Selling A Malaysian Business – Share Sale vs Asset Sale

Is selling your business something you envisage or have planned to take place at some point in time? In any event, it helps to know what a sale of business in Malaysia entails. This article is written from the point of view of a seller of a business. Regardless of the size of your business, there are two common ways to sell a business, either via a ‘share sale’ or an ‘asset sale’. For simplicity, this article assumes that the business is owned and conducted using a private limited company that is not listed on a stock exchange (i.e., a Sendirian Berhad).

Share Sale

A ‘share sale’ typically involves the sale of the shares of a company. The legal contracting parties to the share sale agreement will be the actual shareholder of the company (ie, as the seller) who is disposing of his shares in the company, and the buyer who will become the new shareholder of the target company.

As a company is, under law, regarded as a separate legal person, the business of the company (i.e., its licences, employees, assets and liabilities) will remain with the company notwithstanding the change of ownership at the shareholder level.

The seller of shares should check if any contractual restrictions or procedures need to be observed under a shareholders’ agreement or the company’s constitution apply before signing an agreement to dispose of its shares. These could include pre-emption rights or tag along rights conferred to other shareholders of the company.

The seller, upon disposing of its shares in the company, will no longer be entitled to participate in the company’s affairs, to vote, or receive any dividends as a shareholder. It is also common for an exiting shareholder to resign as a director of the company at the point of sale. As a share sale involves the sale of a company’s shares, a business owned by a sole proprietor (also known as ‘enterprise’) can only be sold by way of an asset sale and not a share sale.

Asset Sale

In contrast, in an ‘asset sale’ (which is not restricted only to a sale of assets but may also include debts and liabilities), the contracting parties to the business sale agreement will be the company itself (ie, as the seller) disposing the different components of the business owned by the company, and the buyer who will become the new owner of the business assets.

Under the Companies Act 2016, the company must pass a resolution before the directors of the company can dispose of a substantial portion of the company’s business. A company’s business include all the tangible and intangible assets, such as equipment & machinery, inventory, real properties, goodwill, intellectual property, confidential information & personal data, ongoing contracts and may also include the company’s historical, existing and contingent liabilities such as accounts receivables, bad debts, tax liabilities etc.

Essentially, the assets or liabilities that will be sold to the buyer have to be carefully and specifically agreed by both parties. The company seller may therefore ‘cherry-pick’ by choosing to exclude a particular asset or liability in an asset sale, or retain specific employees under the company’s employment. Further, as only selected components of a business are sold, the seller may end up still being liable over the business’s existing obligations and liabilities, unless the obligations or liabilities have also been assigned or novated to the buyer pursuant to the asset transfer (for example, obligations under existing tenancy agreements, employment contracts and loans).

As with any other business transaction, it is important to know what you are getting into and be prepared for it. Here is a checklist of action steps for you to plan ahead and know what to expect in a sale of business.

Share Sale Checklist:

• Notify your accountant, lawyer and company secretary about the pending share sale at the earliest possible stage. These professionals can advise you on the details of preparation for the pending due diligence, negotiations and eventual transaction with the buyer and can potentially secure you a higher sale value or reduce the onerous indemnities you may have to be responsible for post-sale.
• If you would like to protect your confidential information, ask your lawyer to prepare a Non-Disclosure Agreement (“NDA”). An NDA is a binding agreement which obliges the potential buyer to keep your identified information confidential, and not to use the confidential information for any other purposes apart from negotiating the deal.
• Check the shareholders’ agreement or constitution for any transfer restrictions such as pre-emption rights or tag along rights before signing a share sale agreement. Ignoring these provisions may result in a breach of contract with your other shareholders (if any) or your share sale being challenged or stopped.
• Ensure that the latest audited accounts are available, which are not more than 18 months old. These are required by the purchaser for stamping and not having them ready may result in delays in the release of the purchase price.
• Ensure that your latest management or closing accounts are prepared to take stock of inventory, short term liabilities, cash in bank etc., especially if selling company as a going concern as there may be some adjustments to the purchase price needed after the handover date.
• If the company owns real property, consider if the company is a ‘real property company’ as a disposal of shares may also trigger RPGT reporting obligations and RPGT exposure to the seller.

Asset Sale Checklist:

• Notify your accountant, lawyer and company secretary about the pending share sale at the earliest possible stage. These professionals can advise you on the details of preparation for the pending due diligence, negotiations and eventual transaction with the buyer and can potentially secure you a higher sale value or reduce the onerous indemnities you may have to be responsible for post-sale.
• If you would like to protect your confidential information, ask your lawyer to prepare a Non-Disclosure Agreement (“NDA”). An NDA is a binding agreement which obliges the potential buyer to keep your identified information confidential, and not to use the confidential information for any other purposes apart from negotiating the deal.
• Check the shareholders’ agreement or company’s constitution if a disposal of the assets of the company will trigger a ‘liquidation event’, and also check if the other shareholders (which may also comprise of investors) are agreeable to the disposal of the company’s assets at the offered price, in order for the requisite resolutions to be passed.
• Prepare a detailed list of the components of the business that the company will be disposing. This will be one of the key focus points of your discussions and negotiations with an interested buyer.
• Compile the proper documents of title (for tangible assets & equipment, property), key contractual documents (tenancies, employment contracts, operational contracts, loans), insurance policies, inventory listing, deposits or accounts payable, databases, online accounts and passwords etc., and anything that is required in the operation of the ongoing business. Identify if any assets are still encumbered or owned by third parties (i.e., on hire purchase, lease, equipment financing). While this list may also be relevant in a share sale deal, it will be a subject of greater scrutiny by the buyer in an asset deal.
• Where the sale of business entails a ‘transfer’ of employees, seek professional advice on the proper employment procedure, termination notice periods and potential termination benefits that may be payable by the seller pursuant to the Employment (Termination and Lay-off Benefits) Regulations 1980. This Regulation applies only to employees within the purview of the Employment Act 1955, e.g. employees whose salary do not exceed RM 2,000 a month or who are engaged in manual labour. From a legal perspective, if the employees are offered with employment with terms not less favourable than their existing contract prior to the “transfer” and yet the employee unreasonably refuses the offer, the employee will not be entitled to termination benefits.
• Where the sale of business entails a disposal of real property or plant & machinery, seek professional advice on the potential tax exposure in the form of Real Property Gains Tax (for real property) and Balancing Charges (for plant and machinery) respectively.

Conclusion:

Both an asset sale and share sale may carry its own risks and costs to the seller. It is therefore important for a seller to be aware of and prepared for these aspects before entering into a transaction.

This article was written by Shawn Ho and Ee Lyne Chong from our corporate, property and tax practice group. Our corporate team advises on legal compliance, corporate governance, shareholder and founder arrangements, joint venture and partnership structures and corporate tax matters. Have a question? Contact us.