In the dynamic landscape of mergers and acquisitions (“M&A”), not every transaction involves selling or acquiring an entire company. Increasingly, companies are opting to restructure or streamline their operations by divesting specific business units or assets ⎼ a strategy commonly referred to as a “carve-out”. In Malaysia, carve-out transactions (commonly referred to as “carve-outs”) are gaining traction as conglomerates seek to unlock value, achieve regulatory compliance, or focus on their core operations.
This article examines the nature of carve-outs in M&A transactions, the legal and commercial considerations that arise, and the unique challenges faced in executing such deals within the legal and regulatory framework.
What is a Carve-Out?
A carve-out is a strategic arrangement in which a parent company separates, spins off, divests, or otherwise sells an asset or specific business unit while retaining ownership of the remaining assets or business units. Carve-outs can be executed through various structures:
- The sale of specific assets of a business unit or subsidiary company;
- The sale of a subsidiary company;
- The separation of a business unit to be absorbed by a separate legal entity;
- The separation of a business unit to form or participate in a joint venture or collaboration with a third party.
An illustration of an exercise involving a carve-out is as follows:
Company A is involved in the road maintenance industry and has three business units relating to (i) thermoplastic product manufacturing (“Business Unit A”), (ii) road and highway maintenance (“Business Unit B”), and (iii) signage installation and removal (“Business Unit C”).
After a decade of operations, the shareholders and directors of Company A determined that Business Unit A was the only profitable business while Business Unit B and Business Unit C were making losses. Thus, it was decided that Company A would retain ownership of Business Unit A and separate Business Unit B and Business Unit C, which would be acquired by an identified purchaser, Company X.
This exercise will generate funds and liquidity for Company A from the sale of the two Business Units, allow Company A to focus its resources on Business Unit A to maximise operational efficiency and enhance the valuation of Company A.
If carefully planned and well executed, carve-outs can benefit all parties involved in the M&A transaction. Regarding the party undertaking the carve-out exercise, the carve-out can help raise capital and liquidity, boost and enhance the company’s post-carve-out valuation, and improve the company’s business objectives and operational efficiency. On the other hand, a carve-out can appear more attractive to a prospective purchaser as the purchasers are often more willing to acquire an independent business unit that aligns with the purchaser’s business objectives rather than an entire company with unrelated assets, business units and liabilities.
Key Legal Considerations in Carve-Out Transactions
There are several factors to consider when including carve-outs in an M&A transaction. What are some essential questions to be asked?
- What is the structure of the carve-out?
It is crucial to identify and determine the subject matter of the carve-out. As mentioned above, the subject matter of the carve-out can take various forms, such as a business unit, subsidiary company, or land, property, or other assets.
- How will the carve-out be executed?
Carve-outs require careful planning, especially when separating and selling a business unit that is integrated with the company. A due diligence exercise is essential in planning and execution, and parties can negotiate on matters such as ownership of intellectual property rights, real estate, and regulatory approvals.
- What are the regulatory approvals or restrictions that apply?
Depending on the nature and industry of the transaction, various approvals may be required to transact the carve-out, such as Bursa Malaysia, Securities Commission Malaysia (SC), Bank Negara Malaysia (BNM), the Ministry of Investment, Trade and Industry (MITI), and the Malaysian Investment Development Authority (MIDA).Suppose the carve-out transaction involves a subsidiary company with existing charges or encumbrances. In that case, the parties will be required to notify the relevant financial institutions of the change in control and proceed accordingly.
- Does the carve-out involve transferring employees?
Sometimes, a carve-out may involve transferring employees in connection with a specific business unit. It is important to note that employees are not automatically transferred with the sale of an asset or business under the laws of Malaysia. The Employment Act 1955 does not provide for the automatic transfer of employment; hence, employee consent and fresh employment contracts with the purchaser are required, failing which constructive dismissal claims may arise.In addition, when collective agreements or trade unions are involved, negotiations may be necessary, and it is advisable to keep the Ministry of Human Resources informed.
- Is there any post-carve-out transition and support required?
In some instances, the selling company provides transitional support to the purchaser for a defined period to ensure continuity of operations after the carve-out. The parties will execute a transitional service agreement for essential support services, including finance, human resources, and IT.
Conclusion
Carve-outs are more than divestitures, separations and spin-offs; they are a powerful strategic tool that unlocks hidden value, generates and optimises liquidity, streamlines operations, and creates growth opportunities. A well-planned and executed carve-out can transform a business and maximise its returns. However, navigating the legal, financial, and operational complexities requires careful planning, strong execution, and a clear vision. With the right strategy, Carve-outs can be a game-changing tool in M&A transactions, enabling businesses to thrive in an ever-evolving corporate landscape.
Our firm’s Corporate and M&A Team meticulously advises on carve-out transactions and comprehensively understands the commercial and operational realities of our clients’ businesses. We ensure that deals are not only legally sound but also commercially viable. Please do not hesitate to contact us for a complimentary consultation to discuss your M&A transaction.
By Tommy Wong
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.
