Commentary: Privatisation offers too often a dilemma for shareholders

Date: March 27, 2023

First published in Straits Times on 27 March 2023

Over the past decade, thanks to low interest rates, depressed valuations and poor liquidity, takeover-cum-privatisation exercises have become commonplace in the local stock market.

Many well-known companies such as Osim International, Koufu, Eu Yan Sang and Global Logistic Properties have opted to surrender their public listing.

By most accounts, this outflow is set to continue as many firms, after weighing the costs and benefits of remaining listed, decide that going private is best for them.

With the frequency with which these offers are being made, one would reasonably have thought that the process would by now be relatively smooth and seamless.

An offer is made to buy everyone out, an independent financial adviser is appointed to render an opinion on its fairness and reasonableness. The independent directors then make their recommendation on whether to accept or reject the offer, and then shareholders, after digesting this information, proceed to vote.

On paper, this sounds straightforward enough. Unfortunately, in practice, this is not the case.

Over the past month or so, retail investors have witnessed first-hand the weaknesses that plague the privatisation process. In particular, the unacceptable low-ball offers made for Boustead Projects and Golden Energy and Resources.

In both cases, the offers were too low to be deserving of serious consideration. In the case of Golden Energy, there was an inexplicable, eleventh-hour plunge in the stock price a day before the offer was announced, and no consideration given for a valuable Australian asset.

In the case of Boustead Projects, the independent financial adviser’s view was that the price was “not fair but reasonable’’, a confusing conclusion that provided virtually no guidance to the average retail shareholder.

Shareholders were then left scratching their heads when the independent financial adviser advised the independent directors to recommend that they accept the “not fair” offer.

In the view of the Securities Investors Association Singapore (Sias), it is high time for a full review of how such deals are to be handled, starting from the offeror, the boards of the target companies, the independent financial advisers appointed to advise the target companies, right up to the regulators.

The role of companies and Sias

Sias has several times in the past publicly acknowledged that no offeror can reasonably be expected to pay the perceived full value for a company it is seeking to buy out and delist.

However, tabling ridiculous “low-ball’’ offers only serves to stir resentment, unhappiness and cries of foul play among minorities, which will inevitably bring Sias into the fray.

Sias’ stand is very clear – if the price is clearly inequitable and unfair, it will first appeal for better terms, failing which, it will do its utmost to rally minorities to vote against the offer.

This was what transpired in the case of Boustead Singapore’s offer for Boustead Projects when Sias first appealed for a better price than the 90 cents per share initially offered.

Although this was then raised to 95 cents, Sias has now urged minorities to reject it on the grounds that the independent financial adviser has deemed it “not fair’’. It remains to be seen whether the deal will pass, especially since the Singapore Exchange’s (SGX) rules require exit offers to be both fair and reasonable.

Similarly, Sias’ appeal to Golden Energy has resulted in an upward revision to the offer price, albeit modest. It remains to be seen what the independent financial adviser’s opinion will be, after SGX has weighed in on the opinion based on the terms of the original offer.

More companies should take a leaf out of GK Goh’s book, where the $1.26 per share that is on the table is almost on a par with the company’s net asset value (NAV) per share of $1.3033 as at Dec 31, 2022.

GK Goh Holdings’ founder and chairman, along with its managing director, on Feb 28 launched an offer to take it private at $1.26 per share in cash, valuing the investment company at $396 million.

Although there is undoubtedly value to still be extracted from GK Goh Holdings, the large premiums of 35 per cent to 39 per cent over the counter’s traded prices over various periods ranging from one to 12 months and the small discount to NAV would be patently fair to minority shareholders.

Moreover, although the offer is final, the offerors have reserved the right to raise it if “a competitive situation arises’’.

In short, companies should recognise that with the advent of the Internet and many educational initiatives conducted by Sias, SGX and the Monetary Authority of Singapore, retail investors are no longer as unsophisticated as they used to be, and they will rally against offers that are clearly unfair and unreasonable.

The role of IFAs and regulators

The requirement that privatisation offers be both fair and reasonable was introduced a few years ago because opinions in the past could be one but not the other. In Sias’ view, this should be strictly adhered to, and independent financial advisers (IFAs) should not revert to saying an offer is not fair but reasonable, or fair but not reasonable.

As noted earlier, such conclusions convey zero informational content to minorities seeking expert guidance.

Perhaps regulators should study whether the investing public would be better served if the independent financial adviser’s conclusion is unequivocally whether shareholders should accept or reject the offer, rather than allow them leeway to hedge their bets with vague recommendations based on semantics surrounding “fairness’’ and “reasonableness’’.

In the case of Boustead Projects, the independent financial adviser has advised accepting the offer without explaining why, despite it being unfair.

Although the independent financial adviser has suggested that shareholders could sell in the market if they can get a higher price after accounting for transaction costs, invoking second-level thinking prompts the question of who would be the buyers in the market at a price higher than the final offer price.

At the same time, regulators should also study ways to address the inherent conflict of interest that surrounds the appointment of independent financial advisers.

The fee payment for the services of these supposedly independent evaluators would eventually be effected only after the offerors have taken control of the target companies that had supposedly appointed them, which may place them in a potential conflict-of-interests position.

While Sias has no doubt that independent financial advisers do their utmost to preserve their objectivity, it should be noted that independence has to be not just in substance, but also manifestly perceived as such.

The public should see that independent financial advisers are independent, in order to believe that they are truly independent.

Ideally, they should be nominated by SGX with clear directions that payment be made by the target company after the adviser has issued its report that is satisfactory to SGX.

Having independent financial advisers who not only claim to be independent, but are also seen to be such, would surely be congruent with the stated goal.

The role of independent directors

Finally, it is worth examining the role of “independent directors” in privatisation offers.

The current definition of independent directors considers only those who are independent in relation to the offer when making recommendations to shareholders. This creates an untenable situation where the managing director of Boustead Projects is tasked with making recommendations for or against the wishes of the offeror, which has been his employer and paymaster for over 25 years.

Furthermore, the Boustead Projects directors were recently awarded shares in the company. Half of the shares have yet to vest, and there is no clarity on how the company will deal with the shares when they vest in August 2023.

Allowing directors to be considered independent solely in relation to the offer weakens trust in the system. Although independent of the offer, many directors making recommendations to shareholders are not independent of relationships with the offeror and/or the controlling shareholder.

Tightening the definition of independent directors to consider more factors in such privatisation situations would enhance the perceived fairness of the system.

All things considered, more can clearly be done to protect the investing public when it comes to takeovers-cum-delistings.

A radical rethink is needed, starting with companies acknowledging that low-ball offers will simply not wash because of improved investor sophistication and Sias’ presence, to independent financial advisers who render less-than-useful opinions, to the need to ensure true independence among these advisers and directors.

Offerors wishing to make exit offers must first put forward their best offer and not make low-ball ones that are unfair to shareholders of the target companies.

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