IT happens oh so rarely, but the capital market can produce a cultural catalyst. In fact, something like that may be happening right now.
A lot of people are befuddled by the ongoing streak of independent advisers (IAs) describing general offers and proposed deals as “not fair but reasonable” and yet recommending that shareholders accept the offers or vote for the deals.
Amid the confusion and puzzlement, we shouldn't overlook the possibility that the use of the phrase “not fair but reasonable” will be embraced across the whole spectrum of society as more and more people discover the power and utility of these four words when strung together.
And should this swell into a full-blown cultural phenomenon, we can easily trace its roots to March 2010. That was when the Securities Commission (SC) came up with a public consultation paper that introduced proposed updates to the Guidelines on Offer Documentation of the Malaysian Code On Take-Overs And Mergers (Take-Over Code).
“The proposals set out in this consultation paper are intended to ensure that certain matters are analysed and synthesised as a minimum in reaching a conclusion as whether a transaction is fair and reasonable',” the SC explained.
“It is not the intention of the Commission to prescribe an exhaustive criteria or methodology for providing independent advice. IAs must exercise their discretion in ascertaining the approach they must take and the work to be carried out on a case-by-case basis.”
The SC pointed out that IAs had evaluated the fairness and reasonableness of offers as a matter of market convention, although the Take-Over Code only required the IAs to comment and advise on the reasonableness of an offer.
Another gap was that in Malaysia, fair and reasonable' was treated as a composite term and yet, there was no definition for the phrase.
As such, the regulator declared: “The Commission is of the view that since the standard of fair and reasonable' is used to determine whether an offer should be accepted or rejected, it is important that such a standard be clearly defined and interpreted in a consistent manner.”
And so, the SC's Practice Note 15 (PN15) of the Take-Over Code was revised in November 2012 to incorporate changes mooted in the consultation paper.
(Although PN15 was issued in respect of the Take-Over Code, some of its rules on independent advice is also commonly applied in other types of corporate exercises.)
The most impactful move, of course, was the decision to require IAs to analyse the term “fair and reasonable” as two distinct criteria.
The assessment of fairness is basically a comparison of prices and values. A take-over offer is considered “not fair” if the offer price is equal to or higher than the market price, but lower than the value of the securities that are the subject of the offer.
However, if the offer price is equal to or higher than the market price and also equal to or higher than the value of the securities, it's a fair offer.
The level of subjectivity rises significantly when determining reasonableness. “In considering whether a take-over offer is reasonable', the independent adviser should take into consideration matters other than the valuation of the securities that are the subject of the take-over offer,” says the PN15.
The SC identifies five aspects that should be looked into when an IA evaluates reasonableness, but that's not an exhaustive list. In fact, the IAs are told to “take into consideration all relevant factors”.
By splitting up fairness and reasonableness, the SC has made room for IAs to label offers as “not fair but reasonable”, which in some cases, is sufficient to justify the IAs' recommendations that shareholders accept the offers or support the proposed transactions.
If criticised for giving neither-here-nor-there advice, these IAs can point to this part of PN15: “Generally, a take-over offer would be considered reasonable' if it is fair'. Nevertheless, an independent adviser may also recommend for shareholders to accept the take-over offer despite it being not fair', if the independent adviser is of the view that there are sufficiently strong reasons to accept the offer in the absence of a higher bid and such reasons should be clearly explained.”
“Not fair but reasonable” is great for awkward and contentious situations. It's a convenient device to lean on when you need to tell people something that they are not likely to fancy hearing.
The term acts on several levels. It can soften the blow. Or it serves as a seemingly authoritative verdict that discourages second-guessing. Or the ambiguity stupefies people to the extent that they can only shrug their shoulders and go with the flow. Or people get so upset by the contradiction that they do exactly the opposite of what's recommended.
Given such usefulness, “not fair but reasonable” may become part of the vocabulary of many spheres. For example:
Sports and controversy are a natural pair because sports is fuelled by competition, emotion and quick judgements. Decisions by match officials and judges will always be subject to dispute. When that happens, the officials and judges should have this standard response: “You may feel that I made an unfair call, but I definitely think it was a reasonable one.” Try arguing with that.
Nations sometimes go to war for flimsy causes. But nobody has to apologise for that. All the leaders need to do is pacify the dissenters with arguments like this: “We agree that the invasion was based on what we now know is flawed intelligence. That's unfair. But we take the firm view that it was reasonable to act as we did.”
You're asked to give an employee the marching orders. That's a torturous assignment, but now you have “not fair but reasonable” in your tool kit. You say: “Bob, we value your many years of service. I can understand if you feel it's unfair of us to dismiss you, but as we have discussed, it's a reasonable step.”
Mums and dads, do you often struggle to say no to your kids? When reasoning fails, you should resort to obfuscation. “Son, I know you really, really want that RM215 Optimus Prime action figure. It's reasonable for you to feel that life would end if you don't get it, but it's unfair to my wallet to buy it.”
Breaking up is hard to do. If you can't figure out what to say to end the relationship, try this: “I know this is hard for you to accept, as it is for me, but I truly believe that it's unfair but reasonable for us to stop seeing each other.”
Executive editor Errol Oh thinks it's neither fair nor reasonable when investors have problems comprehending the recommendations of IAs.