Sheba Gumis discusses the regulatory concerns in the gold mining sector in Malaysia.
1. MINING SECTOR IN MALAYSIA
Mining is one of the larger industries in Malaysia. Malaysia is blessed with various natural resources, including bauxite, clay, coal, copper, feldspar, gold, gravel, ilmenite, iron ore, kaolin, limestone, mica, monazite, sand, silica sand, struverite and tin. The value of the gross output of the mining sector in Malaysia in 2015 amounted to RM10,667.2 million (approx. USD 2,575.6 million).1
One of the main minerals mined in Malaysia is gold. The majority of these gold deposits are found in the eastern states of Pahang, Kelantan and Terengganu.
Gold is an important resource and is commonly used in a wide variety of industries, such as jewellery, electronics, medicine, computers, etc. Further, gold is commonly traded as a commodity and is used as a form of investment. Accordingly, the gold mining sector in Malaysia is a lucrative foreign investment attraction.
1.1. 7 important factors why the Malaysian gold mining industry attracts foreign investment
(a) Limited Foreign Equity Restrictions
While certain industries in Malaysia (e.g. the banking, healthcare, oil and gas and education industries) have foreign equity restrictions requiring a minimum Malaysian or Bumiputera equity shareholding, the gold mining industry does not have such restrictions. Bumiputeras are persons of the Malay race or natives of Sabah and Sarawak.
As of 2012, at least 5 gold mines in Malaysia were owned by foreign companies2. Accordingly, this makes the gold mining sector particularly attractive to foreign investors.
(b) Good Logistic Networks
Malaysia has good logistic connections and the quality of Malaysian infrastructure is among the best in the world, with world class facilities for maritime, air, road and railroad transport. There are numerous highways, a well-connected railroad system which connects to Thailand, and easily accessible ports and airports.
The East Coast Expressway connects the east coast states, where the gold deposits are found, to the rest of West Malaysia. Malaysia also has 7 federal ports throughout the country, including Kuantan Port on the East Coast. This assists in the expeditious export of the gold. There are also 5 international airports with air-cargo facilities.
(c) Industry-friendly
Other than transport infrastructure, Malaysia is also very industry friendly.
It has a wide telecommunications network served by digital and fibre optic technology which assists in communications.
Additionally, Malaysia's human resources are young, educated and productive, and a majority of the workforce are bilingual. English and Mandarin are widely spoken among the Malaysian workforce, in addition to the local Malay language.
Cost of the workforce is low, with the minimum wage in West Malaysia starting at RM1,100.00 (approx.. USD 265). The workforce is also well educated with the labour force participation for graduates standing at 83.6 per cent, encompassing 4.15 million people in 20183.
There are also over 500 industrial estates and Free Zones developed throughout the country, which cater to the requirements of export-oriented industries. For export-oriented industries, there are also various facilities with bonded warehouses and bonded trucks.
(d) Environmental, Safety and Health Laws
Malaysia has stringent environmental, safety and health laws, which consist of inter alia the Environmental Quality Act 1974, the Occupational Safety and Health Act 1994 and the Factories and Machinery Act 1967.
The relevant authorities, including the Department of Environment and the Department of Safety and Health, conduct regular spot checks and audits and enforce the aforementioned acts. Failure to comply may result in fines, stopwork orders and even imprisonment terms. There are also deemed liabilities on directors and officers of bodies corporate that are found to have committed offences under the relevant acts.
These stringent laws provide confidence in foreign investors to invest in Malaysia, and to comply with their corporate social responsibility requirements in respect of sustainability.
(e) Sustainability as an important topic on the agenda
Environmental and mining laws in Malaysia require mining companies to have an environmental impact assessment and an approved operational mining scheme to ensure that undue or reasonably avoidable adverse impacts of the construction, operation and decommissioning of a project are prevented. This ensures sustainability in the long run.
There is also an added emphasis in Malaysia to promote sustainability. Interestingly enough, the Malaysian stock exchange, Bursa Malaysia, has also initiated its BursaSustain initiative which encourages and promotes corporate governance and sustainability among companies listed on its stock exchange.
(f) Corporate Taxation
Corporate income tax in Malaysia is relatively low for smaller companies.
While companies are generally taxed at 24% per annum, companies with a paid-up capital of RM2.5 million or less, and with annual sales of not more than RM50 million (w.e.f. YA 2020) are taxed at the following scale rates:
| Chargeable income | Rate (%) |
| The first RM600,000 | 17 |
| In excess of RM600,000 | 24 |
(g) Repatriation of Profits
Malaysia does not impose any restrictions in respect of repatriation of profits out of the country. However, such profits can only be repatriated in foreign currency.
1.2. Regulatory requirements regarding the mining sector
The Mineral Development Act 1994 (MDA) and the various State Mineral Enactments (depending where the mining operations are located) (SME) govern the regulatory landscape of mining operations in Malaysia.
The MDA is governed by the Ministry of National Resources and Environment, whereas the various SMEs are governed by the various state land and mine offices. The federal government works hand in hand with the relevant state land and mine offices to govern the mining landscape.
In addition to this, environmental laws such as the Environmental Quality Act 1974, the Occupational Safety and Health Act 1994 and the Factories and Machinery Act 1967 also govern various environmental, safety and health aspects of the mining operations.
Where the mining operations have manufacturing facilities, depending on the share capital and the number of employees of the relevant company, a manufacturing licence may be required.
(a) Mining Lease
Depending on the size of the operations and the state where the mining operations are located, the company is required to obtain a mining lease. The mining lease provides the right from the State to mine. This is granted by the relevant State Land and Mines Office.
The mining lease granted shall specify, inter alia, whether the lessee is permitted to conduct a small scale operation or a large scale operation. The mining lease will also set out the terms and conditions upon which the application is granted, which will need to be complied with, failing which the mining lease can be revoked. There will also be requirements to pay royalties to the State for the mining lease.
"Large scale operation" is defined as a mining operation within a mining lease area-
- which exceeds any of the following production limits:
- in the case of extraction of minerals from primarily alluvial deposits, annual throughput of 3.5 million cubic metres per year;
- in the case of underground mining operations, annual combined run-of-mine ore, waste and overburden production of 100,000 tonnes per year (waste material not exiting mine mouth to be excluded); or
- in the case of open-cast mining operations extracting minerals from primarily non-alluvial deposits, annual combined run-of-mine ore, waste and over-burden production of 300,000 tonnes per year;
- with a capital and infrastructure investment exceeding one hundred and fifty million ringgit;
- with more than 250 employees or workers at the mine site on a typical day (including all shifts); or
- which uses any of the following mining practices:
- extensive and continued use of explosives;
- continuous flotation circuits; or
- extensive and continued use of toxic chemicals or Agents.
Some of the rights provided pursuant to the mining lease may include the right:
- to exclusively mine the land in respect of which the mining lease has been granted in accordance with the pre-feasibility study in the case of small scale operations and the mine feasibility study in the case of large scale operations;
- subject to the relevant SME and any other law relating to minerals:
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- to store, transport, process and sell any mineral extracted and dispose of any waste;
- to use any timber, sand or gravel as required for mining within the mining land;
- to use such portions of the mining land as may be required for the purpose of erecting houses, lines, sheds or other buildings as may be reasonable for the purposes of the mine or for use of employees of the mine; and
- to use, occupy and enjoy the land in respect of the mining lease has been granted for mining purpose.
- The SME prohibits removal of timber or forest produce, plant, vegetable, animal, poultry of fish or coral, earth, gravel, guano, loam, rock, sand, shell, clay, brick, lime, cement or other commodity manufactured from such materials from the land unless authorised by any other law.
The registered mining lease shall subject to the provisions of the relevant SME, be conclusive evidence that the lease of the land described therein is vested in the lessee and of the conditions and other provisions to be complied with by the lessee.
The mining lease so granted is indefeasible save where (i) there is fraud or misrepresentation to which the lessee was a party or privy to; or (ii) where registration was obtained by forgery or by means of insufficient or void instrument or (iii) where the title or interest was unlawfully acquired by the lessee in the purported exercise of any power or authority conferred by written law.
Generally, mining leases may require that the lessee shall not commence any development work or mining on the land in respect of which the mining lease has been granted until after the approval of:
- a mine feasibility study;
- a plan for rehabilitation, if required (i.e. if the operation is a large scale operation); and
- an environmental impact assessment, if so required under the Environmental Quality Act 1974.
(b) Operational Mining Scheme
Pursuant to Section 10(1) of the MDA, the lessee is required to submit for approval by the Director of Mines an operational mining scheme for development work and mining on the land which is the subject of the Mining Lease.
The approval for the Operational Mining Scheme (OMS) is issued by the Department of Minerals and Geoscience, under the Federal Ministry of Natural Resources and Environment.
Under Section 10 of the MDA, one of the salient criteria for approval of the Operational Mining Scheme would be that the Director of Mines is satisfied that the scheme will provide a reasonably safe workplace. Furthermore, Section 13 of MDA requires mining to be carried out in accordance with good and safe practices and such environmental standards as may be prescribed under the MDA and any written law relating to environment.
Section 40 of the MDA states that any holder of a proprietary mining licence or mining lease who fails to submit an operational mining scheme or comply with the approved operational mining scheme shall be guilty of an offence and shall, on conviction, be liable to a fine not exceeding RM100,000 or to imprisonment for a term not exceeding 5 years or to both.
(c) Environmental Approvals
(i) Environmental Impact Assessment
Section 34A of the Environmental Quality Act 1974 (EQA) provides inter alia that any person intending to carry out any of the activities listed under the Schedule in the Environmental Quality (Prescribed Activities) (Environmental Impact Assessment) Order 1987 (Prescribed Activities Order) must submit an environmental assessment report (EIA Report) to Department of Environment and have it approved before carrying out such activity.
Such report must set out:
- an assessment of the impact such activity will have or is likely to have on the environment; and
- the proposed measures that shall be undertaken to prevent, reduce or control the adverse impact on the environment.
A list of "prescribed activities" is set out in the Schedule of the Prescribed Activities Order. Pursuant to the Schedule of the Prescribed Activities Order, mining activities involving mining of minerals in new areas where the mining lease covers a total area in excess of 250 hectares is considered to be a prescribed activity under the EQA.
The EIA Report is taken into account by the Department of Minerals and Geoscience, under the Federal Ministry of Natural Resources and Environment when approving the OMS. If the Director General of the DOE on examining the EIA Report and after making such inquiries as he considers necessary, is of the opinion that the EIA Report satisfies the requirements of the EQA and that the measures to be undertaken to prevent, reduce or control the adverse impact on the environment are adequate, he shall approve the EIA Report, with or without conditions attached thereto, and shall inform the person intending to carry out the prescribed activity and the relevant approving authorities accordingly.
The Director General of the DOE may sometimes approve the EIA Report with the condition that an environmental management plan be conducted on a scheduled basis and submitted to the DOE to ensure that the EQA and the various regulations thereunder are complied with.
(ii) Various other environmental approvals
The EQA contemplates various other approvals being obtained from the DOE for inter alia any emission, discharge or deposit of environmentally hazardous substances, pollutants or wastes or the emission of noise which exceeds specified levels.
There are restrictions on soil pollution, noise pollution, emissions into the atmosphere and into inland waters. There is also a requirement to ensure continuous compliance with the aforementioned specified limits, failing with the DOE may issue a compound or a stopwork order. The DOE may also choose to prosecute the offence in court.
The penalties provided by the EQA include fines and imprisonment terms.
Additionally, where an offence against the EQA or any regulations made thereunder has been committed by a company, firm, society or other body of persons, any person who at the time of the commission of the offence was a director, chief executive officer, manager, or other similar officer or a partner of the company, firm, society or other body of persons or was purporting to act in such capacity shall be deemed to be guilty of that offence unless he proves that the offence was committed without his consent or connivance and that he had exercised all such diligence as to prevent the commission of the offence as he ought to have exercised, having regard to the nature of his functions in that capacity and to all the circumstances.
(d) Manufacturing Licence
Where the mining operations have manufacturing facilities, depending on the share capital and the number of employees of the relevant company, a manufacturing licence may be required. This is issued by the Ministry of International Trade and Industry through the Malaysian Investment Development Authority (MIDA).
Under Section 3 of the Industrial Co-ordination Act 1975 (ICA 75), no person shall engage in any manufacturing activity unless he is issued a licence in respect of such manufacturing activity.
Section 2 of the ICA 75 defines "manufacturing activity" as "the making, altering, blending, ornamenting, finishing or otherwise treating or adapting any article or substance with a view to its use, sale, transport, delivery or disposal and includes the assembly of parts and ship repairing but shall not include any activity normally associated with retail or wholesale trade".
Only companies with share capital of RM2.5 million and above or employing 75 or more employees are required to obtain the manufacturing licence. Companies which carry on manufacturing activities but do not meet these requirements will need to apply to MIDA for an exemption from the manufacturing licence.
Failure to obtain a manufacturing licence results in a fine not exceeding RM20,000 or to a term of imprisonment not exceeding six months and to a further fine not exceeding RM1,000 for every day during which such default continues.
Additionally, where an offence under the ICA or any rule made thereunder has been committed by a person or a manufacturer being a company, partnership or body of persons, any person, who at the time of the commission of the offence was a director, manager or other officer serving in a managerial capacity or was a partner of the company, partnership or body of persons or purported to act in any such capacity shall be deemed to be guilty of that offence unless he proves that the offence was committed without his knowledge, consent and connivance and that he had exercised all necessary diligence to prevent the commission of the offence as he ought to have exercised having regard to the nature of his functions in that capacity and all the prevailing circumstances.
(e) Safety and Health approvals
The Department of Safety and Health (DOSH) monitors the safety and health aspects in respect of a workplace.
The Occupational Safety and Health Act 1994 (OSHA) provides requirements to be complied with in respect of a workplace. The OSHA provides for duties for employers and self employed persons to inter alia ensure, so far as is practicable, the safety, health and welfare to work of all his employees. There are requirements to have a safety and health policy, and, depending on the type and size of workplace, to have a safety and health officer. There are also duties for occupiers of workplaces to third persons (i.e. non-employees).
DOSH has the power to issue a compound or a stopwork order for failure to comply with the OSHA. The DOSH may also choose to prosecute the offence in court.
The Factories and Machinery Act 1967 (FMA) provides for regulations relating to factories and machineries. There are general provisions on the safety of factories. Approval of DOSH is required for the operations of a factory and for the installation of machinery. There are also requirements for certain machineries (such as hoisting lifts, steam boilers and unfired pressure vessels) to possess certificates of fitness.
The FMA also provides for requirements to inter alia keep a register of machineries and to notify DOSH in the event of an accident, dangerous occurrence and dangerous diseases.
DOSH has the power to issue a compound or a stopwork order for failure to comply with the FMA and, may also choose to prosecute the offence in court.
Under the FMA, there is deemed liability on the owner or occupier of the factory. Whenever it is proved to the satisfaction of a court that a contravention of this Act, has been committed by any person other than the occupier or owner of the factory or machinery in respect of which the contravention has been committed, the owner or occupier as the case may be shall also be held to be liable for that contravention, and to the penalty provided therefor, unless he shall prove to the satisfaction of the court that the same was committed without his knowledge or consent and that he had taken all reasonable means to prevent the same and to ensure the observance of the FMA.
Additionally, where an offence under the OSHA has been committed by a body corporate, every person who at the time of the commission of the offence is a director, manager, secretary or other like officer of the body corporate shall be deemed to have contravened the provision and may be charged jointly in the same proceedings with the body corporate or severally, and every such director, manager, secretary or other like officer of the body corporate shall be deemed to be guilty of the offence.
(f) Employment Passes
Foreign workers in Malaysia are required to possess valid employment passes issued by the Department of Immigration of Malaysia. Such employment passes are specific to a particular employer and a place of work. These passes cannot be transferred. The said foreign worker can only carry out the job specified in the employment pass.
Failure for such foreign workers to possess these employment passes will result in the employer being liable to the following penalties:
- liability to a fine not exceeding RM5,000 or to imprisonment for a term not exceeding one year or to both (Employment (Restriction) Act 1968); and
- liability to a fine of not less than RM10,000.00 but not more than RM50,000.00 or to imprisonment for a term not exceeding twelve months or to both for each such employee.
Please note that the Board of Directors, manager or secretary of the employer could also be imputed with the same offence and be liable for the same punishment.
(g) Statutory worker contributions
Employers in Malaysia are required to contribute to inter alia the following statutory contributions for their employees: the Employee Provident Fund (EPF), Employee's Social Security Fund (SOCSO) and the Employment Insurance System (EIS). Note that EPF is not mandatory for foreign workers.
Failure to comply results in fines of RM10,000 per offence and imprisonment terms ranging from 2 to 3 years. In respect of failure to pay EPF and EIS contributions, any person who at the time of the commission of the offence was a director, manager, secretary or other similar officer of the company shall be deemed to be guilty of the offence, unless he proves that the offence was committed without his consent or connivance and that he exercised all such diligence to prevent the commission of the offence.
In respect of failure to pay SOCSO contributions, the directors of such company, including any person who was a director member or office bearer during the period in which the contributions were payable, shall together with the company be jointly and severally liable for the contributions together with interest due and payable thereon to the organization.
2. TRANSACTION STRUCTURE
2.1. Introduction of the investment project
In 2018, one of our Chinese clients indirectly invested in a Malaysian private company with limited liability ("Malaysian Target Company"). It acquired 100% indirect interest of the Malaysian Target Company by acquiring its Singaporean holding company.
The Malaysian Target Company operates a gold mine in the East Coast of Malaysia with manufacturing facilities.
2.2. Transaction documents
In connection with the transaction, the seller and our client entered into a share purchase agreement (the SPA). Said SPA governs the rights and obligations of the seller and our client with respect to the sale and transfer of the shares in the capital of the target company. The seller sold and transferred all of its shares in the holding company to our client. As a result, the client indirectly acquired 100% of the Malaysian Target Company.
Under Malaysian law, it is common practice that parties enter into a non-disclosure agreement with respect to their intentions regarding the envisaged transaction. A non-disclosure agreement creates a legal obligation between the parties securing that certain information (e.g. the envisaged transaction) remains protected/confidential. Such a non-disclosure agreement is usually the first transaction document to be entered between parties.
Following the signing of a non-disclosure agreement, parties often enter a term sheet. The term sheet governs the initial intentions of parties with respect to the transaction (e.g. the purchase price for the shares, access to due diligence, etc). Our client was not represented by Malaysian legal advisors during the negotiations of the term sheet. We were engaged at the due diligence level and the drafting of the SPA.
2.3. Due diligence investigations
Prior to the drafting of the transaction documents as described above, we conducted a legal due diligence investigation regarding the Malaysian Target Company and the business carried out by it. The purpose of such an investigation is identifying key issues relating to the transaction.
In this transaction, environmental and safety and health matters played a big concern due to the nature of this transaction. There was added emphasis on whether the proper environmental, safety and health legal issues were complied with.
There was also importance placed on identifying whether the Malaysian Target Company possessed the necessary mining leases and whether it complied with the conditions attached to the mining lease, including the payment of the requisite royalties to the State.
Compliance with immigration laws was also an issue as the Malaysian Target Company employed various foreign workers to mine. Some of the employment passes had expired, and renewal of the same had to be addressed as conditions precedent.
Following identification of certain issues, we have sought protection against those issues in the transaction documents. In general, potential risks can be limited/covered by means of (i) including specific conditions precedent or conditions subsequent, (ii) including warranties; and (iii) including specific indemnifications.
3. PROJECT FINANCING METHOD
In this specific case, the purchase price was paid by our client on Completion Date in cash.
4. KEY TERMS IN TRANSACTION DOCUMENTS
4.1 With respect to the SPA, the following terms were of great importance (please note that this is not an exhaustive list, but just some examples):
Conditions Precedent: There were numerous items to be regularized prior to Completion, including ensuring compliance with the various environmental safety and health laws, and renewal of employment passes. The regularization of the environmental matters took time as it involved building of certain structures and confirmation of compliance by environmental consultants.
Indemnities: Specific indemnities had to be obtained in respect of the non-compliance of various environmental safety and health laws.
Payment of the purchase price: The purchase price was paid in cash on Completion Date. As the parties were non-Malaysian and the completion occurred outside Malaysia, the purchase price was paid in foreign currency, and not Malaysian ringgit.
Completion actions: As the Completion occurred at the Singaporean holding company level, the transfer of shares occurred in respect of the Singaporean holding company. In respect of the Malaysian Target Company, the directors, the company of the secretary and the bank mandates of the Malaysian Target Company were changed on Completion Date.
Limitation of liability: in the event that one of the parties to the SPA is in breach of its contractual obligations contained therein, the other party may hold the defaulting party liable.
The seller's indemnities and the fundamental warranties provided did not have a limitation of liability. However, the non-fundamental warranties were capped at the Purchase Price and with a time limit of 5 years from the date of Completion.
Escrow: A portion of the purchase price was withheld in an escrow account and released after a period of 2 years.
5. MAIN LEGAL ISSUES
One of the main legal issues during the negotiations with respect to the transaction documents was the environmental, safety and health issues (ESH Matters).
There were numerous non-compliances in respect of the ESH Matters which had to be regularized as conditions precedent and specific indemnities had to be obtained by the client to ensure that it would be protected post-Completion. A portion of the purchase price was also withheld in an escrow account and released after a period of 2 years. There was a lot of negotiation on the retention on the escrow amount, particularly as the vendor was very reluctant to withhold the portion of the purchase price.
There was added emphasis on the environmental, safety and health warranties to ensure that the ESH Matters were adequately covered.
Another main legal issue was the compliance with immigration laws by the Malaysian Target Company in respect of the various foreign workers. As some of the employment passes had expired, they had to be renewed as conditions precedent. There was also an issue about who should bear the costs of renewal given that the purchaser would benefit from the renewal post-Completion.
6. OTHER ISSUES AND RELEVANT SOLUTIONS
Other issues which we come across when assisting our Chinese clients in other deals are:
6.1. Bumiputera/local equity policies;
As mentioned above, certain industries in Malaysia (e.g. the banking, healthcare, oil and gas and education industries) have foreign equity restrictions requiring a minimum Malaysian or Bumiputera equity shareholding. Bumiputeras are persons of the Malay race or natives of Sabah and Sarawak.
It is usually an issue for foreign investors who intend to hold 100% of shareholding in a Malaysian company in such a restricted industry.
In the past, investors had gotten around this restriction by appointing a nominee to hold their shares in trust.
Additionally, there were also structures which involve ali baba schemes which involved a Bumiputera/local Malaysian (Local Shareholder) to subscribe for shares by obtaining a loan from the foreign investor. In exchange, the Local Shareholder would pledge his shares to the foreign investor and use the dividends of such pledged shares to pay off the loan. The Local Shareholder's voting rights would be curtailed through a shareholders' agreement with the foreign investor.
However, caselaw has held that such an ali baba scheme or trust arrangement was invalid and void as it was against public policy and contrary to the Contracts Act 1950.
Foreign investors should be conscious about such equity restrictions and consult Malaysian legal counsel as to how to best structure the investment to suit their needs.
6.2. Foreign exchange restriction issues;
The Central Bank of Malaysia (BNM) has pursuant to the Financial Services Act 2013 imposed exchange control restrictions in respect of the ringgit and foreign currency.
A resident is allowed to make or receive payment in ringgit, in Malaysia, to or from a non-resident, in specific circumstances such as the settlement of a ringgit asset including any income and profit due from the ringgit asset.
Additionally, a resident's payments in foreign currency to another resident is only allowed in specific circumstances, such as settlement for domestic trade in goods by the resident entity with export earnings to another resident entity using foreign currency funds in specified accounts.
There are also specific limits for a resident to borrow in ringgit and foreign currency from another resident or a non-resident. The limits vary depending on whether the borrower is part of the group companies of the lender, or whether the lender is a financial institution, etc. Additionally, there are restrictions on the provisions of guarantees as well.
These matters would need to be taken into account for consideration when structuring the payment or financing of a Malaysian transaction. The approval of BNM may take time so this should be taken into account in respect of the timing of the transaction.
Footnotes
1. 2016 Economic Census by the Department of Statistics, Malaysia https://www.dosm.gov.my/v1/index.php?r=column/cthemeByCat&cat=97&bul_id=dVE3UXhFcVkzTFVPVXVWNkt6NDlpUT09&menu_id=TXdvYTlvQXVlTFhVOUJ6NVVESVBNUT09
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
