Date: November 30, 2018
First published in Business Times on 30 November 2018
SOMETIMES the best of intentions can lead to unintended outcomes.
Such appears to be the case with steel trading firm LTC Corp (formerly known as Lion Teck Chiang). Its privatisation-cum-delisting plans have been thrown into doubt after some 31 shareholders at a Nov 14 extraordinary general meeting (EGM), which was convened to vote on the deal, instead opted for an adjournment to see if a proposed change by Singapore Exchange (SGX) to the delisting rules comes into force in the future. If it does, the minority feel that the new rules will be fairer to them, as the majority shareholder will not be able to vote.
Should the minority who asked for the adjournment be of the view that the new rules were already in force, then they were mistaken.
The proposals, issued by SGX on Nov 9, are intended to benefit minority shareholders. But it is important to note that:
- They are only suggestions by SGX for which the exchange is seeking public feedback, so they may or may not be eventually adopted.
- Even if the rules are changed after public feedback, the implementation could take many months.
- Most importantly, they cannot apply retrospectively. So the LTC offer, made several months earlier, would not be subject to any new rules that may be introduced.
In other words, the first step leading to the drama came when SGX, before LTC’s EGM, issued a paper whose contents are aimed at benefiting minorities if adopted.
The second came when some LTC minorities then sought an adjournment to try and see if that benefit might apply to them, in which case they might presumably be able to secure a higher exit price. This is the situation at the moment, but the end result may well be that all minorities might lose out.
On this last point, shareholders must note that the final offer letter states that “the exit offer is conditional on the delisting resolution being passed at the EGM” and that if the main requirement is not met “at the EGM to be convened, the delisting will not proceed and the company will remain listed on the SGX-ST and the exit offer will lapse”.
Since the “EGM to be convened” was on Nov 14 and the resolution was not passed, the deal now hangs in the balance, as is the fate of the 100-odd shareholders who have already accepted the offer.
The controlling shareholders of LTC had proposed a voluntary delisting with an exit offer at S$0.925 per share after failing to force compulsory delisting from an earlier takeover bid for the steel and property group. They have stated that the offer is final and will not be changed under any circumstances.
They have also obtained the necessary approvals from the authorities to go ahead with a voluntary delisting.
Their rationale for taking the company private is similar to that given by others in the past – the company sees no need to raise capital through the stock market, and it wishes to have greater flexibility to run its businesses and to save fees related to maintaining a listing.
At the EGM, LTC would have been delisted if at least 75 per cent of the votes that were present favoured it, with not more than 10 per cent voting against it. This is in line with the current rules which do not prohibit controlling or majority shareholders from voting.
Since the controlling shareholders own about 88 per cent of LTC’s shares, that they are allowed to vote, and that the independent financial adviser feels that S$0.925 is fair and reasonable, it was expected that the delisting would routinely proceed.
SGX for its part has been studying whether to disallow majority shareholders from voting at EGMs that are held to decide on voluntary delisting, which is the situation in other countries such as Hong Kong.
In its Nov 9 proposals, the exchange sought to reduce the threshold from 75 to 50 per cent, and to scrap the 10 per cent dissenting requirement.
Note that lowering the needed votes to 50 per cent gives greater clout to minorities and thus presumably affords them greater protection from unfair offers and/or tyranny of the majority. This is an encouraging development for the minority.
As noted earlier, whether those proposals come to pass remains to be seen and may take months to materialise.
An alternative offer is unlikely to be tabled as the company’s financials are not particularly stellar – it has had difficulty securing contracts and operates in a difficult, competitive environment.
In the three months ended Sept 30, LTC made a net profit of just S$939,000, up 6.2 per cent from the same period a year earlier. Revenue fell 23.7 per cent to S$24.8 million on lower turnover for the steel business. Earnings per share was S$0.006, up from S$0.0057 for the third quarter last year.
Furthermore, the exit offer price exceeds the closing prices of the shares for the past 20 years, and is approximately 44.5 per cent over the S$0.64 closing price on the last day before the offer.
LTC’s trading has also been illiquid for some time, and is very likely that if the deal is called off, the share price may fall back as it is trading around only S$0.92 now because of the offer.
Nevertheless, as the dissenting shareholders maintain, the offer price is below the NAV. Of incidental interest, is the need for the IFA to explain why the offer was considered “fair” when it is below the NAV, given that the latest SIC practice note evaluates fairness relative to NAV.
In a nutshell, the adjournment may disadvantage those who have accepted and would warrant voting by all shareholders to arrive at a fair resolution.
It would be a shame if actions that were intended to benefit minorities – and this includes the adjournment move, perhaps, aimed at obtaining a better price – ends up achieving the opposite.
- The writer is David Gerald, founder, president and CEO of the Securities Investors Association (Singapore)