Date: September 25, 2016
Singapore’s stock market is witnessing an interesting trend. A number of high-profile companies have either delisted, or announced their intention to do so. OSIM International Ltd, China Merchants Holdings (Pacific) Ltd, Eu Yan Sang International Ltd, Neptune Orient Lines and now SMRT Corporation Ltd are among the big names on that list.
However, no other company’s proposed privatisation has generated as much interest as that of SMRT. There are multiple reasons for that. Firstly, it is hard to find another publicly-listed company that affects the lives of millions of Singaporeans on a daily basis. As such, any development related to SMRT always sees a tinge of emotion being a part of all arguments. Secondly, the fact that Temasek is proposing to fully acquire SMRT adds another dimension to the interest level.
But the aspect that has been discussed the most among shareholders is the decision to undertake the proposed privatisation via a Scheme of Arrangement rather than a General Offer. While there are fewer examples of other firms that have taken this route, a Scheme of Arrangement is not totally uncommon – for example, KKR’s acquisition of Goodpack. That said, some shareholders may not fully appreciate the difference between a Scheme of Arrangement and General Offer, and the respective merits of each.
Over the past few weeks, SIAS has received enquiries from shareholders regarding the offer. To assist shareholders and to help them make an informed decision on the offer, I wish to discuss the issues dominating their minds.
Why a Scheme of Arrangement and not a General Offer?
There are various differences between these two. To see how these differences impact SMRT’s proposed privatisation, it is important to understand Temasek’s intentions. Temasek, which is already SMRT’s majority shareholder, has stated that it is not looking to simply increase its shareholding further. Its desired goal is take SMRT private and delist it.
A Scheme of Arrangement is much better suited for that than a General Offer. This is true for both Temasek as well as retail shareholders. This is because a Scheme of Arrangement has a binary outcome. Simply put, it either succeeds or fails. Retail shareholders have an opportunity to cast their vote and decide whether they want to sell their shares or not and be part of a collective decision by the general body of shareholders. If the vote is successful, SMRT will be delisted from the Singapore Exchange. If it is not, SMRT will continue to remain a listed company with no change in Temasek’s shareholding. It is important to note that Temasek cannot vote.
Under a General Offer there is a possibility that Temasek may see its shareholding increase further, but not enough for it to delist SMRT. That, Temasek has said, is not the desired outcome of this exercise.
At the same time, under a Scheme of Arrangement, SMRT is required to call a special shareholders’ meeting, often termed the Scheme Meeting. This is to give minority shareholders a platform to raise any questions about the proposed Scheme, as well as to cast their vote to decide its outcome. A General Offer does not require any such meeting to be called and does not provide for shareholders to cast their votes as a collective body.
How does a Scheme of Arrangement protect minority rights?
In a Scheme of Arrangement, Temasek cannot vote. One of the most important things to note is that,
for a Scheme of Arrangement to be successful, it needs to meet two distinct thresholds at the
Scheme Meeting: Number of shareholders voting, and volume of shares represented. It requires the
approval of a simple majority of shareholders who are voting at the meeting, either in person or
proxy. In addition, those voting in favour of the scheme need to hold at least 75% in value of the
shares that are voted at the meeting.
For example, let’s assume 2,000 shareholders turn up at the Scheme Meeting (including proxies – so
let’s assume for this example it is 800 shareholders present, and another 1,200 proxies). Let’s say
they own a combined two million SMRT shares. For the Scheme to be successful, it requires the
approval of a majority in numbers. As such, at least 1,001 of those shareholders (inclusive of the
proxies) will have to vote in favour. In addition, those 1,001 shareholders must own at least 1.5
million shares (75% of total shares being voted at the meeting) for the volume threshold to be met.
So not only does a Scheme of Arrangement give retail shareholders a platform to raise questions,
clarify doubts and make an informed decision, it also ensures that their interests are not
compromised. The fact that the Scheme of Arrangement requires a further clearance from the High
Court provides additional assurance that the interests of minority shareholders will be protected.
Is the Offer Price Fair?
The biggest question around any proposed privatisation is whether the price offered is fair.
Shareholders always want more, especially if they originally invested at a higher price. Temasek too,
has to take multiple factors into account while deciding on how much it is willing to pay for a
company. In this particular case, as stated in the Scheme document, the offer price will not be
increased.
I have always advocated that shareholders should pay close attention to the opinion of the
Independent Financial Adviser (“IFA”) on the price. The Board of Directors of SMRT appointed a wellknown
international investment bank, Rothschild (Singapore) Limited, as the IFA to opine on the
terms of the offer including the Scheme Price of S$1.68 per share. The IFA has found the terms of
the Scheme to be fair and reasonable. In addition, the Independent Directors of SMRT concur with
the recommendation of the IFA, and have unanimously recommended that shareholders vote in
favour of the Scheme. In addition, ten equity analysts have also recommended that shareholders vote
in favour of the offer, and international corporate governance groups, ISS and Glass Lewis, have
recommended the same.
Shareholders now have a decision to make – you can either vote for or against the Scheme. In such a
situation, it is important to put aside the emotions and evaluate the offer based on the merits of the
case, looking forward, not backwards. Comparing the Scheme to historic value may not be a useful
way of looking at the Scheme if circumstances have changed markedly, as they have in this case.
If shareholders vote for the Scheme and the Scheme is successful, then they will be assured of the
Scheme Price of $1.68 per share. If they vote against the Scheme and the Scheme fails, then there
would not be a support in terms of the Scheme Offer Price to keep share price at the current level
and the market will be left to decide at what price the shares would be trading. If one goes by
analysts’ predictions, and if they are correct, the price is expected to fall. Whether it will or not, only
time can tell. Temasek will have to wait for at least 12 months before making any new offer, but that
is if it decides to do so. In addition, you will need to understand how the company will continue to
operate under the New Rail Financing Framework (NRFF) and its prospects moving forward. Further,
SMRT has shared that to be prudent, it plans to use a substantial part of the net proceeds from the
proposed sale to retire part of its existing debt. As such, shareholders will have to accept that there is
no special dividend, and both the company and Temasek reaffirmed this when they announced the
Scheme.
Shareholders are encouraged to read the IFA report in the Scheme Document, evaluate the case for
and against and make a well-informed decision come 29 September 2016. And for those who cannot
or will not attend the meeting, you should still consider submitting your proxy so that your voice can
be heard on this important question affecting your shareholding. This is not like a General Offer,
where a shareholder only has to act if he or she agrees with the offer. This is a process where
shareholders express their views by voting at the meeting one way or the other. One should not
assume an outcome, and not vote because of an assumption. Participation is both a right and a
responsibility of shareholders in a proposed Scheme of Arrangement, because the outcome affects all
minority shareholders, even if you don’t vote. It is your investment and it needs your attention. It is,
therefore, in your interest to vote, and vote you must with your head and not with your heart.
David Gerald
President & CEO
Securities Investors Association (Singapore)
