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Delistings and the 'independence' of IFAs

The Singapore Exchange's (SGX) changes to the voluntary delisting rules do place more voting power in the hands of minorities, but as with most things, the devil is in the details.

THE Singapore Exchange's (SGX) changes to the voluntary delisting rules do place more voting power in the hands of minorities, but as with most things, the devil is in the details.

Of the two changes announced on Thursday, the first requires voluntary delisting offers to be both "reasonable" and "fair", in the opinion of the appointed independent financial adviser (IFA).

The second change requires offerors and parties acting in concert with them to abstain from voting on the voluntary delisting resolution. The 10 per cent block will also be removed.

The crucial detail missing for now is how the SGX and relevant industry bodies plan to develop guidance and standards for IFAs and their opinions.

Speaking to The Business Times on Thursday, SGX Regulation CEO Tan Boon Gin said it is "a bit premature to discuss this, given that the rules were only just rolled out today". But the industry is anxious to know.

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Why? Because now an inordinate amount of power has been put in the hands of a stakeholder (IFA) that, over time, investors seem to have lost confidence in.

In recent extraordinary general meetings, IFAs have been put in the uncomfortable spot of defending their recommendation - any permutation of "fair" and "reasonable" - and have failed to present convincing rationales to angry shareholders demanding higher offer prices.

But perhaps it's not just greed that leads investors to be insatiable.

Mr Tan said it can stem from the fact that shareholders and IFAs value the shares in different ways.

"There appears to be some misconception out there that in order for an offer to be fair, the offer price must be higher than the net asset value (NAV) and net tangible assets per share (NTA), otherwise it's not fair. That's not true."

This is because shares on the local bourse often trade at a discount to NAV and NTA.

IFAs also usually justify the offer price based on whether they feel the discount to NAV or NTA is a fair discount, after taking into consideration the financial condition of the company, as well as the discounts applied to comparable companies and transactions.

That said, there is a bigger, and often unspoken, issue here - "IFA shopping".

Mah Kah Loon, a partner in the Asia-Pacific transaction advisory services at Ernst & Young Solutions, said: "IFA shopping - shopping for an appropriate opinion leading to a preferred outcome - should not happen but there is always a risk of this happening. The normal process would be for the board to convene requests for proposals when a transaction is announced. That will hopefully prevent shopping for a favourable opinion."

That does not always happen.

A person from a local corporate finance house says: "We don't pitch for every IFA deal. We will look at the terms before pitching. Unfortunately, if you pay high enough, you'll get an IFA who says yes."

The person agreed that IFA's independence can sometimes be compromised. "We have been in meetings where the company says, 'Can you support or not? Only if you can support then we engage you.' My team will look through the assessment and only when we're comfortable that we can support, then we pitch."

There is little incentive otherwise to step on the toes of corporates and high net worth individuals orchestrating an offer.

Responses to the consultation paper alluded to the issue as much. A few respondents had raised concerns relating to the independence of IFAs and IFA opinions. One cautioned that requiring the exit offer to be fair and reasonable may lead to the board of directors of the target company to "shop" for an IFA that is prepared to provide the requisite opinion.

But Mr Tan believes that by adding the requirement for an offer price to be "fair" - which is a quantitative measure according to certain financial metrics that will be prescribed in due time - "it would be more difficult for there to be IFA shopping, because now you would have to justify why an offer is fair in quantitative terms, with regard to financial metrics such as NTA and NAV, as opposed to reasonableness, which was the only requirement previously, and is a much more qualitative judgment."

Reasonableness has to do with consideration of other factors such as the existing voting rights in the company held by the offeror and parties acting in concert with it, and the market liquidity of the relevant securities.

"Once we have introduced the concept of fairness... the discretion afforded to the IFAs is reduced."

Market watchers have raised other gripes, such as the fact that shareholders should be the ones to decide whether to accept an offer price, without being limited by the outcome of an IFA's recommendation.

Investors can have their own reasons to want to accept an offer deemed "unfair" by an IFA. They shouldn't have to be boxed in by the adviser's professional opinion, they argue.

There is also concern that offerors that attempt a takeover but fail because they don't meet IFA requirements, may find themselves in a rut because SGX is unlikely to allow the issuer to delist, and may suspend the trading of the issuer's securities.

Such issuers will still need to comply with listing rules, including the requirement to restore its public float, through private placement or otherwise. Their best hope is probably that a subsequent offer or scheme of arrangement that complies with listing rules will enable the company to delist.

So while the changed rules do return some power to minorities, it is not all true that they will make the delisting process easier.

Overall, with the heavier reliance now on IFA opinions for exit offers to succeed, more must be done to regulate the sector to ensure the independence of these advisers, and restore back investors' confidence in their opinion.

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