A mockery of takeover rules

THE protection of minority shareholder interests is one of the tenets of rules and regulations surrounding capital markets.

After a company goes to the capital market to raise funds from the public by selling them equity, these public shareholders are now part owners of the company and have certain rights as a result.

This is why we have strict laws governing the takeover of such companies.

Malaysia’s takeover laws of public companies are enshrined in the Capital Markets and Services Act 2007 (CMSA) and the Takeovers and Mergers Code 2016, which have been periodically amended.

In many takeover attempts, the buyers intend to privatise the target company, which means take it off the stock market.

Incidentally, buyers seek this as they would have total control over the company and its assets and carry out any major restructuring without having to seek multiple regulatory and shareholder approvals needed if the company is still publicly traded.

They could also break up the company and sell it in bits and pieces for a higher value than what they paid to buy it, a process known as asset stripping –think Gordon Gekko in the movie Wall Street.

While asset stripping is an antiquated practice today, the point is, the buyer of the listed company could have plans to restructure the operations of the target company by carrying out drastic measures that are easier done if the buyer and its partners were the sole shareholders of the company.

No doubt those actions are aimed at extracting more value from the company than what the buyers are paying for, essentially the raison d’etre of private equity firms.

Coming back to takeover laws in the CMSA and the Takeovers and Mergers Code, one important aspect of these laws is that, the offeror in a takeover situation will need to secure 90% acceptances of the shares that it did not own at the point of making the general offer, before it can compulsorily acquire the balance shares.

There is some basic math in the picture.

If the offeror and its related parties say, own 41% of the target company at the point of making the general offer for the rest of the shares, it would need to get acceptances from 90% of the balance 59% of shareholders for the offer, before the offeror can compulsorily acquire the balance shares and go ahead and privatise and delist the target company.

This means that the offeror must have a total of 94.1% of the total shareholding in the company before all that can happen. Which means its offer has to be so attractive to that many shareholders.

And if 10% of the balance 59% of shareholders are holding out for a better deal, then the privatisation cannot take place. This group of shareholders can effectively block the deal.

This is what is meant when it is said that minority shareholder interests have been enshrined in the CMSA and the Takeovers and Mergers Code.

And yet, you have many offerors trying to scare minority shareholders into accepting an offer by using a technical rule in the listing rules of Bursa Malaysia.

This rule states that if a company’s free float of shares drops to 10% or less, the company could get de-listed.

So offerors use this fear tactic that once they reach an absolute shareholding level of 90% of the target company, that the company will get de-listed.

This tends to induce the remaining shareholding to throw in the towel as most investors do not want to be holding stock in an unlisted entity.

But if you read the listing rules closely, it does not state that de-listing of the affected company will be automatic once there are only 10% or less of shares remaining in free float.

Bursa Malaysia has the discretion on whether to suspend or de-list such a company.

The stock exchange can always choose not to do so, especially when minority interests are at stake.

It can then direct the listed entity to sort out its lack of shareholding spread.

The listed company will need to submit plans on how to regularise the public spread, such as undertaking corporate actions like new share placements.

Bursa Malaysia has confirmed with Starbiz 7 that this is the correct interpretation of the affected listing rules.

You may ask what is the big difference between this 90% threshold and securing the 90% of shares the offeror did not own (as per the CMSA and Takeovers and Mergers Code).

The answer is, there is a world of difference.

Applying the example cited above, the offeror can only de-list and privatise the company when it gets a total of 94.1% of shares in the company.

So that 4.1% is the difference. And that can work out to millions of shares and thousands of shareholders in large listed companies.

This will protect minority interests in the spirit of the CMSA and the Takeovers and Mergers Code. The only acceptance level that offerors should be striving to achieve is the 90% of the remaining shares that they do not own.

This has been going on for far too long and looks like a loophole that needs to be plugged, in the interest of minority shareholders’ rights.

The listing rules ought to be amended to make it clear that the exchange will safeguard the interests of minority shareholders when this de-listing rule comes into play in takeover situations. Anything less amounts to a mockery of the CMSA and Takeovers and Mergers Code.