Minding the minority shareholders

THERE is something fundamentally uncomfortable about the way some privatisation exercises are presented to minority shareholders in Malaysia.

A controlling shareholder makes an offer to take a listed company private, the offer price comes with a seemingly attractive premium to the prevailing market price, and shareholders are told they are getting a good deal.

But are they?

Take the latest proposal involving Tong Herr Resources Bhd.

The company’s controlling shareholders are offering RM2.55 per share through a selective capital reduction and repayment exercise. This represents a 34% premium on its last traded price before the announcement.

But look beyond the market price and the picture changes.

Tong Herr’s net tangible assets (NTA) stood at RM3.44 per share as at June 30, 2026, while independent adviser Mercury Securities valued the company at RM4.13 per share.

The proposed offer is therefore about 26% below NTA and 38% below the adviser’s own valuation.

However, Mercury Securities has recommended that shareholders accept the offer, describing it as “not fair but reasonable”.

Its justification is that Tong Herr’s shares are thinly traded and could fall if the privatisation fails.

That may be a valid concern, but it does not answer the more fundamental question.

Why should minority shareholders have to accept less than the company’s assessed value simply because the market has not recognised it?

A depressed share price does not necessarily reflect the worth of a business. Poor liquidity, limited analyst coverage and weak investor interest can keep a stock undervalued for years.

These factors should not automatically work in favour of a controlling shareholder seeking to acquire the remaining shares.

Tong Herr is hardly an isolated case.

MKH Bhd’s RM2 per share takeover offer was also classified as “not fair but reasonable”.

Kenanga Investment Bank valued the company at RM4.31 per share, putting the offer at a 53.6% discount to its assessed value. Its latest net asset value was RM3.27 per share.

MMC Corp Bhd faced a similar situation, with its RM2 per share privatisation offer falling below the independent adviser’s valuation of RM3.32 to RM3.41.

That offer, too, was considered reasonable because the shares had historically traded below that price and a competing bid was unlikely.

Similar conclusions were reached in takeover exercises involving FGV Holdings Bhd, Timberwell Bhd, Magna Prima Bhd and Yee Lee Corp Bhd.

Even the Malaysia Airports Holdings Bhd (MAHB) takeover in 2024 attracted criticism.

Hong Leong Investment Bank considered the RM11 offer not fair but reasonable, valuing the shares at RM12.61 to RM13.71. Several non-interested directors disagreed and urged shareholders to reject the offer.

The companies and circumstances differ, but the recurring justification is difficult to overlook. An offer below assessed value is considered reasonable because it is better than the prevailing market price as there may be no alternative buyer.

This raises a question about the purpose of independent advice.

If an adviser concludes that an offer is not fair, its recommendation to accept should require considerably stronger justification than the possibility of a falling share price or the absence of a competing bid.

Regulator’s position deserves scrutiny

The Minority Shareholders Watch Group (MSWG) has raised similar concerns, questioning whether independent advisers should be allowed to recommend acceptance of offers they themselves consider unfair.

The SC, meanwhile, has defended the existing framework, maintaining that fairness and reasonableness are separate considerations.

It has also cautioned that imposing minimum valuation requirements could discourage legitimate corporate exercises and deprive shareholders of an opportunity to exit illiquid investments. There is merit to that argument.

I am not suggesting that the SC impose a blanket requirement for every privatisation offer to match or exceed NTA.

NTA is an accounting measure, not what a company’s assets can fetch in the market.

A manufacturer with ageing machinery, poor earnings and weak returns on capital should not automatically command an offer price based on its book value.

Such a rule could also discourage buyers from acquiring and turning around underperforming businesses.

But the reverse should apply too: market price should not be treated as the ultimate measure of value.

For companies holding substantial land, property, investments or cash, the gap between market capitalisation and underlying asset value deserves proper scrutiny.

Minority shareholders should understand what they are giving up, particularly when a controlling shareholder stands to gain full ownership and the opportunity to unlock value in the future.

The experiences surrounding Astro and Maxis, including subsequent corporate restructuring and changes in ownership, have also kept questions about asset value and who ultimately benefits from such exercises alive.

A fairer test for independent advice

The SC does not need to dictate what every company is worth. What it should do is raise the bar for independent advisers.

Where an offer is deemed not fair, advisers should be required to explain clearly why shareholders should nevertheless accept it, including the valuation gap, the assumptions behind their assessment and the risks of rejecting the offer.

A premium to historical market prices should not, by itself, become the deciding factor.

There should also be closer scrutiny of transactions involving controlling shareholders whose existing stakes make competing offers difficult to mount.

After all, minority shareholders are often left with a difficult choice: accept an offer they know is below assessed value or remain invested in a stock that could become even less liquid if the privatisation fails.

Having the right to vote does not necessarily mean having meaningful bargaining power.

Malaysia wants to deepen its capital market and attract more retail investors. That requires confidence that minority shareholders will be treated fairly when controlling shareholders decide to take a company private.

A takeover premium may look attractive, but it does not automatically make an offer fair.

Perhaps it is time for the SC to reconsider whether an independent adviser should be recommending acceptance of an offer that it has already concluded is unfair.