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Tuesday 12 May 2009
A nail in the coffin for share splitting
Tycoons, hedge fund arbitrageurs and others who may have been mulling PCCW-style “share splitting” as a strategy for winning shareholders’ votes will probably think twice following yesterday’s release of the Court of Appeal’s reasons for judgment.
Share splitting, whereby large shareholders transfer smaller blocks of shares to multiple others in order to boost the number of shareholders in favour of a vote, was yesterday labelled as “objectionable” by a three-judge appellate panel led by Mr. Justice Anthony Rogers.
Equating the practice with “manipulation”, the justices cautioned that widespread use of share splitting “would become a free for all; any vote would be meaningless”.
Market observers said the judgment would likely cause companies to shy away from making court-sanctioned buyout bids like the one attempted in the PCCW case.
“Historically, there have very rarely been cases where the court will really inquire into the circumstances behind a bid,” said Timothy Loh, principal at Timothy Loh Solicitors. “This will give offerors some pause. Do you want to roll the dice with the court?”
Before it was thrust into the spotlight by Richard Li Tzar-kai’s since-derailed HK$15.93 billion buyout bid for PCCW, share splitting existed as a little-known loophole in local votes on corporate takeovers, mergers and acquisitions.
Under Hong Kong law, buyouts are conducted in one of two ways. The most common is a mandatory offer, which requires approval from 90 per cent of minority shareholders by share value.
The second method, which was applied in the PCCW bid, is a “scheme of arrangement”. Such schemes require the approval of the court in addition to 75 per cent of shareholders by value and 50 per cent of voting shareholders by their absolute number - the so-called “headcount rule”.
The justices ruled that, as a form of manipulation, splitting shares to bolster support under the headcount rule was grounds for the court to withhold its approval for such privatisation schemes.
“Vote manipulation is nothing less than a form of dishonesty,” the judges wrote. “The court cannot sanction dishonesty. It is also a form of coercion where the wishes of the minority in number of shares are overridden by those who hold the majority of the shares.”
Judges also noted the hefty discount that the offer price represented to PCCW’s share price in recent years. Observers said that by considering the commercial value of the PCCW privatisation bid, the appellate panel in this case appears to have raised the bar on securing court approval for buyouts.
“Judges do not usually rule on the merits of a takeover offer, and I would be surprised if they do so in the future,” said Paul Li, a financial services partner at Simmons & Simmons.
Such court-sanctioned bids are “unpredictable because you don’t know how the vote is going to turn out, but this adds a further dimension of judges saying ‘Yes, it’s a good deal,’ or ‘No, it’s not,’ which could make it very difficult”, Mr. Li said.
Still, one hedge fund manager said share splitting had gone on for many years in Hong Kong and would probably continue, albeit with a more cautious approach. “Something else was going on here. The courts were under pressure because of the vitriol of the public who still owned PCCW shares from when they were over HK$100.”
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A nail in the coffin for share splitting
Neil Gough and Naomi Rovnick
12 May 2009
Share splitting, whereby large shareholders transfer smaller blocks of shares to multiple others in order to boost the number of shareholders in favour of a vote, was yesterday labelled as “objectionable” by a three-judge appellate panel led by Mr. Justice Anthony Rogers.
Equating the practice with “manipulation”, the justices cautioned that widespread use of share splitting “would become a free for all; any vote would be meaningless”.
Market observers said the judgment would likely cause companies to shy away from making court-sanctioned buyout bids like the one attempted in the PCCW case.
“Historically, there have very rarely been cases where the court will really inquire into the circumstances behind a bid,” said Timothy Loh, principal at Timothy Loh Solicitors. “This will give offerors some pause. Do you want to roll the dice with the court?”
Before it was thrust into the spotlight by Richard Li Tzar-kai’s since-derailed HK$15.93 billion buyout bid for PCCW, share splitting existed as a little-known loophole in local votes on corporate takeovers, mergers and acquisitions.
Under Hong Kong law, buyouts are conducted in one of two ways. The most common is a mandatory offer, which requires approval from 90 per cent of minority shareholders by share value.
The second method, which was applied in the PCCW bid, is a “scheme of arrangement”. Such schemes require the approval of the court in addition to 75 per cent of shareholders by value and 50 per cent of voting shareholders by their absolute number - the so-called “headcount rule”.
The justices ruled that, as a form of manipulation, splitting shares to bolster support under the headcount rule was grounds for the court to withhold its approval for such privatisation schemes.
“Vote manipulation is nothing less than a form of dishonesty,” the judges wrote. “The court cannot sanction dishonesty. It is also a form of coercion where the wishes of the minority in number of shares are overridden by those who hold the majority of the shares.”
Judges also noted the hefty discount that the offer price represented to PCCW’s share price in recent years. Observers said that by considering the commercial value of the PCCW privatisation bid, the appellate panel in this case appears to have raised the bar on securing court approval for buyouts.
“Judges do not usually rule on the merits of a takeover offer, and I would be surprised if they do so in the future,” said Paul Li, a financial services partner at Simmons & Simmons.
Such court-sanctioned bids are “unpredictable because you don’t know how the vote is going to turn out, but this adds a further dimension of judges saying ‘Yes, it’s a good deal,’ or ‘No, it’s not,’ which could make it very difficult”, Mr. Li said.
Still, one hedge fund manager said share splitting had gone on for many years in Hong Kong and would probably continue, albeit with a more cautious approach. “Something else was going on here. The courts were under pressure because of the vitriol of the public who still owned PCCW shares from when they were over HK$100.”
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