Cai Jin

Takeover rules: Tweaks needed to protect small investors

In some markets such as the United States, news of a takeover is literally a ticket to riches for shareholders as bidders tend to offer a huge premium over the undisturbed share price to buy them out.

Not here, though. Time and time again, complaints have surfaced that when it comes to a particular type of takeover - majority shareholders buying out the remaining shareholders to take the company private - smaller shareholders are often forced to sell their shares against their will and at unattractive prices.

Take Nobel Design, for which minority shareholders got an offer of 51 cents a share, even though its books showed it had net cash per share of almost 56 cents.

That means shareholders who accepted the offer not only got less than the money sitting in the bank that was due to them - they got nothing for the inventories, receivables and other assets.

If you think "squeeze-outs", as such strong-armed tactics are known, are confined to small-capitalised firms, you might be surprised to find that they occur in large companies too.

In 2014, United Industrial Corp (UIC) sough t to buy up the rest of Singapore Land (SingLand), in which it held an 80.4 per cent stake.

UIC had offered an 11.24 per cent premium over SingLand's undisturbed price, but that still priced the offer at a 33 per cent discount to SingLand's book value. That prompted the Singapore Exchange to ask ANZ, the offer's independent financial adviser, how it had arrived at its assessment that the offer was fair and reasonable.

Furthermore, minority shareholders often get squeezed out when the stock is trading at a historically low price. Controlling shareholders also choose to buy out the remaining shares at the bottom of the business cycle, and deprive minority shareholders of any upside they might enjoy with a revival in the company's fortunes.

Worse, it seems to be very much a Singapore phenomenon. A recent paper by Associate Professors Christopher Chen and Wan Wai Yee and Assistant Professor Zhang Wei from Singapore Management University suggests squeeze-outs are far more prevalent in Singapore than in Hong Kong, which is a much bigger market in terms of the number of companies listed and total market capitalisation.

For the period 2008-14, they counted 123 squeeze-out transactions in Singapore, against 62 in Hong Kong. They also observed that premiums offered by bidders in Hong Kong were "significantly higher".

In the light of these observations, you might ask why Singapore investors are getting short-changed by comparison.

In a takeover by outside parties, a company's board is typically involved in getting the highest price from the bidder. In contrast, an offer from the controlling shareholder very often does not involve the board - to the detriment of minority shareholders.

The researchers noted that retail participation is much higher in the Hong Kong market. That carried weight with Hong Kong regulators when they were confronted with media reports "aggressively documenting squeeze-outs of family-controlled companies".

Also, takeovers here in the past tended to involve external bidders who offered decent premiums. Squeeze-outs have become a controversial feature only in recent years, as major shareholders elbowed out smaller investors following the bubble in 2001, the Sars epidemic in 2003 and the global financial crisis in 2008.

So how can the Hong Kong experience help small-time investors? The researchers observed that the main driver in providing relief there came from tweaks made by regulators to the takeover code and listing rules.

They noted that, in both Hong Kong and Singapore, a controlling shareholder can buy out the remaining shareholders in three ways - by making a general offer, via a scheme of arrangement, or by delisting the firm before making an exit offer for the rest of the shares.

However, Singapore parts company with Hong Kong when it comes to how these three mechanisms are administered.

For a general offer, in both Singapore and Hong Kong, the acquirer can proceed to compulsorily acquire the rest of the company's shares only if the 90 per cent threshold acceptance level is crossed for his offer.

A 90 per cent acceptance level would seem an impossibly tough hurdle to cross for most bidders.

However, in Singapore, there is a loophole that major shareholders can exploit to get around the hurdle - they can set up a shell company as the vehicle to do the takeover and say upfront that they will accept the offer made by this shell company.

Whatever shareholdings they or their associates own will still count towards the 90 per cent acceptance level.

Say the bidder already controls 80 per cent of the shares. All he needs before he can acquire the rest is acceptance for another 10 per cent.

In Hong Kong, however, the shareholdings of the bidder and those associated with him are specifically excluded from the count towards the 90 per cent acceptance level. Thus, using the same example, the bidder would need to get acceptance for 18 per cent of the shares to pull through. That is almost double the number of shares he would be required to get in Singapore.

Alternatively, a bidder can resort to a scheme of arrangement to buy the remaining shares. Under this arrangement, a meeting must be held in which 75 per cent of shareholders present, excluding the bidder, must vote in favour of the buyout.

However, in Hong Kong, apart from this requirement, the scheme can go through only if dissenters do not make up more than 10 per cent of the votes. That forces the bidder to offer more incentives to minimise dissenting votes.

One other mechanism that major shareholders use to buy out a company is to delist it first. This puts pressure on the minority shareholders to sell out when they make an exit offer because the shares are no longer traded on the exchange.

For a delisting, a shareholders' meeting must be held where approval for the move must be received from 75 per cent of the shareholders present and where not more than 10 per cent disagree. For major shareholders, this feat is made easier in Singapore because listing rules here do not bar them from voting on the move.

In Hong Kong, the rules have been tightened to ensure that a company can be delisted only if 75 per cent of the shareholders present at the meeting, excluding the major shareholder and directors, agree to the move.

In the light of these comparisons, should the regulators here make tweaks to the listing rules and takeover code similar to what has been done in Hong Kong? This must be the fervent hope of disheartened investors who find themselves getting the short end of the stick when they get a lacklustre price for their shares in a takeover exercise engineered by the major shareholder.

A version of this article appeared in the print edition of The Straits Times on August 07, 2017, with the headline 'Takeover rules: Tweaks needed to protect small investors'. Print Edition | Subscribe