In this article, we look at cases in which events identified as a result of due diligence turned out to be problems.
License matters
Not only cases where the expiry date of a license has passed, but also cases where necessary licenses were not held occur frequently. In Malaysia, we can say it is rather rare to have all the necessary licenses for a business properly.
In addition, it is not always clear what licenses are necessary for the business, and it is often troublesome that the judgment of whether a license is necessary differs depending on the person in charge of the authority.
In one case we handled, the target company had not obtained a license that was considered necessary for its main business. According to the seller, who is the owner of the target company, “We do not need the license because our business is not XX but falls under YY. Many other peer companies in the same industry have the same interpretation and have not obtained the license, so you can check it out. We have been in this business for more than 20 years and we have never been pointed out by the authorities about license.” he said. When we researched it, we found that there were many other companies in the same industry that did not hold licenses, and in that case, our client ended up taking over the business without the license, following the seller’s explanation. From a Japanese perspective, a license would naturally have been considered necessary, but we also considered in that case that it would have taken a long time to apply for a license from scratch, so our client accepted some risk and took a practical approach. Particularly in Malaysia, even if a license is not held, penalties such as suspension of business are often not imposed immediately, so although it depends on the type of license, we can say it is not as sensitive as in Japan to license inadequacies.
In another case, as a transaction scheme, a share transfer was chosen instead of a business transfer in order to take over the necessary licenses. This is because in the case of a business transfer, license cannot be taken over and the buyer has to apply for a new license from scratch, while in the case of a share transfer, license can be taken over as it is without any impact. It is important to note that there are foreign investment and bumiputra restrictions on licenses such as to undertake construction work for Petronas and Tenaga National, as well as in the education, logistics and human resources industries. If the company becomes 100% foreign-owned, it will not be able to meet the requirement, so a local or bumiputra nominee shareholder needs to be appointed, and the transfer needs to be executed with care, including the timing of renewal and change of shareholders so as not to affect the renewal of licenses. It is important to note that there are foreign investment and bumiputra restrictions on licenses such as to undertake construction work for Petronas and Tenaga National, as well as in the education, logistics and human resources industries. If the company becomes 100% foreign-owned, it will not be able to meet the requirement, so a local or bumiputra nominee shareholder needs to be appointed, and the transfer needs to be executed with care, including the timing of renewal and change of shareholders so as not to affect the renewal of licenses.