Wednesday, April 07, 2010

Changes To Mergers and Acquisitions Rules

Star Biz: The hotly debated issue on takeover rule changes will be thrashed out at a number of focus groups to be chaired by the Securities Commission (SC) today and tomorrow, industry sources said.

Included in these discussions will be investment bankers, lawyers, accountants, shareholder rights activists, local and foreign-based equity analysts as well as experts from overseas markets, which have undergone similar changes.

One of the more hotly debated issues will be whether to give the right to at least 10% of shareholders to block a takeover deal in a sale of assets situation.

Some investment bankers and their advisors have vociferously denounced this proposal as it could lead to giving minorities too much power and potentially leading to a situation of “greenmailing”. This is where opportunistic investors could purchase enough shares in a firm to threaten a takeover or force the target firm to buy those shares back at a premium.

On the flipside, there are other groups who are applauding the proposal as it affords better minority investor protection.

To recap, the SC had recently issued a consultative paper which proposed to raise the shareholder approval level in an acquisition via assets and liabilities from the current simple majority to 75% shareholder approval.

It also suggested an additional requirement that not more than 10% of shareholders present can object to the deal.

Under Section 132 (c) of the Companies Act, a buyer only needs a simple majority to take out the assets of the listed company.

This allows the buyer to circumvent the Takeover Code, where the threshold to take over a company and de-list it is higher at 90% acceptance of shares outstanding that are not owned by the offeror.

The SC, it is understood, will be seeking to collate all the feedback on the proposals in order to come up with a holistic framework that seeks to protect minorities while at the same time not unnecessarily thwarting value creation through mergers and acquisitions.

However, that will not be easy. As a corporate lawyer pointed out: “On the one hand you have some deals (via the assets and liability route) where minorities have benefited tremendously. On the other hand, you have other deals done in this manner, where minorities have been severely disadvantaged. Striking the right balance is going to be a challenge.”

Not surprisingly, those opposing the proposals would be encouraged to substantiate the views that they presented, sources said.

For example, there have been claims that merger activity will dry up if the new proposals are implemented. (Claims that deals would dry up is such a hollow argument. If something is not fair, why do we claim that implementing fairer rules will hurt ... it will only eliminate those deals that are blatantly unfair to minority shareholders. SO, the drying up of deals is a good thing as those deals are probably blatantly unfair).

The question is, has this happened in other markets?

Markets like Hong Kong, Thailand and New Zealand have all raised the shareholder approval level in asset disposals to 75% from the simple majority. (Aspiring to global best practices, people. Why there is even a discussion is beyond me).

The invited experts from foreign markets are expected to share the experience which changed the rules there and the implications the changes have had on their markets.

Those opposing the current proposals are also encouraged to provide options that would enable better protection of minority rights in such takeovers, it is understood.

It is learnt that one such suggestion is to keep the status quo (in asset sales) but limit the voting rights of major shareholders by, say, half. So for example, all shareholders who own more than 15% of the affected listed company can only exercise 7.5% of their voting power if their company proposes to sell its assets, thereby limiting the dominating effect of large shareholders on such proposals. (This is slipshod proposal, why slice and dice, its seems arbitrary).

However, such a proposal still had limitations as major shareholders could then seek to break up their shareholding using proxies, noted an analyst.

(I think 75% rule is good, and the 10% minority disapproval rate is good to stop a company from being delisted. We have to have rules looking out for minority shareholders, not company owners. It goes back to the very essence and objectives of having a capital market - there are basically two main objectives:
a) to allow a company to raise funds to fund their growth
b) to allow the private investor to participate in that growth

Anything else is secondary... things like cashing out, reduction of risk by owners, etc. Hence SC and Bursa, more SC than Bursa, are there to regulate and ensure fairness, especially to see that minority shareholders are not disadvantaged, because they are weaker ones in this capital markets game.

The 75% rule is a solid proposal. The 10% rule may be up for discussion as it could result in vulture investor groups ganging up to extort higher prices from the company for them to go through the corporate exercise. The 10% rule must be qualified - maybe 2 or 3 independent advisers be appointed to ascertain that the G.O. is fair and that minority shareholders are not unfairly treated, or recommend a final fair G.O. if the 10% deadlock is in place).

KAVITA KAUR by Md Radzi Ahmad.

1 comment:

emacro said...

Very simple, those that are 'vociferously opposing' the proposals are obviously preying on the rules to exploit minirity shareholders, enriching themselves.