Time to review Malaysian takeover code

THE Rules on Takeovers, Mergers and Compulsory Acquisitions (Rules) are issued by the Securities Commission (SC) pursuant to Section 377 of the Capital Markets and Services Act 2007 (CMSA).

These Rules must be read together with the Malaysian Code on Take-Overs and Mergers 2016 (Code) and the ruling issued by the SC pursuant to Section 217 of the CMSA.

The ongoing voluntary takeover offer of Malaysian Airport Holdings Bhd (MAHB) by the consortium, Gateway Development Alliance Sdn Bhd (GDA), have raised some key points that perhaps the authorities would like to revisit to tighten the rules of the Code itself.

Fair and reasonable

The independent adviser (IA) to the deal has taken the view that the offer price is “not fair” as it believes that the fair value was between RM12.61 and RM13.71 per MAHB share.

Nevertheless, the IA reckons the deal to be “reasonable” as there is no competing or alternative offer on the table and the offer price represents a significant premium over the company’s net asset value as well as historical traded prices.

The idea of the reasonableness of an offer surely cannot be compared with rigid rules as explained under Schedule 2: Part III of the Rules, which states that “where an IA views the takeover offer to be ‘reasonable’ despite it being ‘not fair’, it should be on the basis that the IA 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. If there were inadequate justifications, such takeover offer should be regarded as ‘not reasonable’ and thus, the recommendation would be to reject the offer”.

In most takeover offers, it is rather rare to have a competing offer and at a higher bid, which results in an IA taking the view that the offer on the table is “reasonable”.

In the case of MAHB, the IA takes the view that the offer is also “reasonable” on the basis that the offer price is at a significant premium to historical prices and liquidity factors.

Surely, the term “reasonableness” means more than just comparing historical market prices and liquidity.

In this case, we must applaud the stance taken by the five independent non-executive directors (INEDs).

They conclude that the offer is “not reasonable” based on several factors including the strategic plans that are in place to drive MAHB’s traffic growth, increased connectivity, positive results from the commercial reset and rejuvenation programme, environmental, social and governance initiatives undertaken, as well as improved connectivity and passenger experience at Istanbul Airport.

In addition, MAHB’s operating performance has been relatively strong, but a potential delisting could hinder its ability to raise funds through the equity market. Furthermore, its listing status promotes transparency and good governance.

Clearly, reasonableness factors are subjective in nature and not objective by deploying tactics like the offer price being higher than the historical market value or simply due to liquidity factors, although these are of course valid reasons.

First hurdle

The first hurdle in any takeover should be based on a fair price first. If the price is unfair to minority shareholders, the question of reasonableness is immaterial.

This is similar to the approach of the Singapore Stock Exchange, whereby the exchange may approve a delisting if an independent financial adviser opines that the exit offer is fair and reasonable.

This is on the premise that offering minority shareholders an unattractive exit price, because an offer is reasonable, is deemed to be not good enough.

Hence, in the case of MAHB, the views of the IA, the INEDs, as well as the view taken by UBS on the fairness of the offer, should be paramount, and whether it is reasonable or otherwise should be a secondary consideration.

Lowering of threshold level

In the MAHB takeover offer, GDA explicitly stated in its voluntary takeover offer document that the offer would become conditional upon receiving valid acceptances that would result in GDA holding not less than 90% of the total issued shares of MAHB.

In addition, the offeror reserves the right to revise the level of the acceptance condition to a lower threshold, provided the offer remains open for no less than fourteen days following the revision and that shareholders who have accepted the offer are permitted to withdraw their acceptances within eight days of the revision notice.

While the conditionality was well explained in the offer document, as well as within the Code and Rules, the baffling part is GDA’s initial pre-condition of acquiring 90% of total issued shares to make the offer unconditional.

This threshold was well above the minimum required level of “more than 50%”.

Perhaps the rationale for this is to trigger a suspension of trading of the shares on the local bourse, allowing the offerors to delist the company.

However, the 90% threshold alone is insufficient to trigger a compulsory acquisition of the remaining shares.

The trigger point is actually 94.12%, which is 90% of the remaining 58.78% of shares not already owned, in addition to the existing 41.22% held by the offerors.

As of Jan 28, 2025, GDA holds 95.11% of MAHB shares (including those pending acceptances), making the offer now unconditional.

Having surpassed not only the lower threshold level of 85%, but also the original threshold of 90%, the offerors can now trigger compulsory acquisition of the remaining shares from dissenting shareholders as per Section 222 of the CMSA.

Lowering the acceptance level for the offer to become unconditional should not be allowed, as this is akin to moving the goalpost when a threshold has been set.

This is seen as unfair to minority shareholders as at any point an offeror can lower the threshold and trigger the offer to turn unconditional.

Although there is some form of protection for the minority shareholders to withdraw their acceptances before the offer becomes unconditional, it is unlikely that they would do so.

Fear tactics?

In any voluntary takeover offer, offerors often employ tactics to justify the offer price and pressure dissenting shareholders to accept, sometimes undermining their choices

These tactics include the potential suspension of trading of the company’s shares on Bursa Malaysia for failing to meet the public shareholding spread, which could lead to shareholders holding non-tradable shares, and the threat of delisting the company, which would lead to shareholders holding onto unlisted securities.

While these are real situations, an offeror should not be allowed to threaten minority shareholders into believing that such events will occur.

These tactics often lead to some minority shareholders accepting an unfair offer, which can snowball into others doing the same.

Over time, with an extended offer period and as more minority shareholders accept an unfair offer, the offeror may achieve its objective of taking the company private.

While the offeror may have won the battle, the manner in which it achieves this leaves much to be desired.