Tuesday March 1, 2011

Should takeover trigger points be re-looked at?

Raison D'etre - Risen Jayaseelan

AN interesting aspect of the on-going sale of Khazanah Nasional Bhd's 32.21% stake sale in Pos Malaysia Bhd is that the block is said to come with management control.

This has raised the question of whether in situations like this, will the new entrant trigger a mandatory general offer (MGO) for the all the remaining shares of Pos. (To recap, Khazanah is currently vetting all proposals and will eventually decide on who it is going to sell the stake to.)

On the face of it, there is reason to wonder if the MGO will be triggered.

That's because the new owner of Khazanah's block of Pos shares will be in the driving seat of Pos.

Hence existing shareholders of Pos should be given the option to sell their shares considering that their company will come under the control of an entirely new entity.

More significantly, a key rationale of takeover rules is that all other shareholders have an equal opportunity to participate in the benefits of the transaction that led to the new party coming into company. In other words, that all shareholders should be entitled to the premium price that the newcomer is paying the vendor of the block of shares.

But in Pos' case, the law is clear that the new buyer will not trigger an MGO, unless he goes on to buy more shares of Pos and thereby pass the 33% trigger point.

The takeover rules state that parties will trigger an MGO situation if they pass the 33% threshold of ownership of companies.

Khazanah only owns 32.2% of Pos and therefore does not need to do an MGO for Pos' shares in the past.

It would therefore be odd if the law now required the buyer of the same block of shares to do an MGO.

To be sure, there are instances where a party buying stakes of between 20% to under 33% can be deemed to have obtained control of a company (and thereby triggering an MGO). These instances are laid out in Practice Note 9 of the Malaysian Code on Take-overs and Mergers 2010 and largely involve situations where there is some arrangement between the vendor of the block of shares and the new buyer on how they are going to vote on company decisions.

This clearly doesn't apply in Pos' case as Khazanah is selling off all its shares in Pos.

But if Khazanah was still holding shares in Pos post the divestment of its 32.21% block, and if it was deemed that there was some kind of arrangement between Khazanah and the buyer of its block on issues that entail the voting rights of both parties, then the buyer could be deemed to have gained control of Pos (by controlling more than 33% of Pos) and thereby would need to make an MGO.

The question remains though if it is fair that a new buyer can assume control of Pos from acquiring Khazanah's 32.21% stake in the company without having to make a MGO?

The fact remains that the Khazanah-Pos situation is no different from any one party acquiring just under 33% of a listed company and thereby staying just below the MGO trigger point.

The rationale of this rule is that any party that has only below 33% control of a company can't be deemed to be in total control of the company because it can be ousted by the other shareholders.

Hence the new buyer of Khazanah's 32.21% block in Pos will not have total control of the company. The next question then is this: is 33% too high to be the MGO trigger point, especially considering that a few countries have moved their threshold level to 30%.

Singapore has raised its MGO trigger point from 25% to 30% while Hong Kong had adjusted it from 35% to 30%. The UK also has a 30% trigger point.

Indeed, Malaysia's Securities Commission (SC) had in 2007 considered changing Malaysia's MGO level to 30% but the feedback it received then from market participants was that most had favoured maintaining the status quo.

One investment banker says that to merely change the rules to align it with other markets does not seem like reason enough.

What is important is for there to be a right balance between enabling business and protecting investors, the banker reckons.

For example, by lowering the MGO threshold level it could in some way inhibit strategic investors from taking slices of Malaysian listed companies (especially the smaller ones) as they could fear triggering an MGO.

On the other hand, if a party is willing to own up to 30% of a company, perhaps it should be prepared to make an offer to the rest of the shareholders?It does seem like the time has come for another closer look at this rule.

  • Deputy news editor Risen Jayaseelan wonders how much of a difference it will make if the takeover trigger level is reduced to 30%, considering that parties seeking to garner control could still seek to do so with having just under 30% of the target company.

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