Commentary: Can mandatory disclosures ease minority shareholders’ concerns?

Date: March 25, 2022

First published in Straits Times on 25 March 2022

Although the dust appears to have settled on the controversy surrounding the proposed merger of Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT), it is worth pondering the role that regulators can play when it comes to handling similar controversies in future.

This is important as it looks very much like there will be more mergers involving real estate investment trusts (Reits) in the months ahead, given that many are seeking to attain large size and to grow as quickly as possible.

There were two bones of contention around the proposed MCT-MNACT merger.

Not surprisingly, the first was the price, which had activist fund manager Quarz Capital Management complaining that it undervalued MNACT as it was an 11 per cent discount to net asset value.

The second was that since both Reit managers have the same sponsor, there was no real need for either side to fight for the best possible price, which then implied that unit holders, particularly of the target Reit MNACT, were getting the short end of the stick.

A ‘fair and reasonable’ deal

Since the Vard delisting saga in 2018, Singapore Exchange Regulation (SGX RegCo) has tightened the rules around merger and delisting deals.

The independent financial adviser will first have to assess the terms of the deal and ensure that it is “fair and reasonable” before delisting is approved by SGX RegCo.

In addition, to ensure that minority shareholders are protected, the majority shareholder, sponsors and concert parties are to abstain from the vote.

Although MCT’s and MNACT’s managers have revised the offer – to one that Quarz Capital has said it is happy with – unit holders of both trusts will have to wait for the report of the independent financial adviser to be guided as to whether the offer is fair and reasonable.

Investors should then make up their own minds, taking into account their personal circumstances, when voting.

Concurrently, the additional steps by SGX RegCo to lay out expectations of what needs to be disclosed about a valuation of an asset for significant transactions will be beneficial to investors.

Fundamentally, boards are duty bound to disclose any reasonable potential offer on the table.

However, investors today expect boards to have transparent processes in their assessments of any potential offer and to be accountable for their decisions.

Nevertheless, in situations where the sponsor and acquirer are all connected, a transparent process of assessment should be mandated by the regulator to be disclosed and included in the rules.

Minority shareholders would certainly welcome such a move.

Involvement of regulator

Any merger, acquisition or corporate action should be evaluated on commercial terms. This evaluation can vary from one organisation to another because what is commercially acceptable in one situation may not be so in another.

Given the subjectivity when it comes to judging the merits of a commercial deal, is it reasonable for the regulator to get involved? In today’s diverse and complex business environment, exercising commercial judgments on deals is probably going beyond the role of the regulator.

It is for the board to clearly articulate the commercial value proposition and for the shareholders to vote accordingly. Regulators provide the framework and rules within which companies have to work but should not be called upon to determine the commercial viability of a deal.

Offerors – put your best offer on the table!

For some time now, Securities Investors Association (Singapore) has observed that offerors do not always put up their best offer at first, leaving themselves room to manoeuvre. Investors correspondingly hold out for an improvement of the deal and in some instances highlight how the offer undervalues their shares.

It is time for offerors to just lodge their best offer immediately for shareholders to vote, making it clear that there will not be a revision.

After all, if an offer is rejected, the offeror would have to wait a further 12 months under Securities Industry Council rules.

  • The writer is Mr David Gerald, Founder, President and CEO of the Securities Investors Association (Singapore)