This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in Malta.
It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The cornerstones of M&A regulation in Malta are found in the Civil Code (Chapter 16 of the Laws of Malta) and the Companies Act (Chapter 386 of the Laws of Malta) ( the ‘CA’). These are supplemented by the Listing Rules issued by the Malta Financial Services Authority, applicable to those companies whose securities are admitted to trading on a regulated market.
The framework regulating market abuse set out in the Financial Markets Abuse Act (Chapter 476 of the Laws of Malta) and the anti-trust regime as promulgated by the Control of Concentration Regulations (Subsidiary Legislation 379.08, Laws of Malta) complement the main legislation together with sector-specific rules, targeting, amongst others, the financial and investment services, banking, insurance and gaming industries.
Supervision and monitoring is vested in the Registry of Companies. Compliance of issuers having securities admitted to trading on a regulated market is vested with the Listing Authority, a specialised arm within the Malta Financial Services Authority (the ‘MFSA’). The MFSA is also the regulator of banking and financial institutions, investment services providers and insurance companies. The Malta Competition and Affairs Authority monitors anti-trust matters.
What is the current state of the market?
In recent times, Malta has witnessed significant M&A activity across all sectors. Malta’s status as a preferred jurisdiction for the financial services, gaming and high-end manufacturing sectors continues to flourish. This has resulted in considerable M&A activity in the private sphere mainly involving share and asset acquisitions and cross-border mergers. The last few months have also been characterised by marked activity on the regulated market involving a number of takeover bids concerning companies operating in the telecommunications, IT and e-commerce and hospitality industries.
Which market sectors have been particularly active recently?
The last two years have seen a number of voluntary bids being made in relation to publicly-listed companies. The most recent public offer resulted in the acquisition of a significant stake in GO plc, one of Mata’s major telecommunications providers. Other recent bids involved the merger of two significant players in the Maltese hospitality sector and the merger of a Big Four firm with an IT and e-commerce company. The private sphere has witnessed the setting up of structures incorporating special purpose vehicles and the use of these entities as acquisition vehicles or targets in international transactions.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
Malta’s current economic climate, together with its reputation as a stable and attractive base for international business, boasting a professional English-speaking workforce, complemented by an attractive legal, regulatory and fiscal framework is one of the main factors that will assist in sustaining growth in the near future.
Market consolidation and the pooling of resources is certainly another factor that will impact both local and international M&A activity. Whilst reducing fragmentation, the consolidation of entities with same-sector market players will secure increased efficiency and broaden market exposure resulting in further growth in the sector. On the opposite end, diversification, coupled with a quest to reduce risk exposure may also assist in maintaining the current pace. Growth can also be seen as another driver for increased M&A activity in view of the fact that the merger or acquisition route is often perceived as enabling an entity to grow faster in the shortest time-frame possible.
What are the key means of effecting a merger?
An amalgamation can take place either by means of a merger by acquisition or a merger by formation of a new company.
Merger by acquisition is the operation whereby the acquiring company acquires all the assets and liabilities of one or more other companies in exchange for the issue, to the shareholders of the companies being acquired, of shares in the acquiring company and a cash payment not exceeding ten percent of the nominal value of the shares so issued. A merger by the formation of a new company involves the delivery, by two or more merging companies, to a company which they set up, of all their assets and liabilities in exchange for the issue to the shareholders of the merging companies of shares in the new company and a cash payment not exceeding ten percent of the nominal value of the shares so issued.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
Publicly available information on Maltese-registered target companies is available from various sources. Documentation filed in compliance with the CA is publicly available at the Registry of Companies. This information would typically include copies of the company’s annual accounts as well as returns relating to various matters including the transfer or charging of the shares. A search at the Public Registry will disclose the ownership of immovable property situated in Malta and the registration of any hypothecs or other registrable privileges against the company. Searches with respect to pending litigation, decisions and judicial acts may be effected at the Registry of the Law Courts whilst searches involving registrable intellectual property rights may be effected at the Malta Industrial Property Registrations Directorate.
A target is under no legal obligation to disclose confidential information to a potential acquirer. Indeed, a target cannot disclose information it is contractually bound not to disclose. The Listing Rules prohibit an issuer from disclosing information, including unpublished price sensitive information unless certain conditions are met. Conditions include the attainment of the express consent of the company’s shareholders to make such disclosure and the entry into confidentiality agreements.
To what level of detail is due diligence customarily undertaken?
The level of detail undertaken in a due diligence exercise varies on a case by case basis. As an absolute minimum, a prospective acquirer generally seeks to obtain insight through publicly available information as listed above. The setting up of data rooms hosting legal, commercial and financial data on a target company is a fairly common practice.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
A company operates at the different levels through its two organs – the general meeting and the board of directors. The Listing Rules provide that the context of an offering process, the target company may only proceed to disclose such information that would enable prospective bona fide offerors to make an offer for the shareholding in the company once the consent of the general meeting has been obtained. In the case of a hostile bid being launched, the board may only implement measures aimed at frustrating the bid if such action has been sanctioned by the shareholders. The merger of a company requires the approval, by means of an extraordinary resolution, of each of the amalgamating companies.
What are the duties of the directors and controlling shareholders of a target company?
In addition to their obligations to act at all times, in the interest of the company and its shareholders as a whole and ensure equality of treatment for all shareholders of the same class, in a takeover scenario, the target’s board is specifically required to publish an opinion on the bid. The opinion has to set out the board’s views on the effects of the implementation of the bid on the company’s interests and on the offeror’s plans for the target company and their likely repercussions on employment and the locations of the company’s places of business.
Holders of substantial shareholdings seeking to dispose of their shares (which may not necessarily be controlling shareholders) are obliged to endeavour to prevent the creation of a false market and are bound to take care that statements which may mislead remaining shareholders or the market are not made. Furthermore, the disposal of shares to which voting rights are attached triggers an obligation on the shareholders to inform the company and the Listing Authority of the proportion of voting rights held following such disposal where that proportion reaches, exceeds or falls below the thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75% and 90%.
Do employees/other stakeholders have any specific approval, consultation or other rights?
Once a bid has been launched, the target’s board is obliged to issue an opinion giving its views on, inter alia, the effects of the implementation of the bid on employment and on the offeror’s strategic plans for the target and their envisaged repercussions on employment. Such opinion should be communicated to the employee representatives or in the absence of representatives, to the employees themselves.
In the ambit of a cross-border merger, the Cross Border Merger Regulations (Subsidiary Legislation 386.12, Laws of Malta) require the relevant draft terms of merger and reports drawn up by the directors of the Maltese merging entity to explain the likely repercussions of the cross-border merger on employment.
What regulatory/third party approvals are required and what waiting periods do these impose, if any?
It is not uncommon for acquisitions to be subject to attainment of consents and approvals. Restrictions to share transfers may arise from the articles of association of the target in the form of pre-emption rights or from contractual obligations entered into by the target company in the form of change of control clauses.
Completion may also depend on attainment of sector-specific consent, such as in the case of target companies licensed by a regulatory authority, including companies licensed as credit or financial institutions under the Banking Act (Chapter 371 of the Laws of Malta) and/or Financial Institutions Act (Chapter 376 of the Laws of Malta), or service providers under the Insurance Business Act (Chapter 403 of the Laws of Malta), the Insurance Intermediaries Act (Chapter 487 of the Laws of Malta), the Investment Services Act (Chapter 370 of the Laws of Malta) and the Trust and Trustees Act (Chapter 331 of the Laws of Malta). A period of approximately two months would need to be factored in for the purposes of attaining regulatory approval.
Depending on the nature of the transaction, a notification may also need to be filed with the Office for Competition in terms of the Regulations on Control of Concentrations (Chapter 379.08 of the Laws of Malta). Depending on the nature of the concentration, a decision may be obtained as early as 4 weeks from date of submission up to a maximum of 4 months.
To what degree is conditionality an accepted market feature on acquisitions?
Conditionality is an accepted feature. In fact, the Listing Rules refer to conditionality as one of the elements that ought to be disclosed in the offering document. The nature or level of the conditionality acceptable is not stipulated. Conditionality is a fairly common occurrence, with conditions to a bid tending to range from matters relating to the internal restructuring of the target company/group, to the attainment of project finance by the buyer, to the attainment of regulatory clearances. The non-fulfilment of a condition attached to a bid is one of the limited circumstances when a bid may be withdrawn or declared void.
What steps can an acquirer of a target company take to secure deal exclusivity?
Deal exclusivity is typically achieved by means of the execution of a term sheet at the early stages of an M&A transaction. In addition to the key commercial terms and timelines, a term sheet would also customarily include a binding exclusivity arrangement having the effect of locking-up the seller from soliciting competing offers, entering into discussions or negotiations with potential purchasers or disclosing confidential information on the target for a period of time. This would grant the acquirer sufficient time to conduct its due diligence on the target.
This mechanism does not, however, prevent a competing bid from being launched in the case of a listed company.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
In addition to exclusivity agreements, prospective acquirers may seek to protect the deal through other measures. They may wish to secure the attainment of an irrevocable undertaking from the target’s most significant shareholders. Such undertaking is generally binding on the shareholder, but may be conditional in nature. Certain shareholders may be more willing to grant letters of comfort, indicating their intention to accept the bidder’s offer once launched.
Maltese rules do not provide for break fees, and therefore the parties to a transaction are free to make their own arrangements so long as these do not fall foul of the financial assistance provisions.
In transactions concerning private entities, it is quite common for the transfer of shares to be preceded by a promise of sale agreement. These agreements generally feature restrictions on the conduct of the target’s business until completion.
Which forms of consideration are most commonly used?
Consideration in cash or in kind are acceptable in private and public acquisitions alike. In an offer for shares in a listed company, an offeror may offer securities, cash or a combination of both, so long as a cash consideration is offered as an alternative in all cases. An expert’s report on the consideration offered would need to be annexed to the offer document.
Mergers are effected by the issue of shares to the shareholders of the companies being acquired or to the shareholders of the newly-formed company. A cash payment is also permitted provided this does not exceed ten percent of the nominal value of the shares so issued.
At what stages of an acquisition is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
A transaction involving a substantial shareholding, that is, an entitlement to exercise or control the exercise of ten percent or more of the votes at general meeting or the entitlement to appoint a majority of directors to the board of the target carries specific disclosure obligations as prescribed by the Listing Rules.
An issuer must promptly make a company announcement through the regulated market (i) when the issuer’s board is advised or otherwise becomes aware that a purchaser is being sought for such a substantial shareholding; (ii) when the issuer is subject of rumour and speculation; (iii) when the issuer’s board is advised or otherwise becomes aware of a firm intention to acquire a substantial shareholding; and (iv) when the issuer’s board is advised or otherwise becomes aware that an offer has been made to acquire a substantial shareholding.
Furthermore, an acquisition of shares to which voting rights are attached triggers an obligation on the shareholders to inform the company and the Listing Authority of the proportion of voting rights held following such acquisition where that proportion reaches, exceeds or falls below the thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75% and 90%.
Are there any circumstances where a minimum price may be set for the shares in a target company?
The Listing Rules sets out terms in accordance with which an offer to acquire shares has to be effected. Both in the context of a mandatory bid and in the exercise of squeeze-out rights, the rules require the holder of the controlling interest to launch an offer for the securities held by the minority at an equitable price. The equitable price to be paid for securities is the highest price determined by the following criteria:
- The price offered for the security should not be below the weighted average price of the security or the security transactions made on a Regulated Market during the previous six months;
- The price offered for the security should not be below the highest price paid for the security by the offeror or persons acting in concert with the offeror during the previous six months;
- The price offered for the security should not be below the weighted average price paid for the security by the offeror or persons acting in concert with the offeror during the previous six months;
- The price of the security should not be lower than ten percent below the weighted average price of the security within the previous ten trading days.
Furthermore, it after a bid has been announced and before the offer closes for acceptance, the offeror or any person acting in concert with the offeror, purchases securities that are priced higher than the offer price, the offer shall increase his offer so that it is not less than the highest price paid for the securities acquired.
Is it possible for target companies to provide financial assistance?
Article 110 of the CA sets down the legislative framework within which target companies, so long as they are registered as private companies, can provide financial assistance. For the purposes of the CA, financial assistance refers to that assistance granted by an undertaking for the purpose of an acquisition or subscription for its own or its parent company’s shares.
A private company may grant financial assistance if:
- The board of directors of the company, having taken account of their obligations and of the company’s financial positon has authorized the granting of the financial assistance in relation to a specific transaction;
- Such board resolution has been confirmed by a shareholder’s extraordinary resolution;
- The company has confirmed, by means of a written declaration that both its shareholders and board of directors have approved the granting of the assistance.
These provisions are not applicable to public companies, which remain precluded from providing financial assistance.
Which governing law is customarily used on acquisitions?
Transactions involving shares in listed or regulated entities are generally governed by Maltese law. Similarly, local and cross-border mergers are implemented in accordance with the provisions set out in the CA. However, as Maltese corporate law is heavily modelled on its English counterpart, it is not uncommon for medium and large scale acquisitions involving private entities to be governed by English law. Acquisition documents governed by the laws of Malta also draw inspiration from their English law counterparts especially in the area regarding representations and warranties.
What public-facing documentation is it necessary for a buyer to produce in connection with the acquisition of a listed company?
In the context of a bid, the offeror is required to draw up and publish an offer document containing the information necessary so as to enable holders of securities in the target company to reach a properly informed decision on the bid.
Chapter 11 of the Listing Rules prescribes the minimum information that ought to be disclosed in the offer document. In addition to information relating to the terms of the bid, the identity of offeror, the securities in relation to which the bid is being made and the consideration offered, the offer document should, inter alia, also set out the conditions to which the bid is subject, the time allowed for the acceptance of the bid as well as information concerning the financing of the bid. The offer document should also disclose the offeror’s intentions with regard to the future business of the target company and of the offeror company (in so far as it is affected by the bid), and with regard to the safeguarding of the jobs of their employees and management, including any material change in the conditions of employment, and in particular the offeror’s strategic plans for the two companies and the likely repercussions on employment and the locations of the companies’ places of business. A report on the consideration offered, drawn up by an independent expert and confirming that the offeror has sufficient resources to meet the consideration to be provided on full acceptance of the offer and to pay any debts incurred in connection with the offer ought to be appended to the offer document.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
Transfers of shares in private and public non-listed companies need to be effected in writing. In addition to the formalities that may be required in terms of the memorandum and articles of association of the company, a share transfer has to be registered with the company and the transferee’s name entered in the company’s register of members.
Notification of the transfer to the Registrar of Companies has to be effected by means of a return known as a Form T. In order to be successfully registered, the return has to evidence the payment any tax and duty due on the transfer.
Unless otherwise exempt, transfers of shares in Maltese companies attract stamp duty and income tax on capital gains realised. Payment of stamp duty is effected by the submission to the Commissioner of Revenue of the documents due in accordance with the Duty on Documents and Transfers Rules (Subsidiary legislation 364.06, Laws of Malta) together with the full payment of the amount due by way of duty.
A provisional payment of income tax equivalent to seven percent of the consideration on the share transfer is payable upon the execution of the deed of transfer. Such payment, made to the Commissioner of Revenue, is to be accompanied by the submission of the required documentation, including copies of the financial statements of the target and of the share transfer agreement, the Form T, the duly completed schedules found in Capital Gains Rules (Subsidiary Legislation 123.27, Laws of Malta) and an architect’s valuation in the event that the company is a property-owning company.
Transfers of securities listed on the Malta Stock Exchange are exempt from the formalities listed above. In general, capital gains derived from the disposal of such securities would be exempt from tax in the hands of the shareholder and transfer of such securities should be exempt from the payment of stamp duty.
Are hostile acquisitions a common feature?
Hostile acquisitions are not a common occurrence in the Maltese capital market.
What protections do directors of a target company have against a hostile approach?
Complementing the principles set out in the CA requiring directors to act in good faith in the best interests of the company for the benefit of the shareholders, the Listing Rules contain provisions which restrict directors from exercising defensive tactics in the context of a takeover or potential takeover bid of a listed company. Directors are prohibited from taking or permitting any action that could result in the frustration of an offer or the holders of securities in the target company being denied an opportunity to decide on the merits of an offer.
Defensive tactics are however permitted when such have be approved by the company’s shareholders or permitted pursuant to a contractual obligation entered into by the company or in the implementation of proposals approved by the board of directors of the company and such obligations and proposals were approved prior to the company receiving a takeover notice or becoming aware that an offer was imminent. In certain instances, defensive action could be adopted for reasons unrelated to the offer with the prior sanctioning of the Listing Authority.
In a non-listed company scenario, the board has the means of blocking an undesirable share transfer if the company’s articles of association grant the board the discretion to refuse the registration of the share transfer. This restriction may also be applied in relation to public companies, although not in respect of shares which are admitted to listing.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
The Listing Rules stipulate that where a direct or indirect acquisition of fifty percent plus one of the voting rights of a target company is made, the acquirer of such controlling interest in the company shall be required to launch, within seven days of the acquisition of such controlling interest, a mandatory bid as a means of protecting the minority shareholders of that company. The announcement of the bid shall be followed by the publication of an offering document containing the information necessary as would enable the holders of securities in the target company to reach a properly informed decision on the bid. Publication of the offer document is to be made within twenty one calendar days from the announcement of the launching of the mandatory bid.
A mandatory bid shall be addressed to all holders of securities in the company for all their holdings at an equitable price.
The Listing Authority is vested with the authority to exempt the launching of a mandatory bid in certain circumstances, including cases where the controlling interest in the target company was obtained as a result of the reduction of the company’s share capital and where control was acquired through the exercise of pre-emption rights rather than through the purchase of securities in the company from other persons.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
In the context of a bid made to all holders of a target company’s securities for all the company’s securities, remaining minority shareholders are granted the right to require the offeror to buy their securities at a fair price which shall take the same form as the consideration offered in the bid, or alternatively in cash. An independent expert must be appointed to certify that the price offered, which must equivalent be to or more than an equitable price, is fair and reasonable.
Is a mechanism available to compulsorily acquire minority stakes?
As opposed to a compulsory acquisition of minority stakes, squeeze-out rights facilitate the acquisition by the bidder of the highest possible number of voting shares in the target company. Where the offeror holds shares representing not less than ninety percent of the voting rights in the company, or where, following acceptance of a bid, the offeror has acquired or firmly contracted to acquire securities representing at least ninety percent of the target’s capital carrying voting rights and ninety percent of the voting rights comprised in the bid, the offeror has the right to require remaining minority shareholders to sell him their securities at a price and shall take the same form as the consideration offered in the bid, or alternatively, in cash.
Squeeze-out right may only be exercised within three months at the end of the time allowed for acceptance of the bid.