Disposal of business: What to take note

Article

Business owners or sellers who are disposing their business, whether by way of disposal of business assets or disposal of shares of companies which own the business assets, should take note of the issues set out below. The disposal of business assets and/or disposal of shares of companies which own the business assets is hereafter known as “Proposed Disposal”.

1. Are there any prohibitions or restrictions in agreements which prohibit or restrict the Proposed Disposal?

The provisions of the agreements entered into by (1) the entities which own the business assets to be disposed of; or (2) the companies of which the shares are to be disposed of, may prohibit or restrict the Proposed Disposal. The prohibitions or restrictions may include provisions which prohibit or restrict change of ownership, control, shareholders, directors or management of the companies of which the shares are to be disposed of.

Breach of such provisions may lead to termination of the agreements. As the business dealings with the counterparties of the agreements may be one of the reasons for the buyers to be interested in the Proposed Disposal, it is important for the sellers to procure the consent of or notify the counterparties of the Proposed Disposal as soon as possible and in accordance with the terms of the agreements with the counterparties.

2. Is consent from or notification to financial institutions or regulatory bodies required for the Proposed Disposal?

The Proposed Disposal may be subject to consent from or notification to the following:

(1) financial institutions which grant facilities to the entities which own the business assets to be disposed of or the companies of which the shares are to be disposed of; or

(2) regulatory bodies which grant licences, approvals or permits to the entities which own the business assets to be disposed of or the companies of which the shares are to be disposed of.

The obligations to procure the consent from or to notify the relevant financial institutions or regulatory bodies are usually included in the sale and purchase agreements in respect of the Proposed Disposal (“SPA”).

3. Is there any guarantee which should be discharged?

If a corporate guarantee has been given by a corporate seller or a personal guarantee has been given by an individual seller or a director of a corporate seller for a loan granted by a financial institution to the target company, it is important to have a provision in the SPA to be discharged after the completion of the Proposed Disposal. The discharge would be subject to the approval by the relevant financial institution. Please refer to my previous article Seller Beware: Discharge of Guarantee After Disposal of Shares.

4. Is any employee terminated pursuant to the Proposed Disposal?

The rights of an employee in Malaysia whose wages do not exceed RM2,000 (“EA Employee”) are regulated by the Employment Act 1955 (“Employment Act”). In the event the service of an EA Employee is terminated and the termination is attributable wholly or mainly to the fact that a change has occurred in the ownership of the business for the purpose of which the EA Employee is employed, notice of termination of service must be given to such employee. In such instance, the length of notice of termination to the EA Employee must be in accordance with the notice period as provided under the Employment Act.

If the buyer of the business assets does not offer to continue to employ the EA Employee under terms and conditions of employment not less favourable than those under which the EA Employee was employed before the change occurs, the contract of service of the EA Employee shall be deemed to have been terminated. Consequently, the seller who is also the person by whom the EA Employee was employed immediately before the change in ownership occurs, shall be liable for the payment of all termination benefits payable under the Employment (Termination And Lay-Off Benefits) Regulations 1980 (“Termination Regulations”).

An EA Employee shall not be entitled to any termination benefits payable under the Termination Regulations if within seven days of the change of ownership, the person by whom the business is to be taken over immediately after the change occurs, offers to continue to employ the EA Employee under terms and conditions of employment not less favourable than those under which the EA Employee was employed before the change occurs and the EAA Employee unreasonably refuses the offer.

5. Engage the right lawyer

It is important for the sellers to engage lawyers who could provide the kind of legal services required for the Proposed Disposal and to advise the sellers on the risks and implications involved. Some sellers who are cost-sensitive may choose to appoint lawyers based on the lowest legal fees. This approach may end up being costly if the lawyers are not equipped with the expertise to deal with transaction of the nature of the Proposed Disposal. In such instance, the sellers may not be getting proper advice or value for the services. Some sellers may choose not to appoint any lawyers and rely on the lawyers appointed by the buyers to inform the sellers what needs to be done for the Proposed Disposal. No matter how “friendly” a deal is, the lawyers engaged by the buyers are acting to protect the interest of the buyers and are not duty bound to advise the sellers.

The information in this article is intended only to provide general information and does not constitute legal opinion or professional advice.

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