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Like certain U.S. states, the country of Malaysia does not give dissenting shareholders any right to appraisal of the value of their shares. Instead, the Malaysian Capital Markets and Services Act of 2007 (“Act”) provides that in a “compulsory acquisition,” dissenting shareholders may seek what Americans might refer to as equitable relief.

Pursuant to the Act, a “compulsory acquisition” may occur when a person (i.e. the offeror) has made a take-over offer to the shareholders of a target company[1] and has acquired at least 90% of the target company’s shares. At that point, the offeror may compel the dissenting shareholders[3] to sell their shares on the same terms originally offered by issuing a notice to them.[5] The offeror’s right to compel is more commonly known as the “squeeze out” right.

Any dissatisfied dissenting shareholder may, within one month from the date of the offeror’s notice, make an application to a court of competent jurisdiction for an order either (a) stating that the offeror shall not be entitled to acquire the dissenter’s shares, or (b) requiring that different terms of acquisition shall apply to the dissenter’s shares.[6]

The statute does not prescribe a test the court is supposed to apply in deciding whether to grant the dissenter’s application or, if it is granted, on what terms—the statute instead leaves these decisions to the court’s discretion.

Case law, however, does provide some guidance. For instance, under the cases the court may consider if the dissenting shareholders are bona fide, if there is “patent unfairness” in the terms of the proposed compulsory acquisition, and whether there has been a breach of law or the Malaysian Code on Take-Overs and Mergers of 2016 by the offeror or the majority shareholders.[7] In practice, though, the court may be reluctant to impose its own view of the fairness of the terms of the compulsory acquisition, because by this point the offeror has already acquired at least 90% of the target company’s shares on the basis of the offer which now claimed to be unfair. That is, the court might treat reaching the 90% threshold as prima facie evidence of a fair offer.

That said, the Code on Take-Overs and Mergers provides that all shareholders (especially the minority shareholders) should not be subject to any oppression or disadvantage by the treatment or conduct of an acquirer, offeror, or the directors of the target company in a takeover or merger transaction.[8]

There are also additional remedies available to minority shareholders under the Malaysian Companies Act of 2016. In cases of oppression, the minority shareholder has the right to seek a court order for remedy on the grounds that his or her rights or interests have been affected. Such an aggrieved minority shareholder may also seek leave of the court[10] to initiate a derivative action on behalf of the company against any alleged wrongdoer directors or shareholders who are not acting in the best interest of the company.[11]

Author Information:  Wai Sum TEO & Jessica KEW of Lee Hishammuddin Allen & Gledhill, Kuala Lumpur, Malaysia

 

** Rolnick Kramer Sadighi LLP thanks these authors for their contribution.  Rolnick Kramer Sadighi LLP does not practice outside the United States.

 

[1] Based on Section 216 (1) of the Capital Markets and Services Act 2007 and the Rules on Take-Overs, Mergers and Compulsory Acquisitions (issued on 15 August 2016; Revised on 5 December 2017), a target company includes:

  • A listed corporation;
  • An unlisted public company with more than 50 shareholders and net assets of RM15 million or more;
  • A business trust listed in Malaysia; and
  • A real estate investment trust (REIT) listed in Malaysia.

[3] “Dissenting shareholders” includes any shareholder and convertible securities holder, who has not accepted a take-over offer and any shareholder who has failed or refused to transfer shares to an acquirer in accordance with a take-over offer as provided under Section 216(6) of the Capital Markets and Services Act 2007.

[5] Section 222 of the Capital Markets and Services Act 2007 .

[6] Section 224 of the Capital Markets and Services Act 2007.

[7] Amin Halim Rasip & Anor v Tenaga Nasional Bhd & Other Cases [2016] 1 LNS 591 at para 90.

[8] General principle 2 at para 4(2) of the Code on Take-Overs and Mergers 2016 .

[10] Sections 347 and 348 of the Companies Act 2016.

[11] Section 346 of the Companies Act 2016.

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A recent article from Law 360 [$$$]  broke down the important considerations from the 2020 appraisal decisions of the Delaware Supreme Court and Delaware Court of Chancery.   One of the takeaways from authors Lewis Lazarus and Bryan Townsend of Morris James LLP was statutory appraisal remains “an active area of litigation in Delaware,” notwithstanding legislation in 2016 designed to reduce appraisal arbitrage and judicial decisions that have relied on market based evidence.

 

IRS & Business Taxation of the Cannabis Industry

Given the rapid developments in the cannabis space — with 15 states having now legalized recreational marijuana and 21 states allowing medicinal use — approaches to the valuation of cannabis companies continues to evolve.  In this new piece by EisnerAmper, the firm makes the case for utilizing any combination of an Asset Approach, Income Approach or Market Approach to valuing a marijuana business while bearing in mind a litany of tax and regulatory considerations.

Shareholders: Don't give away your voting rights | Fortune

Devon Energy Corporation seeks to have the Delaware Chancery Court validate a shareholder vote after a notice snafu resulted in approximately 15% of shareholders receiving untimely notices on a $15 billion merger.  After the merger closed between Devon Energy and WPX Energy, Inc. in January 2021, Devon Energy’s sub-contractor Broadridge Investor Communication Solutions, Inc. learned that it did not begin mailing notices of the special meeting of stockholders until up to two weeks prior to the meeting, rendering notices sent to certain shareholders untimely.  Devon Energy filed a petition under Section 205 of Delaware’s General Corporation Law, which allows the court, in limited circumstances, to validate a corporate act whether it is found to be defective or not.  Devon argues no harm, no foul because (i) the votes of the stockholders who received the late notices would have not altered the outcome of the meeting, where over 70% of shareholders approved, and (ii) appraisal rights were not available to any of the company’s shareholders.

Voting rights are a critical, and yet often neglected area of shareholder rights.  More common disputes in this area focus on closely held corporations, business divorce matters, or smaller companies – but at times, a larger concern will run afoul of the technical requirements of the law.  Whether such errors are enough to have prejudiced shareholders and damaged their rights is a case by case issue.

Under the Delaware General Corporation Law, notices of a stockholder vote must be strictly complied with but it gets more complicated, where, as here, the merger has already closed.  We will continue to monitor this situation and post when the Delaware Court Chancery issues a decision on the company’s application for validation of the merger.

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We’ve covered South African appraisal rights before – it remains a jurisdiction with active valuation and appraisal disputes making the news.   One recent news article recaps a situation involving South African appraisal in the case of Sabvest Capital/Sabcap.

Per the article, and this filing, “Sabcap” acquired all the shares of “Sabvest” in exchange for Sabcap shares via a scheme of arrangement. (For US readers, a scheme of arrnagement can be understood to be a form of merger of acquisition but involving additional steps).

South Africa provides appraisal rights under Section 164.

Certain Sabvest shareholders demanded appraisal, requiring a Court to determine the fair value of Sabbest shares.  Petitioners/Applicants initially set out that R69,21 (~$4.75 USD at current exchange rate) represented the fair value per Sabvest share.    They referenced the published NAV of Sabvest shares of R66,89 (~$4.50) as a point in favor of their valuation.

Sabvest/Sabcap responded that Sabvest was worth either R30,00 (~$2.05) or the 30-day Volume Weighted Average Price of R33,67 (~$2.30).   Sabvest/Sabcap apparently offered R33,67 in settlement.

We can view this as the ‘bid-ask’ spread in an appraisal negotiation.  Both parties having set out positions with a significant spread: about R39,21 (~$2.70).

The parties ultimately resolved the matter, again, per the article and filing, with the vast majority of shares settling for R47,54 (~$3.25).  This is close to, and only slightly under, the midpoint of petitioners demand and Sabvest’s offer.

South African appraisal remains an active area of appraisal and we look forward to covering issues in the future.

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The Delaware Court of Chancery was asked last week to approve a $6.85 million settlement in case brought by a class of public stockholders challenging a corporate restructuring alleged to have favored insiders at the expense of the class.

According to this Law360 article, PennyMac Financial Services, Inc. had been set up as an “Umbrella-C” or “Up-C” structure, whereby an LLC held all of the public company’s operating assets.  This structure was supposed to provide certain benefits to large stockholders and insiders BlackRock and HC Partners LLC, but the company restructured in 2018 after the Up-C structure proved unfavorable.  The plaintiff class alleged the restructuring provided massive tax benefits to insiders, which were not shared with common stockholders.  The case had previously survived a motion to dismiss after Vice Chancellor Kathleen S. McCormick found that, due to various conflicts, the case may be decided under an “entire fairness” standard of review.

Entire fairness is the highest review standard available when reviewing transactions – favoring plaintiff-shareholders challenging a transaction and requiring the company to show, in effect, that the deal was entirely fair.

But the high standard of review was only part of the case.  Because there was no deal price associated with the restructuring, Plaintiffs would have had to employ different and potentially novel damages theories in pursuing the case through trial.  With both parties facing risk, the shareholders and company reached the settlement.

This case demonstrates that when a corporate action – even if not a merger – seems to benefit insiders at the expense of minority shareholders, shareholders have a wide variety of claims to potentially vindicate their rights.

In a comprehensive ruling handed down last week, the Grand Court of the Cayman Islands confirmed that minority shareholders of companies that undertake a ‘short-form’ merger are entitled to dissent from the merger and to be paid fair value for their shares, as determined by the Grand Court. The ruling, delivered in Changyou.com Limited, has wide-ranging implications, given that a number of Cayman Islands mergers have already been completed without dissent rights being offered to minority shareholders.

Read further analysis here.

New Law Enforcement Challenges: Is it Marijuana or Hemp? - Cannabis Business Times

As reported in this Law360 piece, “Illegality Nixes Most of Marijuana Investment Scheme Suit,” a Colorado judge dismissed an investor’s fraud claim against the principal behind an investment vehicle whose strategy revolved around the Colorado cannabis industry.  The court found that the relief sought would violate the Controlled Substances Act, underscoring the perils of investing in a space that remains federally illegal.  While courts generally understand themselves to be capable of granting relief so long as such relief does not require the production or distribution of marijuana, as the article reports, the lines defining that distinction are not nearly as clearly drawn as such a test may suggest.

This decision yet again demonstrates how federal illegality is a key aspect of cannabis valuation and litigation, and must be considered at each stage.

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In an apparent question of first impression, the Delaware Court of Chancery is considering whether stockholders in a Delaware corporation can relinquish their rights to object to the sale of the company and waive fiduciary duty claims through a stockholder agreement.  Law360 reports here that Vice Chancellor Sam Glassock III has asked for supplemental motion-to-dismiss briefing on the role the implied covenant of good faith and fair dealing, as well as public policy arguments, should play in applying such provisions in stockholder agreements.

Several minority stockholders, including Manti Holdings LLC, sued the controlling stockholder Carlyle Group and the directors of the company, Authentix, claiming Authentix and its board accepted a “fire sale” price because Carlyle was seeking a quick exit from its majority interest in the company.  Vice Chancellor Glasscock previously held that the stockholder agreement barred the minority investors’ statutory appraisal rights in a decision that has been appealed to the Delaware Supreme Court.  It would appear that if the stockholder agreement’s bar against merger objections and waiver of fiduciary claims is upheld, the Authentix minority stockholders will be left with no remedies for the alleged “fire sale.”