Introduction
This paper contains a report for senior managers of Genco, a pharmaceutical company involved in selling and distribution of HIV/AIDS drugs in Malaysia. The management of Genco Company has entered an agreement with Eurodollars Investment Bank to open up distribution networks in Malaysia in order to have market dominance in the area. There are many legal issues which are involved in the transaction and which should be addressed by Genco Company when investing in Malaysia. The fundamental issue that the company should consider is the laws of the country in which the business channels will be situated. This is because the legal systems of any nation are very critical in determining whether a company is going to be successful or whether its operations will be terminated by the relevant authorities due to failure of conforming to a certain procedure.
The first step for Genco Company should be determining whether the business is authorized to operate in Malaysia. If the business is legally accepted in Malaysia, the management of Genco Company should then proceed in determining the type of business it should set up in Malaysia. There are many types of business options, which the company can open. These include setting up a partnership with local companies through a common firm, setting up an association, operating as a single entity, setting up a foundation, and setting up a private limited company. A private limited Company would be the best option for Genco limited because it would ensure that the branch, which is opened in Malaysia, is limited by the shares but the original capital, which has been invested, is secure (Jennings 78).
As a private limited Company, Genco shares will not be traded in the Malaysian Stock Exchange because the requirements for trading business are lighter than those of public limited Company are. Moreover, the Company should proceed in registering for the necessary business permits in order to have legal access for conducting business in Malaysia. Some of the legal requirements, which the company should undertake, include the Articles of Association and the Memorandum of Association. The Articles of Association is a document, which contains the fundamental law governing the conduct of business in Malaysia while the Memorandum of Association is a document, which contains the activities and the operations of a business (Meek and Chartered Institute of Marketing 56).
Companies act
According to companies Act 1965, of the Malaysian constitution, any business operating in the Malaysian territory should be registered through the registrar of companies within 30 days after the commencement of the business. Genco management should thus move with speed to register the company in order to show its need to conform to the rules governing activities of the business in the company. Upon the date of registration, the company would be able to obtain Certificate of Registration, which shows that the company has been authorized to operate in Malaysia. The management of Genco Company should be keen on setting out the date of registration because it helps to determine the period, which the business will be legal to operate in the country (Brigham, Garpenski, & Daves 130).
Any business operating in Malaysian territory can also be terminated in the following circumstances, if baleful information was delivered during the period of registration. Secondly, the shareholders for Genco Limited should also be aware of the expiry of the period set out in the registration. The management should be keen on renewing the period of operation to prevent the business operations from being terminated. Furthermore, the management should also be aware of the liabilities, which the company would have to bear in case one of the members of the company commits an offence as defined by Companies Act 1965, Section 17(1) of the Malaysian constitution (Jennings 70).
In order for the company to begin its operations, it should consider issues concerned with the purchase of assets. The most important legal concern would be obtaining an asset purchase agreement. This is a legal document, which acts as proof that a contract has been entered between an asset buyer and the seller. The company may also consider leasing some of assets instead of buying them and this document can still be enforceable. The obligations of acquiring an asset should be followed to the latter to ensure that there is no breach in the contract. The document for asset purchase agreement should be signed on the day of the transaction to enhance compliance with the legal framework. The government of Malaysia to enhance integrity and utmost good faith should then approve the assets. This enhances prevention of any liability or even violation of the existing Malaysian laws on the acquisition of the Assets. Any irregularity should be dealt with care to prevent restriction to use the Assets (Meek and Chartered Institute of Marketing 51).
Contractual issues
Apart from Asset Purchase Agreement, there are many contracts, which the company is supposed to enter. The management of Greco Company should understand that a contract has several elements. These elements include; offer and acceptance intention to enter into a legally binding agreement, the legal capacity and specific contractual considerations. Before the company has set up its branches in Malaysia, it should ensure that a contract has been entered. This is because if the company fails to follow the due process of entering into any contract, the process may be termed as void due to any breach of the contractual process. The first step in entering into a contract is the offer and the willingness to enter into negotiations. An agreement is not legally binding unless there is an offer, which is legally binding (Brigham, Garpenski, & Daves 132).
In the process of selling its products, the company should make sure that any offer has been communicated in due time in order to avoid any irregularity which might occur in the process. Although an offer can be withdrawn from, it should be communicated in due time. According to the Malaysian law, invitations to offer a product from a company to consumers should not be misleading but should entail unequivocal agreement between the parties. This is because in so doing a breach may be committed before the contract becomes fully enforced.
The second consideration when entering into a contract is the intention to create relation, which is legal. An agreement between two parties does not solely show that the individuals have entered into the contract. The parties entering into a contract should set up a date when to sign a contract. This should be communicated in time in order to show that there is an intention to create a relation, which is legal. There should be a rebuttable intention to enforce the agreement into a legal contract. The intention to enter enforce the contract should be communicated to the party who has the offer in due time (Jennings 71).
The third stage in entering into a contract is consideration of the agreement. The price, which has been offered, should be of value and this is not limited to monetary value. A benefit or an interest to be gained after signing the contract can be taken as a consideration. The other element to be considered in a contract is the contractual capacity. The company should always avoid entering into a contract with people who have no capacity to enter into a contract such as the minors, companies that are bankrupt and corporations. The capacity question in a contract often arises after the contract has been signed (Jennings 69).
Any breach of any contractual term may amount to a breach of the contract. The type of a breach may include the damages for compensation. In case of any monetary loss through a breach of contractual term, compensation can occur. The breach, which was foreseeable, would be compensated through incidental damages. The parties may also pay the breaches through the punitive damages. This helps to bar an individual from committing the same offense in future. The damages, which have been specified in a contract, are termed as liquidated damages and are compensated through a breach of a contract. Despite a breach of a contractual agreement by both parties, usually a court of law determines the party, which violated the terms and then imposes punishment on that party (Brigham, Garpenski, and Daves 134).
Mergers and Acquisitions
Mergers and acquisitions can be described the process of combining more than one different business entity to a common venture. If the business purchases another business entity, then the process is referred to as an acquisition while a merger can be defined as the process of combing two or more business with the objective of working together under the same objective. There are many legal issues, which Genco Company should consider before acquisition of another business entity. Merger and Acquisition transactions are the very complex and critical as complex issues may arise during the period of business transactions. The process of acquiring a new company begins with the tender offer from the target company. The management of Genco Company should begin with preliminary investigation as to whether the target business owns real assets and properties in order to avoid liabilities, which are foreseeable (Walker 27).
The first stage of merging with a company should begin with the acceptance of terms of offer, which have been put in place by top managers. These steps should be in an attempt to negotiate the tender offer because it may be too high for the company to afford. Many other companies may also be interested in the company and it is thus important to choose the lowest bid possible. In particular, there arise many legal issues from the company, which is merging with another. For instance, the question about the employees jobs should be discussed and negotiated before the company has acquired the necessary legal authority to commence its business. The jobs might be at stake in many ways and therefore Genco Company should plan to rehire them or even dismiss them with a reasonable package for compensation.
In cases of hostile takeover from another company, Genco management should adopt a poison pill strategy to discourage the other company from any attempt to acquire any asset from the company, which had offered to be taken. A poison pill may be either a flip in or a flip over. A flip in gives the shareholders authority to trade many shares with a discount while a flip over gives the stockholders authority to buy shares through a price which has been discounted by a merger. A poison pill enhances dilution of the shares and the right of ownership of the acquirer through buying more shares. This gives authority to the company, which is merging with the other to have more authority and power and thus prevent any form of transaction. The shareholders will then have the right to purchase the stock thus giving them control of business.
Merger acquisitions by cross border Companies are very unique and different from other forms of mergers. This is because a Company is supposed to enter into a lot of legal framework before owning a business. Many regulatory bodies in foreign countries often scrutinize the business, which merge to become a single entity. This is because the main objective of the government is to protect the consumers and shareholders from companies and firms which would like to merge to take advantage of the local consumer. Nevertheless, in mergers and acquisitions, the company should ensure that it follows the right legal documentation to avoid conflict with legal enforcement agencies (Jennings 77).
One of the risks of mergers and acquisitions is that they pose a great lose to a business during a breakup. One of the rising issues is that the demerged firms become smaller than the parent company and this prevents them from getting the benefits of being a large entity. To begin with, the credit institutions will not be willing to lend these firms because their cash flows will have minimized. Secondly, having a small company would also mean that the firms would lack representation in major indexes. Investors and many credit organizations always tend to depend on the companies, which are on the major indexes. Failure to have representation in these indexes would lead to lack of investment.
In case Genco Company has broken up with a company, there are several methods, which the company can use to restructure itself so business can remain as usual. The management of the company may decide to do an outright sell off. This entails getting of unwanted subsidiary for the purpose of raising cash for the company. Secondly, the company can still get an equity carve-out, which would help to boost business. Although a curve out helps to generate cash through the trade of shares from the subsidiary, it is very risky because the owners of the business may develop a loyalty, which is divided. The management of the company may also decide to opt for a spinoff. This helps the business to depress the valuation of the shares and increase the subsidiaries created in the business (Meek & Chartered Institute of Marketing 49).
Laws on competition of firms
There are several laws, which have been enacted to regulate the economic competition of firms and businesses. Firms, which restrict healthy competition with the need to monopolize often, face many legal issues. Although the fundamental objective for Genco Company is having market dominance in the sale of drugs in Malaysia, the company should avoid all forms of strategies to monopolize its business. The competition laws help to secure the welfare of the consumers through prevention of any merging options, which can leading to dominance of the market and lessen competition of the companies (Daft 98). Agreements and practices, which encourage monopoly, are prohibited in many parts of Malaysia.
Perfect monopoly gives the companies power to dominate the market and the welfare of the consumers. That is why it is very easy for monopolies to impose huge prices of commodities to the consumers. In addition, monopolies also dictate the allocation of products to consumers and prevent healthy competition, which is necessary for the growth of the economy. Besides, monopolies are also responsible for boycotts of products in the market. This deprives consumers of the necessary products, which they should have for their daily welfare in the society. This is also coupled with laws and agreements, which prevent other competitors who lack market power to continue with their business (Karminder and Aswathappa 84).
Perfect monopolies are also adamant in price violations such as offering discriminatory prices. The management of Genco Company should avoid any form of violation, which would lead to customer discrimination. Furthermore, if a company has entered into an anticompetitive agreement with any other company or entity, it can still be liable for violation of the existing legal frameworks on the operations of a monopoly. Any agreement, which helps to control prices, is also taken as a violation by a monopoly. The issue of the behavior of cartels is also prohibited in the country where the business is legal. Some of the behavior of the cartels includes lack of market sharing, rigging of the bids and limitation of the supply of goods and services. All these prevent perfect competition of businesses (Meek and Chartered Institute of Marketing 46).
When signing franchise agreements, the management of Genco should scrutinize all the provisions leading to the signing of the agreement. This is because some of the provisions of a franchise agreement limit competition and the term of operation. Some monopolies also misuse their position of dominance in the market to have gains, which prevent perfect competition. For instance, an agreement to impose huge prices to the consumers may amount to monopolization. Mergers and Acquisitions are also known to increase monopoly through reduction of perfect competition. The management of Genco Company should therefore analyze all the legal issues and avoid becoming a monopoly (Jennings 72).
Product liabilities
Genco Company should be able to bear a liability of the products, which it offers to the consumers. Under the legal requirements of Malaysia, any manufacturer or distributor of any product is liable for assuming the liabilities of the injuries, which are caused by the usage of the products to the consumer. Every individual in the supply chain is supposed to take care of the products to avoid any injury to the consumer. Secondly, there is a breach of warranty, which binds the seller and the distributor from the trade of the products. In case of any damage, there are factors, which should be considered before a company bears a liability.
Misrepresentation, which includes a false statement about a product, can also amount to a breach. In addition, the Genco Manufacturers can also bear over the defects caused by design and manufacture. A design defect entails manufacture of a product, which is according to specifications but is dangerous for usage. On the other hand, when a product fails to conform to specifications and standardization requirements, it also fails to achieve it objective and therefore contains defects of manufacture. The manufacturer is the liable entity when it comes to defects, which are caused by manufacture of a product to a consumer (Kubr 67).
The manufacturer should make the products in such a manner that they have safety for their users. There should also be proper practices of handling products from the manufacturers to increase safety in the usage of the products for the consumers. In order to increase the safety of the products, it is important for the company to ensure that an insurance cover has covered every product.
Activity based budgeting system
Within Malaysia, firms are encouraged to undertake activity based budgeting systems. The authorities insist on this system because it ensures there is transparency in the financial statements released by the firms. The new system that has been developed uses the conventional approach in budgeting. The system works better, where the resources consumption is grater than the output level for the company (Drury 105). However, the system is not designed to measure the indirect costs, which occur in the accounting department thus ensuring a good measure of the output relationships in the accounting department. The budgets cannot be based on other relationships since factors such as costs are poor measurements of the performance of the business. These budgets also provide the relevant information about the management of the support activities.
The system uses the incremental basis in the preparation of the final budget. The importance of this basis is to enable the indirect costs and the support activities to be accounted in the final draft. Every annual budget thus contains the existing operational activities for an organization while at the same time measuring the annual allowance for the preparation of the budgets (Drury 106). One of the examples is that of the allowance for the budgeted consumption and expenditures, which have an impact in the balance sheet. The most important thing about the activity-based system is that every activity in the budget is accounted for.
Research also shows that in order for a business to manage the costs and minimize them, it is important to account for them in the budgets. The main objective of the system is ensuring that each activity in the accounting department has been managed and only the supply of those resources, which are important for the company, is accounted for. The system also dictates that the cost drivers are assigned to the products and objects, which reverse the whole process of budgeting. The resources in an organization are put into their most productive areas where they will bear more outputs than when they have been directed to a specific direction.
The activity bases system comes up with a model, which is used to manage programs such as activity based costing. This program entails the following stages, estimation of the available resources in the business usually done by volume or even the sales (Brigham and Ehrhardt). The demand of the organizational activities in an organization is also efficient in this process. The demand of a particular product in the market is a good measure to test its productivity, as well as the benefit obtainable from an organization or even a business entity. Thirdly, the management can also be able to estimate the quantity, which is needed to meet the market demand. The quantity is then weighed and the actual figures are then analyzed. Using the network diagram, it is then easier to know which path to follow to implement a program or even a project in the business entity (Drury 94).
Activity based accounting system will also be a solution to the accountants in future. The system is based on simple accounting stages, which help the personnel involve managing their time. Conventional budgeting is the first stage when using the system. This stage involves ordering and scheduling of products to respective customers. In order to implement this system, it is essential for the accountants to have a solution to their products and their respective requirements. All the receipts and orders are put in the system according to their respective manner and then analyzed accordingly.
Taxation laws
Prior to commissioning the business transactions, it will be essential for Genco to put into consideration the taxation laws applied within Malaysia. Most companies investing in foreign countries suffer a set back upon hurriedly making investments due to the attractive potential market while overlooking the taxes to be imposed on them. In such a scenario, the companies end up suffering financial losses as the monies accrued in the marketing of their products is taxed heavily by the governing authorities (Kubr 78). Malaysia just like the other territories around the globe, income made within the country by a state corporation, private company, or even individuals is subjected to tax. Moreover, Malaysia has even entered into various tax treaties with more than sixty-eight countries. The Act governing income taxation within Malaysia was introduced within 1967. Since 2009, companies running diverse business enterprises within the country were subjected to income tax deductions at the rate of twenty five percent. Genco falls under the category of companies and thus twenty-five percent of its yearly income will go to the Taxman. Since 2000, income tax assessment within Malaysia is undertaken on a yearly basis. Therefore, as much as Genco anticipates gaining a large market base within the country, it should review the effect of the taxes on its financial gains.
In the course of 2001, the Malaysian governing authorities were concerned with streamlining, as well as, modernizing the tax administration programs. In that endeavor, all companies are expected to carry out the self-assessment system. Under this program; companies are expected to file their tax returns with the Inland Revenue Board (IRB).The basic rule is that the payment of the tax figure achieved after the assessment should be made to the IRB prior to the expiry of thirty days since the assessment notice was issued. Penalties are imposed those who do not comply with that requirement. In order to avoid incurring unnecessary costs; Genco will be compelled to strictly adhere to that law. Therefore, prior to commencing their business transactions within the country, the firm should ensure that they possess qualified personnel who will be able to carry out the tax self-assessment in accordance to the Malaysian tax laws. It is also of great essence for the Genco management to note that, only the Real Property dealers who enjoy principal, gain taxes. However, since the start of April 2007 the government suspended the Real Property Tax Gains indefinitely.
Genco management should also be aware of the direct tax laws encompassing import duty along with excise duty applied within Malaysia. These previously mentioned taxes are imposed at a tax rate of the range of five percent to three hundred percent. Moreover, there is sales tax along with service tax, which will be imposed on the company at the rates of five percent to ten percent. The Genco financial department should be able to establish the effect of all these taxes on the projected revenue. In the event that the accrued revenue will be adversely affected by the aforementioned taxes, then it will be unnecessary to initiate the business transactions within the country in spite of the presence of a largely untapped market segment.
On top of the income taxes, as Genco will be involved with the production of drugs whose raw materials will be purchased outside Malaysia, then the firm will be required to pay import duty. The import duty is authorized by the 1967 Customs Act legislations. Basically, all imported goods are subjected to the duty while being cleared at the customs’ control points. The import duty rates are variable depending on the class of the imported goods in respect to the HS classification, that is, Harmonized System. In most of the cases, the rates are within the range of zero to two hundred percent.
Even though the import duty will be part of Genco’s liabilities, the imposed rates are considerably fair because they have been formulated in respect to the WTO (World Trade Organization) Valuation rules.
Foreign personnel along with immigration laws
Basically, the personnel who will be involved the production processes will mostly come from Genco’s headquarters. In order to gain entry to Malaysia, they will be required to meet the visa along with passport requirements. In accordance to the Malaysian immigrations laws, it is a must to possess either a passport or any other travel document recognized internationally which both should be valid in order to be legally allowed within the country. Moreover, those documents should have been valid for a minimum of six months period prior to entering Malaysia. Moreover, visa applications should be made within the nearby Malaysian embassies. The Genco management will be expected to meet the costs of all of the specified documents on behalf of its employees. These costs even though may seem insignificant will obviously have some impact on the initial capital cost of establishing the production facilities.
Concerning the use of foreign workforce within the country, the government insists that the local citizens should be given the first priority while dishing out any available jobs. However, in case there are no qualified Malaysians to fill up the positions, foreign firms are allowed by law to bring along expatriate personnel. Moreover, the foreigners are allowed to occupy senior posts within the management. This is allowed in the spirit of ensuring that the employment patterns within the country illustrate its multiracial composition. It is thus evident that the Genco management will not experience any obstacles in introducing the required expertise within the country. However, there will be some costs to be incurred in the training of local the native Malaysians because the personnel cannot be completely made of foreigners only.
The Malaysian government is also concerned with making the investment environment better, as well as, encouraging technology transfer. The expatriate personnel policy has been liberalized in order to improve the foreign skills inflow within Malaysia. The novel expatriate personnel employment guidelines were established in June 2003. Genco will be expected to set up production facilities, which fall under the category of foreign manufacturing companies whose capital cost is above two million United States dollars.
Companies under this category have their special regulations regarding the expatriate employment. In the first place, they are allowed to make use of a maximum of ten foreign employees. Besides, five of the ten are allowed to hold five principal posts (Kubr 63). It is in that regard that the Genco management has to formulate ways on how to limit the required foreign experts to ten. Firms within this category are also expected to retain the foreign employees holding the executive posts for a period of not more than ten years. Foreigners occupying the non-executive posts should not stay on the posts for more than five years. In that regard, Genco will be compelled to train the Malaysians such that they can fit in these positions upon the expiry of the specified timelines. In addition, the expatriates employed within the manufacturing sector should have a minimum of twenty-seven years. However, the ICT (Information and Communication Technology) sector is given an exception because individuals whose age is within the range of twenty-one years are permitted to pick various employment posts within their field (Allen and Tommasi).
Nevertheless, expatriate employees are required to request new work pass upon being transferred to other posts within the same firm. The initial employment pass shall be revised to indicate the alteration in post. Besides, the fresh expatriate taking up the vacant post should obtain a new employment pass. Every employment pass remains valid as per the aforementioned maturity days in respect to the post-occupied (Kubr 57). Nevertheless, expatriates holding executive posts are issued passes, which are renewable within a range of five years. However, in certain circumstances, there are exceptional situations within which this exception is not applicable. For instance, if the foreigner holds a passport, which expires within five years, the exception becomes dissolved. In addition, this exception cannot apply to foreigners whose contract will not even get to five years. Besides, the employing firm may sometimes not require the services of the foreigner for a period exceeding five years. The foreigners however enjoy the advantage of getting numerous entry visas, which are valid in relation to employment pass validity.
Conclusion
Given the findings of the report discussed above, it is clear that, there are several issues, which Genco ought to put into consideration before making the investment. Just like any company wishing to operate in any given nation, Genco should determine if its operations are legalized in Malaysia. Additionally, there are other issues such as taxation Laws, companies Act, mergers and acquisitions, contractual issues and foreign personnel along with immigration laws among other issues discussed in the report ought to be carefully considered. By ensuring that all factors are considered, Genco will ensure the success of the investment.
Works Cited
Allen, Richard, and Tommasi, Daniel. Managing Public Expenditure: A Reference Book for Transition Countries. Paris: OECD, 2001. Internet resource.
Brigham, Eugene, Garpenski, Louis, and Daves, Philip. Intermediate Financial Management. Mason, OH: South-Western, 2010. Print.
Brigham, Eugene, and Ehrhardt, Michael. Financial Management: Theory and Practice. Mason, OH: South-Western Cengage Learning, 2011. Print.
Daft, Richard. Management. Mason, Ohio: South-Western Cengage Learning, 2012. Print.
Drury, Colin. Management and Cost Accounting. London: Cengage Learning EMEA, 2008. Print.
Jennings, Marianne. Business: Its Legal, Ethical, and Global Environment. Mason, OH: South-Western Cengage Learning, 2012. Print.
Karminder, Ghuman, and Aswathappa, Kumar. Management: Concept, Practice, and Cases. New Delhi: Tata McGraw Hill, 2010. Print.
Kubr, Milan. Management Consulting: A Guide to the Profession. Geneva: International Labour Office, 2002. Print.
Meek, Helen, & Chartered Institute of Marketing. Managing marketing performance 2006-2007. Oxford: Butterworth-Heinemann, 2006. Print.
Walker, Janet. Fundamentals of Management Accounting. Oxford, UK: CIMA Pub. /Elsevier, 2009. Internet resource.