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Q&A Guide for Foreign Investors Buying a Malaysian Company

04/02/2025 update

Before Purchase:

What is due diligence, and why is it necessary?

Due diligence is the detailed investigation of a company before finalizing a purchase. It helps assess financial stability, legal risks, and commercial viability, ensuring you don’t inherit undisclosed liabilities or regulatory issues.

What are the types of due diligence?

(a) Financial Due Diligence
Reviews audited financial statements, tax records, cash flow, assets and debts.
Ensures no hidden liabilities, overstated profits, or unpaid taxes with the relevant authorities: including EPF (Employees Provident Fund), SOCSO (Social Security Fund),  LHDN (Inland Revenue Board of Malaysia).

(b) Commercial Due Diligence
Evaluates the company’s business model, market position, and future growth potential.
Reviews customer contracts, supplier relationships, and industry competitiveness.

(c) Legal Due Diligence

Legal due diligence verifies the company’s legality, regulatory compliance, and potential legal risks. Key areas include:

Company Legality & Compliance
Confirms all required licenses are obtained for operation (e.g., Bank Negara for finance, MITI for manufacturing).

Contracts & Litigation Risks
Checks contracts with customers, suppliers, and landlords for any termination risks or financial penalties.
Reviews pending or past lawsuits, regulatory actions, or disputes that could affect the company post-acquisition.

Employment & Labor Law Compliance
Ensures all employment contracts comply with the Employment Act 1955 and Industrial Relations Act.
Identifies risks related to wrongful termination claims, union disputes, and unpaid employee benefits.

Intellectual Property & Asset Protection
Verifies ownership of trademarks, patents, and copyrights under MyIPO (Intellectual Property Corporation of Malaysia).
Checks for any ongoing or potential IP infringement claims.

Regulatory & Licensing Risks
Confirms the company holds all necessary operating licenses and regulatory approvals.
If the company owns property, state-level consent may be required for foreign buyers.

During Purchase:

What is the agreement to purchase shares in a company in Malaysia, and why is it important?

It is a common practice in Malaysia to enter into a Shares Sale Agreement (SSA) or Sale and Purchase Agreement (SPA), which is the legally binding contract that defines the terms of the company sale. It protects both buyer and seller by outlining price, payment terms, legal obligations, and liabilities.

What are the key clauses in an SSA or SPA?

1. Purchase Price & Payment Terms

2. Conditions Precedent
– Requires regulatory approvals (e.g., Relevant Ministry, FIC for strategic sectors, Bank Negara for financial businesses).
– Release or approval from other restrictions (e.g., Bank’s on change of control, shareholders agreement or employment share option)
– Ensures due diligence is satisfactorily completed before finalizing the sale.

3. Seller’s Representations & Warranties
– Guarantees that financial records are accurate and that there are no hidden liabilities.

4. Indemnities & Liabilities
Defines who is responsible for debts, lawsuits, and regulatory fines after the takeover.

5. Non-Compete Clause
Prevents the seller from starting a competing business within a specific timeframe.

6. Dispute Resolution
Specifies whether disputes will be resolved through Malaysian courts or arbitration (AIAC – Asian International Arbitration Centre).

Are there taxes on buying a company?

Yes, key taxes include:
Stamp Duty – Charged on the transfer of shares or assets, borne by the Purchaser.
Real Property Gains Tax (RPGT) – Applies if the company owns property and makes a profit from the sale, to be settled by the Vendor.
Corporate Income Tax Liabilities – Ensure the company has no unpaid taxes before finalizing the purchase, subject to financial due diligence.

Post Acquisition:

How Should Foreign Investors Manage Shareholding Relations in Malaysia?

After acquiring a Malaysian company, foreign investors must navigate shareholder relations, key personnel retention, and future ownership structuring. This section covers:
Shareholders’ Agreement – Managing relationships between foreign and local shareholders.
Employment Agreements – Aligning key personnel with the new foreign owners.
Call & Put Options – Structuring future buyouts or Employee Stock Option Schemes (ESOS).

Why is a Shareholders’ Agreement (SHA) important for foreign investors?

In Malaysia, foreign investors often enter joint ventures or partial acquisitions with local shareholders due to foreign ownership restrictions in certain industries. An SHA:
Protects foreign investors’ rights in a local business.
Defines decision-making power between foreign and local shareholders.
Prevents unexpected share dilution or transfer of ownership to third parties.

What key protections should foreign investors include in a Shareholders’ Agreement?

Voting Rights & Decision-Making Control
Ensures foreign investors maintain influence over key business decisions, even if they do not hold a majority stake.
Board Composition & Management Authority
Guarantees foreign shareholders have board representation and control over business direction.
Exit Strategy & Share Transfer Restrictions
Includes pre-emption rights, ensuring existing shareholders have first priority to buy shares before selling to outsiders.
Drag-along & tag-along rights to ensure the foreign investor can exit if the local shareholder sells their stake.
Dividend Policy & Profit Distribution
Ensures foreign investors receive fair profit distribution, preventing local shareholders from reinvesting all profits without consent.
Dispute Resolution & Governing Law
Specifies if disputes will be resolved through Malaysian courts or arbitration (e.g., AIAC – Asian International Arbitration Centre).

Local Key Personnel:

How Can Foreign Investors Secure Key Personnel in a Malaysian Takeover?

In a Malaysian acquisition, key personnel may hold critical business relationships, industry knowledge, or operational control. A new Employment Agreement ensures:
– Alignment with the new foreign shareholders’ strategic goals.
– Continuity in business operations and client relationships.
– Protection of confidential information and trade secrets.

What key terms should foreign investors include in an Employment Agreement?
Job Role & Reporting Structure

Clearly defines reporting obligations to the new foreign owners.
Performance-Based Compensation & Bonuses
Incentivizes growth targets aligned with the foreign investor’s objectives.
– Non-Compete & Confidentiality Clauses
Prevents key personnel from joining local competitors or setting up a rival business.
– Termination & Severance Terms
Defines conditions for termination by the foreign investor and compensation structure.
– Work Permits for Foreign Executives
If foreign management is appointed, ensures compliance with Malaysia’s Employment Pass (EP) and expatriate hiring regulations.

In an acquisition by stages, How Can Foreign Investors Secure Full Ownership or Offer Employee Shares?

Many foreign investors initially acquire a partial stake and plan for full ownership over time. A Call Option allows them to:
Purchase remaining shares at a pre-agreed price after a set period.
Avoid immediate full investment risks while gaining operational control.
Example: Foreign investor buys 70% now and has a Call Option to buy the remaining 30% after 3 years at an agreed valuation.

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