They say claims that they endorse deals unfair to minority investors are off the mark
By JAMIE LEE 21 September 2009
What’s fair to some is foul to others. It’s a market reality that investors have to accept, industry players say.
While recent privatisation and takeover deals may seem unattractive, independent financial advisers (IFAs) and bankers say claims that they are endorsing deals that are unfair to minority investors are off the mark.
They also refute suggestions that they should look out for the interests of minority shareholders, and argued that obtaining a consensus from all shareholders on an offer price would be extremely difficult, if not impossible.
This comes after the Singapore Exchange (SGX) recently reminded companies to make exit offers that are deemed ‘reasonable’ to all shareholders. The SGX also told IFAs to avoid qualifying their opinions under different investment horizons.
The regulator said that ‘opinions qualified by diverse investment horizons do not meet the requirements of the rules’, meaning that IFAs cannot have different calls for investors with a long-term view and those with a short-term horizon.
While making a recommendation regardless of the investment horizon taken by shareholders is an appealing idea to some, industry players are against the removal of such qualifiers, given that assessing ‘borderline’ deals is already tough enough. ‘If SGX disallows this, IFAs will have to take greater risks and put their neck out with their calls,’ said Ding Hock Chai, co-head of corporate finance at Kim Eng Capital.
Most recent local deals have won approval from IFAs as being fair and reasonable, including those at CK Tang, Man Wah Holdings and recently, Chartered Semiconductor Manufacturing.
A rare case was when DMG & Partners Securities said the offer by Kingboard Chemical to take Elec & Eltek International Company private was ‘neither fair nor reasonable under current market conditions’.
IFAs typically judge an offer price based on an assessment of the company’s net asset value (NAV), the price-to-earnings ratio and trading liquidity, as well as the rationale behind the de-listing or takeover.
These are usually benchmarked against industry measures or similar deals done recently, so as to check if offer prices are in line with the offers made in other transactions.
Most recent offers here have offered little premium to the last traded stock price or the company’s NAV. In Chartered’s case for example, the bid of $2.68 per share offered a premium of less than one per cent to the last traded share price.
And in the fiercely debated privatisation of retailer CK Tang, the Tang brothers’ offer was deemed by minority shareholders to be unfair since it did not match the company’s net asset value and did not factor in the value of the redevelopment potential of its flagship store.
But given the lingering uncertainty over the economic recovery and the poor valuations existing now, IFAs say the financial terms of such deals are still reasonable under the current circumstances.
‘The standard of care required of an IFA is to assess whether a de-listing offer is ‘fair and reasonable’,’ said Brendan Goh, head of corporate finance at DMG & Partners Securities told BT.
‘A de-listing offer that is not attractive to minority shareholders can still be considered ‘fair and reasonable’,’ he pointed out.
A banker who declined to be named told BT: ‘The whole world is at the stage where we’re wondering, are we really headed for full recovery? If it’s a recovery, then all right, the price may not be attractive enough because without the offer, the share price can go higher. But now, no one knows.’
IFAs are also perturbed by SGX’s suggestion that deals should be reasonable to all shareholders. They noted that it is difficult to achieve consensus, since different investors had plonked money into stocks at different times and at different prices.
‘You will never get to a conclusion if you say the deal has to be reasonable to every shareholder,’ said one IFA who declined to be named. ‘If someone had gotten the shares at $2 but for the last five years, the share price traded at around 30 cents, does that mean I need to offer $2 to be able to satisfy the shareholder who came in at that level? No, the offer has to be fair or reasonable given the current circumstances.’
IFAs also rebutted criticism that they tend to favour majority shareholders making de-listing offers, arguing that they are appointed by independent directors and that board members involved in the deals are kept out from the IFA nomination and assessment process.
However, they pointed out that they are not crusaders for minority investors either.
‘Shareholders of the same class of shares enjoy equal rights, be it minority or majority shareholders,’ said DMG’s Mr. Goh.
‘Minority shareholders are beginning to see IFAs as instruments for increasing value for them, which is not correct,’ said the IFA who declined to be named. ‘That should be the role of the financial advisers, whose job is to negotiate a better deal for the company.’
IFAs added that shareholders have the option of voting down deals during shareholders’ meetings. For a de-listing to go through, the offerer must garner 75 per cent of votes represented at the meeting and have less than 10 per cent of votes opposing the deal.
Minorities can also take their grievances to court, although if there is an IFA report that states an offer is fair, it would make it difficult for them to prove that there was minority oppression. ‘There is no in-principle reason why the minority shareholders cannot commence a claim under Section 210 of the Companies Act for minority oppression,’ said one litigation lawyer. ‘However, I suspect that the difficulty may be in proving the acts of oppression or unfair prejudice. This is because there would normally be a report by an IFA and a recommendation by the independent directors. If the IFA report says that the offer is reasonable, then it is hard to prove otherwise.’
CK Tang’s case - in which the offerers held a stake of more than 75 per cent and thus had a far higher chance of pushing the offer through - provides an interesting question of whether a company’s shareholding structure should be addressed as part of the IFA’s assessment.
‘The offer may not be fair but if the IFA believes that it’s going to go through anyway, then he might well conclude that it is reasonable,’ said the IFA who declined to be named. In such cases, there could be some clarity over how reasonableness is defined, such as referring reasonableness to ‘the practicality of the situation rather than the fundamental value’, he added.
Some jurisdictions such as Australia define ‘fair’ and ‘reasonable’ separately in such instances. Though there have been calls for SGX to clarify the terms ‘fair’ and ‘reasonable’, there are practical considerations.
‘It will be extremely difficult for SGX to clearly define such terms. Having prescriptive rules may result in other issues and technicalities, which are difficult to enforce and may add to confusion,’ said Mr. Goh.
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Financial advisers defend stance on exit offers
They say claims that they endorse deals unfair to minority investors are off the mark
By JAMIE LEE
21 September 2009
What’s fair to some is foul to others. It’s a market reality that investors have to accept, industry players say.
While recent privatisation and takeover deals may seem unattractive, independent financial advisers (IFAs) and bankers say claims that they are endorsing deals that are unfair to minority investors are off the mark.
They also refute suggestions that they should look out for the interests of minority shareholders, and argued that obtaining a consensus from all shareholders on an offer price would be extremely difficult, if not impossible.
This comes after the Singapore Exchange (SGX) recently reminded companies to make exit offers that are deemed ‘reasonable’ to all shareholders. The SGX also told IFAs to avoid qualifying their opinions under different investment horizons.
The regulator said that ‘opinions qualified by diverse investment horizons do not meet the requirements of the rules’, meaning that IFAs cannot have different calls for investors with a long-term view and those with a short-term horizon.
While making a recommendation regardless of the investment horizon taken by shareholders is an appealing idea to some, industry players are against the removal of such qualifiers, given that assessing ‘borderline’ deals is already tough enough. ‘If SGX disallows this, IFAs will have to take greater risks and put their neck out with their calls,’ said Ding Hock Chai, co-head of corporate finance at Kim Eng Capital.
Most recent local deals have won approval from IFAs as being fair and reasonable, including those at CK Tang, Man Wah Holdings and recently, Chartered Semiconductor Manufacturing.
A rare case was when DMG & Partners Securities said the offer by Kingboard Chemical to take Elec & Eltek International Company private was ‘neither fair nor reasonable under current market conditions’.
IFAs typically judge an offer price based on an assessment of the company’s net asset value (NAV), the price-to-earnings ratio and trading liquidity, as well as the rationale behind the de-listing or takeover.
These are usually benchmarked against industry measures or similar deals done recently, so as to check if offer prices are in line with the offers made in other transactions.
Most recent offers here have offered little premium to the last traded stock price or the company’s NAV. In Chartered’s case for example, the bid of $2.68 per share offered a premium of less than one per cent to the last traded share price.
And in the fiercely debated privatisation of retailer CK Tang, the Tang brothers’ offer was deemed by minority shareholders to be unfair since it did not match the company’s net asset value and did not factor in the value of the redevelopment potential of its flagship store.
But given the lingering uncertainty over the economic recovery and the poor valuations existing now, IFAs say the financial terms of such deals are still reasonable under the current circumstances.
‘The standard of care required of an IFA is to assess whether a de-listing offer is ‘fair and reasonable’,’ said Brendan Goh, head of corporate finance at DMG & Partners Securities told BT.
‘A de-listing offer that is not attractive to minority shareholders can still be considered ‘fair and reasonable’,’ he pointed out.
A banker who declined to be named told BT: ‘The whole world is at the stage where we’re wondering, are we really headed for full recovery? If it’s a recovery, then all right, the price may not be attractive enough because without the offer, the share price can go higher. But now, no one knows.’
IFAs are also perturbed by SGX’s suggestion that deals should be reasonable to all shareholders. They noted that it is difficult to achieve consensus, since different investors had plonked money into stocks at different times and at different prices.
‘You will never get to a conclusion if you say the deal has to be reasonable to every shareholder,’ said one IFA who declined to be named. ‘If someone had gotten the shares at $2 but for the last five years, the share price traded at around 30 cents, does that mean I need to offer $2 to be able to satisfy the shareholder who came in at that level? No, the offer has to be fair or reasonable given the current circumstances.’
IFAs also rebutted criticism that they tend to favour majority shareholders making de-listing offers, arguing that they are appointed by independent directors and that board members involved in the deals are kept out from the IFA nomination and assessment process.
However, they pointed out that they are not crusaders for minority investors either.
‘Shareholders of the same class of shares enjoy equal rights, be it minority or majority shareholders,’ said DMG’s Mr. Goh.
‘Minority shareholders are beginning to see IFAs as instruments for increasing value for them, which is not correct,’ said the IFA who declined to be named. ‘That should be the role of the financial advisers, whose job is to negotiate a better deal for the company.’
IFAs added that shareholders have the option of voting down deals during shareholders’ meetings. For a de-listing to go through, the offerer must garner 75 per cent of votes represented at the meeting and have less than 10 per cent of votes opposing the deal.
Minorities can also take their grievances to court, although if there is an IFA report that states an offer is fair, it would make it difficult for them to prove that there was minority oppression. ‘There is no in-principle reason why the minority shareholders cannot commence a claim under Section 210 of the Companies Act for minority oppression,’ said one litigation lawyer. ‘However, I suspect that the difficulty may be in proving the acts of oppression or unfair prejudice. This is because there would normally be a report by an IFA and a recommendation by the independent directors. If the IFA report says that the offer is reasonable, then it is hard to prove otherwise.’
CK Tang’s case - in which the offerers held a stake of more than 75 per cent and thus had a far higher chance of pushing the offer through - provides an interesting question of whether a company’s shareholding structure should be addressed as part of the IFA’s assessment.
‘The offer may not be fair but if the IFA believes that it’s going to go through anyway, then he might well conclude that it is reasonable,’ said the IFA who declined to be named. In such cases, there could be some clarity over how reasonableness is defined, such as referring reasonableness to ‘the practicality of the situation rather than the fundamental value’, he added.
Some jurisdictions such as Australia define ‘fair’ and ‘reasonable’ separately in such instances. Though there have been calls for SGX to clarify the terms ‘fair’ and ‘reasonable’, there are practical considerations.
‘It will be extremely difficult for SGX to clearly define such terms. Having prescriptive rules may result in other issues and technicalities, which are difficult to enforce and may add to confusion,’ said Mr. Goh.
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