trend with a moderate 1.2 per cent growth and 2012 saw a decline of 9.7 per cent. Exports to China (including Hong Kong) performed particularly badly with a decrease of 36 per cent.

As opposed to the high margins in the watch industry, margins in the Swiss mechanical and electrical engineering industry were already quite low before the crisis and continued to decline during the last years. The appreciation of the Swiss franc therefore led to an increased pressure on firms active in this sector prompting some of these firms to divest parts not seen as key to their business in

order to further concentrate on their main strengths. One example is the Swiss company OC Oerlikon, a world leader in machine and plant engineering, divesting its natural fibers and textile components business units to the Chinese Jinsheng Group. The transaction was signed in December 2012 and closing is expected in the second quarter of 2013, subject to the merger control approval by the Chinese Ministry of Commerce (MOFCOM).

Chemical and pharmaceutical industrySwitzerland’s chemical and pharmaceutical industry has a global market share of around five per cent, making the country one of the leading nations worldwide in this sector, which is remarkable given Switzerland’s size and population of only about eight million inhabitants. In terms of turnover, the Swiss company Novartis is currently the largest pharmaceutical company in the world and Roche, it’s domestic rival, the fifth largest.

Although the respective exports to China (including Hong Kong) are gathering momentum with +22 per cent in 2012, their share in the global Swiss exports currently accounts for only three per cent. Overall, exports remained very stable and were only slightly affected by the current difficult economic conditions.

With increasing global competition, companies active in the sector have continued to focus on their core competencies, leading to ongoing regrouping and restructuring in the industry. Highly specialised companies have emerged out of formerly diversified companies with broad product offerings.

Clariant, for example, a Swiss specialty chemicals company, recently sold its textile chemicals, paper, specialties and emulsions businesses to the United States-based private investment firm SK Capital Partners.

GROWING ASIAN PROSPECTS

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M&A – Outlook 2013According to the accounting firm Ernst & Young, the fourth quarter of 2012 showed an increase of 16 per cent in deal numbers and almost 86 per cent in deal volume as compared to the third quarter. The year 2012 saw an increase of 11 per cent in the number of transactions and of 56 per cent in the total transaction volume, compared to the previous year. Although US or European counterparties were still involved in most deals with a Swiss buyer or seller, the relative importance of Asian-Pacific counterparties has continued to rise at a fast pace.

The Swiss M&A market is expected to stay stable at the moderate level of 2012 or to slightly increase; the outlook is still uncertain and will in particular depend on the further development of the Euro zone.

Mainly due to large cash reserves and the relative strength of the Swiss franc, Swiss firms act more often as buyers than as sellers. In 2012, 71 per cent of the M&A transactions with a Swiss participant involved a Swiss buyer according to a study by KPMG.

Further deals are expected in the commodities and financial services sectors. Particularly in the private banking sector, many small players have come under considerable margin pressure, which is expected to lead to further consolidation. Continuing margin pressure is also expected regarding export-orientated Swiss companies, leading to further disposals of non-core businesses. This might encourage potential buyers from Asia to invest in European targets with low valuation.

Swiss Legal EnvironmentIn GeneralIn Switzerland, there is no general set of rules and regulations dealing with foreign investments. Rather, the regulatory framework depends on the type of business the target company is active in.

The Swiss Federal Constitution guarantees freedom of trade and industry throughout Switzerland. This allows anyone, including foreign nationals, to found or hold an interest in a company and to operate a business in Switzerland. For most commercial undertakings, neither an approval, registration or licence by the authorities, nor a membership of a professional association are required.

Sectors for which registration or the approval from a government authority is necessary are, for example, banking, insurance, investment funds, gambling houses, as well as the manufacturing and trading of certain arms. Other types of businesses or professions that may need some sort of either a federal or cantonal approval or licence are, for example, broadcasting companies, schools, hotels and restaurants (only in certain cantons), physicians, dentists, pharmacists and attorneys.

Corporate StructuresSwiss corporate law provides different forms of business organisations to set up a company and do business in Switzerland. The appropriate form of a business entity depends on many factors such as the size of the company and the nature of the business. Tax issues may play an important role in choosing the right business entity as well. Companies and private individuals from foreign countries are free to choose the legal form that best fits their business.

Swiss law distinguishes between the partnership-type unincorporated companies (sole proprietorship) and capital based incorporated companies (company limited by shares and limited liability company).

Company limited by sharesThe most popular and widespread type of business association under Swiss law is the company limited by shares (AG). An enterprise constituted in this form has its own name, its own legal personality separate from its members and a fixed nominal capital divided into shares.


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This type is often chosen by foreign companies as the legal form for their Swiss subsidiaries. The legal form of a company limited by shares may be used for very big companies as well as medium- and small-sized companies. A company limited by shares may be found by one or more individuals who do not need to be Swiss citizens or residents in Switzerland. However, it must be represented by at least one person residing in Switzerland. The share capital must be at least 100,000 Swiss francs. In the case of registered shares, a contribution of at least 20 per cent of the par value of each share shall be made. In all cases the contribution of registered share capital shall be at least 50,000 Swiss Francs which have to be paid in upon incorporation (in cash or in kind). Bearer shares must be fully paid up before they can be issued. The supreme body is the board of directors that represents the company externally.

Limited liability companyThe limited liability Company, GmbH, is a good alternative to the company limited by shares for smaller businesses. GmbH as well has its own legal personality separate from its members. The company’s liability is limited to its assets only. The nominal capital that must be paid in is 20,000 Swiss francs. Unlike the company limited by shares, no board of directors is required and the management lies with the managing directors.

Setting up a companySetting up a Swiss company is a very straightforward process that generally takes two to four weeks from the submission of the required documents to the date the company is considered legally established. The timeframe depends on the nature of the company and the location in Switzerland.

Purchasing a business or a companyWhen purchasing a business, an acquirer can choose between an asset deal or a share deal. While share deals are generally more common, the decision

should be carefully assessed and will namely depend on whether or not:

1. The target is organised as a corporation;

2. The acquirer wants to purchase the entire business;

3. There is a risk of hidden liabilities;

4. The assets are easily transferable;

5. Tax and accounting considerations favour one approach over the other;

6. Assets must be pledged in order to finance the transaction.

M&A transactions relating to privately held Swiss businesses or companies are not governed by a specific statute. Instead, the general rules applying to the sale of goods basically apply, as specified by case law. Where deals are handled by professional parties, detailed contractual documentation concretises the relatively rudimentary legal basis.

ReorganisationsApart from setting up a new company or purchasing an existing business or company, other options are available for investing and/or establishing a company in Switzerland, such as setting up a branch office, the formation of a joint venture or the undertaking of a cross-border merger. The most common choices for a foreign company located in Switzerland are subsidiaries (in the form of companies limited by shares or limited liability) and branch offices.

Mergers, de-mergers and transfers of assets between companies and transformations are regulated by the Swiss Code of Obligations and the Swiss Merger Act. In case of (cross-border) mergers, the provisions of Swiss Antitrust Law have to be observed.

Management and Leveraged BuyoutsA management buyout is a transaction by which the


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target’s managers and additional equity and debt investors, such as banks or private equity funds, jointly acquire the shares of the target company. The main difference towards leveraged buyouts is that the initiative for the buyout is taken by debt and equity investors.

Formal purchaser in both cases will usually be a newly formed acquisition company which purchases the shares and is merged into the target after a certain period of time, subject to tax rulings (if relevant). The acquisition is normally financed through the company’s assets and the future earnings which service the company’s loans. Where a bank is involved in financing an acquisition, usually the share of the target (or the acquisition company) will be pledged as a security. While debt investors expect a regular interest payment and a (partial) repayment of the loans and sometimes an option to purchase shares (in the event of mezzanine facilities), equity investors hope to achieve an appropriate return in view of the company’s expected development and the prospects of an exit in the form of a share sale.

In 2009, during the financial crisis, the buyout market came to a near standstill due to the lack of leverage possibilities but has slowly recovered since then.

Private Equity The structure most commonly used for private equity in Switzerland is that of an offshore (regularly a Jersey or Guernsey) limited partnership with its investment advisor, and possibly also its key limited partners located in Switzerland. While new company forms for collective investment schemes have been introduced in Switzerland by the Swiss Collective Investment Schemes Act of 2006, in particular the limited partnership for collective investment intended to be the Swiss equivalent of the common law limited partnership, these legal vehicles have had very limited success as of today mainly due to the lack of the Swiss Financial Market

Supervisory Authority (FINMA)’s respective approval practice and uncertainties with regard to the taxation of the carried interest.

Joint VenturesCompanies can be combined not only by an acquisition or merger but also by a joint venture, either formed as partnership or, more commonly, organised as corporation. It is noteworthy that a Swiss joint venture corporation (JVC) cannot legally bind itself by entering into a contractual agreement when it comes to subject matters falling within the competency of the shareholders’ meeting (like a share capital increase) or the board of directors (eg with respect to board majority requirements, delegation of business to management or approval of share transfers). In consequence, a Swiss corporation should normally abstain from executing a joint venture agreement, except with regard to a specified list of rights and obligations involving non-corporate issues, such as the entering into of a licence, loan, lease or purchase agreement with one of the joint venture partners acting as a counter-party.

In instances related to corporate matters, only the (future) shareholders can assume contractual obligations in the joint venture agreement where they will usually agree that necessary steps must be taken to implement the contractual arrangements at the corporate level, eg by exercising shareholders’ rights or to instruct the board members to draft internal rules of organisation containing the agreed arrangements or to appoint specific managers, and so on.

Where the contractual arrangements are not or cannot be translated into the corporate documents, each joint venture partner still has the possibility of suing the other party for specific performance. For instance, a party can be sued in its capacity as a shareholder of the JVC, to exercise its voting right in a manner consistent with its contractual obligations. The same is true for board resolutions


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provided a shareholder is in a position to instruct a board member how to vote, given that a director is subject to non-transferable and inalienable fiduciary duties. If specific performance is impossible, the party who breached the joint venture agreement will be liable for damages.

Selected Recent Legal Developments Amendment to the Cartel Act (CartA) The Swiss Federal Council submitted its proposal concerning an amendment to the CartA to the Parliament in February 2012. The amended text aims to ban all forms of horizontal price, output and territorial agreements, as well as vertical price and territorial agreements.

Currently, the Swiss Competition Commission (ComCo) has to prove that an agreement does have an effect on competition, ie that the respective agreement restricts competition significantly. Under the proposed amendment, no such prove would be required anymore in case of horizontal price, output and territorial agreements as well as vertical price and territorial agreements. Such agreements would be prohibited and subject to fines even if they intensify competition or if they have not been implemented unless the involved companies could establish that there is a justification for reasons of economic efficiency. This change would bring a shift from an effects based to a very formal object box approach. This shift would especially affect horizontal co-operation, eg purchasing co-operation, production and joint venture agreements where the parties would have to establish clear benefits of their co-operation for the customers. Also, in the area of vertical restraints, it can be expected that the ComCo would step up its already very formal approach.

The envisaged change to the CartA would also introduce the Significant Impediment to Efficient Competition (SIEC) in merger control cases which is already used by the European Commission

and other authorities. Against the dominance test currently used in Switzerland, the SIEC would lower the threshold for prohibiting mergers. However, in some cases, the ComCo has interpreted the current dominance test in a very extensive way. For this reason, the change to the SIEC test would not be expected to bring too much of a shift in practice.

Furthermore, the amendment aims to strengthen the rule of law through an institutional reform. It is intended to create a court that would decide over behavioural cases while the current ComCo would become a prosecutor with no own decision making power except in merger control cases. The competition authority would conduct the investigation and move for motion to the competition court (a new specialised antitrust chamber within the Federal Administrative Court). Amendment to the Collective Investment Schemes Act An amendment to the Collective Investment Schemes Act (CISA) has come into effect in March 2013. It aims at further adapting the Swiss regulation to international standards, especially to the Alternative Investment Funds Managers Directive (AFIMD), an European Union directive expected to come into force by mid-2013 and hence to guarantee a discrimination-free access of Swiss financial service providers to European financial markets.

The new EU directive will introduce a common regulation for alternative investment fund (AIF) managers at EU level, which brings far reaching regulatory changes for asset managers of alternative investment funds such as hedge funds and private equity funds. AIF managers which are domiciled or managed in the EU or distribute their shares to professional investors in the EU shall be required to obtain an authorisation and be supervised. The AIFMD will be applied on all EU investment advisors of collective investment schemes, who


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are not already subject to the Undertakings for Collective Investment in Transferable Securities (UCITS IV) Directive. The management of collective investment schemes can no longer be delegated to investment advisors domiciled in non-EU states which are not subject to an equivalent supervision. It is not yet clear which conditions third-country AIF managers will have to meet in order to obtain a permission to manage EU AIF and to distribute AIF shares in EU member states. The current amendment to the CISA tries to increase the probability of securing the delegation of asset management to Swiss asset managers after 2013 and to obtain an EU permission by aligning the management, safekeeping and distribution rules with the AIFMD.

The partial revision of the CISA has made it mandatory for Swiss asset managers to hold a licence from the Swiss Financial Market Supervisory Authority (FINMA) in order to manage foreign collective investment schemes, generating additional administrative costs for these AIF, which might become an issue, especially for small- and mid-sized companies. It could, furthermore, keep hedge fund managers from relocating to Switzerland.

Popular Initiative “Against Fat-Cat-Salaries”In March 2013, a popular initiative “against fat-cat salaries” (“Abzockerinitiative”) has been approved by the Swiss voters. This initiative, applying only to Swiss public companies, calls for extensive new mandatory rules on transparency and compensation of board members and senior management:

1. The aggregate compensation of the board of directors and the senior management will be subject to the approval of the general meeting of shareholders;

2. Severance payments (golden parachutes), advance payments and similar extraordinary payments to directors or senior managers, as

well as multiple contracts between directors and senior managers and group companies will be prohibited;

3. The articles of association will have to include rules for directors and senior managers on loans, retirement benefits, incentive and participations plans, and the number of positions outside the group;

4. The Chairman of the board, the board members, the members of the board‘s compensation committee, as well as the independent proxy will have to be elected annually by the general meeting of shareholders; and

5. Companies will no longer be allowed to act as corporate proxies but will need to allow shareholders to cast their votes electronically from a remote location.

The implementation of the popular initiative into Swiss law, in particular the Swiss Code of Obligations, is currently being prepared. Therefore, it is yet not possible to assess what effects these future regulations will have on the market; especially the harsh penal provisions of the initiative are, however, expected to have a negative impact on the competitiveness of the Swiss economy, should they actually be imposed. The against fat-cat salaries initiative could also have adverse effects on private equity in particular: private equity firms routinely grant compensations to the management of their portfolio companies if these companies can be sold with a benefit. As the initiative text prohibits sale and purchase incentives, this practice would most certainly no longer be possible, stripping private equity firms of an incentive tool to improve the performance of their portfolio companies.

Capital Contribution Principle Replacing the Nominal Value PrincipleAs from 1 January 2011, any repayment of capital contribution reserves contributions by a company to its shareholders (including share premium and


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capital contributions) after 31 December 1996 is treated in the same way as the repayment of nominal share capital. Such repayments are not subject to income tax in the hands of Swiss-resident private individuals and are exempt from federal dividend withholding tax according to Swiss law.

In order to qualify for tax-free repayment or distribution, the reserves must originate from contributions made by the shareholders. The tax-free distribution of such reserves requires that the reserve is reflected in a separate reserve account in the balance sheet, and further, that any fluctuations are regularly reported to the Swiss Federal Tax Administration (SFTA).

The capital contribution principle is currently being discussed in the Swiss parliament. It is currently rather uncertain whether new rules will be implemented to restrict repayments of capital contribution reserves or not.

Revision of the Federal Act on Stock Exchanges and Securities DealersA revisions of the federal act on stock exchanges and securities dealers entered into force on 1 May 2013, according to which, insider dealing and manipulation of exchange rates will henceforth qualify as possible basis for incriminated money laundering.

Revised Swiss Takeover RegimeOn 1 May 2013, the revised Swiss takeover regime has come into force. The most relevant changes are the abolishment of the control premium and the obligation to offer an all-cash alternative in a number of situations where such obligation previously did not exist. With respect to the structuring of public tender offers, bidders need to consider the implications of the revised regime and explore novel approaches.

Pre-tender Offer Stake BuildingStake building prior to the launch of a public tender offer allows the bidder to increase the chances of success of its public tender offer because a significant stake at launch reduces the likelihood of a competing bid. If a competing bid is launched, the initial bidder is likely to make an attractive return on investment on the stake it tenders into the competing bid.

Under the revised Swiss takeover regime of 1 May 2013, pre-offer stake building has become more complex: according to the minimum price rule, the offer price in the public tender offer must be at least equal to:

1. The highest price that the bidder has paid for target shares in the 12 months preceding the publication of the public tender offer; and

2. The 60 trading days volume weighed average price (or based on a valuation if the target shares are deemed illiquid).

The minimum price rule applies to mandatory offers and change-of-control offers, ie offers which extend to shares whose acquisition would entail a mandatory offer obligation. The rule does not apply to purely voluntary offers, including partial tender offers and offers for any portion of shares of a target which has a valid opting out provision in its articles of association.

The abolishment of the control premium means that in down markets, or when a specific target’s share price plummets due to a target specific negative event, a bidder’s purchases of target shares in the 12 months preceding the launch of the offer and, in particular, the ones prior to the fall of the target’s share price, will set the floor for the subsequent tender offer price.


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Under the revised minimum price rule, a bidder will have to carefully weigh the advantages of pre-launch stake building against the risk of setting the minimum offer price at a level which may proof unnecessarily high.

Another new restriction on pre-launch stake building applies to exchange offers. An all-cash alternative must be offered to all recipients of a change-of-control offer if the bidder (or persons acting in concert with the bidder) has purchased 10 per cent or more of the target shares for cash during the 12-month period preceding the announcement of the exchange offer.

Opting Out to Ensure Flexibility?The only way to avoid the applicability of the revised minimum price rule (and the obligation to offer a cash alternative in exchange offers where the bidder purchases 10 per cent or more target shares for cash prior to the offer) is to introduce a valid opting out provision in the articles of association of the potential target company.

According to the revised practice of the Takeover Board, the shareholders’ resolution on the introduction of an opting out is presumed to be in the interest of the target company or its shareholders, if a majority of votes is reached both by counting the votes of all shareholders represented and by counting the votes of only such shareholders who have an interest in introducing the opting out provision. Even if these requirements are fulfilled, the Takeover Board may in exceptional circumstances hold that the presumption proves wrong. If the shareholders’ resolution does not fulfill the requirements of the double counting of the votes, the Takeover Board presumes that the opting out is to the disadvantage of the minority shareholders and, therefore, not validly introduced.

All-cash Alternative During Exchange OffersThe rules on cash alternatives in exchange offers have not only been tightened with respect to pre-offer stake building, the Takeover Board has also acknowledged that during the period following the settlement of the offer, there should no longer be any restrictions on the bidder with respect to purchases of target shares for cash. A bidder in an exchange offer may, therefore, acquire target shares for cash following the settlement of the offer for as long as the best price rule is respected (ie for six months after the end of the additional acceptance period, the price paid may not be higher than the value of the shares offered in exchange).

Another accentuation of the revised regime on exchange offers relates to the period from the publication of the offer until the settlement. It extends to all types of offers, including partial offers and offers where the target company disposes of a valid opting out provision in its articles of association. In the event that during this period the bidder (or any person acting in concert) purchases any amount of equity securities of the target for cash, the bidder must extend an all-cash alternative to all recipients of the exchange offer.

With respect to all situations where a cash alternative must be offered, the cash alternative and the shares offered in exchange may differ in their respective values. According to the Takeover Board, both types of considerations must comply with the minimum price rule.

The new rules are increasingly restrictive on the bidder and will increase his financing costs.


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DR. CHRISTOPH NEERACHERPartner, Bär & Karrer AG, Zurich, SwitzerlandE [email protected] www.baerkarrer.chA Brandschenkestrasse 90, CH - 8027 Zürich, Switzerland T +41 58 261 5000 F +41 58 263 5264

ABOUT THE AUTHOR

Christoph Neeracher is a partner at Bär & Karrer AG, a leading Swiss law fi rm in Zurich, Switzerland. As a co-head of the practice group private M&A he specializes in international and domestic M&A transactions (focusing on private M&A and private equity transactions, including secondary buy-outs and distressed equity), transaction fi nance, corporate restructurings, corporate law, general contract matters (e.g. joint ventures, partnerships and shareholders agreements) and related areas such as incentive agreements for key employees. He also represents clients in litigation proceedings relating to his specialization.

Besides a Master’s and doctorate from the University of Zurich he earned a Master of Laws (LL.M.) from New York University School of Law.

Recent transactions include the acquisition of OC Oerlikon’s textile business units by the Chinese Jinsheng Group, the acquisition of Clariant’s Textile Chemicals, Paper Chemicals and Emulsions business by SK Capital, and the acquisition of SENIOcare Group by Waterland Private Equity.

The International Who’s Who of M&A Lawyers 2012 lists Christoph Neeracher as one of the world’s leading M&A lawyers, “who is extremely experienced in M&A matters and very strong in negotiations” (The Legal 500 2012).Chambers Europe ranks him as a leader in the fi eld of M&A (2010-2013).

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Recent Developments in Japanese Insider Trading Regulations in the Context of M&ANagashima Ohno & Tsunematsu

IntroductionRecent years have witnessed significant developments in Japanese insider trading regulations. In terms of legislative developments, certain amendments to the statutory ban on certain insider trading, as codified in the Financial Instruments and Exchange Law of Japan (FIEL), were approved by the Diet in September 2012 and June 2013. The 2012 amendment, which will take effect no later than September 2013, aims to modify the applicability of the ban in the context of mergers and acquisitions. The latest amendment from 2013 is expected to be implemented in 2014 and will newly penalize certain insiders for giving tips on non-public information.

The Securities and Exchange Surveillance Commission of Japan (SESC) has been actively enforcing the insider trading regulations. Responsible for market surveillance and investigation of insider trading activity, the SESC makes recommendations on administrative, monetary penalties (kachoukin) to its supervising agency, the Financial Services Agency (FSA), and files criminal charges (kokuhatsu) for public prosecutors to prosecute. In 2012, for instance, the SESC demonstrated its firm stance to crack down on insider trading by institutional investors in connection with public offerings, recommending administrative sanctions in connection with as many as six incidents in that year alone.

The illegal insider trading regime is one of the key areas of law of which all M&A practitioners should be mindful. This article aims to provide a summary of recent developments in Japanese insider trading regulations, with a focus on the context of mergers and acquisitions in Japan.

This article is organised as follows: Section I provides an overview of the Japanese insider trading regulatory regime. Section II examines the proposed 2013 amendment to the regulatory regime to sanction ‘tippers’ and the background for the latest move. Section III discusses some of the key insider trading issues under the 2012 amendment and their implications on transaction structures. Lastly, Section IV summarises the trend of enforcement by the SESC.

I. Overview of Japanese Insider Trading RegulationsElements of Illegal Insider TradingThe FIEL sets forth two sets of provisions prohibiting insider trading, namely arts 166 and 167. Article 166 concerns trading by insiders of equity securities of a publicly-traded company generally, while art 167 applies only in the context of tender offers to purchase equity securities of a listed issuer and other acquisitions of five per cent or more of the voting interest in a listed issuer. Unless otherwise noted herein, for the purposes of art 167, acquisitions of five per cent or more of the


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voting interest of a listed company by a third party is regulated in a similar manner as a tender offer for shares of such company by a third party.

Key elements of the insider trading prohibited under arts 166 and 167 are:

■ Sales or purchase of any shares or other equity securities of a publicly-traded issuer1

■ By certain insiders (see sub-section ‘Insider Requirement’ below)

■ While in possession of certain material facts about the issuer or a tender offer for shares of the issuer, as applicable (see sub-section ‘Material Facts Requirement’ below)

■ Before such facts are duly made public (see sub-section ‘Made Public Requirement’ below)

Note that, unlike in some other jurisdictions, it is not a pre-requisite that the relevant insider executes deals ‘using’ non-public material facts in order to be subject to prohibitions on insider trading in Japan.

Insider RequirementThe Japanese insider trading regulatory regime penalizes two groups of insiders – ‘Related-Party Insiders’ and ‘Tippees’. Related-Party Insiders are further divided into those related to a listed issuer under art 166 and those related to a tender offeror under art 167.

Related-Party Insiders are generally defined in the FIEL as noted below (with No. 5 below to be effective upon implementation of the 2013 amendment). Note that such Related-Party Insiders will be subject to the prohibition on insider trading only if they learn relevant inside information in the manner set forth in the respective parentheses below:

1. Officers, agents and employees of the issuer

or the tender offeror (in connection with the performance of their duties);

2. Shareholders holding three per cent or more of the total voting rights of the issuer or the tender offeror (in connection with the exercise of its statutory right of inspection of accounting books);

3. Parties having statutory power over the issuer or the tender offeror (in connection with the exercise of such power);

4. Parties that have executed or are negotiating a contract, whether written or oral, with the issuer or the tender offeror (in connection with the execution, negotiation or performance of such contract);

5. The target company of the tender offer (upon notice by the tender offeror); and

6. Officers, agents and employees of the parties referred to in No. 2 or 5 mentioned above (in connection with the performance of their duties).

Tippees are persons who receive a tip of inside information from a Related-Party Insider and are also subject to the insider trading prohibition. Conversely, those who learn of inside information from Tippees (secondary tippees, so to speak) are not subject to the insider trading prohibition. In practice, however, the distinction between primary Tippees and secondary tippees is not always easily discernible.

Material Facts Requirement under Article 166For the general insider trading prohibition under art 166, the FIEL provides for four categories of ‘material facts’, namely:

1. Facts based on a corporate decision of the issuer or any of its subsidiaries;

2. Facts based on the occurrence of certain events or circumstances of the issuer or any

RECENT DEVELOPMENTS IN JAPANESE INSIDER TRADING REGULATIONS IN THE CONTEXT OF M&A

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of its subsidiaries;

3. Facts based on financial forecasts of the issuer or any of its subsidiaries; and

4. Other material facts regarding the operation, business or assets of the issuer or any of its subsidiaries that would have a significant impact on the investment decision of investors (basket clause).

The FIEL and its pertinent rules set forth a long catalog of specific corporate actions, events and circumstances that would fall under categories No. 1 through No. 3 mentioned above, as well as applicable de minimis criteria based on numerical or qualitative thresholds. Category No. 4 on the other hand, is a so-called basket or ‘catch-all’ clause, which is discussed in Section IV below.

Importantly, a ‘corporate decision’ of a listed company is often found by courts to have been made at a point much earlier than the time of the official decision making at the company. For one, ‘corporate decisions’ can be made by not only the board of directors of a company, but also by any executive organ that could make a substantially equivalent decision, such as a committee of selected executive board members or, in some cases, the chairman or the president. Furthermore, a ‘corporate decision’ is not limited to an official decision to implement a designated transaction, but may also include an informal decision to ‘work toward’ implementing such action. The Supreme Court has ruled that, in order for a corporate decision to be found to have been made, the relevant executive organ must have made such decision ‘intending’ to implement an action, but it need not be the case that such action was certain to be implemented at the time of the decision.

Material Facts Requirement under Article 167The scope of inside information under art 167 is somewhat limited as compared to that under art 166. A corporate decision of: (i) a third-party

offeror to launch a tender offer for equity securities of a public corporation; (ii) a third party to purchase such equity securities representing five per cent or more of the voting interest in the issuer; or (iii) the issuer itself to launch a self-tender offer for its own shares, or a corporate decision to discontinue said transaction, constitute inside information under art 167.

Made Public RequirementAny information that has been duly ‘made public’ does not constitute inside information for purposes of arts 166 and 167. The FIEL contemplates three measures that constitute publication:

1. Disclosure to at least two major news outlets in Japan followed by a 12-hour blackout period;

2. Disclosure on the electronic system of the relevant securities exchange;2 and

3. Filing with the competent Financial Bureaus of certain statutory disclosure documents.

Note that in each case for information to have been deemed ‘made public’, the disclosure must be made by the listed issuer or the relevant subsidiary in the case of art 166, and by the tender offeror in the case of art 167. A leak of information to news media or a public announcement by a third party, technically, does not suffice to satisfy the made public requirement.

ExemptionsThe FIEL provides for a number of exemptions in respect of insider trading regulations. Exemptions most relevant in the context of M&A transactions are: (i) trading pursuant to pre-insider contracts/plans; and (ii) off-market trading between insiders.

Under exemption (i) noted above, if a person received inside information only after: (a) entering into an agreement to acquire or dispose of equity securities of a listed company; or (b) announcing a


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plan of a tender offer, the person will generally not have violated the prohibition on insider trading even if the person completes the transaction pursuant to the agreement or the tender offer plan and actually acquires (or, in the case of (a), dispose of) the securities. In the context of M&A activity, however, this exemption as currently codified is too rigid. In the case of (b), for instance, if such person amended certain terms of such previously announced plan of the tender offer after receiving inside information, the exemption is not available and the tender offeror may risk violating the prohibition on insider trading. A more blanket exemption is expected to be introduced by the 2013 amendment.

As for exemption (ii), off-market trading of equity securities of a target company between persons with knowledge of a yet-to-be-announced tender offer to purchase the target company’s shares, whether Related-Party Insiders, Tippees or otherwise, is generally exempt from the insider trading prohibition under art 167. With respect to the art 166 general prohibition, on the other hand, an equivalent exemption applies only if such off-market trading is made between Related-Party Insiders and/or primary Tippees only. An exception to the foregoing exemptions applies where both parties know that the securities sold or purchased off-market will thereafter be traded in violation of insider trading regulations. The 2013 amendment will broaden the exemption in respect of art 166 to apply to off-market trading between any persons with knowledge of inside information, including secondary tippees, which is expected to ease the conduct of block trading.

PenaltiesViolations of arts 166 and 167 are subject to criminal and/or administrative sanctions. Unlike in some jurisdictions, it is not a prerequisite that an insider actually gain any profit or avoid any loss as a result of insider trading to be prosecuted under art 166 or 167.

As for criminal penalties, violation of the insider

trading prohibition may be subject to imprisonment for a period of up to five years, or a fine of up to five million yen, or both, as well as confiscation or collection of the monies earned. If an officer or employee of a corporation commits an insider offence with respect to the corporation’s operations or property, then the corporation may also be subject to a fine of up to five hundred million yen.

As for administrative sanctions, a monetary penalty (kachoukin) may be imposed by the FSA independently of a criminal penalty. Generally, the amount of an administrative monetary penalty is determined based on the amount of economic benefit that the insider gains as a result of the illegal trading. For an insider trading offence committed by an investment manager trading on account of its client, under the 2013 amendment, the amount of administrative monetary penalty will generally be three times the amount of the investment manager’s fees for the month during which the offence took place.

II. Proposed 2013 Amendment – Tipping Inside Information PenalizedBackground for Regulating TippersThe latest amendment to the Japanese insider trading regulations passed the Diet in June 2013 and is expected to be implemented in 2014. Of the various issues covered by this amendment, the amendment will introduce a prohibition on passing inside information concerning listed securities to others and make other recommendations regarding the trading of such securities to others under certain circumstances. This amendment is significant in that it introduces new forms of illegal insider trading prohibited under Japanese law.

Underlying the introduction of this amendment was a series of cases where institutional investors were charged with trading on non-public information concerning public offerings by Japanese listed companies. In all six of these cases, the charges


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for which were all brought in 2012, the investors had been tipped by sales/research representatives of the lead underwriter in the public offering, who, despite the internal Chinese Wall, had some level of access to, or was able to make inferences based on, the confidential information. The current insider trading regime does not prohibit the act of tipping itself (except as it may constitute aiding and abetting), and none of the personnel who passed on the confidential tips were charged with insider trading.

Prohibited Tipping and Recommendation on TradingWith a view to preventing unjust tipping and subsequent insider trading by tippers, the proposed amendment, in summary, bans:

■ Related-Party Insiders (see sub-section ‘Insider Requirement’ in Section I above), as distinguished from Tippees

■ From tipping material facts concerning a publicly-traded issuer or a tender offer, as applicable, or recommending a sale or purchase of securities of the issuer or the target of the tender offer, as applicable (prohibited activity)

■ To another person

■ With the intention of inducing such person to trade such securities, either to gain profits or avoide losses, before such material facts are made public (the test of intention)

The scope of prohibited activity is fairly broad. In addition to regulating the passing on of inside information, the amendment may also restrict a corporate insider from recommending to another person that he or she deal in securities of a listed company even where the corporate insider does not disclose inside information. Limiting the breadth of prohibited acts under the amendment, the intention test supposedly serves to exonerate from

insider trading offence M&A transactions, business negotiations, investor relations initiatives or other legitimate activities that involve exchange of non-public material information on public corporations.

Another mechanism to prevent overbroad deterrence of legitimate activities is the requirement that criminal and administrative sanctions are applicable only if, as a result of the prohibited tipping or recommendation, the recipient of the inside information or the recommendation actually trades the subject securities prior to the disclosure of relevant inside information (actual trading requirement).

As of this writing, commentary by the FSA officials in charge of drafting the amendment has not yet been published, and there is little discussion as to how this new rule, particularly the test of intention, should be interpreted or evidenced.3 Individuals and corporations that deal with non-public material information on public companies should review their internal insider trading policies as well as non-disclosure agreements and other contracts with external parties to minimise the risk of intentional or inadvertent violations of the new rule.

Other Areas of 2013 AmendmentThe 2013 amendment also attempts to address various insider trading issues arising in connection with a tender offer. Under the current regime, conduct or cessation of a tender offer or other acquisition of five per cent or more of the voting interest in a listed company (hereinafter known as ‘the target’) constitutes inside information under art 167, and must be announced at the initiative of the tender offeror in order for the information to be considered public (see sub-section ‘Made Public Requirement’ in Section I above). This requirement could serve as a virtual defense measure in the context of potentially competing takeover bids. Suppose, for example, that a potential acquirer, Company A, decided to launch a tender offer against


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the target but had not yet publicly announced the planned offer. Company A may disclose its unannounced plan to a third party, Company B, and make Company B a primary Tippee, upon which Company B will be virtually blocked from acquiring shares of the target until Company A announces its plan pursuant to the FIEL.

The 2013 amendment provides for exemptions in such a scenario. First, Company B may purchase the target shares by way of a tender offer prior to Company A’s announcement, provided that Company B discloses Company A’s plan and certain other information in its tender offer documents. The rationale behind this exemption is that such disclosure will eliminate the information gap between Company B, the insider, and the shareholders of the target. Note that this exemption is not available if Company B is to acquire the target shares other than through a tender offer, for instance, by block trading.

In addition, despite the absence of Company A’s announcement of its possible tender offer, Company B may legally acquire the target’s shares, by way of a tender offer or otherwise, once six months or more have passed after Company B learned of Company A’s proposed tender offer.

III. 2012 Amendment – Insider Trading and Acquisition StructuresThe 2012 amendment to the FIEL, which is scheduled to be implemented in September 2013, modifies the scope of acquisition structures that may be subject to Japanese insider trading restrictions. Prior to implementation of this amendment, the transfer or acquisition of publicly-traded shares by way of merger (gappei) or de-merger (bunkatsu) is not subject to Japanese insider trading restrictions, while such transfer or acquisition by way of transfer of all or part of the business (jigyou jouto) is. This disparity results from the Japanese legal concepts that distinguish a merger or de-merger, where

the subject assets are transferred as a whole by operation of law, and a transfer of business, which is considered a collection of individual sales and purchases of the subject assets.

The amended insider trading rules treat mergers, de-mergers and business transfer equally as a means to transfer or acquire publicly-traded shares.4 Where the assets subject to a merger, de-merger or business transfer include shares of a public company and one or more parties to such transaction possess inside information on the issuer, the relevant transfer or acquisition of shares is generally subject to the prohibition on insider trading. An exemption will apply if the book value of such shares comprises less than 20 per cent of the aggregate book value of all the transferred assets.

Issuance or acquisition of newly-issued shares of a public company in, for instance, private investment in public equity (PIPE) transactions, is not subject to Japanese prohibitions on insider trading. In contrast, the prohibition generally applies to the resale or purchase of treasury shares of a public company. As an exception to the foregoing, the 2012 amendment states that use of treasury shares as a result of mergers, de-mergers and other restructuring (soshiki saihen) proceedings does not trigger the insider trading restrictions.

IV. Trend of Enforcement of Insider Trading RegulationsStatistical FactsThe SESC has been actively pursuing illegal insider trading in recent years. According to statistics published by the SESC, the number of incidents where the SESC recommended administrative penalties on account of insider trading violations peaked at 38 in fiscal year 2009, with 19 incidents in fiscal year 2012.5 In terms of criminal sanctions, the SESC filed insider trading criminal charges in seven and two instances in fiscal years 2009 and 2012, respectively.6


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Tender offers and public offerings comprise the majority of the incidents where insider trading violations were recently found by the SESC. Both types of transactions appear to create a breeding ground for illegal activity as they involve a large number of parties and tend to have a fairly predictable impact on the stock price.

Basket ClausesThe SESC has been enforcing not only administrative penalties but also pursuing criminal insider trading charges utilising the basket clauses of the FIEL (see sub-section ‘Material Facts Requirement under Article 166’ in Section I above), although the number of such charges is fairly limited.

The scope of the basket clauses is, by nature, not defined. It could cover any corporate actions, events or circumstances that are not specified in the other categories of ‘material facts’ so long as they would have a significant impact on the investment decision. Furthermore, even if, for example, a certain event is actually specified in one of such other categories yet falls under the applicable de minimis criteria, this basket clause may still apply if there exist other elements regarding such event that would have a significant impact on the investment decision. The basket clause, which serves as a catch-all to a thorough catalogue of specific material facts, has sometimes been criticised as overbroad.

Incidents where the courts found an insider offence based on the basket clauses include reports of deaths caused by the side effects of promising new drugs, discovery of errors in the financial results of past years or inappropriate accounting treatment for multiple fiscal years, and the procurement of syndicated loans by a cash-strapped company. To avoid the application of the basket clause, careful analysis is required as to whether ordinary investors would certainly have conducted, or withheld, a sale or purchase of equity securities of a listed company

had they had access to the non-public information regarding the company in question.7

ConclusionThe FSA has been emphasising the importance of various market participants, including the financial industry, stock exchanges and listed companies, to establish a system to prevent insider trading. As of this writing, pertinent rules of the 2013 amendment have not yet been published, and the extent of the implications of the amendment is not fully comprehensible. It is, therefore, critical that all public companies and other firms interested in the acquisition of listed firms introduce and periodically review their insider trading policies and practices in order to reflect the then best practice towards minimising the risk of insider trading.

1 Those equity securities issued by a Japanese listed company but not publicly-traded (such as class shares or bonds) could also trigger the insider trading prohibition. In addition, art 166 regulates both the sales and purchase of shares of a listed issuer while having inside information regarding the issuer, while art 167 regulates the purchase or sale of such shares – that is, purchase of such shares knowing the launch of a tender offer for such shares and sale of such shares knowing the cancellation of a tender offer.

2 With respect to inside information concerning a tender offer by a third party under art 167, this method No. 2 is not available at present. The 2012 amendment to the FIEL would permit, as method of publication of inside information, disclosure of inside information on the electronic system of the relevant securities exchange (i) by a tender offeror whose shares are listed on such exchange, or (ii) by the target or its parent company whose shares are listed on such exchange at the request of a non-listed tender offeror.

3 The proposed 2013 amendment to the FIEL was prepared by the FSA taking into account a report published by the insider trading regulation working group established under the Financial System Council, an advisory board to the FSA. The report, titled Establishment of Systems Regulating Insider Trading in Light of the Recent Insider Violations and Financial and Corporate Practice, was published in


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December 2012 and is available at: http://www.fsa.go.jp/singi/singi_kinyu/tosin/20121225-1/01.pdf.

4 Incorporation-type de-mergers (shinsetsu bunkatsu) are exempt from the insider trading restriction, except where two or more corporations conduct incorporation-type de-mergers jointly (kyoudou shinsetsu bunkatsu).

5 Status of Recommendations Made (as of the end of April 2013), published by the SESC; available at: http://www.fsa.go.jp/sesc/actions/kan_joukyou.htm.

6 Status of Criminal Complaints Filed (as of the end of April 2013), published by the SESC; available at: http://www.fsa.go.jp/sesc/actions/koku_joukyou.htm.

7 Yūsuke Yokobatake, Chikujo kaisetsu: Insaidā torihiki kisei to bassoku [Insider Trading Regulations and Penalties] (Shoji Houmu Kenkyukai, 1989).

AKEMI SUZUKIPartner, Nagashima Ohno & TsunematsuE [email protected] www.noandt.comA Kioicho Building, 3-12, Kioicho, Chiyoda-ku Tokyo 102-0094, Japan T +81 3 3511 6225 F +81 3 5213 2325

ABOUT THE AUTHOR

Akemi Suzuki is a partner in Nagashima Ohno & Tsunematsu’s Tokyo offi ce. Ms. Suzuki practices in a broad range of international transactions with particular emphasis on cross-border M&A and fi nancing transactions. Ms. Suzuki’s experience in the M&A area includes inbound and outbound buyouts, international joint ventures, strategic alliances and minority investments in technology, media, life sciences, consumer products and energy industries. Ms. Suzuki also has extensive experience advising clients on various corporate governance matters as well as disclosure and compliance issues. Ms. Suzuki is admitted to bar in Japan and New York.

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1. What are the key laws and regulation that govern mergers and acquisitions in your jurisdiction?

Proposals to acquire control of widely held Australian entities (those listed on the Australian Securities Exchange (ASX) or with more than 50 members) are highly regulated in Australia. Smaller entities may be acquired by private contract.

The guiding principles of takeover regulation are that:

1. Control acquisitions should take place in an efficient, competitive and informed market;

2. Shareholders should:

a. Know the identity of potential acquirers;

b. Have reasonable time and enough information to consider proposals; and

c. Have reasonable and equal opportunity to participate in benefits; and

3. Appropriate procedures for compulsory acquisition of securities (hereinafter known as ‘compulsory acquisition’) must be followed.

Generally, a potential acquirer (hereinafter known as ‘bidder’) may not increase the power it has, together with associates, to control voting or disposal in relation to shares (hereinafter known as ‘voting power’) in a target company (hereinafter known as ‘target’) to more than 20 per cent or from above 20 per cent up to 90 per cent. A bidder wishing to do so must generally proceed by way of takeover bid (hereinafter known as ‘takeover’)

or scheme of arrangement (hereinafter known as ‘scheme’).

Limited other exceptions are available, including increases of three per cent of voting power every six months (hereinafter known as ‘three per cent creep’) or acquisitions approved by target shareholders (with appropriate disclosure and no voting by the bidder and associates).

Takeovers and schemes are statutory procedures regulated by the Corporations Act 2001 (Corporations Act), overseen by the Australian Securities and Investments Commission (ASIC) and the Takeovers Panel (hereinafter known as ‘Panel’) (see Question 2). ASIC and the Panel publish guidance on aspects of control transactions.

TakeoversTakeovers involve bidders offering to acquire the shares of all shareholders of the target, either on-market or off-market.

In on-market bids, which are rare, bidders offer to acquire shares on the securities market on which they are traded at a certain price for a period of at least one month (see Question 10).

In off-market bids, bidders send written offers to the target and its shareholders. Offers are accepted by target shareholders returning acceptance forms before the offer expiry date. Bidders must obtain interests in at least 90 per cent of the shares in the target (and 75 per cent of those bid for) to be entitled to proceed to compulsory acquisition of the remaining shares (see Question 12).


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Bidders may offer cash and/or other consideration, usually bidder securities. The offer of bidder securities may be regulated by local laws in the jurisdictions where foreign target shareholders reside. The consideration must at least equal the highest price paid by the bidder for any target shares acquired in the previous four months.

SchemesSchemes are arrangements between targets and their shareholders for transfer or cancellation of their shares in exchange for consideration from the bidder. The target prepares a booklet for target shareholders containing information about the proposed scheme (hereinafter known as ‘Scheme Booklet’). The arrangement must be approved at a meeting of target shareholders (hereinafter known as ‘Scheme Meeting’). Court approval is also required (see Question 2). Schemes are binding on all target shareholders if all necessary approvals are obtained.

Target board support is essential for a scheme to proceed.

For targets listed on ASX, the ASX Listing Rules require the target to:

1. Disclose proposed takeover activity (other than indicative, non-binding proposals);

2. Not issue securities for three months after becoming aware of a proposed takeover; and

3. Ensure its officers do not receive termination benefits on a change in control of the target.

2. What are the government regulators and agencies that play key roles in mergers and acquisitions?

ASIC is the main government body responsible for regulating and enforcing takeover and scheme laws.ASIC has power to modify some takeover laws,

with the relief applying either generally in takeovers or in individual cases. Individual relief applications are determined on a case-by-case basis and may be declined or granted conditionally. Relief is often sought from:

1. Disclosure obligations for Scheme Booklets; and

2. Requirements to notify acceptances during takeovers.

The Panel is a peer review body with members appointed from the legal and business communities. The Panel is the primary forum for resolving disputes about takeovers during the bid period.

The Panel has wide powers in relation to takeovers, primarily to declare circumstances that infringe the guiding takeovers principles explained in Question 1 to be unacceptable. It also has power to review ASIC modification decisions.

Schemes and Scheme Booklets must be approved by the Federal Court or the Supreme Court of an Australian State or Territory (court). The court orders Scheme Meetings to be held and its approval of the scheme is required following approval by target shareholders.

Scheme documentation is reviewed by ASIC, which assists the court’s review by advising the court if it has any concerns.

If the target is listed on ASX, key takeover and scheme documents must be released to the ASX market.

For transactions resulting in full or partial foreign ownership of Australian companies, prior notification to the Foreign Investment Review Board (FIRB) may be required (see Question 15).

The Australian Competition and Consumer

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Commission (ACCC) may prohibit or impose conditions on a transaction which may substantially lessen competition.

3. Are hostile bids permitted?

A hostile bid is a takeover that does not have the target board’s recommendation when it is publicly announced. Hostile bids are permitted, but target board support is an important factor in the success of takeovers.

Schemes require target board support as they are proposed by the target, so are not suitable for hostile proposals.

4. What laws may restrict or regulate certain takeovers and mergers, if any? (For example, anti-monopoly or national security legislation).

The Foreign Acquisitions and Takeovers Act 1975 (FATA) regulates acquisitions by foreign persons of Australian assets (see Question 15).

Under the Competition and Consumer Act 2010, the ACCC may prohibit or impose conditions on transactions which substantially lessen competition.

Legislation restricts ownership and transfer of interests in certain sectors (see Question 14).

Bidders must also consider any relevant foreign laws.

5. What documentation is required to implement these transactions?

TakeoversThe following documents are required:

1. Offer – formal offer by the bidder to each target shareholder for shares held by them,

contained in or accompanying the Bidder’s Statement;

2. Bidder’s Statement – sent to target shareholders, containing information required by the Corporations Act, including information about the bidder, details of the offer, the bidder’s intentions regarding the target’s business and any information that may be material to target shareholders;

3. Target’s Statement – sent to target shareholders in response to the Bidder’s Statement, containing information required by the Corporations Act, including:

a. All information target shareholders would reasonably require to make an informed decision about the offer, to the extent it is known to the target’s directors and is reasonable to expect to find in the Target’s Statement;

b. A recommendation and supporting reasons from each target director; and

c. If the bidder’s voting power in the target is 30 per cent or more, or there is a common director on the bidder and target boards, an independent expert’s report about whether the offer is ‘fair and reasonable’; and

4. Supplementary Bidder’s or Target’s Statements – supplementary statements are used if required to update Bidders’ or Targets’ Statements.

Bid implementation agreements between bidders and targets, containing the bidder’s agreement to make a takeover, the terms of the proposed acquisition and the steps to be taken by each party to give effect to it are not legally required, but are becoming increasingly common.

SchemeMarket practice is for the following documents to


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be included in a Scheme Booklet and sent to target shareholders:

1. Scheme – the terms of the arrangement between the target and its shareholders;

2. Scheme Deed Poll – deed poll by the bidder in favour of target shareholders under which the bidder covenants to perform its obligations under the scheme (for example, to pay the scheme consideration);

3. Explanatory Statement – certain information required by the Corporations Act, including an explanation of the scheme, any material interests of the directors, the bidder’s intentions regarding the target’s business and any other material information not previously disclosed;

4. Independent Expert’s Report – an independent expert’s report about whether the offer is ‘fair and reasonable’ is typically obtained although not legally required in all cases; and

5. Notice of Scheme Meeting.

Scheme implementation agreements between bidders and targets, containing the target’s agreement to propose a scheme for the bidder to acquire all target shares, the terms of the proposed acquisition and steps to be taken by each party to give effect to it are universally used in schemes.

Other DocumentsThe following documents are common in takeovers and schemes, but not legally required:

1. Pre-bid Agreement – agreement between the bidder and major target shareholders entered into before a takeover is announced, for the acquisition of target shares (up to the 20 per cent limit) or agreement to accept a future takeover; and

2. Confidentiality Agreement – agreement between the bidder and target to keep information confidential, including discussions between them and information exchanged in due diligence. It will sometimes contain an agreement that the bidder will not buy shares in the target in specified circumstances.

6. What government charges or fees apply to these transactions?

The only government charges for takeovers and schemes are imposed by ASIC, the Panel and the court. Fees are immaterial in the context of the cost of a transaction. ACCC and FIRB applications do not attract fees.

ASIC and Panel FeesFees apply for some (but not all) ASIC lodgements. Fees are payable for Bidder’s Statements, but not Target’s Statements or supplementary statements.

Fees apply when seeking specific ASIC relief from a takeovers law (see Question 2).

Fees are payable for applications to the Panel.

Court FeesAs schemes are court-approved, court fees apply for court hearings.

7. Do shareholders have consent or approval rights in connection with a deal?

In takeovers, bidders make an offer to each target shareholder, who may accept the takeover offer or not. Subject to compulsory acquisition (see Question 12), only accepting target shareholders are bound by a takeover.

Schemes are binding on target shareholders if approved by:

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1. A majority in number of target shareholders, present and voting (in person or by proxy) at the Scheme Meeting; and

2. At least 75 per cent of the votes cast on the resolution to approve the scheme.

Schemes are, therefore, ‘all or nothing’ propositions, either approved entirely or rejected by target shareholders.

8. Do directors and controlling shareholders owe a duty to the stakeholders in connection with a deal?

Directors’ DutiesAll directors have fiduciary duties, including duties to act with care and diligence, in good faith in the best interests of the company and for a proper purpose and not to misuse company information for their benefit or the benefit of a third party. Directors owe duties to shareholders as a whole, but do not owe duties to any one or more shareholders (even majority shareholders), employees, customers or suppliers.

In takeovers and schemes, these duties require target directors to:

1. Seek the best outcome for shareholders, which may include maximising price or other ‘valuable’ terms;

2. Carefully assess potential transactions, particularly if agreeing to conditions;

3. Avoid conflicts of interest and take action if a conflict arises, including removing themselves from involvement or resigning; and

4. Balance duties of disclosure and confidentiality where a director sits on both bidder and target boards.

Target directors must ensure the target does not

enter a binding implementation agreement with a bidder which prevents target directors from responding to or recommending acceptance of a superior offer from a third party. However, directors have no general duty to seek superior offers.

Directors may rely on information or opinions from employees and advisors with particular expertise, but only to a reasonable extent and subject to independent assessment of the information in the context of their knowledge of the company and the transaction.

Controlling Shareholder DutiesControlling shareholders owe no duties to the company or to any other stakeholders.

9. In what circumstances are break fees payable by the target company?

Break fees may be negotiated (usually in the implementation agreement) between bidders and targets in takeovers and schemes. They are intended to compensate bidders if specified events occur, resulting in deal failure.

Common triggers for break fees are a:

1. Superior proposal emerging, resulting in a change of recommendation by target directors or a third party acquiring control of the target;

2. Material breach of the implementation agreement by the target; and

3. Material adverse change occurring in relation to the target.

Reverse break fees payable by the bidder to the target may also be agreed. There is an increasing practice for reverse break fees to be paid by the bidder, eg when a foreign bidder fails to obtain a required regulatory approval.


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Panel GuidanceThe Panel may consider a break fee to be unacceptable if it is coercive or anti-competitive. Fees equivalent to up to one per cent of target equity value are likely to be (but are not always) acceptable. Relevant considerations are whether the fee:

1. Was agreed after a public, transparent process;

2. Is fixed or capped; and

3. Reimburses actual expenses.

There is no specific Panel guidance for reverse break fees.

10. Can conditions be attached to an offer in connection with a deal?

On-market TakeoversThe Corporations Act lists certain ‘prescribed occurrences’ which entitle the bidder to withdraw unaccepted offers if they occur during on-market takeovers.

Prescribed occurrences include the target:

1. Agreeing to issue securities;

2. Agreeing to dispose of, or grant a security interest in, all or a substantial part of its business or property; and

3. Becoming subject to external administration.

Apart from prescribed occurrences, on-market takeovers must be unconditional.

Off-market TakeoversBidders may impose any conditions not prohibited by the Corporations Act. However, extensive conditions may impact:

1. The target board’s willingness to recommend the offer; and/or

2. The target shareholders’ willingness to accept the offer until conditions are satisfied or waived.

Most off-market takeovers have minimum acceptance conditions requiring acceptances above a specified percentage, such as 50 per cent (to obtain control of the target) or 90 per cent (to be able to proceed to compulsory acquisition).

Where securities are offered as takeover consideration, there is a statutory condition, which cannot be waived, that quotation of the securities must be granted on a recognised securities exchange within seven days after the end of the offer period. Bidders can waive other conditions until the last week of the offer period.

The Corporations Act prohibits conditions:

1. Which make offers subject to a maximum number or percentage of shares being accepted;

2. Which allow the bidder to acquire securities from some but not all accepting shareholders; or

3. If fulfilment depends on the bidder’s opinion or the happening of events within the bidder’s control.

Bidders must notify the target and ASX (if the securities are quoted) or ASIC (if the securities are not quoted):

1. When conditions are satisfied or waived during takeovers; and

2. At least seven days before the end of the offer period confirming the status of outstanding conditions.

SchemesThe type and number of conditions that can be imposed in a scheme are not restricted. However,

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ASIC and the court may object to conditions that would be prohibited in a takeover.

Schemes are necessarily conditional on target shareholder and court approval. Schemes commonly include a condition that an independent expert concludes that the scheme is fair and reasonable to target shareholders.

Common ConditionsThe Corporations Act does not extend prescribed occurrences to off-market takeovers or schemes, but market practice is to include a ‘no prescribed occurrences’ condition.

Common conditions include:

1. Regulatory approvals (for example, ACCC or FIRB);

2. No regulatory action that could impact the transaction;

3. No material adverse change in the target; and

4. No material acquisitions or transactions being undertaken by the target.

11. How is financing dealt with in the transaction document? Are there regulations that require a minimum level of financing?

No minimum level of financing is required in takeovers or schemes.

Bidders commit an offence if they announce a takeover but are reckless as to whether they will be able to pay any cash consideration. Bidders who are unable to demonstrate existing funds or a reasonable basis to expect finance to be available risk a Panel declaration of unacceptable circumstances.

Most bidders requiring financing will sign binding documentation or, at least, a binding financing term

sheet before announcing a takeover.

No statutory financing requirements apply to schemes, but the court must be satisfied (typically through disclosure in the Scheme Booklet) that target shareholders are provided with all material information relevant to their decision, including how the bidder reasonably expects to be able to pay the scheme consideration. Unlike takeovers, where target shares are transferred to the bidder before payment is made, no target shares are transferred in schemes unless the bidder has paid its cash consideration (typically into a target trust account) before the scheme takes effect. Because of this protection, less detail in the Scheme Booklet about financing of scheme consideration may be accepted by the court than would be required in a Bidder’s Statement for a takeover.

Disclosure of Financing Arrangements under a TakeoverIf takeovers involve cash consideration, the Bidder’s Statement must disclose:

1. Cash amounts held for the payment; and

2. Any financier who will provide cash consideration and arrangements for its provision.

ASIC and the Panel have provided guidance on bidder disclosure, including:

1. Information establishing that the financier has the necessary financial resources (if the financier is an Australian bank, identification of the bank may be all that is required);

2. The amount the bidder has available for drawdown (and any arrangements for the realisation of non-cash assets to finance the takeover consideration); and

3. Material conditions precedent to drawdown.


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12. Can minority shareholders be squeezed out? If so, what procedures must be observed?

TakeoversBidders may compulsorily acquire securities remaining in the bid class after a takeover through a detailed procedure set out in the Corporations Act, if the bidder and its associates:

1. Have interests in at least 90 per cent of the bid class securities; and

2. Have acquired at least 75 per cent of the securities that the bidder offered to acquire (whether under the takeover or otherwise).

The bidder must exercise the compulsory acquisition right within one month after the takeover closes, on the same terms as under the takeover. A target shareholder who receives a compulsory acquisition notice may apply to court to order that their shares should not be acquired because the consideration is not fair value.

If target securities are divided into separate classes, bidders may bid separately for each class and proceed to compulsory acquisition of each class if relevant conditions are met. Bidders may be able to acquire securities by individual agreement where there is a small number of security holders.

The Corporations Act also provides rights for:

1. 90 per cent shareholders to acquire remaining shares, even if 90 per cent is not acquired in a takeover; and

2. Minority shareholders to require a bidder who acquires 90 per cent to acquire their shares or securities convertible into shares.

There is also a mechanism to acquire classes of securities with little overall voting power and value if specified tests are satisfied.

SchemesIf all necessary court and shareholder approvals are obtained, all target shareholders are bound by the terms of the scheme.

If there are different classes of security, separate schemes may be required for the bidder to acquire all securities in each class. Individual agreements may be appropriate if there is a small number of holders in the class.

13. What is the waiting or notification period that must be observed before completing a business combination?

TakeoversA person who publicly proposes a takeover must proceed with the takeover within two months.

Takeover offers must remain open for at least one month, with a maximum period of 12 months.

Payment for shares acquired in a takeover must be made no more than one month after the shares are transferred to the bidder.

Takeovers generally take a minimum of six weeks from lodgment of the Bidder’s Statement with ASIC, with an additional minimum of four weeks if compulsory acquisition is undertaken. The following factors are relevant to the timetable:

1. Significant time may be involved in preparing the Bidder’s Statement, particularly where securities are offered as consideration, as significant disclosure is required;

2. Bidder’s Statements are sent to the target for at least two weeks and then to target shareholders (unless the target consents to early dispatch); and

3. There are automatic extensions of the offer period by 14 days if, in the last week of

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the offer period, the bidder increases the consideration or achieves 50 per cent of the voting power in the target.

SchemesSchemes generally take at least 10 weeks from announcement, but may take considerably longer.

ASIC must be given at least 14 days to review the Scheme Booklet. If the scheme is novel or complex, a greater period may be required. Generally, the court will require 28 days’ notice of the Scheme Meeting to be given to target shareholders.

Significant time may be involved in negotiating a scheme implementation agreement between the bidder and the target, preparing the Scheme Booklet, commissioning the independent expert’s report and preparing for the two court hearings. After the second court hearing, the court order must be lodged with ASIC (and ASX if applicable) and the scheme must be implemented in accordance with its terms.

Other Timing IssuesIf approvals in the bidder’s home country or from FIRB or ACCC are required for a transaction, the time involved in seeking approval must be factored into the timetable.

14. Are there any industry-specific rules that apply to the company being acquired?

Specific laws impose ownership restrictions in some industries, in addition to ownership restrictions applicable to foreign persons (see Question 15).

A non-exhaustive summary of some of the restrictions is set out below:

1. Airports – ownership and cross-ownership of airport-operator companies is regulated (Airports Act 1996);

2. Broadcasting – regulation of the broadcasting industry, primarily under the Broadcasting Services Act 1992, seeks to prevent a concentration of control in the television, radio and newspaper industries;

3. Gaming – the gaming industry is regulated by complex State and Territory based legislation which varies significantly across Australia. Legislative restrictions on shareholding levels exist, notably for casino licences; and

4. Financial Services – a variety of rules and legislation regulate control in the financial services sector. The Financial Sector (Shareholdings) Act 1998 restricts shareholdings to 15 per cent without approval. The Insurance Acquisitions and Takeovers Act 1991 governs agreements which affect control of the boards of insurers and acquisitions of insurance businesses.

15. Are cross-border transactions subject to certain special legal requirements?

Foreign investment is primarily regulated by the FATA and the Foreign Investment Policy (Policy) issued by the Commonwealth Government. Consequently, regulation of investments involves a complex mix of statutory and policy issues.

The FATA and the Policy are administered by the Federal Treasurer, advised by FIRB, a unit within Treasury.

Certain acquisitions by ‘foreign persons’ require prior notification to FIRB and approval by the Treasurer. Under the FATA, the Treasurer can block a proposal or apply conditions to ensure that an investment is not contrary to Australia’s national interest. Failure to notify FIRB of a notifiable proposed investment can have serious consequences, including divestment of assets acquired, fines and/or imprisonment. There are no


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legal consequences of failure to notify FIRB of a proposed investment that is notifiable under the Policy only, but it may have a negative impact on the investor’s relationship with the Australian government.

A ‘foreign person’ means a natural person not ordinarily resident in Australia. A company is deemed to be a foreign person if a single foreign person holds at least 15 per cent of the company or if several foreign persons hold at least 40 per cent in aggregate. In practice, many ASX-listed companies are ‘foreign persons’ for the purpose of the FATA and the Policy.

Investments by ‘foreign government investors’ attract additional scrutiny due to concerns about potential political or strategic objectives. The Policy provides for foreign government investors to notify a wider range of investments to FIRB than other foreign persons. ‘Foreign government investor’ includes entities in which foreign governments or their agencies or related entities from a single foreign country hold an aggregate interest (direct or indirect) of at least 15 per cent, or an aggregate interest of at least 40 per cent if the foreign governments or their agencies or related entities are from more than one foreign country.

What Acquisitions Require FIRB Approval?The FATA and the Policy generally require notification to FIRB of certain proposals by foreign persons including:

1. Acquisitions of substantial interests (15 per cent or more) in Australian businesses or corporations;*

2. Takeovers of offshore companies with Australian subsidiaries or assets;*

3. ‘Direct investments’ by foreign government investors (generally involving a 10 per cent equity holding or more); and

4. Acquisitions of companies with interests in certain types of land (including interests in exploration and mining tenements).

*FIRB notification for these transactions is only required if the applicable monetary threshold is met. Thresholds are significantly more generous for investments by entities from New Zealand and the United States than for other countries.

What does FIRB Consider When Examining a Foreign Investment Proposal?Investment proposals are examined in detail to determine whether there are any national interest concerns, with FIRB typically considering:

1. The impact on Australia’s national security, economy, community and revenue;

2. Whether the investment may hinder competition or cause undue concentration or control in the sector concerned; and

3. The character of the investor.

Approval is usually given within 30 days of notification, but complex transactions may take significantly longer.

Prohibition of foreign investment proposals is rare and approval is given for most transactions with minimal or no conditions.

If FIRB approval for a transaction is inadvertently overlooked, it is possible to seek subsequent approval. However, multiple failures to seek prior FIRB approval may be viewed unfavourably by FIRB and could lead to further consequences for the investor if they involve a breach of the FATA.

Do Any Other Laws Restrict Foreign Investment in Australia?Restrictions apply to acquisitions of interests by foreign persons in particular industries and companies, including:

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1. Aggregate foreign ownership in Australian international airlines is limited to 49 per cent (Air Navigation Act 1920). Ownership in Qantas is limited to 25 per cent for single foreign investors and 35 per cent for collective foreign investment (Qantas Sale Act 1992);

2. Aggregate foreign ownership in Australian airport-operator companies is limited to 49 per cent (Airports Act 1996); and

3. State-based legislation imposes foreign ownership restrictions in companies owning casino licences.

16. How will the labour regulations in your jurisdiction affect the new employment relationships?

Generally, there is no change in employment arrangements because the bidder acquires the shares in the target, with the target remaining as the relevant employer. Arrangements may include individual employment contracts, enterprise agreements, union agreements or other broader workforce agreements.

Employee share schemes adopted by the target may contain change of control provisions. Bidders should identify the impact of the transaction on any schemes and how employee shares can be acquired.

Bidders must disclose their intentions for the target’s employees, assuming a takeover or scheme succeeds, in the Bidder’s Statement or Scheme Booklet.

17. Are there any proposals for reforms to the laws and regulations governing mergers and acquisitions currently being considered?

Treasury Consultation on ASIC Takeovers ProposalsIn October 2012, the Commonwealth Treasury released a paper on the following issues:

1. Use of the three per cent creep exception;

2. Use and disclosure of equity derivatives;

3. Use and disclosure of ‘indicative proposals’ by potential bidders to avoid the requirement to make a takeover within two months of announcing a proposed takeover, and to otherwise apply inappropriate pressure on the target;

4. Associations between parties; and

5. Impact of new media disseminating price-sensitive information.

Treasury will consult with stakeholders to determine whether legislative change is required. No timeframe is yet available.

Agricultural Land RegisterIn October 2012, the Australian government announced it will, following consultation, implement a national foreign ownership register for agricultural land to improve transparency of foreign ownership in Australian agricultural land.

The register could lead to future acquisitions being subject to additional scrutiny, restrictions or FIRB notification requirements under the FATA or the Policy.


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TERESA HANDICOTTPartner, Corrs Chambers WestgarthE [email protected] www.corrs.com.auA Level 35, Waterfront Place, 1 Eagle Street Brisbane QLD 4000, AustraliaT +61 7 3228 9458 F +61 7 3228 9444

ABOUT THE AUTHOR

Teresa practises exclusively in the areas of corporate and commercial law. While the emphasis of Teresa’s practice is on mergers and acquisitions, including takeovers and schemes of arrangements under the Corporations Act, she advises clients from a number of industry sectors on all commercial and corporate aspects of their business, including funding requirements, corporate structures, corporate compliance and securities industry law. She has also advised on several signifi cant private equity M&A transactions.

With over 25 years experience in mergers and acquisitions, Teresa is a highly regarded corporate lawyer, she was named Australian Dealmaker of the Year at the 2008 ALB Australasian Law Awards. She is consistently listed as a leading lawyer by AFR Best Lawyers and Chambers Global.


The most comprehensive legal information platform available in the Chinese market, Lexis® China is a bilingual database with access to millions of data items. This one-stop online service has powerful search functions and efficient features that can be customized.

Flagship provider of Chinese legal information and services.

Lexis China®

Lexis China®

What Lexis China brings to you®

• One-stop provider for Chinese legal information and services Make your legal research more effective and accurate. With millions of data items and practical features, Lexis® China is the legal professional’s one-stop solution.

• Bilingual legal databaseMake your research more efficient with Lexis® China, the most complete bilingual database available to Chinese legal practitioners.

• Practitioner modules based on practice areaBased on clients’ in-depth knowledge, Lexis® China Practitioner Modules provide search indices and content according to key issues and practice areas, such as Taxation, Company Law and Employment Law.

• Standard and customized translationsIn addition to the large volume of professionally translated materials currently available in the database, Lexis® China subscribers are entitled to English-to-Chinese legal content translation service without charge (conditions apply).

• Value-added servicesContract templates, online Q&As by legal practitioners and various topical seminars.


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The most comprehensive legal information platform available in the Chinese market, Lexis® China is a bilingual database with access to millions of data items. This one-stop online service has powerful search functions and efficient features that can be customized.

Flagship provider of Chinese legal information and services.

Lexis China®

Lexis China®

What Lexis China brings to you®

• One-stop provider for Chinese legal information and services Make your legal research more effective and accurate. With millions of data items and practical features, Lexis® China is the legal professional’s one-stop solution.

• Bilingual legal databaseMake your research more efficient with Lexis® China, the most complete bilingual database available to Chinese legal practitioners.

• Practitioner modules based on practice areaBased on clients’ in-depth knowledge, Lexis® China Practitioner Modules provide search indices and content according to key issues and practice areas, such as Taxation, Company Law and Employment Law.

• Standard and customized translationsIn addition to the large volume of professionally translated materials currently available in the database, Lexis® China subscribers are entitled to English-to-Chinese legal content translation service without charge (conditions apply).

• Value-added servicesContract templates, online Q&As by legal practitioners and various topical seminars.


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ChinaKing & Wood Mallesons

1. What has been the general level of M&A activity over the last 12 months in your jurisdiction? What were the most notable mergers and acquisitions during that period?

In recent year, China has become the prime investment destination for foreign investors, as the Chinese middle class rises and foreign investors become more familiar with the M&A markets in China. Though the overall level of M&A transactions in 2012 saw a 14.3 per cent decrease in the number of deals and a 24.1 per cent decrease in the value of deals compared to 2011,1 a strong recovery is expected in 2013. In 2012, there are a total of 42 inbound M&A by the foreign investors and 112 outboard M&A by Chinese domestic companies. The transaction value of these M&A deals totaled US$33.48 billion and accounted for 66 per cent of the total transaction value of all M&A deals involving Chinese domestic companies (ie including foreign M&A, domestic M&A and outbound M&A).2

Some of the notable Chinese outbound M&A transactions in 2012 include:

■ Sinopec International Petroleum Exploration and Production Corporation acquiring 30 per cent equity in a Portugal energy company, GALP Energia

■ Dalian Wanda Group acquiring 100 per cent equity in AMC Theatres Inc.

■ Sinopec International Petroleum Exploration and Production Corporation acquiring the shale gas projects of Devon Energy Co.

■ Bright Food (Group) Co., Ltd. acquiring 60 per cent equity in Weetabix Food Company

■ Weichai Power Co., Ltd. acquiring 25 per cent equity in Kion Holding GmbH and 70 per cent equity in Linde Hydraulic

2. What are the most common methods for acquiring or merging with a public company in your jurisdiction?

The most common methods for acquiring or merging with a public company in China by domestic investors are:

■ Tender offers.

■ Acquisitions by agreement.

■ Private placements of new shares.

However, foreign investors looking to acquire or merge with a Chinese domestic public company are subject to additional requirements and governmental approval.

The most common methods by which foreign investors acquire or merge with Chinese public companies include:

■ Qualified Foreign Institutional Investor (QFII) Investment. Such foreign investors must be approved by China Securities Regulatory Commission (CSRC) as a QFII to enter the Chinese secondary market. QFIIs can convert foreign currency into renminbi through strictly supervised special accounts and invest in the domestic securities market. The QFIIs’ capital gains and dividends, after


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verification, can be converted into foreign currency and remitted out of China. It should be noted that the operation of QFIIs are restricted and subject to quotas.

QFIIs are typically overseas fund management institutions, insurance companies, securities companies and other asset management institutions. Foreign investors can purchase Chinese listed companies’ shares through a QFII; however, a QFII’s shareholding in any single listed company cannot exceed 10 per cent of that company’s total shares and the total foreign investors in a single listed company must not exceed 20 per cent of the company’s total shares. Therefore, QFIIs do face great difficulties in reaching a position of control within a listed company.

■ Acquiring tradable B and/or H shares. Although the A-share market provides a limited access to foreign investors, a listed company is allowed to issue B and H shares to foreign or Hong Kong investors. In principle, a foreign investor could achieve control of a listed company provided it has acquired sufficient B and/or H shares. However, only a small portion of listed companies has issued B and/or H shares and the share proportion of B and H shares is typically relatively small. Therefore, currently it is not always possible for a foreign investor to control listed companies by this means. In addition, it should be noted that foreign investors are prohibited from purchasing more than 30 per cent of B shares of a listed company through the secondary market.

■ Strategic Investments. Strategic investments allow certain foreign investors that meet strict requirements to directly purchase A-shares of listed companies. The policy behind the Strategic Investments is to encourage medium-to-long term investment of a strategic nature. The Ministry of

Commerce (MOFCOM) will need to approve the transaction prior to the foreign investor making the strategic investment. Pursuant to Article 5.1 of the ’Measures for Strategic Investment by Foreign Investors in Listed Companies jointly issued by MOFCOM, CSRC, State Taxation Administration, SAIC and SAFE in 2005’ (hereinafter known as the ‘Strategic Investment Measures’), foreign investors can make strategic investments through:

1. Acquisitions by agreements;

2. Private placements of new shares; or

3. Any other method sanctioned by the PRC law.

3. What are the key laws and regulations that govern mergers and acquisitions in your jurisdiction?

The key laws and regulations that govern mergers and acquisitions in China are:

1. Company Law (revised in 2005). Issued by the National People’s Congress, this law governs two types of corporations: limited liability companies and joint stock companies.

2. Securities Law (revised in 2005). Issued by the National People’s Congress, this is the principal law regulating public M&A in China and sets out the basic legal framework for securities.

3. Provisions on the Mergers and Acquisitions of a Domestic Enterprise by Foreign Investors (revised in 2009). Issued by MOFCOM, these provisions outline the different means, approval procedures and process by which to initiate mergers and acquisitions of domestic Chinese enterprises by foreign investors. These provisions are the most comprehensive and specifically govern the takeovers

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involving foreign parties. Although these provisions do not specifically aim toward listed companies, foreign investment in listed companies must be consistent with these provisions.

4. Measures for the Administration of the Takeover of Listed Companies (revised in 2012) (hereinafter known as the ’Takeover Measures’). Issued by CSRC, the Takeover Measures provide specific principles, means and procedures for domestic companies to take over listed companies. Although the Takeover Measures do not specifically mention foreign investment, foreign investment must be consistent with these measures.

5. Strategic Investment Measures. These measures govern and regulate strategic investments by foreign investors in domestic Chinese enterprises.

6. Measures for Administrating the Disclosure of Information of Listed Companies (2007) (hereinafter known as the ’Disclosure Measures’). Issued by CSRC, the measures regulate information disclosures by issuers, listed companies and other relevant parties in order to protect the rights and interests of investors.

7. Catalogue of Industries for Guiding Foreign Investment (revised in 2011) (hereinafter known as the ’Catalogue’). The Catalogue was issued by the National Development and Reform Commission and MOFCOM. The Catalogue divides foreign investment into four categories according to industry sector: (i) encouraged; (ii) permitted; (iii) restricted; and (iv) prohibited. The Catalogues reflect the policy attitudes of the Chinese authorities.


The main government regulators and agencies are:

1. The National Development Reform Commission (NDRC), which is the body responsible for planning national economic and social development and reporting to the State Council. The NDRC’s approval will be decisive for major projects in restricted areas or sectors considered important to the Chinese economy.

2. MOFCOM, which is the body in charge of China’s domestic and foreign trade, international economic co-operation and foreign investment, including anti-trust regulations. MOFCOM is competent to supervise and approve mergers and acquisitions.

3. The State Assets Supervision and Administration Commission of the State Council (SASAC), which is the body supervising and administering state-owned shares, assets and investments, including managing state-owned enterprises.

4. The State Administration for Industry and Commerce (SAIC), which is a body with a wide range of competencies. The main areas in which the SAIC touches upon mergers and acquisitions is as a registration body. As such it issues business licenses, maintains the corporate records of foreign invested enterprises (FIEs) and conducts annual inspections. In addition, the SAIC is in charge of market supervision and regulation to maintain market order and protect the rights and interests of businesses and consumers.

5. The State Administration of Foreign Exchange (SAFE), which is the body responsible for the supervision and management of the foreign


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exchange market and for monitoring the balance of payments, foreign credit and debt, and cross-border capital flows.

6. The CSRC, which is the body responsible for supervising and regulating activities in relation to the Chinese securities market. This also includes the merger and acquisition of listed companies.

Stock exchanges – there are two independent stock exchanges in China:

1. The Shanghai Stock Exchange; and

2. The Shenzhen Stock Exchange.

For specific industry sectors, pre-approval must also be obtained from the relevant industrial supervising authorities. For example, the approval of the Ministry of Industry and Information Industry (MIIT) may be required for certain acquisition targeting the telecommunication sector.


There are no specific prohibitions against hostile bids under the PRC laws; however, they are not common, especially if the bidders are foreign parties. The main reasons are: hostile bids are usually costlier than recommended bids; and many government approvals (eg the anti-monopoly review) are difficult to obtain without the cooperation of the target company.

6. What laws may restrict or regulate certain takeovers and mergers, if any? (eg, anti-monopoly or national security legislation).

Laws and regulations that may restrict or regulate certain takeovers and mergers include:

■ If the takeover of a listed company or a change of shareholding involves matters related to state industrial policies, market admission

policies, the transfer of state-owned shares and other issues, it is subject to the approval of the relevant authorities. For example:

■ The Anti-Monopoly Law of the PRC (promulgated in 2007), issued by the Standing Committee of the National People’s Congress, which provides for major principles of merger filing procedures.

■ Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators (promulgated in 2008), which set out the thresholds under which the merger filing will be triggered:

1. The combined worldwide turnover of all the undertakings concerned in the preceding fiscal year exceeds 10 billion yuan, and the nationwide turnover within China of each of at least two of such undertakings exceeds 40 million yuan; or

2. The combined nationwide turnover within China of all the undertakings concerned in the preceding fiscal year exceeds two billion yuan, and the nationwide turnover within China of each of at least two of the undertakings concerned in the preceding fiscal year exceeds 400 million yuan.

National Security – Notice of the General Office of the State Council on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (promulgated in 2011), stipulates that acquisitions by foreign investors of domestic Chinese companies in key defense, energy or natural resources areas where the foreign investor may acquire actual control of the target Chinese company requires a national security review. Generally, the scope of security review covers the mergers and acquisitions by foreign investors in areas such as military, agricultural, energy, resources, infrastructure, transportation services, key technologies or major equipment manufacturing enterprises.

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In the case of an acquisition of a public company through tender offer, the documentation below is required to implement the transaction:

1. Tender Offer reported to CSRC

2. Summary of Tender Offer Report to the public

3. Announcement of the Tender Offer

4. Professional financial consultation opinions

5. Legal opinions issued by lawyers

6. Report issued by the board of directors of the target company

A professional opinion issued by the independent financial advisor to CSRC

In the case of an acquisition of a public company through agreement, the documentation below is required to implement the transaction:

1. Letter of Intent or Memorandum of Understanding

2. Share acquisition agreement

3. Resolution of the board of directors of the target company

4. Opinion of the independent directors

5. Opinion of professional financial advisor

6. Legal opinions issued by the lawyers

In the case of an acquisition of a non-public company, the major documents required to implement the transaction are: a letter of intent or MOU, the share acquisition agreement/asset purchase agreement and other ancillary documents.


Generally no government charges or fees apply for mergers and acquisitions in China.

9. When conducting due diligence, what information is required to be publicly disclosed?

No information is required to be publicly disclosed when due diligence is being conducted. In a recommended bid, the documentation received from the target is more complete, although its accuracy must still be verified. The legal advisors for the bidder can retrieve the target’s corporate information from the local SAIC. In addition, the bidder can stipulate in the MOU that the target company will provide all relevant information needed to conduct a thorough due diligence.

The following areas are generally examined by lawyers in public takeovers:

■ Incorporation, ownership and related approval documentation

■ Assets (fixed, non-fixed and intangible assets, ie intellectual property)

■ Contractual obligations and liabilities

■ Taxation

■ Land use rights and buildings

■ Labor and social insurance-related matters

■ Environmental matters

■ Claims, litigation and arbitration

■ Anti-monopoly issues


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10. What sources of information are available in the public domain?

The following information about a public company will generally be available in the public domain:

1. The basic information of the target company

2. The financial statements and reports

3. The introduction of the directors, supervisors and senior management personnel and their shareholding percentage

4. The outstanding stocks, company bonds, including the top 10 majority shareholders and their shareholding percentage

5. The actual controller of the target company

6. The major litigation in respect of the target company

7. The major events that may substantially affect the stock price of the target company


Pursuant to the Company Law, if the target company is a non-public company, the shareholders who intend to transfer the shares to foreign investors will need to notify the other shareholders in writing and obtain the consent of more than half of the other shareholders.

If the other shareholders do not reply to the written notification in respect of the proposed share transfer within thirty (30) days from receipt of such a written notification, the other shareholders will be deemed as consenting to the share transfer. If more than half of the other shareholders do not consent to the share transfer, such dissenting shareholders should purchase the shares proposed to be transferred, and they will be deemed as consenting to the share transfer if they do not purchase such shares. The other shareholders enjoy a pre-emptive right to

purchase the shares to be transferred at the same conditions.

If the target is state-owned then a transfer of state-owned shares requires the approval of SASAC or its local counterpart, as shareholder of state-owned assets will need to be obtained.

For acquiring a public company, the PRC laws do not provide the shareholders of such a company with the consent right or approval right for the acquisition by tender offer. However, in the case of acquisition by agreement, if the control of the public company is obtained through management buyout, the consent and approval of the shareholders’ meeting is required. Where a public company is acquired through private placement of new shares, the approval of the shareholders’ meeting is also required.


The PRC Company Law adopts a two-tier control system comprised of the board of directors and the board of supervisors. The Company Law introduces a framework of management duties resembling common law fiduciary duties, under which corporate directors, supervisors and senior management personnel owe the company a duty of care, diligence and loyalty.

The target’s board can decide or adopt measures in response to a hostile offer, such as seeking alternative tender offers, but the decisions made and the measures taken by the board must be for the good of the company and its shareholders. The directors do not have the right to obstruct takeovers unless it is in the interests of the company.

In addition, the target’s controlling shareholder must not misuse its major shareholding rights

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to damage the target’s or other shareholders’ lawful rights and interests. The target’s directors, supervisors and senior managers have a duty of fidelity and diligence, and must treat all potential purchasers equally.

13. In what circumstances are break-up fees payable by the target company?

In the takeover of a non-public company, the break-up fees payable by the target company to the acquirer depends on the negotiation and the agreed terms between the parties.

With respect to the takeover of a public company, there are no laws or regulations prohibiting the payment of a break fee. In practice, however, they are not common in China, and we have seen few precedents. In order to increase the certainty of a successful takeover bid, the bidder can also negotiate directly with the majority shareholders of the target and obtain their commitment. However, all takeover bids and their terms and conditions must first be approved by the CRSC before they can proceed.


In general, conditions can be attached to an offer (eg the mandatory tender offer). The conditions to trigger the mandatory tender offer to the target are met (unless the bidder has obtained a waiver from the CSRC), if either:

■ The bidder and parties acting in concert with it will hold 30 per cent or more of the issued shares of the company and intend to acquire more; or

■ The transaction may cause the bidder and parties acting in concert to have a total shareholding 30 per cent or more.

A bidder may also send out a tender offer to all shareholders of the target for either purchasing all (general tender offer) or part of the shares (partial tender offer).

The following are the general conditions for a tender offer:

■ Must purchase more than five per cent of the company’s shares

■ Subject to CSRC approval

■ In a general tender offer aimed at taking control of the target (100 per cent), the announced tender offer report must expressly state that the shares to be acquired will cause the target to be de-listed within the stipulated takeover term

■ The term of the tender offer may not be less than 30 days and not more than 60 days, except when a competitive tender offer comes forth (offer period)

■ During the offer period, the bidder and parties in concert with it cannot buy or sell any of the target’s shares by any means not stipulated in its tender offer or beyond the scope of the terms and conditions of the tender offer

■ The consideration for purchase must be either in cash or securities or both (in a general tender offer, the bidder should only pay cash; if it’s by transferable securities, then the bidder must offer cash as alternative for the shareholders to choose)

■ All the conditions in the bid must apply equally to all shareholders of the target

■ Cannot modify the tender offer within 15 days prior to the expiration of the term of the tender offer, except a competitive tender offer comes forth

■ In the event the bidder intends to cancel the


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tender offer on its own will after such tender offer report is submitted to the CSRC and before the report is publicised, the bidder must file an application to the CSRC to explain the reasons and make an announcement to the public. In addition, the bidder may not make another takeover offer to the target within 12 months upon such announcement, and

■ The bidder cannot transfer the purchase shares within 12 months after the conclusion of the transaction.

■ There are no specific rules or regulations against attaching conditions to a tender offer; however, it is not common in practice. Common examples include:

■ The number of shares to be acquired on completion of the tender offer meet a certain shareholding percentage required by the bidder (eg controlling shareholding)

■ Making the tender offer subject to the fulfillment of certain conditions precedent, such as government approvals, no material adverse effect to the target or its business before closing, and so on

Though there is no clearly expressed restriction imposed on the content of these conditions, in principle they may not be used to avoid government supervision, statutory requirements, or discriminate against some shareholders or unreasonably favor the others.


In M&A transactions, there are generally three sources of financing: the buyer’s own funding, third-party (eg banks, private equity groups) financing and seller financing.

In any M&A transactions, the seller needs to carefully evaluate the financial strength of the potential buyers. If seller financing is provided in the transaction documents, the seller would usually request the buyer to provide certain collaterals or securities.

For a share transfer by agreement, there is no minimum level of financing required. In takeovers of public companies, the amount and source of the fund for the takeover is required to be disclosed in the takeover report submitted by the bidder to the CSRC. The source of the fund for the takeover can be composed of the equity fund of the bidder and bank loan. The PRC laws, regulations and stock exchange rules do not expressly stipulate a percentage requirement on the equity fund of the bidder and bank loan. Generally, the percentage of each source of the fund for the takeover should be on a reasonable basis, and the CSRC will not challenge the capacity of the bidder’s performance of the tender offers if the bidder can demonstrate that it has sufficient funding to implement the tender offer. In addition, the bidder is required to provide a performance bond of not less than 20 per cent of the maximum funding needed for the takeover, to be deposited at a designated bank account prior to the suggestive announcement of the tender offer report to the public if the bidder uses cash to acquire the target.


A bidder does not have the right to compulsorily purchase remaining minority shareholders’ shares; this right is given to the minority shareholders in order to protect their minority interests under a takeover.

Pursuant to Article 44 of the Takeover Measures,

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upon the expiration of a term for tender offer (between 30 and 60 days), if the bidder has acquired more than enough shares to de-list the target, then the minority shareholders will have the right to sell their shares to the bidder under the same terms within a reasonable timeframe as stipulated in the tender offer. The bidder is obligated to purchase all of them.

As such, the minority shareholders of the target company have the option to sell the residual shares held by them to the bidder, and the bidder cannot refuse to purchase such residual shares if these shareholders exercise their option. The legislative intent behind such rule is to protect the rights of the minority shareholders on the basis of equality and fairness. This rule is different from a typical ’squeeze out’ where the underlying purpose is to encourage efficiency.


A business combination may be subject to merger control before it can be completed.

The merger control filing should be made before the closing of the transaction. The proposed transaction is not completed until MOFCOM grants its approval. MOFCOM will review the transaction and render a decision within 30 days from the date of receipt of the complete filing documents. If MOFCOM does not issue any decision within 30 days, the transaction will be considered as approved. If MOFCOM decides to conduct a further in-depth investigation, it may extend the review by 90 days from the date of extension decision. Under exceptional circumstances, MOFCOM can further extend its review by another 60 days.

In practice, MOFCOM may consider the initial filing of information and documents to be

incomplete and will only commence its review once it is satisfied with the filing documents. As a result, the actual time required for obtaining merger control clearance may take much longer than the statutory periods provided under the PRC Anti-Monopoly Law.


Mergers and acquisitions of domestic companies by foreign investors are subject to the Catalogue. Foreign investment in domestic companies is classified into four categories: encouraged, permitted, restricted and prohibited. Foreign investment not included in the encouraged, restricted and prohibited categories of the Catalogue fall under the ‘permitted’ category. Certain foreign investment projects may be undertaken only by way of a joint venture with a Chinese partner under the Catalogue. The level of approval authority will depend on the category the foreign investment project and the total investment of the project. Where the transaction value of a foreign M&A deal in the encouraged or permitted category is above US$300,000,000, or the transaction value of a foreign M&A deal in the restricted category is above US$50,000,000, such a transaction is required to be approved by the NDRC and MOFCOM at the central level.

In addition, pre-approval must be obtained from the relevant industrial supervision authorities in specific industry sectors. For example, pursuant to the Regulation on Foreign Investment in Telecommunication Enterprises (revised in 2008), the approval of the MIIT will be required for certain acquisitions targeting the telecommunication sector; the Regulation on Foreign Investment in Advertising Enterprise (revised in 2008) applies to foreign investors seeking to acquire domestic advertising enterprises.


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19. What are the main tax issues that can arise from the typical deal structures?

The Notice of the State Administration of Taxation on Strengthening the Administration of Enterprise Income Tax on Non-resident Enterprises’ Equity Transfer Income (Circular No. 698) was issued on 10 December 2009 with the goal to prevent foreign investors from avoiding taxes in China by using offshore holding company structures. In addition, Circular No. 698 grants the Chinese taxation authority the right to impose taxes on an indirect transfer of equity interest in resident enterprises by disposing of the equity shares of offshore holding companies. Therefore, the offshore M&A now faces an additional tax burden. In addition, Circular No.698 also imposes strict information disclosure requirements.

After Circular No.698, enterprises will need to carefully consider their offshore holding company structures and offshore restructuring arrangements, especially the location of intermediate companies and their business qualifications.

Mergers and acquisitions in China can lead to a variety of taxes that should be assessed on a case by case basis. Generally the main taxes include:

■ Corporate income tax (CIT). Profits generated from share transfers (capital gain) are subject to CIT. Profits will be subject to withholding tax if the seller is a foreign investor.

■ Stamp duty.The target company shareholder must pay stamp duty at 0.1 per cent of the total transaction price. The buyer is exempt from stamp duty.

■ Special tax treatment. Companies can apply for special tax treatment if the following conditions are met:

1. More than 85 per cent of the consideration is paid in negotiable

securities; and

2. The total acquired shares constitute more than 75 per cent of the target’s total shares.

If all the conditions are met, with respect to the consideration paid in negotiable securities, the company may apply for a CIT exemption. The portion of the consideration paid in cash will still be subject to CIT.

There are various taxes to be paid by the parties; however, the companies may apply for special tax treatment on a case-by-case basis. In order to structure the deal in the most tax efficient way, it is advisable to consult with an experienced tax lawyer in China.


Mergers and acquisitions of domestic companies by foreign investors are subject to the approval by competent governmental authorities, including the project approval by NDRC or its local counterparts, the approval by MOFCOM or its local counterparts of the joint venture contract and/or the articles of association of the target company after the deal, and relevant prior approval by industrial supervision authorities in specific industry sectors. As stated in Question 18, the level of the approval authority depends on the category of the foreign investment project and the total investment of the project.

As outlined in Question 2, foreign investors that intend to purchase A-shares of listed companies will be subject to Strategic Investment Measures. Approval of MOFCOM is required for the strategic investment by foreign investors in domestic listed companies under Strategic Investment Measures. In addition, cross-border transactions may be subject to a national security review (NSR) when the

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foreign investors seek to acquire control of certain types of domestic enterprises. The foreign investors are required to file a notification with MOFCOM regarding any transaction that falls under the scope of the National Security Review Notice. MOFCOM will submit the case to the joint ministerial panel under leadership of the State Council (hereinafter known as the ‘Panel’) within five working days if MOFCOM believes the transaction is subject to NSR review.


Employment Contract Law of the PRC stipulates that if a company is consolidated with another entity, the existing employment contracts will remain effective and the rights of the employees will not be compromised by the merger or acquisition.

In addition, if the target is a state-owned enterprise being acquired by a foreign investor, the target’s board must first inform or consult with its employees to ensure that the foreign takeover is not detrimental to the employees’ legitimate interests. The takeover plan must first be submitted to the employee representatives’ conference for their opinion.

The foreign investors will also need to negotiate with the target company regarding employee settlement plan and submit such plan to the competent authority for approval.


Since the promulgation of the Anti-Monopoly Law of the PRC in 2007, the cases reviewed have increased dramatically. In 2012, there were 142 anti-

monopoly cases that have been approved without conditions imposed by MOFCOM. However, as a result of the increase of workload, the time to review each case has also increased. In practice, the average time for MOFCOM to complete a review of a case, even for small deals without substantial controversy, will usually take between four to six months. Hence, to shorten the review period and increase efficiency, a draft ’Provisional Regulation on Application Standards of Simplified Case for Concentration of Undertakings’ was circulated by MOFCOM on 3 April 2013. The draft regulations only provide the definition a ’simplified case’ for a concentration of undertakings but did not stipulate the procedures.

In addition, a draft of ’Regulation on Imposing Restrictive Conditions in Concentration of Undertakings’ was also circulated by MOFCOM on 27 March 2013. The draft regulations provide background to the types, implementation, change and release of restrictive conditions imposed in cases of a concentration of undertakings.

1 The source of these statistics is from the report of an integrated service provider Zero2IPO, http://www.zero2ipo.com.cn/en/. Last visited on 17 June 2013.

2 Ibid.


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XU PINGSenior Partner, Beijing, King & Wood MallesonsE [email protected] www.kwm.comA 20th Floor, East Tower, World Financial Center 1 Dongsanhuan Zhonglu, Chaoyang District Beijing 100020, P. R. ChinaT +86 10 5878 5012 F +86 10 5878 5577

ABOUT THE AUTHOR

Xu Ping is a senior partner and the head of the corporate practice group of King & Wood Mallesons Beijing. She has over 20 years of experience that covers a wide variety of industries, including automobile, machinery, pharmaceutical, energy, manufacturing, health care, infrastructure and fi nancial services.

Ping has served as the lead counsel for a number of landmark cross-border M&A transactions and was instrumental in their structuring, negotiations, and implementation. She has advised many multinationals and large Chinese enterprises in their investment, acquisition and restructuring projects. Recently, she represented a number of large-scale Chinese state-owned enterprises in their cross-border M&A projects, notably Weichai Power in its strategic investment in Kion Group and its hydraulics business which was awarded as the Outbound M&A deal of the year in 2012 by the China Business Law Journal.

Ping was recognized by Chambers, IFLR, Asia law & Practice as one of the “Leading Lawyers” in M&A and named as the “Top 20 Lawyers in China” by ALB in 2012 and the “Client Choice Hot 75” survey conducted by ALB in 2013.

Ping obtained her LLM degree from Stanford Law School, and her LLB degree from University of International Business and Economics, China. She was admitted to both the PRC bar and New York State bar.

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According to the research of MergerMarket, for the year 2012, there were over 760 M&A transactions in Hong Kong and China. The aggregate transaction value of 2012 increased by 4.7 per cent to US$144.9 billion as compared to 2011. Outbound cross-border M&A transactions remained strong in 2012 with the transaction value amounting to US$64.6 billion. Inbound activity, however, experienced a 20 per cent decline compared with 2011, slipping to US$25.3 billion.

Tops deals in 2012, in terms of their transactional value, include the acquisition of 15.57 per cent stake in Ping An Insurance Company by Charoen Pokphand Group Co Ltd and the acquisition of CDMA network assets in China Telecommunications Corporation by China Telecom Corporation Ltd.

In 2012, there were four privatisation transactions involving listed companies in Hong Kong, including Little Sheep Group Ltd, Zhengzhou China Resources Gas Co Ltd, Samling Global Ltd and Alibaba.com Ltd. According to the HKEx Fact Book 2012, 17 Hong Kong listed companies, including Far East Global Group Ltd, Frasers Property (China) Ltd and Hang Ten Group Holdings Ltd underwent takeovers and mergers in that year.


Acquisitions of public companies in Hong Kong are commonly structured as a takeover offer or a scheme of arrangement.

Voluntary or Mandatory Takeover OfferOne of the common methods used for obtaining control of a public company in Hong Kong, if considered fit for commercial reasons, is to make a voluntary offer to acquire the shares held by the shareholders of the target public company (hereinafter known as the ‘target company’) pursuant to the Code on Takeovers and Mergers (the Takeovers Code) of the Securities and Futures Commission of Hong Kong (SFC). If the offer is accepted, the offeror will obtain the majority control of the target company. Subject to certain restrictions, the consideration for the offer can be in cash or in securities, or a combination of both.

Under the Takeovers Code, there are certain events – the occurrence of which will require a person or persons to make a mandatory offer to the shareholders of the target company to acquire all the shares of the target company’s shareholders. This requirement to make a mandatory offer will arise if :

1. A person (and the persons acting in concert) acquires 30 per cent or more of the voting rights in the target company, whether through a single or a series of transactions; or

2. A person (and the persons acting in concert) holding not less than 30 per cent, but not


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more than 50 per cent of the voting rights in the target company, and that person (and the persons acting in concert) acquires voting rights in the target company, which has the effect of increasing such person(s)’s percentage holding in the target company by more than two per cent from the lowest percentage holding of that person(s) in the 12-month period ending on and inclusive of the date of the relevant acquisition.

The consideration of a mandatory offer must be in cash or be accompanied by a cash alternative at not less than the highest price paid for by the offeror, or any person acting in concert with it, for shares carrying voting rights during the offer period and within the six-month prior to the commencement of the offer period.

Scheme of ArrangementApart from voluntary and mandatory takeovers, the Hong Kong Companies Ordinance (the ‘CO’) provides for a court-sanctioned scheme of arrangement, which can be undertaken by listed companies that wish to undergo corporate reorganisation or privatisation. A scheme of arrangement usually involves the controlling shareholder(s) of the listed target company acquiring the shares of the minority shareholders, which is usually called a ‘transfer scheme’, followed by an application to the Hong Kong Stock Exchange (the SEHK) to de-list the company. Apart from such acquisition, a scheme of arrangement may be effected through the cancellation of the existing shares of the minority shareholders and issuance of new shares to the controlling shareholder of the target company. This is sometimes referred to as a ‘cancellation scheme’. If the scheme of arrangement is effected by way of a transfer scheme, stamp duty will be payable for the sale and purchase of shares. The implications of Hong Kong stamp duty are further elaborated in Question 8 below.

If a scheme of arrangement is proposed, the Hong

Kong court, upon the application of the listed company, may order to convene a general meeting of all shareholders to consider, and if thought fit, approve the proposal. Under the CO and the Takeovers Code, which also applies to schemes of arrangement, a scheme of arrangement can only take effect if:

1. A majority in number representing 75 per cent in value of the disinterested shareholders present and voting either in person or by proxy at the meeting have approved the scheme;

2. The number of votes cast against the scheme at the meeting is not more than 10 per cent of the votes attaching to all disinterested shares; and

3. The court approves the scheme.


The Hong Kong Companies Ordinance The CO is the main legislation governing M&A transactions in Hong Kong. Under the CO, all Hong Kong incorporated companies and overseas companies registered under Part XI of the CO must comply with the requirements applicable to such transactions.

The Securities and Futures Ordinance (SFO)Bidders in takeover transactions will have to consider the implications of the requirements under the disclosure of interests regime under Part XV of the SFO. The statute imposes filing obligations on persons who acquire five per cent or more of interests in shares, whether voting or non-voting, of a Hong Kong listed company. Filings are required to be made for subsequent changes to such interests. Stricter obligations are imposed on directors of listed companies, who are required to report all their interests in shares held in the listed companies.

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The SFO further prohibits any insider dealings and other forms of market misconduct.

The Takeovers CodeTakeovers, mergers and schemes of arrangement involving public companies in Hong Kong are primarily regulated by the Takeovers Code, which aims to ensure all shareholders affected by the takeover or merger are treated equally. The Takeovers Code applies to offers, including partial offers, offers by a parent company to acquire shares of its subsidiary, and certain other transactions where control of a company is obtained or consolidated for the purpose of a takeover or merger of companies regulated by the code.

The Takeovers Code sets down the standards of commercial conduct and behavior acceptable in the situation of a takeover or merger. Whilst the Takeovers Code does not have the force of law, the Executive Director of the Corporate Finance Division of the SFC (hereinafter known as the ‘executive’) has the power to refer matters for ruling to the Committee of the SFC (hereinafter known as the ‘Panel’) and institute disciplinary proceedings if it considers that there has been a breach of either the Takeovers Code or a ruling of the executive or the Panel, upon investigation.

The Listing RulesAll Hong Kong listed companies are required to comply with the Rules Governing the Listing of Securities (Listing Rules) of the SEHK, depending on whether it is listed on the Main Board or the Growth Enterprise Market (GEM). As such, if the acquirer is a Hong Kong listed company, apart from the CO and the Takeovers Code, it should comply with the relevant Listing Rules of the SEHK. For instance, if the acquisition would constitute a notifiable transaction under the Listing Rules, the acquirer listed company must comply with the relevant announcement, reporting and shareholders’ approval requirements, depending on the size of the

transaction and if any exemption applies.


The Securities and Futures Commission (SFC)The SFC is an independent statutory body to regulate securities and futures markets in Hong Kong. It aims to ensure orderly securities and futures market operations and protect investors.The SFC is empowered by the SFO to conduct investigative, remedial and disciplinary actions against possible breaches.

The functions of the SFC include:

1. Setting market regulations, investigating breaches of such rules and market misconduct and taking appropriate enforcement actions;

2. Administering the Codes on Takeovers and Mergers and Share Repurchases of the SFC;

3. Overseeing regulations governing takeovers and mergers of public companies and the SEHK’s regulation of listing matters; and

4. Promoting investor education in relation to market operations, the investment risks involved and investor rights and obligations.

The Stock Exchange of Hong Kong Limited (SEHK)The SEHK, a wholly-owned subsidiary of HKEx, operates and maintains the stock market in Hong Kong. It is a recognised exchange company under the SFO and is the primary regulator of stock exchange participants, including companies listed on the Main Board and GEM. The SEHK works closely with the SFC in regulating listed issuers and administers listing, trading and clearing rules.


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Hostile bids are offers to purchase shares in the company not pursuant to any agreements, nor any co-operation with the target company. Although hostile bids are allowed in Hong Kong, they are rare since most listed companies in Hong Kong are either family-controlled or held by a single group of controlling shareholders.

The hostile pre-conditional takeover bid jointly made by ENN Energy Holdings Limited and China Petroleum & Chemical Corporation against China Gas Holdings in December 2011, although unsuccessful, may be the first unsolicited takeover bid in Hong Kong.


Generally speaking, there are no restrictions on foreign investments in Hong Kong or restricted levels of foreign ownership of Hong Kong companies in Hong Kong, save for certain industry-specific restrictions which are applicable to a particular industry. Those industries include telecommunication, television and radio broadcasting, banking and securities and insurance. In addition, there are neither foreign-exchange regulations in Hong Kong, nor any restrictions or tax withholding imposed on repatriation of capital or remittance of profits or dividends to or from a Hong Kong company and its shareholders.

The Hong Kong Competition Ordinance, which is expected to be enforced in either late 2013 or early 2014 may have implications to future takeover transactions. Briefly speaking, the Ordinance regulates anti-competitive agreements and instances of abuse of market power.


The principal transactional documentation involved in a simple sale and purchase of shares of a Hong Kong company typically includes:

1. A confidentiality letter in which the parties undertake to keep confidential any information relating to the transaction and the counterparties;

2. A sale and purchase agreement which records the terms and conditions of the transaction, and usually includes representations and warranties regarding the business and the company to be acquired;

3. A disclosure letter under which a seller makes disclosures against the representations and warranties given by it to the purchaser under the sale and purchase agreement; and

4. An instrument of transfer and bought and sold notes for the sale shares.

For transactions which constitute takeovers transactions under the Takeovers Code, the announcement and circular and offering documentation requirements will apply.


Pursuant to the Stamp Duty Ordinance of Hong Kong, stamp duty on the sale or purchase of any ‘Hong Kong stock’, which includes shares of a company listed in Hong Kong, is subject to stamp duty of a total of 0.2 per cent of either the amount of the consideration paid or of its value of such shares, whichever is higher. Therefore, stamp duty will apply if the offeror takes over the target company by way of acquiring shares of the minority shareholders. However, stamp duty is not applicable to cancellation of existing shares or issuance of new shares.

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The Securities and Futures (Fees) Rules under the SFO and the Takeovers Code have prescribed certain fees which are payable to the SFC in relation to takeovers transactions. Application fees are payable to the SFC when a party would like to seek a formal ruling as to the application of the Takeovers Code from the executive. A fee is payable for the review of any rulings of the executive. However, no fees are required for any initial consultations with the executive, whose views however, will be preliminary and non-binding on the executive.


To conduct due diligence over the shares and affairs of the target company, the following information will be obtainable in the public domain:

1. Corporate filings records maintained at the Hong Kong Companies Registry;

2. Information relating to real properties owned and leased by the target company in Hong Kong which is registered with the Land Registry of Hong Kong;

3. Intellectual property rights which are registered with the Trade Marks Registry of Hong Kong;

4. Information relating to legal proceedings in Hong Kong which can be searched at the Hong Kong Courts;

5. Bankruptcy and compulsory winding-up searches which can be carried out at the Official Receiver’s Office of Hong Kong; and

6. If the Target Company is a listed company in Hong Kong:

a. Announcements, reports and circulars published under the relevant Listing Rules; and

b. The disclosure of interest in shares pursuant to the SFO.


Broadly speaking, directors owe fiduciary duties and the duty of skill, care and diligence towards the shareholders of the company. The source of these duties mainly comes from common law, the company’s constitutional documents and other guidance materials issued by the regulatory authorities. According to the Companies Registries’ Guide on Directors’ Duties, directors have duties:

1. To act in good faith for the benefit of the company as a whole;

2. To use powers for a proper purpose for the benefit of the members as a whole;

3. To avoid conflicts between personal interests and interests of the company;

4. Not to enter into transactions in which the directors have an interest except in compliance with the requirements of the law;

5. Not to accept personal benefit from third parties conferred cause of his position as a director; and

6. To observe the company’s Memorandum and Articles of Association and Resolutions.

If there are possible conflicts between a director’s personal interests and the interests of the company (for instance, if the director is connected to the offeror), such director is required to make proper disclosure of his interests. The Listing Rules prohibit any director who has a material interest in the transaction from being included in the quorum of the relevant board meeting and must abstain from voting on the relevant resolutions.

Under r 2 of the Takeovers Code, when the target company receives an offer or is approached with a proposed offer, the board of directors of the target company is required to establish an independent


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committee to make recommendations as to the fairness and reasonableness of the offer, and the acceptance or voting thereof. The independent committee shall comprise all non-executive directors who have no direct or indirect interest in any offer or possible offer other than as a shareholder of the target company. The board is required to retain a competent independent financial advisor to advise the independent committee on these matters. The appointment of such independent financial advisor must have been first approved by the independent committee. The written advice of the independent financial advisor and the reasons thereof must be provided to the shareholders by inclusion in the offeree board circular along with the recommendations of the independent committee with respect of the offer.

11. In what circumstances is break-up fees payable by the target company?

A break-fee arrangement is commonly seen in takeovers and mergers transactions involving companies listed in Hong Kong. Under such an arrangement, the offeror (or a potential offeror) would enter into an agreement with the target company, pursuant to which a cash sum will be payable by the target company if certain specified events occur that would have the effect of preventing the offer from proceeding or causing it to terminate.

The Takeovers Code does not prohibit break-fee arrangements, but requires that they must be de minimis, which value should normally be under one per cent of the offer value. The board of directors of the target company and its financial advisor must confirm to the executive in writing that each holds the opinion that the arrangement is in the best interest of the target company. Any such arrangement must be fully disclosed in the announcement of the offeror of its firm intention to make an offer, and the terms of the arrangement must be disclosed in

the offer document. All documents relevant to the arrangement will be required to be put on display for public inspection.


All offers, with the exception of a partial offer, must at least be conditional upon the offeror (and persons acting in concert with it) receiving acceptances of share purchases that, in aggregate with any existing or future shares held, will confer the offeror with over 50 per cent of the voting rights of the company, save where the executive approves otherwise. The level of acceptance of shares may be set higher than 50 per cent in a voluntary offer, but no offers should be made subject to conditions which are in the control of the offeror, thus allowing it to easily withdraw the offer. Mandatory offers, however, cannot be subject to any other conditions.

If the potential bidder does not wish to commit itself to making a firm offer, it may make an announcement of a possible offer. If a pre-conditional offer announcement is made, the executive must be consulted in advance and the announcement must state whether the pre-conditions are waivable or not.


If a takeovers offer is made, it is likely that not all minority shareholders of the target company would accept the offer. In such circumstances, according to the CO, if the offeror (and persons acting in concert with it) is able to secure not less than 90 per cent in value or more of the disinterested shares for which the offer was made within four months of posting of the initial offer document, the offeror is entitled to serve notice on the dissenting minority shareholders to compulsorily acquire their outstanding shares.

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SIMON LUK Chairman of Asian PracticePartner, Winston & StrawnE [email protected] www.winston.comA 42nd Floor, Bank of China Tower, 1 Garden Road, Central, Hong KongT +852 2292 2222 F +852 2292 2200

ABOUT THE AUTHOR

If an intention of exercising the powers of compulsory acquisition is stated by the offeror in the offer document, the offer must not remain open for more than four months from the date of posting of the offer document, unless the offeror has by the time become entitled to exercise such powers. Once the offeror is so entitled to squeeze-out the minority shareholders, it must do so without delay.


In July 2012, the Hong Kong Legislative Council passed the Companies Bill which will lead to substantial amendment to the current CO and will affect takeovers and mergers transactions. The bill was gazetted on 10 August 2012 and is expected to come into force in 2014. Major changes include

the replacement of the existing ‘headcount’ test with a ‘disinterested shares test’ when counting the votes cast on resolutions approving a scheme of arrangement that relates to takeovers and privatisation. Under such ‘disinterested shares test’, the number of votes cast against the resolutions shall not exceed 10 per cent of the votes attached to all disinterested shares, which is an alignment with the ‘10% objection rule’ under the Takeovers Code mentioned above.


Browse the largest collection of legal books of Hong Kong, India, Japan, Malaysia and SingaporeVisit www.lexisnexisasia.com/AsiaCatalogue

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IndiaAmarchand & Mangaldas & Suresh A. Shroff & Co.


India has the distinction of being one of the fastest growing economies in the world. In the past two decades, liberalisation has transformed India from being an inward looking state-based economy, into a globalised market-based economy, now identified as one of the most attractive investment locations globally. The success of Indian economic reforms is evidenced by high GDP growth, high growth rate in the manufacturing sector, comfortable foreign exchange reserves, improved short-term debt profile and buoyant export. Indian companies have consolidated around their areas of core competence, within India and overseas, by opting for foreign tie-ups and infusing new technology, management expertise and access to foreign markets. For example, in the technology sector, almost all the major global players have established operations in India.

As regards the M&A trend in the past 12 months, while fiscal year (FY) 2012 was not too promising for the global economy – which in turn resulted in the Indian economy also being impacted – as per the global deal tracking firm Mergermarket, M&A activity in India witnessed a significant surge in this year’s second quarter (approximately US$7.7 billion, representing 145.6 per cent increase in deal value over first quarter of 2013).

As per Mergermarket, the highest level of activity in terms of value was recorded in the consumer

sector, while the highest value in terms of deals was recorded in the industries and chemical sector. Moreover, there has been an uptick in both inbound and outbound deal activity with outbound deals comprising of Indian firms acquiring US$5.2 billion worth of assets overseas (732.6 per cent above the first quarter tally). However, despite the strong increase in the second quarter, this year’s M&A (until the completion of the first half) only totalled $10.9 billion (130 deals) – the lowest opening half year since the 2009 ($7.8 billion (98 deals)).

A majority of the big ticket cross-border (both inbound and outbound) M&A deals of this year were advised by AMSS which included the sale of Videocon’s participating interest in Rovuma, Mozambique, Etihad’s investment in Jet Airways, Apollo Tyres’ acquisition of Cooper Tyres (USA), acquisition of United Spirits by Diageo, acquisition of Gujarat Gas Company by GSPC Distribution Networks from BP and Goldman Sachs’ US$600 million investment in DEN Networks.


The extant provisions of Indian law prescribe various methods for acquiring/merging with public companies. Under Indian corporate law, there exist two kinds of companies, public companies and private companies. Public companies can further be sub-divided into two categories, public listed companies and public unlisted companies. The methods listed below are in relation to both listed and unlisted public companies:


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Mergers/Demergers In India, mergers/amalgamations/demergers are subject to court approval; appropriate petitions must be filed before a court of competent jurisdiction for approval of the proposed merger/demerger. In addition, shareholder and creditor approval is also required.

Business/Asset Transfers While mergers/demergers are court driven processes, companies in India are also permitted to transfer assets/undertakings through private arrangements. The primary options for transferring assets include: (i) a ‘slump sale’ of an undertaking; and (ii) sale of individual cherry picked assets. The options are predominantly tax driven.

Share Acquisition The acquisition of shares of a public unlisted company is undertaken through a private arrangement between the selling shareholder/target company and the buyer. Acquisition of shares (both primary and secondary) is regulated by the procedures set out in the (Indian) Companies Act, 1956 (Companies Act) and the charter documents of the target company. In the case of public listed companies, an acquisition of shares is further regulated by the Securities & Exchange Board of India (Substantial Acquisition of Shares And Takeovers) Regulations, 2011 (Takeover Regulations), which in turn prescribes ‘open offer’ obligations in the event of a ‘takeover’. As per the Takeover Regulations, a ‘takeover’ involves buying shares of a publicly listed target company from its existing shareholders. Takeovers which result in acquisition of more than 25 per cent of shares or voting rights, or control over a target company, trigger the requirement of an open offer to the existing shareholders. Control is defined as the power to appoint the majority of the directors or control management decisions. Acquisition of an indirect interest in the target (for example, by acquiring the holding company of the target), also

triggers the open offer requirement to minority shareholders.

Leveraged Buy-out This involves an acquisition by the investor of a controlling interest in the target’s equity, with a significant percentage of the purchase price being financed through debt finance.


Mergers and acquisitions are primarily regulated under the following laws and regulations:

■ The Companies Act: The Companies Act is the statute primarily governing all matters relating to companies incorporated in India. The Companies Act specifically provides for the manner in which mergers, demergers, amalgamations and/or arrangements may take place pursuant to an Indian court sanctioned scheme. Under the Companies Act, a scheme for merger or amalgamation must be approved by the High Court, subject to the prescribed procedure.

■ Takeover Regulations: As discussed above, the provisions of the Takeover Regulations govern acquisition of direct/indirect control over a listed public company, mandate open offer obligations (in select cases) and also prescribe disclosure requirements in various processes involving creeping acquisitions.

■ Preferential Allotment Regulations: Preferential Allotment of shares by unlisted public companies is regulated by the provisions of the Companies Act and the Unlisted Public Companies (Preferential Allotment) Rules, 2003. The rules prescribe various procedural formalities as regards preferential allotments including, inter

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alia, requirement of shareholder approvals, timelines for the same, and pricing requirements in cases where warrants are issued.

A preferential allotment by a public listed company is subject to the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 and the listing agreement executed by the target company with the relevant stock exchanges, which prescribe, inter alia, the eligibility requirement for the acquirers, the process and requirement for shareholders and stock exchange approvals, the time period for the allotment process, and the pricing requirements.

■ The Competition Act, 2002 (Competition Act): The Competition Act regulates business combinations which may have an appreciable adverse effect on competition within a relevant market in India. A ‘combination’ may result from a merger or an acquisition, provided that the resulting entity satisfies certain asset value or turnover thresholds as provided under the Competition Act. If the resultant entity were to be a combination, then a detailed notification is required to be made by the investor and the target company within 30 days of: (i) the execution of a binding agreement in the case of acquisitions; and (ii) the board approval/resolution in case of mergers/amalgamations.

■ Exchange Control Regulations: Foreign Exchange Management Act, 1999 (FEMA) read with the Consolidated Foreign Direct Investment Policy (FDI Policy) (effective from April 5, 2013), issued by the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India along with various notifications issued by the Indian government and the Reserve Bank of

India (RBI), from time to time.

■ The Income Tax Act, 1961 (IT Act): The IT Act sets out the applicable taxes in relation to mergers and amalgamations, slump sales (ie the transfer of an undertaking for a lump sum consideration), asset sales, transfer of shares and demergers.

■ Labour Regulations: The primary legislation is The Industrial Disputes Act, 1947 which prescribes various provisions in relation to transfer/retrenchment of employees in the event of a transfer of undertaking. There are various other central and state level legislations that may be relevant depending on facts and circumstances of each case.

■ Sectoral Regulations: Various regulators have been provided with the power to prescribe industry-specific rules vis-à-vis mergers and acquisitions of companies engaged in such businesses. These include, the insurance sector (regulated by the Insurance Regulatory and Development Authority), financial services sector (regulated by the Reserve Bank of India), defence sector (regulated by the Ministry of Defence) and print media/information technology sector (regulated by the Ministry of Information and Broadcasting) and telecom sector (Telecom Regulatory Authority of India), to name a few.


The primary regulators governing M&A activity in India are the Securities and Exchange Board of India (SEBI), the RBI, the Foreign Investment Promotion Board (FIPB) and Competition Commission of India (CCI). Besides, there are various sectoral regulators, as mentioned in our response to Question 3 above.


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Although not specifically prohibited, hostile bids or takeovers are not common in India, probably due to the open offer and disclosure requirements under the Takeover Regulations. Under the Takeover Regulations, if an investor acquires ‘control’ over a target company, or more than 25 per cent of the share capital or voting rights of the target company, the investor must make an open offer to the existing shareholders for the purchase of minimum 26 per cent of the share capital of the target company. Further, in case of creeping acquisitions by existing shareholders, disclosures are required to be made if more than two per cent of the share capital of the target company is acquired. These factors act as a deterrent for hostile takeovers.


As discussed in our response to Question 3 above, the Competition Act regulates business combinations which may have an appreciable adverse effect on competition within a relevant market in India. A ‘combination’ may result from a merger or an acquisition provided that the resulting entity satisfies certain asset value or turnover thresholds as provided under the Competition Act.

Mergers and takeovers are also required to be compliant with the extant FDI policy. Under the FDI Policy, there are certain sectors which have a complete prohibition on foreign investment, including, inter alia, sectors such as gambling, real estate, atomic energy etc. The FDI Policy also prescribes the limits on foreign investment in certain sectors, and accordingly, mergers or takeovers in such sectors are also required to comply with the prescribed restrictions.


We have divided our response to this query on the basis of the various kinds of transactions commonly undertaken in India:

Merger/Demerger As discussed previously, the Companies Act specifically provides for the manner in which mergers, demergers and arrangements may take place pursuant to an Indian court sanctioned scheme. Accordingly, the primary document involved is the Scheme of Merger/Demerger detailing the various aspects of the transaction. In addition to the Scheme of Merger/Demerger (which is required to be filed in the relevant High Court under whose jurisdiction the concerned companies have their registered office) and the requisite court proceedings, it is not uncommon to execute a separate agreement detailing their respective underlying obligations vis-à-vis the merger/demerger.

Business/Asset Transfer As discussed previously, companies in India are also permitted to transfer assets/undertakings through private arrangements. In case of a transfer of assets through private arrangements, parties execute asset purchase/slump sale agreements which detail, inter alia: (i) the procedure for the asset transfer; and (ii) the rights and obligations of the parties subsequent to the sale, ie representations and warranties of the seller/indemnification rights of the acquirer etc. In addition to the master document (ie the asset purchase/slump sale agreement), certain ancillary agreements such as: (i) deeds of assignment with various counter parties for assignment of the material contracts of the transferor; (ii) agreements for the assignment of intellectual property rights; (iii) deeds of conveyance in cases where an asset transfer includes the sale of immovable property, etc are also executed.

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Primary/Secondary Acquisition of Securities The definitive documents in transactions contemplating acquisition of securities comprise of: (i) share purchase agreements; (ii) share subscription agreements; (iii) shareholders agreements; and (iv) joint venture agreements. While a share purchase/share subscription agreement is limited to setting out the terms and conditions for the sale of shares of the target company, a joint venture agreement/shareholders agreement sets out the rights and obligations of the shareholders of the target company, including those relating to its functioning and management.

It is pertinent to note that usually, the first step for most transactions is the execution of a term sheet between the contracting parties, wherein the parties to the transaction enunciate the intent of the proposed transaction and impose, inter alia, the ‘exclusivity’ obligations on each other. Typically, the purpose of such term sheets is to bind the parties to the proposed transaction until the acquirer completes its due diligence and the parties negotiate the definitive documents, although it is not uncommon to execute non-binding term sheets as well.


Set out below are the various costs/charges applicable to ‘deals’:

Capital Gains The gains arising from a business transfer which fall within the definition of a “slump sale” under the IT Act are taxed as long term orshort term capital gains depending on the period for which the seller held the undertaking as a whole prior to disposition, irrespective of the period for which each constituent asset was held. Similarly gains from a sale of shares are taxed depending on the period for which they were held by the selling shareholder.

Sales Tax Transfer of assets in an asset sale will attract the payment of sales tax.

Stamp Duty Stamp duty is attracted on the document effecting the transfer of property/shares, and the rate of duty would depend upon the state in which the document is executed and the property sought to be transferred is situated. The rate at which stamp duty is payable is typically an ad valorem rate.

Registration Fees Transfer documents in respect of transfer of immovable property are required to be registered with the relevant authority upon payment of fees, which may vary from state to state.

Filing Fees with the CCIDepending on the nature of filing required to be made with the CCI, a company is required to incur 1 Million Indian rupees (INR) or INR 4 Million as the filing fees.


Under Indian law, there is no legal requirement for the acquirer to conduct a due diligence on the target company and, therefore, there is no legal requirement of any information to be publically disclosed.

However, in the case of the target companies being listed public companies, the target, at the time of due diligence being conducted, is permitted to provide the acquirer with documents/information, subject to the provisions of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (Insider Regulations). According to the said regulations, listed target company can disclose only that information which is either already in the public domain or does not fall


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within the purview of ‘unpublished price sensitive information’.


Under the Companies Act, each company is required to make filings with the concerned Registrar of Companies (which in turn are publically available) relating to various issues, including: (i) the incorporation of the company; (ii) the Memorandum and Articles of Association; (iii) the financial statements of the company; (iv) the annual return and all other statutory forms ; (v) information pertaining to the directors (and changes thereto); and (vi) the share capital details of the company, etc.

While the filing requirements set out above are applicable to public and private companies, public listed companies are further required to comply with the filings requirements prescribed under the listing agreements executed by such companies with the relevant stock exchanges. These include providing the stock exchange with all such information material to the business/functioning of the companies, and are accordingly available on the website of the stock exchange as publically available information.

Furthermore, intellectual property information, whether registered, or pending registration, is also publically available.


As per the provisions of the Companies Act, shareholders of a company have substantial (veto) rights vis-à-vis transfer of assets and/or shareholding of the company. It is pertinent to note that most of the ‘pre-approval’ rights have mostly been conferred as regards ‘public’ companies

and ‘private’ companies are, therefore, typically regulated by the provisions contained in their respective charter documents. We have analysed and discussed various possible ‘deals’ in light of the same.

Business Transfer/Sale of UndertakingIn the event of a deal involving a transfer of the whole, or substantially the whole, of an undertaking of a public limited company, the Companies Act mandates the need to obtain a prior approval of 75 per cent of the shareholders.

Merger/Demerger Any scheme involving merger or demerger through court requires a prior approval from the majority in number representing 75 per cent of the shareholders (present and voting) of the company.

Preferential Allotment of Shares to a Third Party The Companies Act mandates the need for a prior approval from 75 per cent of the shareholders for a public company to offer shares to a non-shareholder.

Sale of Shares While there are no specific provisions under the Companies Act that provides any pre-approval rights to a shareholder in the event of a sale of shares by another, the Articles of Association of the Company typically provide standard pre-emption rights in this regard. In this regard, the issue of enforceability of transfer restrictions in case of a public company is currently the subject matter of judicial scrutiny. The Companies Act provides that there can be no restriction on the right to transfer shares in a public company. There have been conflicting judgments delivered by different High Courts on this issue. In a recent judgment, the Bombay High Court (which is pending before the Supreme Court of India in appeal) has interpreted this to mean that the restriction contained in the Companies Act does not affect private arrangements between shareholders.

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Acquisition of SharesThe Companies Act prescribes the need for obtaining a prior approval of 75 per cent of the shareholders of public limited company in the event the company is proposing to, directly or indirectly, acquire (by way of subscription, purchase or otherwise) the securities of any body corporate exceeding 60 per cent of its paid up share capital and free reserves, or 100 per cent of its free reserves, whichever is more.


The Companies Act does not prescribe any specific duties upon the directors and/or controlling shareholders in connection with ‘deals’. Having said that, the fiduciary duties of a director towards the company and the shareholders would nevertheless extend to deals as well and, therefore, directors would continue to be required to act ‘in the best interests of the company and the shareholders’ in their role vis-à-vis a deal as well. Directors can be liable under civil law for monetary penalties and/or claims for damages for breaches of fiduciary duties.

Furthermore, a deal would typically involve the directors and controlling shareholders of a company to have certain ‘price sensitive information’. In view of the same, the provisions of the Insider Regulations would be applicable to such persons in the case of public listed companies.


Typically, break fees and reverse break fees are not common in India. Although there is no specific provision in this regard, the concerned parties can contractually agree to such fees. In cases involving public listed companies, the draft letter of offer, which contains the terms of any break fee, must be submitted to SEBI, enabling it to change the terms

if it considers them to be unreasonable. Further, if the party due to receive the break fees is a foreign party and the party paying the same is an Indian party (or vice versa in case of a reverse break fee), prior approval of the RBI may be required in relation to the same.


It is common to find ‘conditions precedent’ in transaction documents specifying actions required to be completed prior to the completion of deals.

As regards ‘open offers’ made by acquirers of a public listed company under the Takeover Regulations, an open offer may be conditional on a minimum level of acceptance. If the open offer is subject to an agreement, then the agreement must contain a provision that in the event the desired level of acceptance of the open offer is not attained, the acquirer will not acquire any shares and the agreement will stand rescinded.

When an offer is made conditional on a minimum level of acceptance, the acquirer (and any person acting in concert):

1. Is prohibited from purchasing any shares of the target company except under the open offer and subject to any underlying agreement.

2. Must keep 100 per cent of the offer consideration for the minimum level of acceptance, or 50 per cent of the total offer consideration (whichever is higher) in an escrow account.

3. Lose the entire escrow amount if it does not fulfill its obligations under the Takeover Regulations.

The offer cannot be made subject to other pre-conditions. However, if the acquisition agreement (which attracts the obligation to make the open


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offer) is subject to conditions which are not met (for reasons outside the reasonable control of the acquirer) and that results in the rescission of the agreement, then the acquirer has the right to withdraw the open offer.


There are no ‘minimum financing limits’ prescribed for acquisitions.

In relation to acquisition of shares by leveraging within India, the following factors need to be borne in mind:

1. Indian target companies are restricted from making available their assets as security for the acquisition of their own shares or shares of their holding company;

2. Restrictions imposed by the RBI on the resources and liquidity of domestic banks and the limits on capital market exposure;

3. Investing companies with foreign investment/foreign-owned operating cum investing companies are not permitted to leverage funds from the domestic market for making downstream investments in India;

4. Prohibition on the use of foreign debt for investment in the capital markets under the end-use restrictions imposed by the guidelines in relation to external commercial borrowings issued by the RBI; and

5. Pledge of shares of the Indian investee company by non-residents is permitted subject to certain conditions prescribed by RBI.

Having said the above, subject to the rules against financial assistance and the limitations on the

ability to pledge shares of an Indian company, a non-resident acquirer may leverage overseas to fund the acquisition of shares in India. Typically, a separate contractual arrangement (ie separate from the acquisition documentation) is executed for this purpose.

16. Can minority shareholders be squeezed-out? If so, what procedures must be observed?

Under Indian law, in the case of an open offer (under the Takeover Regulations), an acquirer cannot compulsorily purchase the shares of the remaining minority shareholders. In addition, under the Takeover Regulations and Securities Contracts (Regulation) Rules, 1957, the public shareholding in the target company must not fall below 25 per cent, that is, the acquirer’s maximum shareholding is limited to 75 per cent. If the acquirer’s shareholding exceeds 75 per cent, then the Takeover Regulations provides for a time-bound reduction of the acquirer’s shareholding down to 75 per cent.

Having said the above, an acquirer can potentially squeeze-out the minority pursuant to the following:

1. In the case of a public listed company, through de-listing the shares in accordance with the de-listing process under the SEBI (Delisting of Equity Shares) Regulations 2009 by offering all the shareholders to tender their shares to the company.

2. By undertaking a selective buy-back of shares held by the minority shareholders.

3. In the case of a scheme or contract involving the transfer of shares of a company, in which 90 per cent of the shareholders of such company have approved the sale, the acquirer can initiate the action to acquire the shares of a minority shareholder under S 395 of the Companies Act.

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While the law prescribes the aforementioned ‘rights’ to acquirers, in practice, the exercise of such provisions is seldom successful and exercise of such options is often marred by litigation filed by the minority shareholders which tend to drag on for long durations.


As discussed above, the details regarding a business ‘combination’ (along with other market information) are required to be notified to the CCI in order for it to ascertain whether the combination has caused or will likely cause appreciable adverse effect on competition in the relevant market in India.

Once the notification/disclosure is made, an acquisition/combination cannot be consummated until the earlier of obtaining CCI’s clearance or the passing of 210 calendar days. Having said that, as per The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011, CCI shall ‘endeavor’ to clear/approve combinations within 180 days of the filing of the notification/disclosure. Accordingly, while the CCI is required to clear proposals regarding combinations within 180 days, the parties to the transaction are nonetheless required to await the CCI clearance/passing of 210 days before proceeding to complete the transaction.

Further, the CCI can ‘stop-the-clock’ if it requires additional information or clarity on the notification filed which in turn increases the time taken for the approvals to come through.


Please refer to our response to Question 3 above. In addition, the extant exchange control regulations also prescribe various sector specific conditions as regards acquisition of Indian companies by foreign entities, including prior approval requirements.


The first step in structuring a transaction in order to achieve tax optimised efficiencies involves determination of the mode of effectuating a transfer, ie merger, demerger, acquisition, asset sale and slump sale. This is because mergers and demergers, subject to certain conditions, may be tax neutral modes whilst there may be special provisions for slump sale. Therefore, in every M&A deal, it is important to finalise and structure the mode of effectuating the transfer, keeping in view tax exemptions and considerations.

Considering the recent legislative development(s) in the Indian tax arena, the most important tax issue in a deal is the transactional liability of capital gains and the consequent withholding tax obligation arising in cases of cross-border transactions. The negotiations surrounding the obligation of withholding tax have gained prominence and, therefore, tax indemnity clauses in the transfer agreement have become important.

Transfer of tax credits, refunds and exemptions of the transferor company to the transferee company are other tax issues that are always under scanner for the parties to deliberate on. Valuation of the sale consideration, bifurcation of non-compete fees from the sale consideration have also become important points of consideration from a tax perspective in view of the recent pursuits of the tax authorities questioning the valuation of share/business transfer and the legislative mandate to transfer shares of


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unlisted company at minimum book values failing which huge tax implications would follow.

Moreover, since General Anti Avoidance Rules (GAAR) has been legislated in India and would be effective from April 1, 2015, it is important that the deals have robust commercial bona fide(s) so as to stand the test of tax avoidance/tax evasion.


Acquisition of SecuritiesThe extant exchange control regulations prescribe detailed requirements vis-à-vis both inbound and outbound investments/acquisitions.

Investments by foreign entities into India are regulated by the provisions of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 issued under the FEMA read with the FDI Policy.

Outbound investments/acquisitions by Indian companies are regulated by the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 issued under FEMA.

The aforementioned regulations prescribe detailed rules as regards: (i) categories of permitted/prohibited investments; (ii) pricing guidelines; (iii) sector specific provisions/investment limits, etc.

Cross-border MergersThe merger of a foreign company into an Indian company has been provided for under the Companies Act. However, such transactions, where the foreign company is the transferee/surviving entity, cannot be undertaken at present.

Competition ActIn addition to the above, the Competition Act also regulates cross-border transactions having

an impact in India and prescribes thresholds for notification/approval requirements applicable to such transactions.


In India, both central and state legislatures have enacted more than 45 labour laws that regulate various aspects of employment, including: (i) industrial relations; (ii) service conditions (including retrenchment); (iii) remuneration; and (iv) social security benefits offered to employees.

The applicability of labour legislation depends primarily on the: (i) geographical location of the employer or establishment; (ii) number of employees; (iii) nature of the work carried out by employees; and (iv) industry in which the employer is engaged.

In this regard, employees are grouped into two categories:

1. Workmen (blue collar employees engaged in a manual, skilled, unskilled, technical or clerical capacity, without any managerial or administrative powers).

2. Non-workmen (white collar employees engaged primarily in managerial, administrative or senior supervisory roles).

Usually, workmen are given a greater degree of legal protection and benefits compared to non-workmen. Specific protection is provided to ‘workmen’ in the case of transfer of the undertakings. Such transfers normally attract a retrenchment compensation and notice, as prescribed, unless: (i) the workman is absorbed in the transferred undertaking; (ii) the terms of employment in the transferred undertaking are no less favorable than those applicable to the workman originally; and (iii) the new employer is

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liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous. For such employees who do not classify as ‘workmen’, the cessation of employment in the undertaking of the transferor may be required to be in accordance with the relevant Shops and Establishments Act, applicable to the state in which such persons are employed as well as their employment agreements.


1. Companies Bill, 2012 (Companies Bill): The Companies Bill, 2012 (hereinafter referred to as ‘Bill’), which seeks to revise and modify the existing company law, in consonance with changes in national and international economic environment, has been passed by the Lok Sabha, ie the lower house of the Indian Parliament, on December 18, 2012. The Bill still needs to be approved by the Rajya Sabha, ie the upper house of the Indian Parliament and, therefore, may undergo further changes. Pursuant to the Bill being approved by both the houses of the Indian Parliament, the same shall require the assent of the President of India before the Bill can be notified as a statute. Some of the key provisions of the Bill in relation to M&A are as follows:

a. Merger of Indian companies with foreign companies incorporated in such countries as may be notified, has been permitted.

b. Holding of treasury shares pursuant to any court approved arrangement has been prohibited.

c. Postal ballot has been added as a mode

of voting on the scheme of compromise or arrangement.

d. Any objection to a scheme of merger, demerger or similar arrangement can be made only by persons holding not less than 10 per cent of the shareholding or having outstanding debt amounting to not less than 5 per cent of the total outstanding debt.

e. In case of merger of a listed company with an unlisted company, the listed company is required to provide exit opportunity to its shareholders to opt out of the unlisted transferee company.

f. An acquirer or a person acting in concert with the acquirer or a person/group of persons holding 90 per cent or more of the issued equity share capital of a company by virtue of an amalgamation, share exchange, conversion of securities or for any other reason, may now purchase the minority shareholding of the company at a price determined by a registered valuer in accordance with the rules to be prescribed.

g. Minority shareholders may also offer to the majority shareholders for purchase the shares held by such minority shareholders at a price determined by a registered valuer in accordance with the rules to be prescribed.

h. Merger between small companies or between a holding company and its wholly-owned subsidiary or such other classes of companies as may be prescribed, shall be approved by the Registrar of Companies and Official Liquidator without the requirement of obtaining approval of the National Company Law Tribunal (NCLT),


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MR. SHARDUL SHROFF Managing Partner, Amarchand & Mangaldas & Suresh A. Shroff & Co.E [email protected] 216 amarchand towers, Okhla Industrial Estate, Phase III, New Delhi 110020, IndiaT +91 11 2692 0500 F +91 11 2692 4900

ABOUT THE AUTHOR

CONTRIBUTING AUTHORS

subject to fulfillment of prescribed conditions.

i. Mandatory notification of the scheme to multiple regulatory authorities, including the Central Government, income tax authorities, RBI, SEBI, stock exchanges, CCI and other relevant sectoral regulators. Such authorities shall make their representations on the proposed scheme within 30 days of receipt of notice, failing which it shall be presumed that they do not have any representations.

j. Any compromise or arrangement may include takeover offer to be made in the manner to be prescribed. In case of listed companies, takeover offer shall comply with the SEBI regulations.

k. Any compromise or arrangement may include buy-back of securities provided such buy-back is in accordance with the buy-back provisions stipulated in the Bill.

l. Valuation report is now required to be sent to all the members and creditors along with the notice convening their meeting to consider any scheme.

2. GAAR: GAAR has been legislated in India and would be effective from April 1, 2015. GAAR proposes to keep a check on tax avoidance and tax evasions cases in M&A deals, and more importantly on internal restructuring.

3. Direct Taxes Code Bill, 2010 (DTC): The government of India is proposing an overhaul of the existing income tax law with a view to rationalise and simplify it. Under the DTC, it is proposed to introduce provisions relating to GAAR, thin capitalisation and Controlled Foreign Corporation (CFC) Rules which would transform the Indian tax system and the approach of the Indian revenue authorities viewing a M&A transaction.

MR. KUNAL MEHRA, Principal Associate-DesignateMR. AAYUSH KAPOOR, Senior AssociateMS. PALLAVI BEDI, Research Scholar

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IndonesiaTumbuan & Partners


The general level of M&A in Indonesia between July 2012 and June 2013 has not significantly increased compared to the same period in the previous 12 months. Most M&A transactions were in the natural resources and financial services sectors. However, some of the most notable acquisitions were in other sectors, and included the acquisition of PT Indosat Tbk (a publicly listed telecommunication company) by Tower Bersama Infrastructure, PT Indomobil Sukses International Tbk (a publicly listed automotive company) by Gallant Venture Pte. Ltd., PT Carrefour Indonesia (a consumer retail business) by CT Corp and PT Matahari Pacific and PT Putra Nadya Investama (another consumer company) by PT Multipolar Indonesia Tbk.


The most common method for acquiring a public company in Indonesia is by way of a direct acquisition in which the existing shares are directly acquired from the shareholders.

Beside the above method of acquisition, there is the indirect acquisition in which the board of directors is involved, such as by way of a rights issue in which the acquirer subscribes to the newly issued shares and acts as the standby buyer. This indirect

acquisition method is less common since there is no assurance about the number of available remaining shares that can be acquired.


The key laws and regulations can be found in the Indonesian Company Law, Anti-Monopoly Law, the Indonesia Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal or BKPM) regulations (if involving foreign parties/foreign investment companies), government regulations concerning M&A, specific regulations depending on the related industries, and when it concerns a limited liability company that is a publicly company also the Capital Market Law, the Indonesian Financial Services Authority (Otoritas Jasa Keuangan or OJK, which was formerly known as the Capital Market Supervisory Board and Financial Institution/Badan Pengawas Pasar Modal dan Lembaga Keuangan or BAPEPAM-LK) regulations and, when it concerns a limited liability company that is are publicly listed companies (“PT Tbk”), also the Indonesia Stock Exchange (IDX) regulations.


Companies undertaking M&A are required to obtain a set of approvals from various governmental agencies in order to proceed with a M&A transaction.


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The key government regulators and agencies involved in M&A transactions are the Ministry of Law and Human Rights (MOLHR), the Indonesian Financial Services Authority (OJK), the Business Competition Supervisory Commission (Komisi Pengawas Persaingan Usaha or KPPU), the Indonesia Capital Investment Coordinating Board (BKPM), and several other government regulators and agencies of the related industries having jurisdiction over the companies/target companies (such as the Indonesian Central Bank, Ministry of Energy and Natural Resources, Ministry of Finance, and so on).


Yes, subject to certain requirements. When the M&A transaction involves a limited liability company (PT), certain requirements must be observed which are aimed at protecting the legitimate interests of the company, the minority shareholders, the company’s employees, creditors and the public.

When it concerns an acquisition of a publicly listed company (PT Tbk), aside from the requirements as set out above, OJK is also concerned about whether the acquisition will result in a change of control. If the acquisition results in a change of control then the acquirer is obliged to perform a mandatory tender offer of the remaining shares of the said PT Tbk. On the other hand, OJK is not particularly concerned about the method of acquisition (whether hostile or friendly).


The basic philosophy underlying all M&A transactions is that they must not prejudice the interests of certain parties (the company, minority

shareholders, company’s employees, creditors and the public) and therefore cannot be undertaken if they will cause loss or are detrimental to the interests of such parties.

Aside from that, there are some specific regulations that could restrict or regulate certain M&A transactions.

Under the Indonesian competition regulatory framework pursuant to the Indonesian Anti-Monopoly Law and its implementing regulations, businesses are prohibited from conducting any M&A transaction that may result in a control over the market share of certain goods and/or services which could cause monopolistic practices and/or unfair business competition.

Other restrictions and/or prohibitions can be found in the Negative Investment List which stipulates the business fields that are closed to foreign shareholders and certain business fields which limits the shareholdings of the foreign shareholders.


Mergers: ■ PT: When it concerns a merger, as stipulated

in the Indonesian Company Law, the board of directors of the merging company and surviving company must prepare a merger draft. The merger draft must, after having obtained the approval of the board of commissioners of the respective companies, be submitted to the General Meeting of Shareholders (GMS) of the respective companies to obtain their respective approvals.

The resolution of the GMS approving the merger will need to be documented in a notarial deed, which subsequently must receive the MOLHR’s approval and/or

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acknowledgment. A summary of the merger draft is required to be published in at least one daily newspaper and announced to the company’s employees.

■ PT Tbk: When the merger involves publicly listed companies, the merger draft must also include among others an appraisal report and legal opinion, which requires an effective statement letter from OJK.

Acquisition: ■ PT: Similar to a merger, when it concerns an

indirect acquisition, the board of directors of the company acting as the acquirer (buyer) and the acquired company (seller), after obtaining the approval of the board of commissioners of the respective companies, must also prepare an acquisition draft which has to be approved by the GMS. The resolution of the GMS approving the acquisition will also need to be documented in a notarial deed which subsequently must receive the MOLHR’s approval and/or acknowledgment.

For both direct and indirect acquisitions, a summary of the acquisition draft is required to be published in at least one daily newspaper and announced to the company’s employees.

■ PT Tbk: When it concerns an acquisition by/of a publicly listed company, there are certain documentations (depending on the type of transaction, such as a conflict of interests transaction, affiliated transaction or a material transaction) and disclosure requirements (including an appraisal report).

If the acquisition results in a change of control, such a transaction includes certain additional documentations and procedures as well.

Certain companies in a M&A transaction will also need prior approval from the relevant government

agencies depending on the related industries.

There are further publication requirements following the merger and/or acquisition. In addition, when as a consequence of a M&A transaction the total assets of the group of companies amounts to 2.5 billion rupiah and/or the sale value amounts to five billion rupiah, then a reporting obligation to the Business Competition Supervisory Commission will apply.


There are certain administrative charges involved when applying for certain approvals from the related government institutions (eg, MOLHR, BKPM, and so on). However, for example, the administrative fees for the application to the MOLHR and publication in the Official Gazette are usually included in the notary’s invoice.

In addition, there is a mandatory 6,000 rupiah stamp duty (revenue stamp) that must be affixed to each transaction document.


When the M&A transaction involves limited liability companies (PTs), the information that is required to be publicly disclosed includes at least:

1. Related to a merger: name and registered office of each of the companies involved; background/purpose of the planned merger; valuation and conversion method of the shares; draft of the amendment to the articles of association (if any); financial report of the last three book years; continuity plan or ending of the merging company; pro forma balance sheet of the surviving company; settlement method of the status, rights and obligations of the directors, commissioners and


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employees of the merging company; settlement method of the rights and obligations of the merging company; settlement method of the rights of the shareholders who disagree with the planned merger; name, salary, honorarium of the directors and commissioners of the surviving company; timeline of the execution of the merger; report on the situation, development and achievement of each of the companies involved; primary business of each of the companies involved and any change involved; and any pending dispute which affects the merging company.

2. Related to an acquisition: name and registered office of each of the companies involved; background/purpose of the planned acquisition, financial report of each of the companies involved; valuation and conversion method of the shares; number of shares that will be acquired; financing; consolidated pro forma balance sheet of the company who will act as the acquirer; settlement method of the status, rights and obligations of the directors, commissioners and employees of the company who will act as the acquired company; settlement method of the rights of the shareholders who disagree with the planned acquisition; timeline of the execution of the acquisition; and draft of the amendment to the articles of association (if any).

When the M&A transaction involves publicly listed companies (PT Tbks), the information that is required to be publicly disclosed includes all the above, and in addition the following:

1. Related to a merger: name and registered office of the merged company; appraisal report; expert report (if any); opinion from an accountant registered at OJK; legal opinion from an independent legal consultant registered with OJK; composition of the board of directors and commissioners of the merged company; and an assessment on the advantages and/or disadvantages as result of the merger. OJK may also from time to time and depending on the

case, require additional information and/or certain documentations.

2. Related to an acquisition: the number of shares that are already held by the acquirer (if any); any plan, agreement or decision to cooperate with other affiliated companies (if any); negotiation method and process of the acquisition; and negotiation materials for the acquisition. OJK may also from time to time and depending on the case, require additional information and/or certain documentations.


The merger draft and/or acquisition draft, and any disclosure information that is published in the newspaper as required by OJK, OJK’s website and in the Capital Market Data Center at the Indonesia Stock Exchange.


Yes. Pursuant to the Indonesia Company Law, the minimum attendance and voting quorum for a merger and/or acquisition is 75% of the shareholders present in the GMS.

In the event a publicly listed company undertakes a M&A transaction which includes a conflict of interests transaction, then approval is required from the independent shareholders.


Under the Indonesian Company Law, the directors and controlling shareholders of a company intending to enter into an M&A transaction must take into account the interest of the following stakeholders:

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1. The company, minority shareholders, employees of the company;

2. The creditors and the other business partners of the company;

3. The public and fair competition in conducting the business.

As for the creditors’ interests, the Indonesian Company Law provides the right for creditors to file an objection to the company within 14 days following the public announcement of a proposed merger or acquisition. If no creditors have submitted any objection to the proposed merger or acquisition then the creditors are deemed to have approved the merger or acquisition. As for the interests of employees of the company, Indonesian law does not require the approval of the employees for a merger or acquisition; however, employees have certain rights that are protected (eg, severance pay – see item 21 below).


Under the prevailing laws and regulations, break up fees are subject to the agreement made by the parties involved in the deal and is therefore not regulated. The circumstances may vary depending on the transactions and the interests of each party involved in a merger or acquisition.


Conditions in connection with a deal can be imposed and is very common in deals as Indonesia’s contractual law recognizes the freedom of contract principle as long as the conditions stipulated by the parties are not contrary to the prevailing laws and regulations in Indonesia.


Indonesia’s regulatory framework does not impose a minimum level of financing in the transaction documents in a M&A deal as this is left to the parties in the transactions to determine the minimum level of financing.

However, certain industries may set out certain restrictions (eg, the Ministry of Finance restricts the capital injection of the shareholders of a multi-finance company obtained from a loan).


The minority shareholders’ interests are protected under the Indonesian Company Law. By law, an acquisition must be approved by a supermajority of at least three-quarters of the voting shareholders representing at least three-quarters of the issued shares with valid voting rights. Thus, without the above-mentioned majority of shareholders’ support, no acquisition can be successfully accomplished. Due to this, the Indonesian Company Law specifically stipulates provisions which would protect the interests of the minority shareholders.


Pursuant to the Indonesian Company Law, when planning a merger and/or acquisition, the board of directors must publish a merger draft and/or acquisition draft in at least one newspaper (when it involves a publicly listed company, in two newspapers) and announce it in writing to the employees of the Company no later than 30 days


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before convening notice for the GMS.

A convening notice for a GMS must be delivered at least 14 days (excluding the day of the convening notice and the day of the GMS) before the GMS.

In addition, OJK regulation also sets out certain conditions when it concerns publicly listed companies. Among others, OJK requires that prior to the convening notice for the GMS, the publicly listed company also has to publish an announcement of the planned GMS at least 14 days before the convening notice for the GMS (which may be jointly done with the publication of the merger draft and/or acquisition draft). Also, prior to this announcement’s publication, the agenda of the GMS must be submitted to OJK not less than seven days before.


A M&A transaction can be undertaken involving different industries. Each industry has its own regulatory framework for mergers and acquisitions that applies to the companies of the related industry, such as mining, financial services, telecommunication, insurance, and so on. For example, in the case of an acquisition of a mining company, an approval is required from the relevant government institution as stipulated in the mining license of the target company.


When it concerns a merger, the assets are required to be revalued after the merger, which may impose certain tax issues.

When it concerns an acquisition, the seller may be subject to certain income taxes if the sale results in a gain which depends from case to case.


As the amounts of foreign capital and number of investors increases in Indonesia, cross-border transactions are also made possible but with certain special legal requirements.

Aside from the key laws and regulations, such as the Indonesian Company Law and OJK regulation, a M&A transaction must also comply with requirements in the Negative Investment List that imposes restrictions and prohibitions for foreign ownership in certain industries. In addition, an approval from the Indonesia Capital Investment Coordinating Board (BKPM) is required in undertaking a cross-border transaction if the target company is an Indonesian company.

Further note that a cross-border merger of an Indonesian company and foreign company is currently not legally possible, since the two companies are subject to different company laws (Indonesian Company Law and foreign company law) which are governed by different legal systems (eg, civil law and common law).


In the event of a merger or acquisition, employees have several options. Employees who do not want to continue their employment after the merger or acquisition can terminate their employment with the company. In such a case, they are entitled to receive severance pay, and certain compensation as regulated in the Indonesian Labor Law. Employees also have the option to be transferred to the new company and have the possibility to negotiate new employment terms and conditions.

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UNTRY CHAPTERJENNIFER B. TUMBUAN Managing Partner, Tumbuan & PartnersE [email protected] www.tumbuanpartners.comA Jl. Gandaria Tengah III No. 8, Kebayoran Baru, Jakarta Selatan 12130, IndonesiaT +62 21 722 7736, 722 7737, 720 8172, 720 2516F +62 21 724 4579

ABOUT THE AUTHOR


Indonesia, as one of the world’s fastest growing economies, has become an attractive investment market for foreign investors. The need to constantly adjust its current investment regulations to meet the demands of the global investment market has resulted in the amendment of various regulations.

A regulation concerning foreign investment, particularly the Negative Investment List, is currently in the process of being revised. Therefore, this may have an implication with respect to M&A transactions.

In addition, the enactment of a new BKPM regulation No. 5 of 2013 on the Guidelines and Procedures for Capital Investment Licences and Non-Licences, may result in further study with respect to laws and/or regulations governing M&A transactions.

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ContractLawHB_Adv_M&A Guide.pdf 1 8/16/2013 10:37:02 AM

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JapanAnderson Mori & Tomotsune


M&A activity in 2012 and the first quarter of 2013 saw a general increase in both the numbers of deals and the deal value, as compared to the previous year.

As a result of the strong Japanese yen, there was a steady increase throughout 2012 of deals involving acquisitions by Japanese companies of foreign companies (ie outbound transactions). A number of high-profile and high-value transactions were announced during 2012, including the announcement in October 2012 of the acquisition by Softbank Corporation, a leading Japanese telecommunications and internet corporation, of Sprint Nextel Corporation, a United States entity also involved in the business of offering a range of communications services, and the announcement in August 2012 of the acquisition by Daikin Industries Ltd, a Japanese company and one of the largest commercial and providers of industrial air-conditioning systems, of Goodman Global Inc, a US entity and a leading manufacturer of housing air-conditioning systems.

With regard to acquisitions by Japanese companies of Japanese companies (ie domestic transactions), there was an increase in the number of domestic transactions for the first time in six years. One notable domestic transaction announced in December 2012 was the investment by a consortium including the Innovation Network Corporation

of Japan in Renesas Electronics Corporation, a Japanese manufacturer of Micro Control Units.

Finally, with regard to investments by foreign companies in Japanese companies (ie inbound transactions), the number of inbound transactions decreased in 2012, partly also due to the strong yen. However, it is expected that inbound transactions will rebound in the later half of 2013, due to the current economic reform package popularly known as ‘Abenomics’, lead by Prime Minister Abe.


The most common method used in Japan for acquisitions of public companies is by way of a takeover-bid (hereinafter known as ‘TOB’). A TOB is often followed by a squeeze-out process to acquire the shares of the whole company (please see the response to Question 16 below for more details). Apart from TOBs, the following statutory methods of corporate reorganisation available under the provisions of the Companies Act are also commonly used for acquisitions or mergers: (i) a merger (gappei); and (ii) a share exchange (kabushiki koukan). These methods may be used only between Japanese companies, and foreign companies would need to establish their own Japanese entity to use these methods. Another possible method of acquiring a company is by way of partly acquiring the target company through issuance of new shares or the transfer of treasury shares to an acquiring entity, known as a third party allotment (daisansha wariate).


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In general, the Companies Act governs the various methods of mergers and acquisitions for both public companies and private companies. These methods include corporate reorganisation by means of: (i) a merger; (ii) a corporate split (kaisha bunkatsu); (iii) a share exchange; and (iv) a share transfer (kabushiki iten) (hereinafter collectively known as ‘corporate reorganisation’). The Companies Act also provides rules regarding business transfers. Additionally, with regard to a TOB of public companies listed on a Japanese stock exchange, provisions applicable to TOBs contained in the Financial Instruments and Exchange Act (the FIEA) and the listing rules issued by the relevant Japanese stock exchanges will apply. Other key laws regarding mergers and acquisitions are the Antimonopoly Act (the AMA), which regulates merger filing, and the Foreign Exchange and Foreign Trade Act (the FEFTA), which regulates the international transfer of money and goods, including the acquisition of companies in Japan by foreign companies. Please see the response to Question 4 below for more details on these laws and regulations.


There is no specialised government regulator or agency which generally oversees or regulates mergers and acquisitions deals. However, different government regulators and agencies are involved in relation to specific aspects of mergers and acquisition deals as follows:

1. With regard to TOBs of public companies, the Financial Services Agency (FSA) and the Kanto Local Finance Bureau (KLFB) administer the FIEA which contains provisions requiring, inter alia, the obligation

to submit large shareholding reports to the FSA in the relevant situations (for more details on large shareholding reports, please see the response to Question 7 below for more details). In addition, the Securities and Exchange Surveillance Commission (SESC) monitors market activities (for example, insider trading) which may violate the FIEA.

2. The Fair Trade Commission (FTC) enforces the AMA and controls merger filings.

3. Supervising ministries for the industries, such as the Ministry of Finance, the Ministry of Economy, Trade and Industry and their administrative arm, through the Bank of Japan administer the reporting provisions of the FEFTA.


Yes, hostile bids are permitted but uncommon. There are only a few precedent cases of hostile bids taking place in Japan.

TOBs are regulated under the FIEA, which do not restrict the identity of parties making tender offers for Japanese listed target companies. The documents required to be prepared with regard to TOBs, whether hostile or friendly, are basically the same. A TOB becomes hostile when the board of directors (hereinafter known as ‘BOD’) of the target company issues an opinion opposing the offered bid. The procedure with regard to a hostile TOB is also generally the same as a friendly TOB, save that with regard to hostile bids, in order for the shareholders to decide whether to or not to accept the offer and for the target company to understand the offeror’s intentions with regards to the TOB, the BOD may issue questions to the offeror, to which the offeror must respond by answering and submitting a copy of the same to the government and the applicable stock exchange on which the target company is listed.

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As mentioned in the response to Question 3 above, the FIEA, the AMA and the FEFTA are the key laws applicable to takeovers and mergers in Japan. The FIEA regulates takeovers and mergers of public companies by setting rules with regard to TOBs, insider trading, disclosure requirements and large shareholding report submission requirements. The AMA contains provisions requiring merger filings to be submitted prior to completion of mergers, business transfers, corporate splits, joint share transfers and share acquisitions where such transactions exceed certain thresholds prescribed in the AMA. The FEFTA contains provisions with regard to matters affecting national security and international transfers of money and goods, including the acquisition of companies in Japan by foreign companies. Under the FEFTA, in general, where as a result of an investment the foreign investor’s shareholding ratio in a public company in Japan increases to 10 per cent or more of the total issued shares of such company, such foreign investor must file a post-facto report with the Bank of Japan by the 15th day of the following month. However, in respect of sensitive industries such as, inter alia, the agriculture, aviation, defence, energy, communications, broadcasting, passenger transport and leather industries, instead of a post-facto report, prior notification will be required to be made to relevant ministries through the Bank of Japan. Upon such prior notification, the relevant government ministries will examine whether or not the transaction will be harmful to the national interest. In practice, the government hardly ever requires for the proposed investment to be altered or suspended after receiving such prior notification. A rare example of this happened in April 2008 when the government decided to recommend the suspension of the proposed investment by The Children’s Investment Fund, a United Kingdom

hedge fund, in Electric Power Development Co, Ltd.


For Corporate Reorganisations, a statutory agreement must be entered into pursuant to the relevant provisions of the Companies Act, and certain other disclosure documents must also be prepared. As the required content of such statutory agreements is quite basic, when the transaction is entered into between independent third parties, the relevant parties to a Corporate Reorganisation often enter into a definitive agreement with terms and conditions appropriate to the specific transaction including representations and warranties, pre closing covenants, closing conditions and indemnification.

With regard to TOBs, the main documents which the offeror needs to prepare are tender offer registration statements for submission to the KLFB through the Electronic Disclosure for Investors’ NETwork (EDINET). Based on such statements, the target company will need to prepare an opinion on the offer and submit the same within 10 business days and submit it to KLFB through EDINET. Where an acquirer’s total shareholding in a target exceeds five per cent of the target’s shares, the other main document which must be prepared is a large shareholding report which will be required under the FIEA through EDINET. Such a report must be filed with the relevant local finance bureau within five business days from the day such threshold is exceeded. An updated report will also be required to be prepared and filed in a similar manner each time: (i) an acquirer’s total shareholding percentage increases or decreases by one per cent or more from the shareholding percentage indicated in the most recent large shareholding report; or (ii) there is a material change to the items stated in the large shareholding report.


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Stamp duty (inshizei) is payable at a flat rate of 40,000 yen in respect of contractual agreements relating to mergers and corporate splits. In relation to share exchanges and share transfers, although no stamp duty is payable in connection with the share purchase agreement, in certain cases, stamp duty may be incurred depending on the nature of the document of the transaction.

Registration and license tax (hereinafter known as ‘registration tax’) will also be incurred when a new company is established or when there is a change in the paid-in capital as a result of the transactions. The rate is 0.7 per cent of the amount of the paid-in capital or of the increase of the paid-in capital (subject to a minimum of 150,000 yen per registration for establishment and 30,000 yen per registration for increase in paid-in capital, respectively). There are special provisions applicable to merger and corporate splits, which provide that following completion of such transactions, registration tax will be payable at the following rates: (i) for corporate split cases – 0.7 per cent of the amount of the paid-in capital or of the increase of the paid-in capital (subject to a minimum of 30,000 yen per registration); and (ii) for merger cases – 0.15 per cent of the amount of the paid-in capital or of the increase of the paid-in capital (subject to a minimum of 30,000 yen per registration) (save that any amount exceeding the paid-in capital of the merged company will be taxed at the rate of 0.7 per cent).


There are no specific laws or regulations which explicitly require any information to be publicly disclosed during the due diligence process. However, the FIEA contains provisions prohibiting

the trading of shares of a publicly listed company on the basis of material information which has not been publicly disclosed, save where a statutory exemption applies. As such, a target company may be required to publicly disclose the material information disclosed to the offeror during the due diligence process for offeror to complete its TOB.


The two main sources of publicly available information are: (i) the Annual Securities Reports submitted by the issuing company every fiscal year, which is made available through the EDINET; and (ii) company information contained in its corporate registration, which may be obtained from the relevant Legal Affairs Bureau.

In addition to these two main sources, further information may also be obtained from the company’s quarterly reports, extraordinary reports and large shareholding reports, which are available through the EDINET. The Companies Act requires all companies to make their balance sheets (for certain large companies, profit and loss statements as well) public through public notice. Although, for public companies, this obligation can be substituted by submitting the Annual Securities Report, not all private companies strictly follow this obligation.


In order to effect a corporate reorganisation, a special resolution requiring the supermajority approval of two-thirds or more of the votes of the target company’s shareholders at a shareholders meeting is required (hereinafter known as ‘special resolution’). In this sense, shareholders may be said to have consent or approval rights in connection with corporate reorganisations.

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Where a public company intends to issue shares to third parties, generally speaking, only a resolution of the BOD of the company will be required. However, a special resolution will also be required if the proposed issue price is especially favourable to such third parties.

Shareholders do not have any statutory consent or approval rights in respect of TOBs. However, if an offeror intends to implement a squeeze-out of minority shareholders following a TOB, special resolutions will be required (please see the response to Question 16 below for more details). The market practice is for an offeror to acquire 90 per cent or more, or near to 90 per cent of the company’s voting rights before effecting a squeeze-out procedure, in order to ensure fairness of such squeeze-out.


Generally speaking, under the Companies Act, directors owe fiduciary duties to the company and do not directly owe duties to shareholders or other stakeholders. However, in the context of hostile takeover bids, given that the interests of the incumbent directors may conflict with those of the shareholders, directors should take into consideration the interests of shareholders in such situations. The same would also apply in circumstances where interest among the shareholders may deviate or interested party transactions are conducted.

Controlling shareholders do not owe duties to any stakeholders, not even to minority shareholders. Although proposals were discussed at the Legislative Council of the Ministry of Justice to revise the Companies Act to define the concept of ‘controlling shareholders’ and to include provisions protecting minority shareholders, it was decided that such provisions would not be included in the

upcoming round of amendments to the Companies Act (please see the response to Question 22 below for more details about upcoming amendments to the Companies Act).


While break-up fee clauses are considered acceptable under certain circumstances as deal protection clauses under Japanese law, such provisions are rarely used in practice. Even in the few examples which are publicly available, the parties to the relevant agreement tend not to specify the amount of break-up fee payable. There are also no court cases relating to break-up fees to refer to for guidance. As such, there is no clear market practice as to the circumstances in which break-up fees are payable by the target company and to the amount payable.

In any case, where parties intend to include such a clause in their agreement, the following factors may be taken into consideration: (i) whether shareholders’ statutory rights may be infringed, as the practical effect of a break-up fee clause may be to deny the shareholders of the opportunity to freely make decisions in respect of a merger or acquisition; (ii) whether any conflict of interest exists between incumbent directors and the target company (and ultimately, its shareholders) in respect of such a clause; and (iii) whether the rationale for such a clause may sufficiently justify limiting free competition between competing offers. These factors should be considered carefully in each transaction containing break-up fees clauses on a case by case basis.


Generally speaking, conditions may not be attached to TOBs and an offeror must purchase all the


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shares tendered by the target shareholders who have accepted the offer, save for in the limited situations specified under the FIEA. One such exception is that an offeror may, in accordance with its intentions, set either a ‘maximum limit’ or a ‘minimum limit’, or both, to the number of shares it wishes to purchase during a TOB.

A ‘minimum limit’ condition stipulates the minimum number of shares which must be tendered by target shareholders before the offeror will agree to acquire any shares pursuant to a TOB. There is no clear rule with respect to setting the minimum purchase limit. The general view is that the minimum criteria of the shares to be purchased by the offeror should not be set too high (for example, at 99 per cent).

A ‘maximum limit’ condition stipulates the maximum number of shares which the offeror will acquire pursuant to the TOB. Where the number of tendered shares exceeds such maximum limit, the offeror must purchase the tendered shares on a pro-rata basis from all shareholders who tendered their shares. The ‘maximum limit’ condition should not be set at a ratio higher than two thirds of the outstanding shares, otherwise the offeror will be required to buy all the tendered shares.

Another exception is for a condition allowing withdrawal from a TOB under very limited situations specified in the FIEA. Generally speaking, this is only allowed in the event of very fundamental changes to the investment situation beyond the control of the offeror. Trigger conditions such as the inability to successfully fund a TOB or an abstract concept such as “material adverse change” are insufficient to warrant a withdrawal pursuant to this exception.


There are no explicit regulatory requirements on the minimum level of financing for merger and acquisition transactions.

With regards to mergers and share exchanges, in most cases, shares are granted as consideration to the shareholders of the merging company or company becoming a wholly owned subsidiary. Especially in large-scale transactions, almost all companies grant shares instead of cash as the consideration. Thus, in these cases, financing does not usually become an issue.

With regard to TOBs, although securities (including the shares of the offeror or third parties) are allowed as consideration under the FIEA, in practice, consideration other than cash is rarely used for various legal and tax reasons. Under FIEA, the offeror will be required to attach to its tender offer registration documents (which will be made available to the public through EDINET) ‘accurate supporting information to a respectable degree’ that the offeror has sufficient finances to carry out the TOB. In practice, this requirement is often satisfied by attaching financing certificates provided by the offerors’ lenders and/or the relevant banks.

Generally, where a loan to finance a TOB contains conditions precedent, it will be required that the material conditions precedent of the terms of such loan be disclosed or included in the TOB registration statements or in a separate document submitted together with the TOB registration statement.

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Yes, minority shareholders can be squeezed-out in several ways. As with some other jurisdictions, one method of squeeze-out is by way of a cash-out merger or share exchanges. However, this method is not commonly used, mainly for tax reasons.

In practice, the most commonly used (and tax-friendly) squeeze-out method is a method similar in concept to a ‘reverse stock split’, the outline of which is as follows:

First, the company will hold a shareholders’ meeting seeking to pass special resolutions to amend its Articles of Incorporation to: (i) introduce a new class of shares that are to be provided in exchange for Fully Exchangeable Shares (as defined below) upon their mandatory acquisition by the company (hereinafter known as ‘Class A Shares’); and (ii) to re-characterise the common shares as a class of shares that is subject to mandatory acquisition by the company (hereinafter known as ‘Fully Exchangeable Shares’). The shareholders at the shareholders’ meeting will also adopt a special resolution to grant the company authority to acquire all Fully Exchangeable Shares and issue Class A Shares as consideration at an exchange ratio which results in only the acquirer receiving more than one Class A Share and all minority shareholders with only fractional entitlements of Class A Shares who will receive cash in exchange for such fractional entitlements.

The Legislative Council of the Ministry of Justice has recently decided that the Companies Act will be amended to include a new squeeze-out scheme. This new scheme will allow a shareholder holding 90 per cent or more of the outstanding voting shares to mandatorily purchase the shares of minority shareholders, subject to approval of the company’s BOD. This new scheme is expected to be more cost

and time efficient than the method involving Fully Exchangeable Shares described above, since no shareholders’ meeting and amendment to Articles of Incorporation will be required.


For corporate reorganisations under the Companies Act, creditors of the relevant companies must be given at least a one-month period to raise any objections that they may have before the effective date of the transaction. The relevant companies involved in corporate reorganisations are also required to inform their shareholders of the proposed corporate reorganisation at least 20 days prior to the effective date of the corporate reorganisation or at least two weeks prior to the relevant shareholders’ meeting (as applicable depending on the transaction) to give them the opportunity to raise any objections and to exercise appraisal rights. This notice can be included in the notice of shareholders’ meeting called to approve the relevant corporate reorganisation when it is held.

With regard to TOBs, tender offers must be kept open for at least 20 business days, but no more than 60 business days. For merger filings under the AMA, the standard waiting period is 30 days, which may be shortened by the FTC in certain cases. For prior-notification cases subject to the FEFTA (required for certain sensitive industries), the standard waiting period is 30 days. Depending on the nature of the investment, the government may shorten such period (usually to two weeks) or extend such period to maximum five months.


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Yes, there are such industry-specific rules. For example, with respect to investments in a financial institution: (i) an owner of more than five per cent of its shares must submit a major shareholding report; (ii) an owner of twenty per cent or more of its shares is required to obtain the approval of the Commissioner of the FSA; and (iii) an owner of more than 50 per cent of its shares is subject to special supervision by the FSA.

Similar restrictions against foreign shareholders are applied under the Civil Aeronautics Act or the Act on Nippon Telegraph & Telephone Corporation, where the numbers of foreign investors in a public company are limited to one-third of the total voting rights in the company. In cases where the ratio of foreign investors in public companies in these industries is higher than one-third of the voting shares, the registration of shareholders will not be updated for the excessive shares over such one-third threshold.


Apart from the taxes and other government charges or fees described in the response to Question 8 above, the main tax issue to consider in respect of corporate reorganisations is whether it falls under the ‘eligible tax system’ or the ‘non-eligible tax system’. There are a set of requirements to be met in order to fall under the eligible tax system. If the relevant corporate reorganisation is an eligible and qualifies under the eligible tax system, assets which are transferred to the transferee will be valued at book value and the profit/loss accrued through the transaction will be tax-deferred. Where assets other than the shares of the surviving company or company becoming wholly owning parent company are granted to the shareholders of the merging company becoming wholly owned subsidiary,

merger or share exchanges will fall into the non-eligible tax system and be subject to taxation. Because cash-out mergers or share exchanges are subject to taxation, it is more common to squeeze-out minority shareholders by way of the Fully Exchangeable Shares method rather than a cash-out merger or share exchanges method (please see the response to Question 16 above for more details).


As mentioned, cross-border transactions are subject to the provisions of the FEFTA. Please see the response to Question 6 above for more details.

21. How will the labour regulations in your jurisdiction and affect the new employment relationships?

Generally speaking, the consent of the target company’s employees will not be required in respect of a share acquisition as the parties to the employer-employee relationship remain the same. However, in some cases, the employer may be required pursuant to the terms of such labour union agreements to hold prior consultations with employees and/or labour unions or to obtain the consent of the employee and/or labour unions.

For transactions involving the transfer of assets which involves the transfer of employees as well (such as in the case of a business transfer), the company will be required to obtain the consent of each employee proposed to be transferred. However, in corporate split cases there is a special rule allowing for the transfer of the employment relationship without consent from the relevant employee, provided that certain procedures are followed.

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Yes, further to discussions within the Legislative Council of the Ministry of Justice, some amendments to the Companies Act are expected to be effected in 2013 or in 2014. Some of the expected revisions include those relating to further disclosure requirements, the introduction of a new corporate governance system and revisions of the regulations in respect of the relationship between parent companies and subsidiaries.

Two of the key new proposed changes which are relevant to mergers and acquisitions transactions are: (i) the new squeeze-out procedure described in the response to Question 16 above; and (ii) a new provision requiring that a resolution be passed at a shareholders meeting in certain circumstances where a third party allotment (daisansha wariate) will result in the allottee becoming a new controlling shareholder (ie controlling more than 50 per cent of the shares in a target), even if such allocation is not particularly favourable to the alottee

TAKASHI TOICHI Partner, Anderson Mori & TomotsuneE [email protected] www.amt-law.comA Akasaka K-Tower, 2-7, Motoakasaka 1-chome, Minato-ku, Tokyo 107-0051, JapanT +81 3 6888 1086 F +81 3 6888 3086

NAOKO TAKASAKI Associate, Anderson Mori & TomotsuneE [email protected] www.amt-law.comA Akasaka K-Tower, 2-7, Motoakasaka 1-chome, Minato-ku, Tokyo 107-0051, JapanT +81 3 6888 5653 F +81 3 6888 6653

ABOUT THE AUTHORS

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KoreaLee & Ko


In 2012, there was an overall decrease in the level of M&A activity, with overall deal value decreasing by approximately 30 per cent and deal volume by approximately 14 per cent as compared to 2011. The decline was mostly due to low levels of domestic M&A activity, and especially due to there being relatively few large-scale transactions. In particular, the fourth quarter of 2012 saw a significant decrease in overall deal value as several large-scale transactions closed in the third quarter. 2012 was also a presidential election year in the Republic of Korea (hereafter referred to as Korea) and companies were generally reluctant to commit to large-scale transactions prior to the outcome of the election.

On the other hand, cross-border M&A activity has increased consistently over the past few years and last year was no exception. In 2012, inbound deal value increased by approximately 37 per cent, and outbound deal value by 14 per cent as compared to 2011. These rates of growth are expected to continue into the near future, as cross-border M&A in the Asian region at large has been consistently increasing. Market surveyors and investment companies predict that Asian companies will play a substantially larger role in the global M&A market.

The first quarter of 2013 has shown an increase in overall M&A activity, with the aggregated deal value showing an increase of more than 50 per cent

compared to the same period in 2012.

Some of the notable mergers and acquisitions in Korea during the last 12 months include Hana Financial Group’s acquisition of the Korea Exchange Bank, with total deal value of almost 4 trillion won (US$3.6 billion), and the sale of 65.25 per cent stake in Himart Co., Ltd., one of the largest retail electronics businesses in Korea, to Lotte Shopping Co., Ltd., with a total deal value of approximately 1.25 trillion won. The Himart transaction was a notable transaction, not only in terms of its deal value, but also in terms of its complexity involving multiple sellers comprised of corporations, private equity funds and individuals.


M&A transactions in Korea most often take the form of a share acquisition, with mergers, business transfers and asset transfers also being utilised from time to time depending on the deal structure. A business transfer is a type of M&A transaction recognised in Korea whereby a part of a company’s business is transferred to another company, with the transferred business maintaining its same identity. Although it is similar to an asset transfer because it involves a comprehensive asset transfer, it is also different in that an entire business line is wholly transferred to the acquiring party.

However, mergers between listed companies tend to be rare in Korea, and the majority of mergers involve mergers between listed companies and their unlisted subsidiaries or affiliated companies,


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or mergers between unlisted affiliated companies. Business transfers are also not often utilised for M&A transactions of listed companies because the transfer of an essential business of the target company could result in the target company having difficulties in maintaining its operations with its unsold businesses, which may lead to the delisting of the target company.

With regards to the acquisition of shares, the most typical structure is the purchase of outstanding shares from the existing shareholders of the target company, but purchasers also sometimes subscribe to new shares of the target company or utilise a deal structure whereby they acquire an equity stake in the target company by a combination of subscription to new shares and purchase of outstanding shares. Please note, however, that in connection with the acquisition of outstanding shares of a listed company, if 5 per cent or more of the voting shares in a public company are purchased from ten or more persons outside of the market within a six month period, and are held by the purchaser and its specially related persons (family members, affiliates, and so on), then such purchaser may be obligated to conduct a tender offer (i.e., a mandatory tender offer) pursuant to the Financial Investment Services and Capital Markets Act (FSCMA).


The major legislation that regulates M&A transactions in Korea is the Korean Commercial Code (KCC). The KCC governs the terms and processes of general meetings of shareholders, issuance of new shares, share transfers, mergers, business transfers and other corporate activities of all types of companies, whether or not its shares are publicly traded. Therefore, the KCC constitutes the basic legal framework under which mergers and

acquisitions are regulated.

While the KCC is the major legislation that governs the terms and processes of mergers and acquisitions, if one of the parties to the merger is a listed company, certain provisions of the FSCMA may also be applicable. The FSCMA and its Enforcement Decree set forth special provisions applicable to a merger of a listed company, in particular, in connection with the determination of the merger price, conditions to the merger and appraisals to be conducted by an independent appraisal agency. On the other hand, in regards to a share acquisition, the KCC is the basic law that governs share acquisitions, but it does not set forth restrictions specifically applicable to share purchase agreements. Therefore, contractual principles govern the terms of a share purchase agreement.


Mergers and acquisitions exceeding a certain size are supervised by the Korea Fair Trade Commission (KFTC) pursuant to the Monopoly Regulation and Fair Trade Act (MRFTA). With respect to listed companies, the Financial Supervisory Service (FSS) also supervises the submission of securities reports that are required to be submitted in connection with the subscription of new shares or a merger.

In addition, for certain industries, the acquisition of shares exceeding a certain proportion may be supervised by the relevant ministry overseeing the particular industry.

Items 6 and 7 below discuss the relevant information in greater detail.

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In Korea, hostile takeovers are not prohibited.

However, in regards to the accumulation of shares by means of purchases outside of the market, shares will likely be acquired from ten or more persons, and thus the mandatory tender offer requirement described in item 2 will likely be applicable. Therefore, hostile takeovers by means of off-the-market accumulation of shares of listed companies may be subject to practical limitations.

In addition, those (together with their specially related parties) holding five per cent or more shares in a listed company must report their shareholding to the FSS and the Korea Exchange (KRX) (hereafter known as ‘Five Per Cent Report’). This reporting requirement allows incumbent major shareholders or management to detect certain parties increasing their shareholding and to carry out defensive measures such as the accumulation of shares through tender offers.

In the United States, a merger bid by which bidders submit competitively higher bids for the merger is permitted. However, in Korea, if the merger ratio between the two merging companies is deemed to be unfair, then it can be a cause for invalidating the merger. If a party to the merger is a listed company, the determination of the merger ratio is governed by the FSCMA. Due to such practical limitations, since it is difficult for bidders to submit substantially differing merger ratios by increasing the merger price/premium for the target shares, merger bids are generally deemed as impermissible under Korean law.


The MRFTA prohibits transactions that restrict competition which may take the form of share acquisition, merger, business transfer, or by having the same person holding officer or director positions in multiple companies. Business combinations exceeding a certain threshold must be reported by submitting a business combination report to the Korea Fair Trade Commission (KFTC). The KFTC examines the possibility of practical restrictions on competition, mostly but not exclusively within the domestic market, due to the reported business combination. For more information, please refer to item 7 below.

Further, M&A activity in certain industries are subject to the approval by the relevant ministry. For example, a merger with a financial institution or the acquisition of 10 per cent or more of shares in a financial company including banks, insurance companies or financial investment companies may require approval by the Financial Services Commission (FSC) pursuant to the relevant laws and regulations governing the financial industry such as the Banking Act, the Insurance Business Act, the FSCMA and the Act on the Structural Improvement of the Financial Industry. Also, a merger with, or an acquisition of 15 per cent or more of shares in, a core telecommunication company must be approved by the Ministry of Science, ICT and Future Planning pursuant to the Information and Communications Construction Business Act. In case of a merger with, or an acquisition of shares in, a company whose business is in the defence industry, the approval by the Ministry of Trade, Industry and Energy is required pursuant to the Defense Acquisition Program Act.

In addition, share acquisition by foreigners may be restricted for certain industries. For example,


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the Communications Construction Business Act provides that foreigners may not own more than 49 per cent of shares in a core telecommunication company.


For all types of M&A transactions, the relevant agreement between the parties is required to be executed. In case of a merger, the parties are required to execute a merger agreement that is in accordance with the KCC, and which requires the approval of the shareholders’ meeting.

In addition, regardless of whether a company is listed or unlisted, if a company with more than 200 billion won in total assets or revenue combines its business with another company that has more than 20 billion won in total assets or revenue by means of a share acquisition, merger or business transfer, then the company that has 200 billion won in total assets or revenue must file a business combination report with the KFTC within 30 days of the business combination. The assets and revenue of a company are calculated by adding the assets and revenue of all affiliates of the company both before and after the business combination. In addition, if the assets of the company required to file a business combination report exceed two trillion won, then the company must file a business combination report with the KFTC within 30 days prior to the consummation of the acquisition, and will not be able to close the deal if it fails to obtain approval of the transaction from the KFTC. Please note, however, in case of business combinations between affiliates, the timeline for obtaining clearance from the KFTC is usually shorter since a simplified approval process is involved.

Meanwhile, if the issuance of new shares satisfies the standards related to public offering or public sale set forth by the FSCMA (under a provision of

the FSCMA, minus a few exceptions, issuance of new shares by a listed company is deemed to be a public offering), then the company must file a securities report with the FSC, and can issue the new shares only after a certain waiting period has passed (until the ‘Effective Date’ of the securities report) following the FSC’s acceptance of the report. Even after the FSC approves the securities report, the waiting period will be reset if the FSC requests the company to amend its securities report during the initial waiting period. The submission of a securities report may also be required for mergers involving issuance of new shares of the merging company to the merged company’s shareholders or take-over of a listed company through subscription to new shares, where issuance of new shares satisfies the standards related to public offering or public sale set forth by the FSCMA. Therefore, the timeline for closing the transaction may depend on how long it takes to obtain the FSC’s approval and whether any amendments to the securities report is necessary.

Other than the reporting requirements mentioned above, M&A transactions involving companies in certain industries may require the approval of the relevant ministry; in which case, such transactions may have to be reported to the ministry and receive its approval prior to closing.


In Korea, there generally are no applicable government charges or fees in connection with M&A transactions. For example, there are no charges or fees that are required to be paid with regards to the filing of the business combination report, securities report, or foreign exchange report. However, if registration is required with respect to a merger, subscription to new shares, business transfer or asset transfer, the payment of a certain registration fee will be required, which will be quite nominal.

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In general, most information is not required to be publicly disclosed at the due diligence stage but, depending on the type of transaction, the purchaser or target company may be required to make certain disclosures at later stages of the transaction.

For share acquisitions, the purchaser or target company is not required to disclose any information until prior to the execution of the share purchase agreement (SPA). However, if a target company is a listed company, upon the execution of the SPA and upon the acquisition of ownership of the shares following the closing of the transaction, the purchaser must submit a Five Per Cent Report to the FSCMA. The KRX’s disclosure regulations also require the listed target company to disclose any change in the largest shareholder.

When the board of directors of a listed company resolves to merge the company with another company, the FSCMA requires such a listed company to submit a summary report to the FSC by the following day. In addition, a surviving company that is a listed company must submit a securities report to the FSC if it issues new shares in connection with the merger and it satisfies the standards related to public offering or public sale set forth by the FSCMA. The summary report and securities report must set forth the major terms of the agreement, as well as the objectives, method and timetable for the transaction, post-closing plans, information on valuation and the parties, risk factors and information relating to shareholder rights.


Anyone may freely view and obtain a copy of a company’s registration certificate through the online registry operated by the Supreme Court

of Korea (http://www.iros.go.kr). For listed companies, anyone may also freely view and obtain, from either the electronic data analysis retrieval and transfer system (DART) operated by the FSS (http://dart.fss.or.kr/) or the website operated by the KRX (http://kind.krx.co.kr), reports and important information such as business reports, semi-annual and quarterly reports, audit reports, information relating to increase in paid-in capital, the sale or purchase of important assets and the sale or purchase of treasury shares.

Unlisted companies generally do not have a duty to disclose, but those that fall under the category of enterprise groups subject to limitations on mutual investment as prescribed in the MRFTA are required to disclose certain information, and such disclosures may be viewed through DART.


Under Korean law, a special resolution of the shareholders’ meeting (affirmative vote of one-third of all issued and outstanding shares and two-thirds of shares represented at the meeting) is required for mergers and business transfers of all or an important part of the company’s business, and the Supreme Court of Korea has also taken the view that such a special resolution is also required for the sale of important assets (typically if the value of such assets is equal to or greater than 10 per cent of the company’s total assets).

A special resolution of the shareholders’ meeting is generally not required for M&A transactions involving share acquisitions.

If the articles of incorporation of a company set forth a higher threshold for passing a special resolution than what areis provided under the law, then such higher threshold would need to be met to approve such mergers or business or asset transfers. In addition,


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as is the case in other jurisdictions, shareholders are free to enter into shareholders’ agreements whereby certain shareholders contractually receive consent or approval rights with respect to the transfer of shares or mergers or business or asset transfers.


A director has an obligation to manage the tasks of the company in accordance with their fiduciary duty, and if the company incurs losses due to a director’s breach of their fiduciary duty, the director has an obligation to compensate the company for such losses and may be subject to legal sanctions for breach of trust. Also, if a director’s wilful act or gross negligence causes damage to third parties, such as creditors, the director may be jointly and severally liable with the company or with other directors for damages to such third parties.

While a director owes a duty to the company, the courts and the majority of scholars view that a director does not directly owe a duty to shareholders, and any losses incurred by the shareholders are indirectly compensated by requiring the director to make the company whole.

In the context of M&A transactions such as share transfers, mergers or business transfers, a director has an obligation to manage the tasks of the company according to their fiduciary duties. A director who made a decision with respect to an M&A transaction in breach of their fiduciary duty may be subject to a damages claim by the company or may be sanctioned for a breach of trust.

In addition, whether a controlling shareholder owes a duty of care to minority shareholders is a topic that is a subject of debate in Korea. However, the stronger view appears to be that there is no such duty on the part of the controlling shareholder.


In the case of a merger, although it is possible for a merger agreement to provide for a break-up fee payable by the target company in case it decides to terminate the merger agreement, such practice is not common in Korea. In certain countries such as the United States, a break-up fee is often negotiated and inserted into a merger agreement because the board of directors of a target company has the duty to seek the highest price for the sale of the target company and therefore it would like to retain the option to terminate an existing agreement and to enter into a merger with another company, if such a company provides a higher bid. From the counterparty’s perspective, this break-up fee is necessary to deter other bidders from submitting a higher merger bid. However, as stated in item 5 above, merger bids are generally deemed as impermissible under Korean law. Therefore, although the parties are allowed to include such break-up fees, it is quite unusual to have such a clause in the merger agreement.

In the case of a share acquisition, it is more common to have a reverse break-up fee provision where the acquiring party is obligated to pay a break-up fee if it walks away from a transaction. It is quite uncommon to have a break-up fee provision where the seller (or in case of a share subscription, the issuing company) is obligated to pay such break-up fee.


In a privately negotiated share purchase transaction or a business or asset transfer transaction, a prospective purchaser is free to attach any conditions to an offer and there are no regulations prohibiting or restricting the attachment of such conditions.

In the context of a tender offer, however, the offeror is restricted in the conditions for purchase it can attach to the tender offer. The offeror is permitted to

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attach the following conditions for purchase in the context of a tender offer: (i) that it will not acquire any shares if a certain threshold number of shares have not been tendered and/or (ii) that it will only acquire shares on a pro-rata basis and not any or all shares in excess of a certain threshold number of shares if more shares have been tendered than such threshold.


In the context of M&A, a bidder is not subject to any particular minimum financial requirements, disclosure requirements or requirements in connection with the bidder’s ability to pay. There are also no regulations which require a bidder to sign binding documentation or provide documentation showing how it reasonably expects to be able to pay for the transaction.


The KCC’s recent amendments went into effect from 15 April 2013, and one of the new provisions was to introduce a mechanism allowing for minority shareholders to be squeezed out.

Prior to its amendment, the KCC did not have a particular provision allowing minority shareholders to be squeezed out. There were discussions on whether it is possible to ‘cash out’ minority shareholders with nominal shareholdings through a consolidation of shares by providing them with payment for the odd lots. However, whether such squeeze outs should be permitted was a subject of controversy because allowing such cash outs were deemed to be at odds with protecting the rights of the minority shareholders.

According to the amended KCC, a controlling shareholder with shareholding of 95 per cent or greater may request that the minority shareholders sell their shares to the controlling shareholder. For the controlling shareholder to exercise this right, prior approval of the general meeting of shareholders (the majority legal view is that such a resolution can be passed by an ordinary resolution; i.e., affirmative vote of one-fourth of all issued and outstanding shares and a majority of shares represented at the meeting) is required, and the controlling shareholder must communicate their intent to each minority shareholder. The purchase price of the shares is to be determined by negotiation with the minority shareholders, and if this negotiation is unsuccessful, the court may be requested to determine the purchase price.

The amended KCC also sets forth a provision permitting the squeeze out of minority shareholders through a merger. As the amended KCC enables the entire remuneration for a merger to be paid in cash (which was not possible prior to the amendment of the KCC), in a merger with a subsidiary, the controlling shareholder is now able to squeeze out minority shareholders by cashing them out.


As set forth in item 7 above, if the assets of the company required to file a business combination report exceed two trillion won, then the company must file a business combination report with the KFTC within 30 days prior to the consummation of the acquisition, and it will not be able to close the deal if the company fails to obtain approval of the transaction from the KFTC. The KFTC is required to make a determination on whether to approve the transaction and notify the filer of the report within 30 days (within 15 days if a simplified approval process is utilised, which may be used, for example,


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in case of merger between affiliates) from the filing of the report. However, this period may be extended for up to 90 days.


All listed companies are subject to provisions of the FSCMA related to listed companies, and target companies may be subject to certain restrictions under the MRFTA if they qualify as an enterprise group subject to limitations on mutual investment.

If the target company is a financial company, it may also be subject to financial laws and regulations such as the Financial Holding Companies Act, the Act on the Structural Improvement of the Financial Industry, the FSCMA, the Insurance Business Act, the Banking Act, and the Mutual Savings Bank Act. As mentioned before, if the target is a core telecommunication company or defence company, then it may also be subject to the Information and Communications Technology Industry Promotion Act or Defense Acquisition Program Act, respectively.


For share transfers, the transferor must pay a capital gains tax on the transfer value of the shares. If a foreigner obtains shares of a domestic company and then transfers their shares to another party (regardless of whether the transferee is a domestic or foreign party), then the transferor will be required to withhold capital gains under the Income Tax Act. On a related note, if the transferor is a foreign corporation established under the laws of a country with whom the Republic of Korea has a tax treaty exempting the transferor from withholding tax, then the transferor will not be required to withhold the tax. However, if the foreign corporation is found to be a paper company, then the company that set up the

shell corporation may be subject to a withholding tax according to the principles of substantial taxation.

For mergers, surviving companies are required to pay corporate income tax under the Korean Corporate Tax Act (KCTA). However, corporate tax is deferred for certain ‘qualified mergers’ under the KCTA because such qualified mergers are considered to have no transfer value. Qualified mergers are those (a) between domestic companies that have been in business for at least one year prior to the merger registration date, (b) the value of the shares of the surviving company (or the parent company of the surviving company) constitutes at least 80 per cent of the total consideration that the shareholders of the merged company receive for the merger, (c) the stock of the surviving company (or the parent of the surviving company) are distributed pro rata to the shareholders of the merged company in accordance with their shareholding in the merged company, (d) shareholders of the merged company retain at least half of the shares that they received in the merger until the end of the fiscal year in which the merger is registered, and (e) the surviving company continues the business that it succeeded from the merged company until the end of the fiscal year in which the merger is registered.


Foreigners who wish to invest in a domestic company or acquire a domestic company through an M&A transaction may be subject to the Foreign Investment Promotion Act (FIPA), the Foreign Exchange Transactions Act (FETA), and its sub-regulations, the Regulations on Foreign Exchange Transactions (RFET).

If a foreigner acquires outstanding shares or subscribes to newly issued shares of a domestic company or acquires shares of a domestic company through a merger, and the investment amount for

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such an acquisition exceeds 100 million won, then the foreigner must file a report of the acquisition to the Ministry of Trade, Industry and Energy within 30 days of the acquisition in accordance with the FIPA. If the investment amount is less than 100 million won, then the report needs to be filed, pursuant to the FETA and the RFET, with the governor of the Bank of Korea.

Conversely, if a Korean company acquires 10 per cent or more shares of an foreign entity in order to participate in the management of the company, or even if it acquires less than 10 per cent, if the Korean company acquires the right to appoint directors, then this transaction will be deemed a foreign direct investment and, pursuant to the FETA and the RFET, would need to be reported to the head of the foreign exchange bank. If the acquisition of shares of a foreign entity does not satisfy the foregoing conditions, then it will be deemed a capital investment and would need to be reported to the governor of the Bank of Korea.


There are no labour regulations that require companies to obtain their employees’ approval for M&A transactions. However, the terms of the M&A transaction must comply with provisions of the Labour Standards Act because it contains comprehensive and mandatory standards on the terms of employment (i.e., prohibition on unfair termination of employment) and any agreement that departs from these standards will most likely be found invalid. Without going into the specifics, we would like to note that it is not easy to terminate the employment of an employee without a justifiable reason in Korea, and the justifiable reason is also narrowly construed. Due to such reasons, there may be limits on an acquiring company’s ability to conduct significant human resources restructuring.

This is particularly true in cases where there is an existing collective bargaining agreement in place because the acquiring company will be obligated to comply with (or to allow the purchased entity to comply with) such collective bargaining agreements that are in place.


The KCC was substantially amended on 14 April 2011, and the amended KCC went into effect on 15 August 2012. As mentioned in item 16 above, one of the important amendments relating to M&A was the introduction of the squeeze out of minority shareholders. The FSCMA was partly amended on 18 May 2013 and the amendments will take effect on 29 August 2013 (however, certain amended provisions are expected to take effect on at a later date, as specified in the respective provisions). The recent amendments of the FSCMA relating to M&A include certain amendments involving the method of merging listed companies and the appraisal rights of dissenting shareholders.

While discussions on additional amendments to the KCC and the FSCMA are continuously ongoing among legislators, it seems unlikely that extensive amendments to the KCC and the FSCMA will be adopted in the near future considering that extensive amendments have recently taken effect.


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ABOUT THE AUTHORS

Sang Gon KIM is a partner in the corporate department of Lee & Ko specializing in mergers and acquisitions, private equity and restructurings. He has been involved in a wide variety of M&A transactions, particularly in the fi nancial and petrochemical industries, advising clients in both friendly and hostile takeovers. Mr. Kim also represented several major Korean conglomerates in their restructurings into holding company structures. Amongst other publications, he is the author of the following articles: Tender Offer with New Shares as Consideration in Korea in AsiaLaw Corporate Finance Review, 2008, and Korea’s Appraisal Rights System in AsiaLaw M&A Review, 2006.

Jang Hyuk YEO is a partner in the corporate department of Lee & Ko specializing primarily in mergers and acquisitions, joint ventures and other general corporate matters. He has extensive experience in advising clients on both inbound and outbound transactions to and from Korea. Prior to joining the fi rm in 2012, he was with Cleary Gottlieb Steen & Hamilton, where he gained substantial experience in capital markets and mergers and acquisitions. Mr. Yeo has extensive experience representing purchasers, sellers, fi nancial advisors and joint venture partners in a variety of cross-border transactions.

SANG GON KIMPartner, Lee & KoE [email protected] www.leeko.comA Hanjin Main Building, 18th Floor, 118, Namdaemunno 2-Ga, Seoul 100-770, KoreaT +82 2 772 4362F +82 2 772 4001/2

JANG HYUK YEOPartner, Lee & KoE [email protected] www.leeko.comA Hanjin Main Building, 18th Floor, 118, Namdaemunno 2-Ga, Seoul 100-770, KoreaT +82 2 2191 3258F +82 2 772 4001/2

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MalaysiaShearn Delamore & Co.


It was reported in the Securities Commission’s Annual Report 2012 that in 2012, the Securities Commission received a total of 35 applications for clearance of offer documents involving a total offer value of 14.54 billion ringgit, as compared to 23 applications in 2011 involving a total offer value of 14.06 billion ringgit. There were also many international cross-border M&A transactions involving assets and companies in Malaysia, which were not included in the latter statistics, as they did not require the approval of the Securities Commission.

Amongst the notable mergers and acquisitions deals over the last 12 months are:

■ Property – The offer by Permodalan Nasional Bhd and Tan Sri Dato’ Sri Liew Kee Sin for the remaining shares in SP Setia Bhd valued at 5.7 billion ringgit. This is the largest Malaysian takeover offer of a Malaysian company in terms of offer value in 2012.

■ Insurance – The acquisition of ING Management Holdings (Malaysia) Sdn Bhd by AIA Group Ltd for 5.29 billion ringgit, which was completed in December 2012. With the acquisition, AIA has emerged as the largest life insurer in Malaysia in terms of total premium revenue of US$2.05 billion post acquisition.1

■ Oil and gas – The RM11.85 billion merger between Kencana Petroleum Bhd and Sapura Crest Bhd in May 2012 formed the largest integrated oil and gas service provider by assets in Malaysia, known as Sapura-Kencana Petroleum Berhad. Under a cash and share swap deal, a special purpose vehicle, Intergral Key Sdn Bhd made the offer to acquire all the as sets and liabilities of SapuraCrest for 5.87 bil lion ringgit and Kencana for 5.98 billion ringgit.2

■ Solar – Hanwha Chemical Corporation’s (listed on the Korean stock exchange) successfully bid for and acquired Q-Cells SE’s headquarters in Germany, its production facilities in Germany and Malaysia and its sales offices in the US, Australia and Japan positioning it as the third largest solar manufacturer in the world.3

■ Retail – AEON Co Ltd’s (Japan) acquisition of Carrefour’s Malaysian operations through a new entity, AEON BIG (M) Sdn Bhd. The deal was to acquire Carrefour’s Malaysian hypermarket operating subsidiary Magnificient Diagraph Sdn Bhd and Carrefour Malaysia Sdn Bhd for the purchase price of 147 million euros. The acquisition was completed in October 2012 and with the acquisition of the Carrefour’s Malaysian operations, AEON becomes the 2nd largest retailer group in Malaysia.4


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The most common methods of acquiring a public company in Malaysia are:

1. Acquisition of shares of the company through sale and purchase agreement;

2. Acquisition of assets and liabilities of the company;

3. Takeover of the company by way of voluntary offer or mandatory offer in accordance with the Malaysian Code on Take-overs and Mergers 2010 (hereinafter known as ‘the Code’); and

4. Scheme of arrangement under s 176 of the Companies Act 1965, which is regarded as a takeover offer regulated under the Code.


The key laws and regulations that govern mergers and acquisitions in Malaysia are:

1. The Code, Practice Notes and Guidelines on Contents of Applications relating to Take-overs and Mergers issued by the Securities Commission, which governs the conduct of all persons involved in takeover offers, mergers and acquisitions in Malaysia, and is administered by the Securities Commission;

2. Capital Markets and Services Act 2007 (CMSA 2007), which contains, inter alia, provisions that regulate the activities of markets and intermediaries in Malaysian capital markets and substantial shareholding reporting requirement. Part VI Division 2 of CMSA 2007 contains provisions to govern takeovers, mergers and acquisitions of

companies;

3. Companies Act 1965 (CA 1965), which contains, inter alia, provisions that govern the conduct and affairs of companies, the director’s duties, disclosure requirements on substantial shareholding and schemes of arrangements; and

4. Bursa Malaysia Listing Requirements 2010 (Listing Requirements), which apply to a company listed on the Bursa Malaysia Stock Exchange and contains rules that govern the conduct of a public listed company, including disclosure requirements, public spread requirements and other requirements during

the M&A process.


The main regulators for M&A activity in Malaysia are:

1. Securities Commission (SC) – SC has regulatory power to regulate the takeover, merger and acquisition of companies and to ensure compliance with the provisions of securities laws;

2. Companies Commission of Malaysia (CCM) – CCM is empowered, amongst others, to administer and enforce the Companies Act 1965;

3. Bursa Malaysia Securities Berhad (Bursa) – Bursa which operates Malaysia’s stock exchange is the front line regulator with the primary responsibility to oversee compliance by listed companies with the Listing Requirements;

4. Bank Negara Malaysia (Malaysian Central Bank) – the Malaysian Central Bank

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administers the regulation of the financial sector and its power includes the consideration of applications for approval for the acquisition of interests in financial institutions ; and

5. Other Regulatory/Licensing authorities – Government agencies, regulators (including industry regulators) and/or local authorities may impose specific conditions or other requirements. Such conditions depend on the industry in which the target company operates.


There is no prohibition under the Code on hostile bids. In fact, there are a number of provisions under the Code, which relate to competing takeovers. Hostile bids are uncommon in practice and one of the reasons may be due to the lack of opportunity for potential bidders to conduct due diligence on the target company. The only information available in respect of the target company in hostile bid situations is normally limited to those available in the public domain (see Question 10 for information in public domain).


The main anti-monopoly legislation in Malaysia is the Competition Act 2010 (CA 2010), which came into effect on 1 January 2012. There are no merger control provisions under the CA 2010 but there are provisions that prohibit anti-competitive practices and abuse of dominant market position. The CA 2010 is aimed at regulating agreements between enterprises which have the object or effect of significantly preventing, restricting or distorting competition in any market for goods and services in Malaysia and conduct which amounts to abuse of

dominance in the relevant market. In the past, the Guidelines on the Acquisition of Interests, Mergers and Takeovers by Local and Foreign Interests in 2009 (hereinafter known as ‘Foreign Investment Guidelines’) restricted foreigners in the percentage of shares they may own in a Malaysian company. This restriction worked in parallel with similar prescriptions by other government ministries such as the Ministry of International Trade and Industry, which is the licensing authority for manufacturing companies. Since the abolishment of the Foreign Investment Guidelines, there is no longer a general restriction on the foreign ownership of shares in Malaysian companies. However, such limitation is now industry specific and is regulated and administered by the relevant government ministry or body such as Malaysian Central Bank.


Other than the usual sale and purchase documentation, in the case of a general offer under the Code, the following documentation is required: 1. Announcement for notice of a takeover

offer, which must be immediately made by the offeror of his firm intention to make a takeover to the public by press notice, ie at least three main national newspapers (one in the national language and one in English), and by written notice to the target’s board of directors, the SC and Bursa if the target is listed. The announcement of the takeover must contain, inter alia, the following information:

a. The identity of the offeror and all person acting in concert (hereinafter known as ‘Pac’);

b. The basis of the offer price;

c. The basis of consideration, if other than by cash;


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d. The type and total number of voting shares or voting rights of the target company which have been acquired by the offeror;

e. The details of the agreements relating to the acquisition; and

f. The terms and conditions of the takeover offer.

2. Announcement of the receipt of the takeover notice, which must be made by the target’s board of directors to the public by press notice or to Bursa if the target is listed. This announcement must contain all information disclosed to the target’s board of directors and a statement as to whether they are seeking an alternative offer.

3. Offer document, which must be submitted to the SC for its consent. The offeror is required to disclose in the offer document, all information that the target’s shareholders and their advisors would reasonably require and expect to find 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. The offer document shall contain all information and statements as required under the ‘First Schedule’ of the Code, including:

a. The identity of the ultimate offeror;

b. The terms and conditions of the takeover offer;

c. The offeror’s intentions with regard to the continuation of the target’s business and the major changes to be introduced in the target’s business;

d. The offer price and the confirmation that the offeror has sufficient financial resources where the takeover is by cash; and

e. Whether the offeror intends to invoke the right of compulsory acquisition.

4. Target board’s circular, which must be issued by the target’s board of directors to every shareholder. The circular will contain the board of director’s comments, opinion and information on the takeover offer and must contain all information that the target’s shareholders and their advisors would reasonably require and expect to find 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.

5. Independent advisor’s circular, which is to be issued by an independent advisor containing its comments, opinions, information and recommendation on the takeover offer to the target’s board of directors, shareholders and holders of convertible securities. The independent advisor’s circular must include the information set out in the ‘Second Schedule’ of the Code.


The fees payable to the SC in respect of takeovers, mergers and compulsory acquisitions are prescribed under the Capital Markets and Services (Fees) Regulations 2012. The amount payable varies depending on the type of application to the SC. For example, in respect of an application to the SC for its clearance of offer document, under the current regulations, the fees payable are calculated as follows:

1. For an offer value from 1.00 ringgit to 2.98 billion ringgit, the fee payable is 10,000.00 ringgit + 0.05% of offer value (up to 2.98 billion ringgit); and

2. Any remaining sum above the offer value of

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2.98 billion ringgit, the additional fee payable is 0.025 per cent of the remaining offer value.

In the case of a circular to shareholders requiring Bursa’s review (either limited review or full review), a fee may be charged by Bursa and the amount payable is to be determined by Bursa from time to time.

Apart from the above, stamp duty is payable in relation to the transfer of shares and property.


The overriding principle under the Listing Requirements in respect of information that has to be disclosed is that a listed company has to immediately disclose all material information. Information is considered material if it is reasonably expected to have a material effect on the price, value or market activity of any listed company’s securities or the decision of the shareholder or investor in determining his choice of action. Material information includes information which concerns the listed issuer’s assets and liabilities, business, financial condition or prospects.

In the situation where there is a potential takeover of a listed company, which may involve the conduct of due diligence by potential bidder/purchaser, there are a number of circumstances where the target company may be under an obligation to make an announcement for, eg:

■ Where there is unusual movement in the price of the potential target company’s voting shares or voting rights

■ Where the potential target company becomes the subject of rumours or speculations about a

possible takeover offer

Consistent with the thorough public dissemination policy which forms part of the disclosure policies, the Listing Requirements provide that no disclosure of material information should be made on an individual basis or selective basis unless such information has been previously disclosed and disseminated to the public. Further, in the circumstances where selective disclosure of material information is necessary, for example, where the listed company is undertaking a corporate exercise or to facilitate a due diligence exercise, the listed company must still ensure that disclosure is restricted to only relevant persons and the strictest confidentiality is maintained. In practice, this may necessitate any material information that has not been previously announced if disclosed to a potential bidder in the course of due diligence to be immediately announced.


Information that is available in the public domain is that, which is by law required to be lodged with the relevant authorities, such as:

1. Information/documents which are statutorily required to be lodged with or maintained by the CCM under the CA 1965, including:

a. Memorandum and articles of association of the target company;

b. Form 8 (certificate of incorporation of public company) or Form 9 (certificate of incorporation of private company);

c. Form 24 (return of allotment of shares);

d. Form 34 (statement of particulars to be lodged with charge);

e. Form 49 (return giving particulars in register of directors, managers and secretaries and changes of particulars); and


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f. Annual return and audited accounts;

2. Information/documents which are lodged by listed companies with Bursa pursuant to the Bursa Malaysia Listing Requirements. They include:

a. Announcements;

b. Circulars and notices to shareholders;

c. Annual reports and audited accounts;

d. Quarterly financial reports; and

e. Prospectuses; and

3. Other information posted on the target company’s website.


Shareholders on a collective basis may have consent/approval rights under the CA 1965 in the situations as prescribed there under, such as:

1. Acquisition or disposal of any company’s undertaking or property of a substantial value; and

2. Any arrangement or transaction where a director or a substantial shareholder of the company or its holding company, or a person connected with such a director or substantial shareholder acquires from the company or disposes to the company shares or non-cash assets of the requisite value.

In the case of listed companies, the question of when shareholders will have to give their consent or approval to a transaction will depend on the percentage ratio (computed based on the formulas stipulated under the Listing Requirements) applicable to the transaction ie 25 per cent or more unless in the case of related party transactions where shareholders’ approval will be required where the

percentage ratio in respect of the transaction is five per cent or more.


Under the CA 1965, a director of a company owes a duty to exercise his powers for a proper purpose and in good faith in the best interest of the company; and to exercise reasonable care, skill and diligence with:

1. The knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities; and

2. Any additional knowledge, skill and experience, which the director in fact has.

There are no specific duties imposed on the controlling shareholders of companies under the CA 1965. However, the CA 1965 provides remedies where the controllers of companies misuse their positions of power in an oppressive, unfairly discriminatory or prejudicial manner towards members. The members that are being oppressed may seek remedies from the Court, such as an order to direct or prohibit any act or cancel or vary any transaction, or an order to wind up the company.


Whilst there is no specific prohibition against the payment of break-up fees under the Code, the issue commonly encountered when such provision is to be included as part of a proposed acquisition is whether it would be in breach of s 67 of the CA 1965 which prohibits a company from providing, whether directly or indirectly, any financial assistance for the purpose of or in connection with a purchase or subscription of its own shares. Hence, if a break-up fee was to be paid by the target

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company, they would be prohibited under s 67. Break-up fees if not payable by the target company may be possible.


Depending on the type of the offer, the Code stipulates certain conditions that must be or may be imposed:

Mandatory offer:An offeror must include in the offer document an acceptance condition that the takeover offer will be subject to the offeror having received acceptances which would result in the offeror and all Pacs with offeror holding in aggregate more than 50 per cent of the voting shares or voting rights of the target company. No other condition is permitted.

Voluntary offer:An offeror must include in an offer document an acceptance condition that the takeover offer will be subject to the offeror having received acceptances which would result in the offeror holding in aggregate more than 50 per cent of the voting shares or voting rights of the target company. In addition, a voluntary offer may be conditional upon a higher level of acceptances, eg 90 per cent of the shares that enables the offeror to compulsorily acquire the remaining 10 per cent who have not accepted subject to the offeror having satisfied the SC that he is acting in good faith in imposing such high level of acceptances. The level imposed may affect the continued listed status of the target company.

An offeror, in a voluntary offer, may include conditions except a defeating condition however expressed, where the fulfilment of which depends on:

1. An opinion, belief or other state of mind of the offeror or any Pac with the offeror; or

2. Whether or not a particular event happens, being an event that is within the control of or is a direct result of an action by the offeror or any Pac with the offeror.


Under the Code, where the takeover offer is for cash or includes an element of cash, an offeror must ensure and his financial advisor must be reasonably satisfied that:

1. The takeover offer would not fail due to the insufficient financial capability of the offeror; and

2. Every target company’s shareholder who wishes to accept the takeover offer would be paid in full.

An offer document submitted by the offeror for a takeover offer, as required under the ‘First Schedule’ to the Code, must include a statement made by the offeror and its financial advisors that they satisfied that:

1. Where the takeover offer is by cash, either in part or in whole, the offeror has sufficient financial resources and the takeover offer would not fail due to insufficient financial capacity of the offeror; and

2. Every shareholder who wishes to accept the takeover offer will be paid in full.


Section 222 of the CMSA 2007 confers on the offeror the right to invoke a squeeze-out mechanism, which


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enables a successful offeror to compulsorily acquire the shares of dissenting shareholders who have not accepted the bid where the offeror’s offer to acquire all the shares or all the shares in any particular class in a target company has, within four months after the making of the offer, been accepted by at least 90 per cent in the nominal value of those shares of that class (excluding shares already held at the date of the takeover offer by the offeror or Pac).

In order to invoke s 222 of the CMSA 2007, the successful offeror is required to give a notice (hereinafter known as ‘Requisite Notice’), within two months from the date the 90 per cent acceptance condition has been achieved by the offeror, to the dissenting shareholders to indicate its desire to acquire their shares together with a copy of a statutory declaration by the offeror that the conditions for the giving of the notice are satisfied.

Upon receipt of such Requisite Notice, the dissenting shareholders may serve upon the offeror a written demand requesting for a written statement of the names and addresses of all other dissenting shareholders as shown in the register of members (hereinafter known as ‘Demand Statement’) and the offeror is not entitled to acquire the shares of the dissenting shareholders until 14 days after the posting of the Demand Statement.

After the giving of the Requisite Notice and statutory declaration, and subject to compliance with any request for a Demand Statement, the offeror may acquire the remaining shares on the terms of the takeover offer as being applicable to the dissenting shareholders. Upon the expiration of one month from the Requisite Notice, the offeror is required to send a copy of the Requisite Notice and an instrument of transfer executed on behalf of all such dissenting shareholders by the offeror together with the consideration for the shares concerned to the target company.


The Code only specifies the timeline for conducting a takeover offer starting from the moment a firm intention to make an offer is announced until the offer is closed or lapses. There is no timeline prescribed by the Code for the completion of a business combination.

The timeline for takeover offer specified under the Code is set out as follows:

Day(s) Matters to be undertaken

Notice day(hereinafter known as ‘ND’)

The offeror is required to immediately announce the takeover offer by press notice and also send a written notice (hereinafter known as ‘Written Notice’) of the takeover offer to the board of directors of the target company, the SC and Bursa if the securities of the target company are listed on the stock exchange.

ND + 1 The target’s board of directors must make an announcement to the public by way of press notice and also to Bursa in writing if the target company is listed within 24 hours of the receipt of the Written Notice.

ND + 4 The offeror is required to submit the offer document to the SC for its consent within four days from the date of sending the Written Notice.

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ND + 7 The target’s board of directors must dispatch an announcement of the receipt of the Written Notice to all target’s shareholders within seven days of the receipt of the Written Notice.

Posting day ND + 21 (hereinafter known as ‘D’)

The offeror is required to dispatch the offer document as consented to by the SC to the target’s board of directors and shareholders within 21 days from ND.

D + 10 The target’s board of directors must issue its comments, opinion and information on the takeover offer in the form of a circular to all target shareholders within 10 days from D.

The independent advisor appointed by the target’s board of directors must issue its comments, opinion, information and recommendation on the takeover offer in an independent advice circular to the target’s board of directors, shareholders, holder of convertible securities within 10 days from D.

D + 21 The offeror is required to keep the takeover offer open for acceptance for at least 21 days from D (hereinafter known as ‘offer period’). The takeover offer may be accepted by the target’s shareholders on any day after the dispatch of the offer document until the closing of the takeover offer, which must not be later than 74 days from D.

Where there is a competing takeover offer made during the offer period, the approved offer document will be deemed to have been posted on the date that the competing takeover offer document was posted.

Where the offeror revises the takeover offer, the offeror is required to keep the offer open for acceptance for at least another 14 days from the date of the posting of the revised takeover offer to the target’s shareholders.

D + 46 The offeror is not permitted to revise the takeover after the 46th day from D.

Where there is a competing takeover offer, the offeror is also not permitted to revise the takeover offer after the 46th day from the date on which the offer document relating to the competing takeover offer was posted to the target’s shareholders.


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D + 60 The takeover offer will lapse after 60 days from D if the offeror has not received acceptances that would result in the offeror and all Pac holding, in aggregate, more than 50 per cent of the voting shares of the target company to which the takeover offer relates.

D + 60 will be the closing date of the takeover offer where the takeover offer has become or been declared unconditional as to acceptances as at D.

In the event that the takeover offer has become or is declared unconditional as to acceptances on or before D + 46, the offer must be kept open for acceptances for not less than 14 days from the date on which the takeover offer becomes or is declared unconditional and the closing date of the takeover offer must be not later than D + 60.

D + 74 In the event that the takeover offer has become or is declared unconditional as to acceptances on any day after D + 46, the offer must be kept open for acceptances for not less than 14 days from the date on which the takeover offer becomes or is declared unconditional and the closing date of the takeover offer must be not later than D + 74.


Yes. The rules will depend on the industry target company is in. For example, the banking and insurance industries are governed by the Financial Services Act 2013 which came into force on 30 June 2013 whilst the manufacturing industry is governed by the Industry Co-Ordination Act 1975.

Certain industries may require licensing under the relevant laws, regulations and/or guidelines and the relevant regulators may impose certain conditions on the terms of the licences in relation to the manner of the businesses to be operated, acquired or disposed, such as restriction on the foreign shareholding, approvals required for changes of ownership of a company and approvals required for reaching certain threshold for acquisition or disposal of shares in certain regulated industries. For instance, the approval of the Malaysian Central Bank is required prior to entering into an agreement or arrangement to acquire any interest

in shares of a licensed institution (for banking and insurance business) by which a person would hold five per cent or more in the shares of the licensed institution; whilst the approval of the Minister of Finance is required for any person who has an aggregate interest in shares of a licensed institution of more than 50 per cent or has control over the licensed institution to enter into an agreement or arrangement to dispose any interest in shares of the licensed institution.


Capital Gains Tax:There is no capital gains tax in Malaysia apart from real property gains tax (RPGT). RPGT is levied on capital gains accruing on the disposal of any property or shares in a real property company (RPC), as defined. Capital gains from the disposal of real property or RPC shares held for more than five years are currently exempt from RPGT.

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Tax losses and Capital Allowances:Tax losses and unabsorbed capital allowances remain with the company. If the company is liquidated, the unutilised tax losses, unabsorbed capital allowances etc. would be lost.

With effect from year of assessment 2006, unutilised tax losses and unabsorbed capital allowances cannot be carried forward to subsequent years if there is a change of more than 50 per cent of shareholders of the company. However, the Ministry of Finance has clarified that this restriction is only applicable to dormant companies, where there is a change of more than 50 per cent of their direct shareholders.

Income Tax Assessments:Tax authorities may raise income tax assessments on back years within six years from the end of a year of assessment (but note that the limitation period would be reduced to five years with effect from 1 January 2014). No time limit is imposed if the authorities allege fraud, wilful default or negligence by the taxpayer.

Stamp Duty – Transactional Tax:Stamp duty is a tax levied upon instruments (ie written documents) and is payable on ad valorem basis on, among others, instruments of transfer or conveyance. For instance, in an asset acquisition, the stamp duty imposed on a conveyance on sale of property is as follows:

1. One per cent on the first 100,000 ringgit;

2. Two per cent on the amount in excess of 100,000 ringgit but not exceeding 500,000 ringgit; and

3. Three per cent on any amount in excess of 500,000 ringgit.

In a share acquisition, stamp duty is chargeable at the rate of 0.3 per cent on the purchase price paid or market value of the shares, whichever is higher.


Cross-border transactions are generally not subject to special legal requirements.

However, in structuring cross-border transactions, one should consider whether there might be any tax or cost saving advantage available under the applicable double taxation agreements between Malaysia and other countries, and the use of Labuan. To promote Labuan as an international business and financial centre, Labuan entities enjoy preferential tax rates and other tax incentives and exemptions.


In an acquisition or takeover involving the sale of shares, there is no new employment relationship and consent is not required from the employees as the employment status of the employees remain unaffected by the transaction or change in shareholding.

In an asset/business transaction, there is no unilateral or automatic transfer in law of the employment contracts. Consent of the employees will have to be obtained if it is intended for the employees to take up employment with the new owners of the business.

In 2013, two new labour statutes came into force, namely the Minimum Retirement Age Act 2012 and the Minimum Wages Order 2012.

The Minimum Retirement Age Act 2012 came into force on 1 July 2013 and sets a national retirement age for the private sector at 60 years. However, this statutory retirement age does not apply to employees of the public sector, foreign national employees, probationers, domestic servants and any fixed-term


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contract employees that do not exceed 24 months in respect of the contract duration.

The Minimum Wages Order 2012 came into force on 1 January 2013 and sets a national monthly minimum wage at 900 ringgit (for Peninsular Malaysia) and 800 ringgit (for the states of Sabah, Sarawak and the Federal Territory of Labuan). For employees who are employed at hourly rates, the minimum hourly rates have been set at RM4.33 and 3.85 ringgit respectively for the aforesaid categories.

In addition, the Personal Data Protection Act 2010, a legislation which will regulate the processing of personal data in the private sector, including employment relationships, is expected to come to into force this year. The date of coming into force has not been set yet.


The latest significant reform to the regulations governing takeover in Malaysia is the introduction of the Malaysian Takeovers and Mergers Code 2010 on 15 December 2010 which replaced the old Malaysian Code on Takeovers and Mergers 1998.

There is a draft Companies Bill that is currently being put forth for public consultation. The draft Companies Bill sets out the new legal framework to replace the existing CA 1965 and may include provisions affecting aspects of mergers and acquisitions.

1 The Edge (http://www.theedgemalaysia.com/business-news/233121-aia-to- lead- insurance-industry-post-merger-with-ing.html)

2 The Star (http://www.thestar.com.my/s t o r y . a s p x ? f i l e = % 2 f 2 0 1 3 % 2 f 1 % 2 f 5 % 2 f b u s i n e s s % 2 f 1 2 5 2 8 6 5 7 & s e c = b u s i n e s s , h t t p : / / w w w . t h e s t a r . c o m . m y / s t o r y .a s p x ? f i l e = % 2 f 2 0 11% 2 f 1 2 % 2 f 1 0 % 2 f b u s i ness%2f10069983&sec=business)

3 http://www.renewableenergyworld.com/rea/news/article/2012/10/newly-launched-hanwha-q-cells-becomes-worlds-third-largest-solar-manufacturer

4 The announcement made by AEON CO Ltd on 1 November 2012. (http://www.aeon.info/export/s i tes/renewal /common/ images/en/pressroom/imgsrc/121101R_1.pdf)

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MARHAINI NORDIN Partner, Corporate and Commercial Practice Group, Shearn Delamore & Co.E [email protected] www.shearndelamore.comA 7th Floor, Wisma Hamzah-Kwong Hing No.1, Leboh Ampang, 50100 Kuala Lumpur, MalaysiaT +603 2027 2853F +603 2072 6503

SWEE-KEE NG Partner, Corporate and Commercial Practice Group, Shearn Delamore & Co.E [email protected] www.shearndelamore.comA 7th Floor, Wisma Hamzah-Kwong Hing No.1, Leboh Ampang, 50100 Kuala Lumpur, MalaysiaT +603 2027 2898F +603 2072 6503

ABOUT THE AUTHORS

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MyanmarKelvin Chia Yangon Ltd.


Over the last year, the Myanmar government has taken important steps to reform and liberalise its political and economic systems, which has resulted in the lifting of economic sanctions by many Western countries and a surge of interest in the country. This interest has led to a number of investments in Myanmar, and some of the more significant investments include:

■ Coco-Cola announced a US$200 million joint venture with Pinya Beverages Myanmar Ltd to produce non-alcoholic beverages and purified drinking water at four factories in Yangon

■ Heineken announced a US$60 million joint venture with Alliance Brewery Company Ltd to produce and sell Heineken beer

■ Carlsberg announced a joint venture with Myanmar Golden Star Breweries to produce and sell Carlsberg beer


The article will focus on investments made by foreign investors in Myanmar as opposed to mergers and acquisitions or investments by or between domestic investors. Domestic investors comprise either Myanmar citizens or Myanmar

companies, which are companies wholly-owned by Myanmar citizens (hereinafter known as ‘Myanmar company’).

As discussed in question 3 below, companies may be established under the Foreign Investment Law or the Myanmar Citizens Investment Law. Because foreign investors are prohibited from purchasing shares in companies established under the Myanmar Citizens Investment Law, mergers and acquisitions in Myanmar typically take one of three forms:

1. The foreign investor purchases the shares held by an existing foreign shareholder;

2. The foreign investor establishes a new joint venture company in Myanmar with a local partner and the local partner contributes, as its capital contribution, whatever assets the foreign investor had hoped to purchase; or

3. The foreign investor incorporates a company in Myanmar and purchases the relevant assets from its target.


Myanmar has not enacted any specific legislation with regard to mergers and acquisitions and, therefore, matters pertaining to mergers and acquisitions are governed by laws and delegated legislation relating to foreign and domestic investment (as well as internal governmental policies in certain instances). Under Myanmar law, there are separate investment schemes for foreign investors (including any investments comprising


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joint ventures between foreign and domestic investors) and domestic (Myanmar) investors.

For foreign investors, the key laws and regulations are as follows:

■ The Foreign Investment Law (2 November 2012)

■ The Foreign Investment Rules and Regulations (31 January 2013)

■ The Foreign Investment Notification (31 January 2013)

■ The State-owned Economic Enterprises Law (31 March 1989)

For domestic investors, the key law is as follows:

■ The Myanmar Citizens Investment Law (31 March 1994)

In addition to the above laws, the Myanmar Companies Act (1 April 1914) will apply to companies generally in Myanmar and is relevant to both foreign and domestic investors.

As an initial matter, a foreign investor contemplating an acquisition in Myanmar must consider whether such an investment is permitted under Myanmar law. The State-owned Economic Enterprises Law, in conjunction with the Foreign Investment Law and the Foreign Investment Notification, set out certain restrictions with regard to foreign ownership in specified industries/sectors.

A foreign investor must also consider whether the target company was established under the Foreign Investment Law or the Myanmar Citizens Investment Law. If the target company was established under the Foreign Investment Law, then the Myanmar Investment Commission (MIC) has the discretion to approve the acquisition by a foreign investor of the shares held by a Myanmar citizen or a Myanmar company shareholder;

thus, we recommend confirming with the MIC in advance of any planned acquisition that its current policies permit such an acquisition of shares. If the foreign investor desires to purchase the shares of a foreign shareholder, then such an acquisition would be permitted, provided the share transfer complies with the requirements and procedures as set out in the Foreign Investment Rules and Regulations, and MIC approval is accordingly obtained.

If the company was established under the Myanmar Citizens Investment Law, then a foreign investor would be prohibited from acquiring any shares in such company (the latter being a Myanmar company).

In order to register a share transfer, it would also be necessary to follow the requirements of the Myanmar Companies Act, which are discussed in question 4.


The relevant government regulators and agencies will depend on whether the target company has received a MIC Permit under the Foreign Investment Law or whether the company was incorporated directly with the Companies Registration Office and without obtaining an MIC Permit.

For companies that have received an MIC Permit, the Foreign Investment Rules and Regulations set out the approvals required for share acquisitions. As a starting point, if the acquirer (either a foreign investor or a domestic investor) desires to purchase all of the shares in the target company, the transferor of the shares will first have to receive certification from the relevant Internal Revenue Departmental Office that it/he has ‘undergone revenue-related scrutiny’ in connection with the sale of the shares. If the acquirer only desires to acquire some of

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the shares in the target company, the Foreign Investment Rules and Regulations do not provide for a similar requirement of obtaining a certification from the Internal Revenue Departmental Office.

Once a certification is received, a share transfer application can be submitted by the transferor to the Directorate of Investment and Companies Administration (DICA) for approval. DICA may, with the approval of the MIC, form a panel of experts from relevant government departments and organisations to assist it in scrutinizing the application to determine the following:

1. Whether the reason for the transfer of all or a portion of the shares through a sale is valid;

2. Whether the interests of the state and citizens may be harmed by the transfer of all or a portion of the shares through a sale; and

3. Whether the party receiving the transfer of all or a portion of the shares through a sale has the capacity to successfully continue the operations.

If DICA deems that the sale and transfer of all or a portion of the shares should be permitted, then the matter will be put up to the MIC for a final determination as to whether to approve or reject the share sale and transfer.

In addition to the above approvals, share transfers must be recorded with the Companies Registration Office.

If the target company has not received an MIC Permit, then share transfers can be effected by directly applying to register the transfer with the Companies Registration Office.


In practice, it is not possible to conduct a hostile takeover in Myanmar because shares of companies are not publically traded and the target company/transferor must submit an application to DICA seeking approval for the share transfer. Without the target company/transferor’s agreement to submit a share transfer application, acquisition of shares cannot take place.


There are two main restrictions affecting foreign investors seeking to acquire a target company in Myanmar.

First, it would be necessary to determine whether the economic activity is permitted to foreign investors. Under the State-owned Economic Enterprises Law, certain economic activities are reserved for the state and may only be undertaken through joint ventures with government-owned entities. Under the Foreign Investment Law and the Foreign Investment Notification, economic activities are further divided into the following categories:

1. Economic activities that are not permitted;

2. Economic activities that are permitted only under a joint venture with a citizen;

3. Economic activities that are permitted under conditions.

Second, as discussed in question 3 above, it would be necessary to confirm whether the target company was established under the Foreign Investment Law or the Myanmar Citizens Investment Law and whether the foreign shareholder sought to purchase shares from a Myanmar citizen, a Myanmar company or a foreign shareholder.


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The documentation required will depend on what corporate actions the investor is taking. In cases where an investor desires to acquire the shares in an existing company registered under the Foreign Investment Law, the investor will have to submit either a Form (6) – Transfer Through Sale form (if all shares in the company are acquired) or a Form (7) – Transfer Through Sale form (if only a portion of the shares are acquired) to the MIC. Once the MIC approves the transfer, it will be necessary to transfer the shares in accordance with the Myanmar Companies Act.

Under the Myanmar Companies Act, an instrument of transfer is required to be duly stamped and executed by the transferor and the transferee under art 34(3) of the Companies Act in order to effect a share transfer.

In order to have the instrument of transfer duly stamped, either the transferor or the transferee will have to submit a share transfer form at the Companies Registration Office and pay a stamp duty fee of three per cent of the value of the shares under sch I, No. 62 of the Stamp (Amendment) Act 1957 at the Township Revenue Office under the Internal Revenue Department.

Once the instrument of transfer and the share transfer form are duly stamped and executed, then they will have to be filed with the Companies Registration Office (CRO). The Companies Registration Office will, thereafter, issue a certificate of registration that confirms that a transfer of shares was made pursuant to the Myanmar Companies Act.


The fees typically paid to the government to transfer shares, obtain MIC approval and incorporate an

entity with the CRO are set out below.


Myanmar law does not set out any requirements with regard to mandatory disclosure during the due diligence process.


In Myanmar, information relating to a company is not in the public domain and there is no mechanism for conducting company searches or obtaining information on a company’s shareholders, directors or registered office address.

With regard to companies obtaining investment

Share Transfer Share Transfer Form

100 kyat

Registration Fees 75 kyatStamp Duty three per

cent of the value of the shares being transferred

MIC Approval MIC Proposal Form

5,000 kyat

Company Incorporation at the CRO

Name Search 1,000 kyat

Incorporation Form

5,100 kyat

Registration Fees 1,000,000 kyat

Stamp Duty Fees for Memorandum and Articles of Association

200,000 kyat

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approvals from the MIC, however, the government has recently begun publishing such approvals.

As for land records, official land title searches to determine land ownership and encumbrances on land can be conducted at the Department of Human Settlement and Housing Development and the Yangon City Development Committee. In order to conduct such a search, however, it is necessary to possess and provide a copy of the land grant lease or other ownership document to the relevant authorities.

Myanmar does not have a trademark registration office and the records of the Registrar of Deeds are not publically available; however, unofficial trademark searches can be conducted through private entities that record all Cautionary Notices, which are trademark related notices published in local Myanmar newspapers.


Unless the Memorandum and Articles of Association of a company specify otherwise, or the shareholders have entered into a shareholders’ agreement, Myanmar law does not provide shareholders with consent or approval rights in connection with a merger or acquisition. That said, as DICA and the MIC must approve all share transfers of companies formed under the Foreign Investment Law, and such approvals are discretionary, a dissenting shareholder may be able to lodge an objection with DICA and the MIC, and such an objection may be taken into consideration by DICA and the MIC when determining whether or not to grant approval for the share transfer.


No. Myanmar law does not impose on the directors

and the controlling shareholders any duties to the stakeholder in connection with a deal.


The payment of a break-up fee would be a contractual issue under Myanmar law and under art 74 of Myanmar’s Contract Act (1872), a contractually stipulated amount of compensation in case of breach would generally be enforceable if the amount is reasonable.


Attaching conditions to an offer would be a contractual issue under Myanmar’s Contract Law, and the imposition of conditions would not generally be prohibited.


At present, domestic sources of financing are not yet available in Myanmar, and thus, foreign investors must arrange financing from outside of Myanmar.

If the foreign investor will be initiating a new investment or a joint venture, the relevant application forms to seek investment approval will require the foreign investor to set out the amount of the proposed investment and provide evidence that the foreign investor has the financial capabilities to fund the investment. Such evidence may take the form of a bank reference letter or a bank statement covering the three-month period prior to the submission of the application.


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Myanmar law does not provide any mechanisms for squeezing-out minority shareholders. All share transfers would require the affirmative approval of the transferring shareholder/s.


Myanmar law does not stipulate any specific waiting or notification periods with regard to completing a business combination. However, any share transfer or new investment with regard to a company formed under the Foreign Investment Law would be subject to the approval of DICA and the MIC. For companies formed under other legislation, it would be necessary to go through the required share transfer or establishment procedures at the Companies Registration Office for any share transfer or new investment. Therefore, any documents purporting to effect a transfer of shares prior to such approvals having been obtained would not have effect under Myanmar law.


Foreign investors need to consider whether the economic activity is permitted to foreign investors. If the foreign investor is purchasing the shares of an existing foreign shareholder, then this would not be an issue. However, if the foreign investor desires to establish a new joint venture to carry out its business objective, then the foreign investor will need to consider whether the investment is permitted under the State-owned Economic Enterprises Law, the Foreign Investment Law and the Foreign Investment Notification. As discussed above, under the Foreign Investment Notification,

certain economic activities are permitted under conditions. Therefore, a foreign investor seeking to engage in such an economic activity must discuss with the relevant ministry set out in the Foreign Investment Notification what specific conditions are applicable to the investment.


Under Myanmar’s tax laws, capital gains taxes are payable on any gains realised from the sale, exchange or transfer of one or more capital assets, which includes shares in a company. Resident and non-resident companies are subject to a 10 per cent and 40 per cent capital gains rate, respectively; however, increased rates of between 40 per cent and 50 per cent apply to capital gains on the transfer of shares in an oil and gas company.

If the deal is financed in any part through loans, interest payments will be subjected to a withholding tax rate of 0 per cent or 15 per cent depending upon whether the recipient of the interest is a resident or a non-resident in Myanmar.

From a tax structuring perspective, it is important to be aware that Myanmar has entered into double taxation avoidance (DTA) treaties with Singapore, Malaysia, India, Thailand, Vietnam, South Korea, the United Kingdom, Bangladesh and Laos. Under a typical DTA, the tax regime of the foreign jurisdiction will apply to taxes on capital gains and interest. Therefore, serious consideration should be given as to what jurisdiction provides comparatively favourable tax treatment.

In addition to capital gains taxes, all transfers of shares are subject to a stamp duty tax of three per cent on the value of the shares transferred.

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As discussed above, all investments or share transfers relating to companies formed under the Foreign Investment Law would be subject to the approval of the MIC and DICA.


In Myanmar, laws on employment and labour are primarily contained in the Shops and Establishments Act, Leave and Holidays Act, Payment of Wages Act, Minimum Wages Act, Social Security Act, Workmen’s Compensation Act, Trade Unions Act and the Trade Disputes Act. Myanmar’s Department of Labour under the Ministry of Labour (MOL) also issues regulations and guidelines concerning the legal rights and duties of employers and workers, model employment contracts and fair labour practices with a view to establishing and maintaining industrial peace.

The above laws, regulations and guidelines, however, do not provide for any specific provisions relating to mergers and acquisitions and transfers of employment in connection with such mergers and acquisitions.

While Myanmar law is silent on such matters, if it becomes necessary to transfer any employees to a new entity, then such transfers may be effected through contractual agreements between the former employer, the new employer and the employees. Such contractual agreements will be governed by Myanmar’s Contract Act.

If the transfer is effected through a contractual arrangement, then any requirements under that contractual arrangement should be observed. If an employee does not consent to a change in employers, or to enter into any contractual

arrangement for a ‘transfer’, then the employee’s existing employment would have to be terminated and the termination payments described below would then have to be paid. The employee would not be deemed to have resigned.

Under MOL Notification No. 55/1976, an employee will be entitled to a termination payment of between one month’s pay and five month’s pay depending on the length of employment. Five month’s pay is triggered by a period of employment that exceeds three years.


In May 2012, the Central Bank of Myanmar signed a Memorandum of Understanding with an arm of Daiwa Securities and the Tokyo Stock Exchange Group to co-operate towards establishing a securities exchange. While the Securities Exchange Law was already enacted on 31 July 2013, it remains to be seen how the law will be implemented in practice in terms of the extent foreign investors will be permitted to purchase shares in Myanmar listed companies. That being said, having a modern securities exchange would likely change the mergers and acquisitions environment in Myanmar for both prospective investors and shareholders seeking exit strategies. Revisions to the Myanmar Citizens Investment Law are also currently under consideration by the government; however, no timeline has yet been provided regarding its enactment.


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JAY COHENForeign Consulting Attorney, Kelvin Chia Yangon Ltd.E [email protected] www.kcpartnership.comA #35-37, Street 214, Unit B4, 1st Floor CBM Building, Phnom Penh, CambodiaT +855 23 998 393 F +855 23 998 393

Jay is a Foreign Consulting Attorney for Kelvin Chia Yangon and the Country Manager of our Cambodia offi ce, KCP Cambodia Ltd. He regularly assists clients investing and conducting business in Myanmar and Cambodia, and advises clients throughout the investment process – from advising on preliminary investment issues, establishing appropriate investment structures and supporting the project with relevant commercial agreements.

During Jay’s career, he has assisted companies in transactions throughout Asia, Europe and the United States and is experienced in providing practical solutions to legal and business issues arising from cross border transactions. Jay is a member of the California bar.

ABOUT THE AUTHORS

MARLON WUIPartner, Kelvin Chia Partnership, and Foreign Consulting Attorney, Kelvin Chia Yangon Ltd.E [email protected] W www.kcpartnership.comA 6 Temasek Boulevard, Suntec Tower Four 29th Floor, Singapore 038986T +65 6408 7921 F +65 6224 4118

Marlon is a Foreign Consulting Attorney at Kelvin Chia Yangon Ltd. and a Partner at Kelvin Chia Partnership. He is actively involved in a variety of corporate and commercial transactions in Southeast Asia, including Myanmar, Indonesia, the Philippines, Thailand and Cambodia. Marlon’s diverse practice portfolio currently spans mergers and acquisitions, joint ventures, mining, energy, oil and gas, investments, corporate restructurings, and the establishment of offshore private equity funds.

As a member of the fi rm’s Myanmar practice group, Marlon collaborates with the fi rm’s Yangon-based lawyers in rendering and undertaking advisory and transactional work on a variety of subjects, including foreign investments in general and the regulatory framework on the mining, energy and agricultural/plantation sectors in particular. Marlon also helps in overseeing the fi rm’s Indonesia desk. Marlon was admitted as an Attorney and Counsellor-at-Law in the Philippines in 1999.

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TaiwanBaker & McKenzie


The M&A market in Taiwan for the last 12 months has been relatively quiet. One of the largest deals that attracted intense public attention was the proposed sale of the Next Media Taiwan operation, which includes a leading newspaper (Apple Daily), a leading news magazine (Next Magazine), and a television station (Next TV). It is wholly owned by Next Media Limited, Hong Kong’s largest publicly listed Chinese language print media company. Given the nature of the media business and the target’s leadership in the Taiwan market, the prominence of the purchasers/consortium (that included three of Taiwan’s leading corporate dynasties, the Koo family of Chinatrust Financial Holding Company Ltd., the Wang family of Formosa Plastics Group, and the Tsai family from the Want Want Holdings Group, the latter which controls another leading Taiwan media interest and with a large consumer products operation in China), and subsequent rumours of political connections with China, the transaction generated intense public interest and government scrutiny. Precisely because of the anti-trust concerns and the suspicion of commercial interests with China relating to the Want Want Group, the transaction eventually failed to receive regulatory approval at the end of the day.


Probably the most common method is by way of a public takeover (or tender offer) whereby the buyer acquires through the public market a controlling number of shares (typically over 50 per cent) to ensure control, followed by a statutory merger to squeeze out the minority shareholders and to obtain 100 per cent of the target. The target will at the same time be delisted. Less common but more notably in a domestic context is the use of proxy fight to gain management control of a public company.


■ Enterprise Merger Law (EML)

■ Company Law

■ Tax Law

■ Financial Institutions Merger Law.


The Investment Commission of the Ministry of Economic Affairs: the ‘gatekeeper’ for any foreign entity activity in a Taiwan M&A deal.


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Central Bank of Taiwan: oversees foreign exchange control and monitors the inflow and outflow of investments.

Fair Trade Commission: the anti-trust regulator if the transaction requires anti-trust approval.

Other regulators may also play a key role when the business the company operates in requires a special approval: eg, financial services, telecommunications, media, real estate, and so on.

The Financial Supervisory Commission will need to be consulted when there is a listed company involved.

The Executive Yuan and the Ministry of Economic Affairs may also be consulted when the foreign investor or funds are from China.


Yes.


Fair Trade Law: the anti-trust law of Taiwan applies when the transaction reaches certain thresholds either in terms of overall revenues or market share.

Statute for Investment by Foreign Nationals: all foreign investments made (including purchase of controlling shares of a public company) requires advance approval under this law. The Investment Commission of the Ministry of Economic Affairs acts as the gatekeeper that coordinates approvals that may be required from other government agencies.

Special regulations by the Executive Yuan and the Ministry of Economic Affairs also apply when the foreign buyer/investor is from China or receives funding from China.

Depending on the industry operated by the target company, special legislation may also apply and the authorities responsible for enforcing the law will also have power to approve the transaction. For example, if the target is in the financial industry, then the approval from the Financial Supervisory Commission is required. If the target is in the media business, then the approval from the National Communications Commission is required.


If the transaction takes the form of a takeover, then there may be a lock-up agreement between the purchaser and the controlling shareholders, and a prospectus that will be issued as part of the mandatory tender offer process. If the transaction takes the form of a merger, then there will be a merger agreement between the two entities, and in many cases a shareholders agreement between the ultimate purchaser and the controlling shareholder(s) of the target company.


There are very nominal government registration fees involved. Depending on the structure of the transaction, there may be a securities transaction tax levied on the sale or exchange of shares.

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Unless the target is a public company, normally there is very little information that is required to be publicly disclosed when conducting due diligence.


For all companies, normally the basic corporate information kept by the Ministry of Economic Affairs is open to the public. Such information includes the company name, address, business scope and licences held, share capital structure, names of directors and supervisors, and any managers who are registered. If the company is a publicly traded company, additional information disclosed to the securities authorities in the form of an annual report will also be available. This will include additional financial information of the company for the relevant disclosure periods.


Yes, if the deal takes the form of a merger between two companies, then a super majority vote from the shareholders is required.


Directors owe the shareholders a fiduciary duty and thus, for example, in the case of a takeover (tender offer) will be required to convene a meeting and to determine whether it would recommend the shareholders to accept the tender offer. A controlling shareholder does not owe a duty by virtue of being a majority shareholder, but in practice may have that duty in any case because it may also control the board of directors.


This is largely a result of the commercial negotiation between the parties. For example, the parties may agree that a target company will pay a break-up fee to the purchaser if subsequently it has accepted a higher offer from a competing purchaser.


Technically only a minimum number of shares can be stated as a condition to a takeover (tender offer), although the regulations provide that there are other circumstances that, if approved by the regulator, can be a condition not to proceed (eg, if the target company has a material adverse change to its operations).

If the transaction takes the form of a merger or other type (such as shares or asset purchase, share swap), then the parties can generally stipulate in the controlling document what the conditions to close should be.


Financing is typically dealt with by the purchaser on its own and is not made a condition to or part of the transaction document with the seller. Except for the thin-capitalization rule as part of the tax law, there are no regulations that require a minimum level of financing.


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In a merger of two companies, a super majority vote (normally a quorum of 2/3 of the shareholders) will be required. Once a resolution is passed, the merger will be binding on all shareholders. For the dissenting minority shareholders, they can then exercise a statutory appraisal right and ask that their shares be purchased by the company at a fair price.


If an anti-trust approval is required, because of the market dominance of the parties or because their revenues exceed a certain threshold, then typically there is a 30-day waiting period for the anti-trust authorities to review the application (or to object to the combination during that period). This period can be extended for another 30 days.


A special license may be required because of the industry that the target company operates in. For example, a financial services company (such as a bank, securities, asset management, insurance, and other firms) will need a special license from the Financial Supervisory Commission. If a transaction that involves a target where a special (industry-specific) license is involved, it will then require the special approval from the oversight authorities.


Most of the tax issues are in relation to the seller and the target company. Issues that typically arise include whether the transaction or the sale of shares are subject to tax and, if so, at what rate. For the purchaser, tax issues that may arise typically have to do with post-closing planning, including deductibility of various expenses (such as interest expenses and the amortization of goodwill), and the intercompany /transfer pricing issues going forward.


For cross-border transactions involving a Taiwan target company and a non-Taiwan purchaser, approval from the Investment Commission of the Ministry of Economic Affairs is required.


Taiwan has a mandatory statute that governs the employment relationships of almost all companies. In a cross-border transaction where there may be a change of control of a legal entity, the various provisions of the statute may apply. Among other things, the employees who are affected may have a right to be laid off and to demand severance payments and/or retirement benefits if certain thresholds are met.

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MICHAEL WONG Senior Consultant, Baker & McKenzieE [email protected] www.bakermckenzie.comA 15/F, 168 Tun Hwa North Road Taipei 105, TaiwanT +886 2 2715 7246 F +886 2 2712 8292

ABOUT THE AUTHOR


On July 1, 2013, the cabinet announced that it has sent a proposal to amend the current foreign investment legislation to provide a more streamlined review procedure with particular inclusion for private equity investors, with the hope that this would send a more welcome signal to the international private equity and capital markets. This proposal is pending legislative approval after the summer.

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ThailandWeerawong, Chinnavat & Peangpanor Ltd.


Thailand’s economy continues to perform strongly despite recent global economic malaise and a decade of local political struggles. In 2012, the country experienced considerable growth in merger and acquisition activity, both in the number of deals and deal value. At the same time the stability and growth of Thai conglomerates catalyzed expansion through M&A transactions across Asia, with a particular focus on Southeast Asia and China. Importantly, inbound and outbound investment opportunities are now being promoted by the Thai government with a view to enhancing industrial competitiveness and in response to domestic resource limitations.

Thailand, one of the largest economies in Southeast Asia, has attracted foreign investors for many years. When looking at M&A deals in Thailand people tend to focus on foreign investors acquiring Thai businesses or investing in manufacturing or similar facilities. In 2012, cash-rich Thai businesses started looking overseas to invest and to diversify their business footprints. Given this recent development, we focus our initial discussion below, on the outbound transactions that dominated the M&A market in 2012 and early 2013. Thailand M&A deals announced in 2012 were valued at approximately US$21 billion, according to the Institute of Mergers, Acquisitions and Alliances.

Two of the most notable outbound M&A transactions were:

Thai Beverage Public Company Limited/Fraser and Neave, LimitedIn early 2013, Charoen Sirivadhanabhakdi, through Thai Beverage Public Company Limited (Thai Beverage) and its affiliates, completed a takeover bid for Fraser and Neave, Limited (Fraser and Neave) a company listed on the Singapore Exchange (SGX). Fraser and Neave have interests ranging from carbonated beverages to residential and commercial real estate, valued at an estimated US$11.2 billion.

In September 2012, TCC Assets, an affiliate of Thai Beverage, made an initial bid of 8.88 Singapore dollars (S$) per share or an estimated US$9 billion for Fraser and Neave. In November, Singapore-based Overseas Union Enterprise Ltd. (Overseas Union) made a counter bid for Fraser and Neave of S$9.08 per share. Over the next few months Thai Beverage and Overseas Union extended their bids without increasing them. Singapore’s Securities Industry Council, to help ensure shareholder confidence, instituted a process which would have forced each of the bidders to adhere to rules of an auction process. Three days before the auction was to commence, TCC Assets increased its bid for Fraser and Neave to S$9.55 a share – a bid that Overseas Union was not willing to match or increase. With its bid of S$9.55 per share, Mr. Charoen was assured of a successful takeover and one that will greatly expand his already large business holdings.

CP Group/The Hongkong and Shanghai Banking Corporation/Ping An InsuranceThe privately held CP Group, led by one of Thailand’s most successful businessmen, Dhanin


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Chearavanont, bought a 15.6 per cent stake in Ping An Insurance for US$9.4 billion. Ping An is one of China’s largest insurers with approximately 74 million clients. The CP Group is no stranger to doing business in China – Dhanin obtained his foreign investor license in China in 1978 and is believed to have connections within the upper echelons of China’s ruling party. The deal almost toppled when financing from China Development Bank was abruptly pulled, forcing the CP Group to finance the deal itself. The deal also required approval from the China Insurance Regulatory Commission, which was only granted hours before a deadline that this approval was set to expire.

One of the most significant inbound transactions in Thailand was the acquisition by Prudential Plc., of Thanachart Bank’s insurance unit. Thanachart is Thailand’s sixth-largest bank by asset size with approximately US$32 billion in total assets. The cash deal, valued at approximately US$590 million, enabled Prudential to expand its footprint in one of Southeast Asia’s largest economies, where historically, Prudential has maintained a low market share. According to Prudential, the transaction will double its market share in Thailand.

Another key aspect of the transaction was the inclusion of an exclusive partnership between Prudential and Thanachart to develop a bancassurance business with the term of the partnership lasting at least 15 years. It was speculated that one of the driving forces behind the acquisition was an attempt to catch up with AIA, which has a predominant position in the Thai market.


The most common ways to acquire or merge with a listed public company are tender offers or

acquisitions by agreement. The most common way to acquire a private limited company is by way of a share or asset sale.

3. What are the key laws and regulations that govern mergers and acquisitions in your jurisdiction, and what are the government regulators and agencies that play key roles in mergers and acquisitions?

When companies are considering acquisition opportunities in Thailand, one of the principal considerations investors need to be aware of are the restrictions on business activities that can be undertaken by foreign entities.

The cornerstone piece of legislation relating to foreign investment in Thailand and M&A transactions, is the Foreign Business Act 1999 (FBA). The operation of businesses in Thailand by foreigners is restricted by the FBA under the administration of the Ministry of Commerce. The FBA restricts (and in some cases forbids) foreigners from engaging in a wide range of business activities, including most service businesses. For the purpose of the FBA restrictions, a ‘foreigner’ is classified as a foreign individual, a company incorporated outside Thailand, or a company incorporated in Thailand that has 50 per cent or more of its shares owned by foreign individuals or foreign companies.

The Schedule of the FBA sets out three ‘lists’ of business categories in which the participation of foreigners is either prohibited or restricted. Foreigners are prohibited from participating in the businesses specified in ‘List 1’, which includes antiques trading, broadcasting, farming, and forestry. Foreigners are restricted from participating in businesses specified in ‘List 2’ unless they obtain a foreign business licence (FBL) from the Ministry of Commerce and approval from the Thai Cabinet. ‘List 2’ includes activities that are concerned with national safety, agriculture, arts and culture,

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and natural resources and environment. Finally, foreigners are restricted from participating in the businesses specified in ‘List 3’ unless they obtain an FBL from the Director-General of the Department of Business Development with the approval of the Foreign Business Committee. ‘List 3’ contains a total of 21 categories of restricted businesses, including fisheries, forestry, accountancy, engineering, construction (with certain exceptions), retailing and wholesaling (with certain exceptions), advertising, hotel operation (excluding hotel management), tourism, sale of food and beverages, and the catch-all category known simply as ‘other services’.

A foreigner engaging in a restricted business under the FBA can obtain a foreign business certificate (as opposed to an FBL) by, (i) obtaining a promotion certificate from the Board of Investment Authority of Thailand (BOI), or (ii) is eligible under an international treaty (the most often cited example is the Treaty of Amity between the US and Thailand). Generally, the administrative process for obtaining a foreign business certificate is less onerous than for an FBL.

The BOI oversees almost all tax and non-tax incentives and privileges applicable to foreign investment in Thailand. At present, there are approximately 200 types of businesses that are eligible for BOI privileges (subject to investors meeting minimum capital requirements). Some of these businesses include those that would otherwise be restricted to foreigners under the FBA. This incentive alone is very attractive to many foreign investors as it obviates the need to apply for an FBL or enter into a joint venture arrangement with a Thai partner.

Incentives offered by the BOI to eligible foreign investors include majority shareholding by foreigners, acquisition of land for industrial use by foreign corporations, exemptions from or

reductions of import duties on machinery and raw or essential materials and exemptions from or reduction of corporate income tax up to a maximum of eight years.


There is no squeeze out mechanism under Thai law and hostile takeovers, whilst permitted, are not common.


Merger control in Thailand is governed by the Trade Competition Act (1999) (TCA). Section 26 of the TCA prohibits mergers of businesses that may result in monopoly or unfair competition, as prescribed by the Trade Competition Commission (TCC), unless permission is obtained from the TCC.

The TCA empowers the TCC to enforce the merger control provisions. In addition, the TCC is responsible for prescribing notifications to enforce the provisions of the TCA, including issuing notifications concerning the specific process by which a certain merger will be examined and/or approved. In this regard, the TCC is empowered to set a minimum threshold of market share, total sales, amount of capital, number of shares or quantity of assets that will be subject to prohibition under this section. This is part of the pre-merger notification requirement.

Since 1999, no notifications have been approved by the TCC under Section 26 of the TCA and, accordingly, the restrictions on mergers under that section are not currently enforceable.

However, on 6 June 2013, the TCC approved


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certain pre-merger notification requirements with respect of the following:

■ The merger of businesses which have an aggregate market share in any market for any goods or services before or after merger of 30 per cent or more, and had total sales (turnover) or income in the preceding year of two billion baht or more; and

■ The acquisition of shares with voting rights accounting for at least 25 per cent of the total shares of a public company, or 50 per cent of a limited company, and the acquisition resulting in the business of a company or both companies having an aggregate market share of 30 per cent or more in any market of any goods or services before or after the acquisition, and a total sales volume (turnover) or income in the previous year of at least two billion baht.

Although this approval by the TCC represents some progress in the long-awaited issuance of notifications enabling the merger controls to finally become effective, the process under the provisions of Section 26 is far from complete.

There are details to be ironed out. The TCC will ask its legal sub-committee to draft the merger notification thresholds and details of the criteria for pre-merger filings in respect of particular businesses. Once these detailed notifications are approved by the TCC, they, like all laws, must be published in the Government Gazette, and a date set for their effectiveness. If a merger covered by such notification is made on or after the effective date of the notification, the merger must be approved by the TCC before it can take place.

It is not possible to predict when these notifications will be drafted, approved by the TCC and published in the Government Gazette. However, there is cautious anticipation that Section 26 will become

capable of enforcement either this year or in 2014.


For an acquisition or merger of a listed company, in addition to a share/asset sale and purchase agreement as well as the relevant documents relating to corporate approvals and the disclosure documents as required by the Public Limited Companies Act (1992) as amended, the Notification of the Capital Market Supervisory Board No. TorChor 20/2008 re: Rules on Entering into Material Transactions Deemed as Acquisition or Disposal of Assets as amended), the Notification on the Board of Governors of the Stock Exchange of Thailand re: Disclosure of Information and Other Acts of Listed Companies Concerning the Acquisition and Disposition of Assets, 2004, and other relevant regulations, the documentation required to implement the transaction includes:

a. In the case of a share acquisition

■ Report on Acquisition of Securities (Form 246-2)

Pursuant to Section 246 of the Securities and Exchange Act (1992) as amended (SEC Act), if an acquisition of securities, including shares, of a listed company increase the aggregate number of securities held by the acquirer and its concert parties as well as their related persons to a number which reaches any multiple of five per cent of the total number of voting rights of the listed company so acquired, eg, 5 per cent, 10 per cent, 15 per cent, 20 per cent, and so on, the acquirer of such securities must submit a report on acquisition of the securities (Form 246-2) to the Office of the Securities and Exchange Commission (SEC).

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■ Documentation for Tender Offer

If the acquisition of securities, including shares, of a listed company results in the aggregate number of securities held by the acquirer and its concert parties as well as their related persons reaching or exceeding the thresholds of 25 per cent, 50 per cent or 75 per cent of the total number of voting rights of the listed company so acquired, a mandatory tender offer must be made to other securities holders to purchase all of their securities. The acquirer must comply with Sections 247 of the SEC Act and the Capital Market Supervisory Board’s Notification No. ThorJor 12/2011 concerning Business Takeovers, for which the following key documentation is required to be submitted to the SEC:

1 Form 247-3, a statement of intent to make a tender offer;

2 Form 247-4, an offer to purchase securities (prepared by a financial advisor approved by the SEC);

3 Proof of funds, a letter or statement issued by any commercial bank to prove that the acquirer has sufficient funds to make a tender offer;

4 Form 247-6 Gor, a report on the preliminary result of tender offer; and

5 Form 256-2, a report on the result of tender offer.

Please note that the acquirer may make other categories of tender offer, ie, voluntary or partial tender offer, as well as apply for a waiver of tender offer subject to the details of the transaction and business arrangement of the acquirer. The documentation required for other types of tender offer or in the case of a waiver will be different.

b. In the case of an asset acquisition

■ Documentation relating to the transfer of licenses related to the transferred assets (if transferable);

■ Documentation relating to the registration of the transfer of ownership of the assets to the acquirer with the relevant authorities (if required); and

■ Novation agreement or assignment agreement in relation to certain agreements related to the transferred assets (if required).

For an acquisition or merger of a private limited company, a sale or asset purchase agreement and, depending on the level of investment, a shareholders’ agreement will be executed.


a. Acquisition of shares of a listed company or a private limited company

The rate of stamp duty on a transfer of shares is calculated at 0.1 per cent of the greater of the selling price and the paid up value, of the shares. If share transfer instruments are executed and kept outside of Thailand, stamp duty is not payable, unless the share transfer instruments are subsequently brought into Thailand.

In the case of the acquisition of shares of a listed company, and where the sale of shares involves a tender offer transaction, the acquirer who makes a tender offer is subject to payment of the following fees to the SEC.


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b. Acquisition of Assets of a listed company or a private limited company;

The government charges/fees related to an acquisition or merger of assets of a listed company or a private limited company are subject to the assets transferred. For example, in the case of the acquisition of land, the registration fee for the transfer of ownership of land is imposed at the normal rate of two per cent of the appraised value of property of the Land Department. Please note that the transfer of land is also subject to a specific business tax, stamp duty and/or withholding tax (as the case may be).

8. When conducting due diligence, what sources of information are available in the public domain?

Generally, the due diligence process will begin with local counsel conducting searches of publicly available information. Information of a target company that is in the public domain includes:

1. Memorandum of association;

2. Articles of association;

3. List of shareholders;

4. Company affidavit;

5. Land title documents;

6. Trademark registrations; and

7. Ongoing litigation proceedings.


A seller of shares is not required to obtain either board or shareholder approval but common practice, as a matter of good corporate governance, is to obtain at least board approval. That being said, one must also look to the articles of association of a company as these may contain restrictions on the transfer of shares that would need to be complied with.

Most housekeeping matters resulting from an acquisition require board and/or shareholder approval. For example, changing the company auditor, company name or fiscal year will all require approval from the shareholders. A few matters require a special resolution to be passed by the shareholders, which requires 75 per cent of the votes present and entitled to vote to pass the resolution, and which are relevant in the context of an M&A transaction. Those matters include: (i) amendments to the memorandum of association; (ii) amendments to the articles of association; (iii)

Rate of Fees (Baht) Value of Tender Offer (Baht)*

1 50,000 < 10 million

2 100,000 ≥ 10 million but < 100 million

3 500,000 ≥ 100 million but < 500 million

4 1,000,000 ≥ 500 million but < 1 billion

5 1,500,000 ≥ 1 billion but < 5 billion

6 2,000,000 ≥ 5 billion

*The value of Tender Offer is determined by the offer price multiplied by the maximum number of securities as indicated in the offer.

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an increase or decrease of the registered capital of the company; and (iv) converting a limited company to a public company.


Limited CompaniesDirectors must manage the business of a limited company: (i) under the control of shareholders acting through general meetings of the company; and (ii) in accordance with the regulations of the company as prescribed in its memorandum and articles of association.

Directors must, in their conduct of the business of the company, apply the diligence of a careful business person. In particular, the directors are jointly responsible for:

1. Payment for shares by shareholders actually being made;

2. Existence and regular keeping of books and documents prescribed by law;

3. Proper distribution of dividends or interests as prescribed by law; and

4. Proper enforcement of the resolutions of general meetings (subject to the resolutions being within the company’s objects, consistent with its articles of association and practically enforceable).

A director must not, without the consent of shareholders in a general meeting of the company, undertake commercial transactions of the same nature as and competing with that of the company, either on his own account or that of a third person, nor may he be a partner with unlimited liability in another commercial concern carrying on a business of the same nature as and competing with that of the company.

Listed CompaniesDirectors must perform their duties with responsibility, due care and loyalty and shall comply with all laws, the memorandum and articles of association of the company, the resolutions of the board of directors and the resolutions of the shareholders.


Generally, according to regulations of the SET, full disclosure of a deal should be made only once definitive documentation is signed. The definitive documents can and often contain conditions and deal security measures. For example, the parties can agree to break fees, non-solicitation and non-disclosure provisions. Break fees can be unilateral or bi-lateral depending on the cause of the termination; however, break fees payable by the target company in return of deposit made by the acquirer are more common.


There is no squeeze out mechanism under Thai law.


This is not applicable under Thai law, and such conditions are generally found in industry-specific legislation.


Industry-specific rules may vary widely depending on the relevant industry. For example, in the oil and


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gas industry, transfer of concession rights requires both Ministerial approval and cabinet approval.


The acquisition of a Thailand limited company has no tax consequences on the acquirer except for the payment of stamp duty on a share transfer instrument. The rate of stamp duty on a transfer of shares is calculated at 0.1 per cent of the greater of the selling price and the paid up value, of the shares. If share transfer instruments are executed and kept outside of Thailand, stamp duty is not payable, unless the share transfer instruments are subsequently brought into Thailand.

The target company will continue to be liable for corporate income tax on the same basis as before the sale. The current corporate income tax rate in 2013 is 20 per cent. The utilization of tax losses is not affected by a change in shareholding.

Post-closing acquirers should be aware that repatriation of profits to a foreign company not carrying on business in Thailand through dividends, interest or service fees are subject to a 15 per cent withholding tax, except for dividends which are subject to a 10 per cent withholding tax. All dividends are subject to a 10 per cent withholding tax. Thailand has entered into a number of bilateral agreements to resolve the issue of double taxation which, in some cases, reduces the rate of withholding tax.


Cross-border transactions are not subject to any special legal requirements.


Unlike in other jurisdictions, parties to M&A transactions in Thailand are not required to obtain the consent of employees, except in situations where employees may be transferred to a new company (eg, where an amalgamation is part of the deal structure, in which case employee consent must be obtained in writing).


EmploymentIn early 2013, the Thai Government fulfilled its 2011 election campaign promise by adopting the new nationwide minimum wage policy. Under the new policy, Thailand’s employers must pay all employees a minimum wage of at least 300 baht (approximately US$10) per day. Employers who fail to comply with the new law are subject to six months’ imprisonment and/or a fine of 100,000 baht.

The increase to the minimum wage has not been free from controversy – with employers and other business leaders warning against dire consequences, including company shutdowns for small and medium-size enterprises and highly labour-intensive industries. To date, there is little evidence that these dramatic events have come to pass.

Despite dismissing the fears of Thai businesses, however, the Thai Government introduced several measures to offset any real or perceived impact of the minimum wage increase. These included a significant reduction in corporate income tax from 30 per cent in 2011, to 23 per cent in 2012 and 20 per cent in 2013.

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TaxOn 19 December 2012, Thailand signed an agreement for the avoidance of double taxation (DTA) with Taiwan. Of note was a reduction of withholding tax rate on dividends to 5 per cent − conditional upon the recipient holding not less than 25 per cent of the shares in the company paying the dividends. This was significant in that it was the first time since Thailand entered into a DTA with Sweden in 1963 that the withholding tax rate on dividends has been reduced to below 10 per cent (which is the rate currently applied under Thai law).

Interestingly, this reduction in withholding tax under the Taiwan DTA will also have an impact on Thailand’s DTAs with Mauritius and the United Arab Emirates (UAE) – both of which contain provisions stating that the applicable withholding tax on dividends shall be equal to the rate stated in

the DTA (which in both cases is 10 per cent) or any lower rate of withholding tax agreed by Thailand in any subsequent DTA with any other country. Therefore, the rates of withholding tax applicable to Mauritius and the UAE will also now be reduced from their current rates of 10 per cent to 5 per cent. Mauritius is a jurisdiction commonly used as an investment vehicle for offshore investors structuring M&A deals in Thailand − due to the already favourable terms under the DTA between Thailand and Mauritius and also because Mauritius has relatively relaxed reporting requirements, enhanced privacy protections, and straightforward incorporation procedures. Accordingly, this new development will give Mauritius a distinct advantage over other jurisdictions commonly used to incorporate investment vehicles for Thai M&A transactions, such as Hong Kong and Singapore.


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Pakdee Paknara is a partner of Weerawong C&P specializing in mergers and acquisitions, property funds, international trade, power and energy projects, and tax. Previously, Pakdee was a partner of White & Case (Thailand) Limited, and prior to that worked in a respected law fi rm in Thailand as head of commercial and international trade and tax. He obtained an LL.B. degree from Chulalongkorn University, and a Master of Science degree from Golden Gate University, in the US.

Jeffrey Sok is a senior associate in the international practice group at Weerawong C&P with substantial experience in corporate mergers and acquisitions, private equity, and cross-border transactions. Previously, he also had experience in a respected international law fi rm at their offi ces in Singapore and Bangkok. He obtained a B.A. degree in Urban and Regional Planning from the University of Illinois, and a J.D. degree from The John Marshall Law School (Chicago), in the US.

ABOUT THE AUTHORS

PAKDEE PAKNARA Partner, Weerawong, Chinnavat & Peangpanor Ltd.E [email protected] www.weerawongcp.comA 540 Mercury Tower, 22nd Floor, Ploenchit Rd., Lumpini 10330 Bangkok, ThailandT +662 264 8000F +662 657 2222

JEFFREY SOK Senior Associate, Weerawong, Chinnavat & Peangpanor Ltd.E [email protected] www.weerawongcp.comA 540 Mercury Tower, 22nd Floor, Ploenchit Rd., Lumpini 10330 Bangkok, ThailandT +662 264 8000F +662 657 2222

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VietnamVB Law


The Last 12 Months’ M&A Activity Overview1

The M&A market in Vietnam in 2012 had been less active than last year. The total value of the deals in the Vietnamese market for 2012 reached nearly US$2 billion, down more than a half when compared with 2011. However, there were more large-scale transactions than in previous years.

Highlights included Mizuho Corporate Bank’s decision to pay US$567 million for 347.6 million shares of the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank). Besides, Bank of Tokyo-Mitsubishi UFJ (Japan) purchased 20 per cent of the additionally issued shares of Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank). The value of the transaction was US$743 million. The Japanese confectionery company Ezaki Glico Co Ltd spent US$31 million to buy a 10.5 per cent stake in Kinh Do Corporation.

The second half of the year saw Masan Group spend nearly US$96 million to purchase a 40 per cent stake in forage production company Viet Phap (Proconco) from the Prudential Foundation.

For the first quarter of year 2013, the M&A market size reached US$675.6 million, with 14 deals recorded, including 10 foreign-backed and four domestic M&A deals. Some typical M&A cases in the first quarter included American-based Kohlberg

Kravis Roberts (KKR) investment fund increasing its ownership in Masan Consumer from 10 per cent to 18 per cent, with additional value of US$200 million, Mekong Capital withdrawing 6.7 per cent equity at Mobile World Joint Stock Company for a financial investor with US$110 million.

The M&A market in the second quarter of year 2013 was more vibrant with a list of huge transactions, for instance, Siam Cement PCL. (Thailand) purchased 85 per cent stake in Prime Group Joint Stock Company (Prime Group) which is one of the biggest Vietnamese enterprises operating in the sector of building material. Value of the transaction is 4,900 billion dong. Besides, Warburg Pincus LLC and Vincom Retail Joint Stock Company announced their transaction, in which, Warburg Pincus LLC purchases a 20 per cent stake in Vincom Retail Joint Stock Company, which is an affiliate of Vingroup Joint Stock Company. Value of the transaction is US$200 million. Meanwhile, Vingroup Joint Stock Company sold its real estate project known as the Complex of Commercial Centre and Hotels – Vincom Center A – Ho Chi Minh City to Vietnam Infrastructure and Property Development Group Corporation (VIPD) with the total value of the transaction of 9,823 billion dong (about US$470 million). In addition, Texas Pacific Group (TPG), a US leading private investment fund invested US$50 million to take 49 per cent shares stake of Masan Agriculture, one of the subsidiaries of Masan Group.

Despite the vibrant figures above, it should be stressed that the understanding of the term M&A in Vietnam is affected more by the development of financial laws than the growth of the economy.


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To elaborate this statement we would like to give a short background of the laws governing financial transactions.

Vietnam accepted the market economy system around 1990. The inflow of foreign investors began with companies called joint venture and wholly-foreign owned. Changes of capital holding among shareholders in those companies began from 1992. No one ever talked about M&A.

The stock market was set up by law, not by economic demand, in 1998. From 1999, foreign investors may hold up to 30 per cent of the shares of a listed company; this room was raised to 49 per cent in 2003. This means that there are unlisted companies which may sell up to 30 per cent of its capital to foreign investors beginning from 2003; from 2009 the room was raised to 100 per cent.

The law facilitating M&A is the Law on Enterprises enacted in 1999 and replaced in 2005. The said law provides: consolidation, division, merger and separation of enterprises. The term M&A is not in the law.

As used nowadays by the media in Vietnam, the term M&A is understood along the development of the above events and started with foreign investors purchasing shares in listed and unlisted local companies. They are mostly private equity investors.

After 2005, shares were being purchased among local companies, and most of the transactions were share purchase, assets purchase were very few.

A permissible ceiling of 49 per cent for foreign investors to hold shares in listed companies does not enable the foreign investors to have control over the business of companies; because resolutions in companies require 65 per cent of the vote of the participating shareholders in an annual general

meeting of shareholders. Nevertheless, the media still calls such purchases M&A.

Due to the maturity of Vietnamese companies and the funding vehicle accorded to acquirers, it is almost impossible for foreign investors in Vietnamese companies to drive the companies toward M&A purposes found in developing countries, such as product line expansion, market share, geographic reach, vertical integration and product diversification. Consequently, despite its wide use, the term M&A, in Vietnam, refers almost entirely to financial investments.


In Vietnam, the type of companies follows the French system with, among others, limited liability companies and joint stock companies. Only the joint stock companies may be listed on the stock exchange.

However, a joint stock company may issue shares to 100 investors or more, and has a paid-up capital of 10 billion dong or over; but still be unlisted. Due to these popularities, the State Securities Commission (SSC) requires such companies to register themselves with the SSC for the sake of the shareholders. Accordingly, they are called public companies.

A public company means a joint stock company whose shares:2

1. Have been put up for a public offer (100 investors or more and 10 million dong); or

2. Have been listed on a Securities Trading Centre (or a Stock Exchange).

We do not mention public companies whose shares are in category 1 above, because they are not in the

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common understanding with respect to companies in other countries.

The most common methods for acquiring or merging with a public company are: (i) to buy shares of listed companies on the stock exchange; (ii) to buy shares from existing shareholders of a listed public company in accordance with a share acquisition agreement with such existing shareholders; and (iii) public offer purchase of companies that issue shares.

Similar to the New York Stock Exchange (NYSE) and NASDAQ Stock Market (NASDAQ), Vietnam has both stock exchanges, called securities trading centers, located in Hanoi and Ho Chi Minh City and the Unlisted Public Company Market (UPCOM) under the Stock Exchange of Ha Noi City. In both markets, securities have to be registered and deposited with the Vietnam Securities Depository Center (VSD) before trading.

Depending on the amount of shares acquired, an acquirer may become a controlling shareholder.

To buy shares, foreign acquirers shall: (i) open a bank account at a commercial bank termed as a capital account to transfer funds to Vietnam; (ii) register with the VSD in order to be issued with a securities code; (iii) open a securities trading account at a securities company (broker); and (iv) negotiate with the existing shareholders of the target company to buy shares.3


To sanction an M&A, the People’s Committee of provinces or cities is empowered to approve an increase of capital, a transfer of share or capital contribution and to issue amended licences to companies in their jurisdictions, but outside of

industrial parks except for banks and insurance companies.

The management authority of industrial parks does the same for companies located in their industrial parks.

The State Bank of Vietnam and the Insurance Supervisory Division are entitled to approve M&A activities of commercial banks and insurance companies, respectively.

Meanwhile, the SSC and VSD take part in the management of M&A activities in securities trading floors.

In addition to the aforesaid authorities, subject to the business lines of the target company, the relevant state agency may be involved. For instance, with respect to the business line of international travel business, the Ministry of Culture, Sports and Tourism and the Vietnam National Administration of Tourism shall also play key roles.


The laws of Vietnam do not contemplate hostile bids as well as any restriction on hostile bids. The reasons are tied to economic growth for companies in Vietnam have not fully developed as they are only 23 years old.

In developing countries, hostile bids are made to make big profits out of listed companies whose market price are far below their book value and a successful hostile bid enables the acquirer to delist and dismantle the target company. Companies in Vietnam have not reached this state.

In Vietnam, a hostile bid, if any, is merely an expression. It occurs in both listed and unlisted companies in the sense that an acquirer uses different nominees to buy shares of a target


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company on the market or via the securities trading floors. By this way, the target company’s management team is not aware of the takeover until the acquirer holds enough shares to summon an unordinary Shareholder General Meeting for changing the management. In parallel with the acquisition of shares as much as possible, the acquirer also approaches the company’s minority shareholders to persuade them to support its proposal in the Shareholder General Meeting. Last year, the M&A market in Vietnam witnessed two huge ‘hostile bids’, including acquisition of Vinacafe by Masan Group and the takeover of Sacombank by Eximbank.


Generally, M&A activity is encouraged and supported by the Vietnamese government. However, there are still several laws and regulations applicable to M&A activities to restrict certain takeovers and mergers, as follows:

1. Regulations on competitionAny M&A transaction (known as economic concentration under the Law on Competition) shall be prohibited if the participating companies have a combined market share of more than 50 per cent in the relevant market, except for the following cases:4

a. One or more of the companies participating in the transaction are presently at risk of being dissolved or of becoming bankrupt;

b. The transaction has the effect of extension of export or contribution to socio-economic development and/or to technical and technological progress.

In addition, if participating companies have a combined market share in the relevant market from 30 per cent to 50 per cent, the legal representative of such companies must send a 30 days’ prior notice to the Vietnam Competition Administration Department (VCAD). The proposed transaction shall be carried out only if the VCAD issues a letter of confirmation certifying that the transaction is legitimate.

If the participating companies have a combined share in the relevant market of less than 30 per cent or if the companies, after the M&A transaction, still falls within the category of small- and medium-sized enterprises as stipulated by law, they shall not be required to provide notification.5

2. Regulations on the ratio of ownership of foreign investors in Vietnamese enterprisesOne of the important parts of the WTO Commitments of Vietnam is to provide the ratio of ownership of shares owned by foreign investors in specific service sectors, including but not limited to telecommunications, insurance, banking, transportation, movies, etc.

Under local laws of Vietnam, the foreign investor is only entitled to acquire up to 49 per cent shares of the public company in the market or via the securities trading floor.

3. Regulations on prohibited conducts and transactions in trading of securitiesRegulations on trading of securities also provide conducts and transactions prohibited during acquisition and sale of shares via securities trading floor, which are mostly related to fraudulent act or cheating, disclosure of false information, insider trading, collusion, market rigging and conducting professional securities business activities without consent from the SSC. 6

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1. Role of members in the limited liability companyThe internal approval of the Members’ Council on increase of capital and transfer of such increased capital to the acquirer shall always be required for the M&A transaction.7

2. Role of shareholders in the joint stock companyThe internal approval of the General Meeting of Shareholders shall always be required in case the company needs to increase its capital by issuance of additional shares or there is any transfer of the existing shareholder’s ordinary shares in the event that the company has operated for three years or less from the date of issuance of the enterprise registration certificate.8


Due to the maturity of companies, which is 23 years old, the concept of stakeholders does not exist in Vietnam. Its definition comes from the understanding of foreign corporate laws.


In common practices, the conditions precedent shall be specified in the share acquisition agreement or the capital contribution transfer agreement. The parties may discuss and agree on the conditions precedent, provided that such conditions are not contrary to the law and conflict with social ethics.9 Otherwise, the agreement on such conditions shall become null and void.

Most relevant conditions usually are amendments of licence and/or charter of the company or appointment of the acquirer’s nominated representatives to managerial positions. Payment

for acquisition of shares is usually paid in accordance with completion of the conditions precedent and disbursement schedule.


The financing in an M&A transaction may be made through various methods, including payment in the form of cash, share exchange, loan stock, convertible loan or preferred shares.

In the previous years, the most practicable method of financing in an M&A transaction in Vietnam was payment in cash; the participating companies were owned either by the Vietnamese or foreign parties. In respect of acquisition of listed or unlisted shares or capital contribution by the foreign investors, the foreign investors must first open an investment capital account with a licensed bank in Vietnam and any transfer of capital in and out of Vietnam must be conducted via this investment capital account, including remittance of capital into and repatriation of income back to their foreign country.10

Financing a M&A transaction via a convertible loan takes place in the following manner with this example: Shareholder A, a foreign investor, owns 30 per cent of the equity of XYZ Company, in which shareholder B possesses 70 per cent. Shareholder A provides a convertible loan to XYZ, which is a shareholder loan. At the time of repayment, if XYZ cannot or does not repay the loan, the equity of A will be increased, say, to around 40 per cent. As a result, the equity of B will be reduced to around 60 per cent; or the value of the equity of XYZ will be increased in proportion to the value of the loan. In either case, A gets more shares in XYZ. If the value of the loan is large, the new equity of A will constitute a M&A.


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However, in the recent years, another practicable method of financing has been gaining popularity: share exchange. Highlights included merger of Vinpearl Joint Stock Company and Vincom Joint Stock Company in 2012 by share swap Vinpearl’s stock for Vincom’s stock and issuance of 1,105,704 common shares by Kinh Do Corporation in order to swap for shares of Vinabico Joint Stock Company in June 2013, etc.

In respect of a minimum level of financing, there is no requirement by law so far. However, this requirement may be agreed by the parties and specified in the share acquisition agreement or the capital contribution transfer agreement.

It should be noted that the document(s) evidencing the completion of payment for shares shall be required before the state authority issues the new enterprise registration certificate or the investment certificate to record that the acquiring party is a shareholder or a capital contributing member of the target company. Also, in case of acquisition by the investors of the listed securities, a securities company (broker) may receive the orders for purchase or sale of securities from their clients only if such securities company obtains 100 per cent of money or securities and shall take necessary measures to assure the solvency of such clients when trading orders are executed.11


A shareholder or a group of shareholders holding more than 10 per cent of the total ordinary shares for a consecutive period of six months or more, or holding a smaller percentage as stipulated in the charter of the company, has the following rights:

1. To nominate candidates to the Board of

Management and the Inspection Committee (if any);

2. To sight and make an extract of the book of minutes and resolutions of the Board of Management, mid-year and annual financial statements in accordance with the forms of the Vietnamese accounting regime, and reports of the Inspection Committee;

3. To request the convening of a General Meeting of Shareholders in the special cases;

4. To request the Inspection Committee to inspect each issue relating to the management and administration of the operation of the company where it is considered necessary.

In respect of the voting to elect members of the Board of Management and of the Inspection Committee, each minority shareholder has the right to accumulate all of its votes for one or more candidates,12 in particular as follows:13

1. Before and during a meeting of the general meeting of shareholders, shareholders shall have the joint right to form a group in order to nominate a candidate and to cast cumulative votes for their candidates.

2. The number of candidates which each group shall have the right to nominate shall depend on the number of candidates decided by the general meeting and the share ownership ratio of each group. Unless the company charter stipulates otherwise and unless the general meeting of shareholders decides otherwise, the number of candidates which a group shall have the right to nominate shall be regulated as follows:

a. A shareholder or group of shareholders holding from 10 per cent to below 20 per cent of the total voting shares shall have the right to nominate a maximum of one candidate; and

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b. A shareholder or group of shareholders holding from 20 per cent to below 30 per cent of the total voting shares shall have the right to nominate a maximum of two candidates.

The provisions on accumulation of votes as mentioned above shall be applied to both listed and non-listed joint stock companies.14


We understand that you wish to mention statutory waiting period before completing the proposed M&A transaction as specified in Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act), as required by the 2000 amendments to s 7A of the Clayton Act of the United States of America. Under this Act, the acquiring person and the person whose business is being acquired must submit information about their respective business operations to the enforcement agencies and wait for a specific period before consummating the proposed M&A transaction. During the waiting period, the enforcement agencies shall review the proposed M&A transaction.

The laws of Vietnam do not provide any regulations on the waiting or notification period before completing a business combination.


The industry-specific rules shall be applied subject to the business lines of the target company and whether it is a listed company or not.

For example, if the target company has the business line of security (guard) service, the M&A transaction shall be subject to satisfaction by the foreign investors of the conditions as specified in

Decree No. 52/2008/ND-CP dated 22 April 2008.

If the target company becomes a public company after the M&A transaction and it wishes to perform the public offer of shares, it must satisfy the following conditions:15

Such company must have, at the time of registration of the offer, a minimum amount of paid-up charter capital of 10 billion dong calculated at the value recorded in the accounting books;

Such company must provide an undertaking, passed by the general meeting of shareholders, to place the shares for trading on an organised (securities) trading market within one year from the date of completion of the offer tranche.

There is an operational duration of one year or more from the date of merger or consolidation and the business operation as at the date of registration of the public offer for sale has been profitable.

There are no debts which are overdue for more than one year in the case of a public offer of bonds.

There is an undertaking from the general meeting of shareholders (in the case of shares and convertible bonds) or from the board of management (in the case of bonds) to bring securities into trading in the formal market within one year from the selling tranche completion date.

Specific rules are set for M&A of banks and insurance companies.


At present, there are two main taxes imposed on income from the transfer by seller of securities, shares or capital contribution in the target company to the acquirer, including personal income tax if the


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seller is an individual and corporate income tax if the seller is a legal entity.

Personal Income Tax (PIT)1. Pursuant to art 3.4 of the Law on PIT, income

from transfer of the capital contribution in an economic organisation and from transfer of securities shall be deemed as income from transfer of capital under the Law on PIT.

2. Pursuant to art 13 of the Law on PIT, taxable income from a transfer shall be fixed as equal to the selling price less the purchase price plus reasonable expenses related to creation of income from such transfer.

In this case (which means it is possible to determine the purchase price and reasonable expenses), the tax rate of 20 per cent shall be imposed on the taxable income (subject to art 23.2 of the Law on PIT).

3. If it is NOT possible to determine the purchase price and reasonable expenses of a transfer of securities, taxable income shall be fixed as the selling price of the securities. Then, the tax rate of 0.1 per cent shall be imposed on taxable income (subject to art 23.2 of the Law on PIT).

4. The PIT imposed on income from transfer of capital made by a non-resident shall be a sum of money which is earned by the non-resident from such transfer multiplied (x) by zero point one percent (0.1%), irrespective of whether the transfer was conducted in Vietnam or abroad.

5. With regard to the seller who is a resident:

a. The PIT shall be calculated on: (i) each occasion of arising of income in case of transfer of capital contribution; and (ii) each occasion of transfer or an annual basis in case of transfer of securities (pursuant to art 7.1 of the Law on PIT).

b. The point of time for determination of taxable income from transfer of capital shall be the time when the transfer transaction was completed as stipulated by law (under art 13.3 of the Law on PIT).

6. With regard to the seller who is a non-resident:

a. The PIT shall be calculated on each occasion of arising of income, applicable to all types of taxable income (pursuant to art 7.2 of the Law on PIT).

b. The point of time for determination of taxable income from transfer of capital shall be the time when the transfer contract takes effect (pursuant to art 32.3 of the Law on PIT).

Corporate Income Tax (CIT)1. Pursuant to art 3.2 of Decree 124, income

from transfer of a part or the whole of capital invested in an enterprise, including transfer of securities, shall be deemed as income from transfer of capital under the Law on CIT.

2. The basis for tax assessment is assessable income within any one period and the tax rate. The tax assessment period for CIT shall be calculated in accordance with the calendar year or the financial year. However, in respect of foreign enterprises, the tax assessment period for CIT shall be each occasion on which income arises. Enterprises may choose either the western calendar year or the financial year as their tax assessment period, but must register the same with the tax office prior to implementation (pursuant to art 5 of Decree 124 and art 5 of the Law on CIT).

3. Assessable income within any one tax assessment period shall be determined in accordance with the following formula:

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In which: (pursuant to art 6 of the Decree 124)

a. In case of income from transfer of capital, it shall be determined as equal to the proceeds received from the transfer contract less the purchase price of that part of the capital which was transferred, and less expenses related to the transfer.

b. In case of income from transfer of securities, it shall be determined as equal to the selling price less the purchase price of the transferred securities, less expenses directly related to the transfer.

Where a shareholding company issues shares, the difference between price for issue of shares and the par value shall not be subject to CIT.

Where a shareholding company conducts a division, consolidation or merger and converts its shares at the time of such division, consolidation or merger thereby earning income, then such income is subject to CIT.

4. The rate of CIT shall be 25 per cent, except for: (i) certain specific cases related to activities of prospecting, exploring and mining petroleum and other rare and precious natural resources in Vietnam or mines of rare and precious natural resources; and (ii) cases where the enterprises are entitled to the preferential rate of CIT.


The cross-border M&A transactions are understood as follows:

1. An investment from a foreign company into Vietnam, including:

a. Foreign investors purchase shares or capital contribution in local company; and

b. Foreign investors purchase securities listed by a public company via the Stock Exchange or Securities Trading Center.

2. An investment of a company in Vietnam to a foreign country.

In those types of transactions, the inflow investment from foreign companies to Vietnam is much higher than the outflow of Vietnamese companies. The reasons are: firstly, most Vietnamese companies are still in the first or second growth stage; only a small number are in the maturity stage, but however, still struggle with capital; and second, the foreign currencies reserve of Vietnam is still small.

In this Section, we focus mainly on investment by Vietnamese investors into a foreign country because regulations on cross-border M&A activity for foreign investors into Vietnam have been presented in other sections hereof so far.

1. Direct investment by Vietnamese investors into a foreign country

The Vietnamese investors must fully satisfy

Assessable income = – [ ]+Taxable

incomeExempt income

Losses carried forward in

accodance with law


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the following conditions before performing the direct investment:

a. Have an offshore direct investment project;

b. Fully discharge all financial obligations to the state of Vietnam.

c. Comply with the laws on management and utilisation of state-owned capital with respect to cases in which state-owned capital is used for offshore direct investment.

d. Be issued with an investment certificate by the Ministry of Planning and Investment.

If the investment capital of the project is less than 15 billion dong, the project shall be subject to the procedure for registration of an investment project. Otherwise, the project shall be subject to the procedure for evaluation of an investment project.16

After performing the procedure for registration or evaluation of an investment project, the Vietnamese investors shall be issued with an (offshore) investment certificate.17

2. Offer for sale of shares in a foreign country by Vietnamese joint stock companies

Although the law provides regulations on offer for sale of shares in a foreign country by Vietnamese companies (as mentioned below), it is not commonly used by Vietnamese joint stock companies in practice because of credibility.

In order to offer for sale of shares in a foreign country, Vietnamese joint stock companies must fully satisfy the following conditions:18

a. The business line of the joint stock

company is not included in the list of business lines in which participation of foreign parties is prohibited by the law of Vietnam and the participating ratio of foreign parties must be ensured in accordance with law.

b. There is a resolution of the general meeting of shareholders approving the offer for sale of shares offshore and the plan for utilisation of proceeds earned.

c. The regulations on foreign exchange control are complied with.

d. The regulations of the home country are satisfied.

e. There is approval from the following competent state authorities: the State Bank of Vietnam in the case of credit institutions; the Ministry of Finance in the case of insurers; and the SSC in the case of securities companies, fund management companies and securities investment companies.

Then, the joint stock company shall submit a dossier for registration of offer for sale of shares in a foreign country at the SSC. Within 10 days from the date of receipt of all documents for reporting, the SSC shall provide the issuing organisation with a notice in writing of its opinion whether or not the documents of an offer for sale are approved and shall specify its reasons.19


Upon merger, consolidation, division or separation, the succeeding employer (or known as the new employer in the case of M&A) is responsible to continue to employ the current number of employees and carry out the amendment and/or

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addition to their labour contracts. If the succeeding employer is unable to employ all current employees, such employer must formulate and implement a labour usage plan.20

In cases of transfer of ownership or of right to manage or right to use an enterprise, or where an enterprise merges, consolidates, divides or separates, then the employer shall continue (to rely on) and the representative of the labour collective shall rely on the labour usage plan to consider and select continuance of performance of, amendment of or addition to the old collective labour agreement, or shall conduct bargaining in order to sign a new collective labour agreement.21

Upon merger, consolidation, division or separation of an enterprise or co-operative, if the employer retrenches employees, such employer must pay severance allowances for job loss to the employees as follows:22

1. The employer shall pay a severance allowance for job loss to an employee who had regularly worked for the employer for 12 months or more. The severance allowance shall be one month’s wages for each working year but at least two months’ salary.

2. The length of a working period for calculating a severance allowance for job loss means the total working time the employee actually worked for the employer minus the period for which the employee received unemployment benefits in accordance with the Law on Social Insurance and the working period for which the employer has already paid a severance allowance.

3. Wages for the purpose of calculating a severance allowance for job loss means the average wage pursuant to the labour contract for the six months immediately preceding job loss.


Below are some existing proposals to achieve the M&A regulations of Vietnam: 1. Develop the legal regulation system to

capture the complex and diverse requirements of M&A reality in Vietnam, especially regulations on buy and sell options, offshore investment, global depository receipt to get access to foreign capital market, etc.

2. Innovate acquisition procedures:

a. In case there is a participation of foreign investor to a local company, it is still a concern as to whether such company has to simply revise its business registration certificate or must apply for a new investment certificate.

b. The participating parties must submit ‘evidence for the completion of the transfer’ to obtain approval of the licensing authority on the transaction. However, such evidence sometimes can be achieved only after the licensing authority’s approval, for instance, the acquiring party is able to make full payment only if the licensing authority approves the transaction.

3. Revise regulation on competition: It is provided that if participating companies have a combined market share in the relevant market ranging from 30 per cent to 50 per cent, the legal representative of such companies must send a 30 days’ prior notice to the VCAD. The proposed transaction shall be carried out only if the VCAD issues a letter of confirmation certifying that the transaction is legitimate. In fact, such provision is likely unenforceable


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Partner/Business Development, VB LAWE [email protected] www.vblaw.com.vnA 11A - 11C Phan Ke Binh Street, Da Kao Ward, District 1, HCMC, VietnamT +84 8 3821 9928 F +84 8 3821 9929

ABOUT THE AUTHOR

due to lack of information to analyse market shares owned by the participating companies. It is necessary to make it more measurable.

4. It is now hard for investors to find regulation to stipulate the M&A activities because the M&A activities can be a ‘project investment’ or a ‘financial investment’; each is governed by different regulations. There has been a proposal that the M&A activity should be provided in just one legislation.

5. The current Law on Enterprises provides four types of company structurally changes: consolidation, division, merger and separation. Acquisition is only in practice, not in law; it thus must be codified.

1 http://tinnhanhchungkhoan.vn/GL/N/DJEICE/m-a-soi-dong-nho-phap-ly-thoang-hon.html

http://vir.com.vn/news/en/money/m_as-are-just-the-ticket.html

http://vir.com.vn/news/en/money/m_as-top-of-the-pops.html

http://www.warburgpincus.com/PDF/Warburg%20Pincus%20invests%20in%20Vingroup-%20May%2029%202013%20.pdf

http://maf.vn/tieu-diem/tieu-diem/scg-group-cua-thai-lan-mua-lai-prime-group.html

http://kinhdoanh.vnexpress.net/tin-tuc/bat-dong-san/vingroup-ban-vincom-center-a-gia-470-trieu-

usd-2805295.html

2 Article 25 of the Law on Securities.

3 Article 7 of Circular 74.

4 Article 18 of the Law on Competition.

5 Article 20.1 of the Law on Competition.

6 Article 9 of the Law on Securities and art 70 of Decree 58.

7 Article 44.2 of the Law on Enterprises.

8 Article 84 of the Law on Enterprises.

9 Article 4 of the Civil Code.

10 Articles 12, 13, 14 and 15 of Decree 160.

11 Article 52.6 of Circular 210.

12 Article 104.3(c) of the Law on Enterprises.

13 Article 29 of Decree 102.

14 Article 29.1 of Decree 102.

15 Article 18 of Decree 58 and art 12 of the Law on Securities.

16 Article 11 of Decree No. 78/2006/ND-CP dated 9 August 2006 of the Government.

17 Article 13 and art 14 of Decree No. 78/2006/ND-CP dated 9 August 2006 of the Government.

18 Article 28 of Decree No. 58/2012/ND-CP dated 20 July 2012.

19 Article 30 of Decree No. 58/2012/ND-CP dated 20 July 2012.

20 Article 45 of the Labour Code.

21 Article 86.1 of the Labour Code.

22 Article 45.3 and art 49 of the Labour Code.


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