Delistings dash shines light on opportunity to lubricate these deals and exploit loopholes

THIS past week, interesting developments unfolded at two locally listed companies in the throes of being taken private, which could shape thinking in the market about these often-contentious deals.

On Friday, Feb 19, shareholders of Sunningdale Tech gave their consent to a scheme that will see the maker of precision plastic components being delisted by April.

With the key uncertainty of this transaction now removed, market attention could turn to the relative merits of investors accepting cash for their Sunningdale shares versus shares in the holding company of the offeror.

Sunningdale's chairman and major shareholder Koh Boon Hwee, alongside a unit of Novo Tellus PE Fund 2, are offering to pay minority shareholders of the company S$1.65 for each share they own.

In lieu of S$1.65 in cash, minority shareholders can opt to be issued with 1,650 shares in Sunrise Technology Investment Holding (Cayman), the holding company of the acquiring vehicle, at an issue price of S$0.001 each.

The maximum number of Sunrise shares that will be issued for such scrip consideration, however, is capped at just under 55.7 million, representing about 30 per cent of the company's equity.

If demand exceeds this cap, the Sunrise shares will be issued on a pro-rata basis and the balance of the consideration will be satisfied by cash. If demand is very strong, as little as just over one-fifth of the consideration to minority shareholders of Sunningdale could end up being satisfied with Sunrise shares.

Prior to the scheme meeting on Friday, there were concerns that minority shareholders of Sunningdale might not vote the deal through. In fact, the offer price for Sunningdale shares was raised to S$1.65 from the original S$1.55, after Quarz Capital Management threatened to mount a campaign against the scheme.

Quarz was less than impressed with the revised price of S$1.65, but chose not to fight on in order to pursue other opportunities in the market.

As doubts over whether the transaction would take place is now removed, Sunningdale's share price during its last few weeks as a public-listed company could provide an indication of whether minority investors have any appetite to ride along with private equity acquirers.

If the stock creeps above S$1.65, perhaps the passage of similar deals in the future could be lubricated by providing minority investors with an avenue to participate in the upside that might be unlocked after a company is taken private.

If the stock languishes below S$1.65, however, it could be a sign that price is everything when it comes to delisting proposals.

Sunningdale shares are expected to trade in the market until March 8. The company is expected to delist on April 20.

Privatisation loophole

Separately, GL Ltd's independent directors recommended this past week that the company's minority shareholders accept Guoco Group's offer to take the company private at S$0.70 per share - which is some 27 per cent below its net asset value (NAV) per share - despite its appointed independent financial adviser (IFA) declaring the deal to be "not fair but reasonable".

This turned the spotlight on an apparent loophole in tougher voluntary delisting rules introduced in July 2019, designed to make it harder for dominant shareholders to take their companies private without adequately compensating minority shareholders.

In particular, Singapore Exchange Regulation (SGX RegCo) announced back then that exit offers in conjunction with voluntary delistings would henceforth need to be "fair" as well as "reasonable".

Even though this rule change related specifically to voluntary delistings, SGX RegCo said it would apply to any corporate exercise that results in a public-listed company being taken private - even if the company loses the minimum necessary shareholding spread to remain listed.

"If the public float of the issuer falls below the minimum threshold, SGX RegCo may suspend trading of its securities. In the meantime, the issuer must meet its continuing obligations under the Listing Rules (including restoring its public float)," SGX RegCo added, in a statement at the time.

So, how is Guoco Group hoping to take GL private with an offer that is not both "fair" and "reasonable"?

An offeror can still apply for a delisting of a target company by exercising its right of compulsory acquisition, according to SGX RegCo.

One company that is going private in this fashion is Sunvic Chemical Holdings.

In November, an entity called Harrier Group, which initially owned no shares in Sunvic, announced an offer for the company at S$0.028 per share.

This offer price was more than 80 per cent below Sunvic's NAV per share. The appointed IFA said the offer was "not fair but reasonable".

At the close of the offer earlier this month, the acquirer had obtained nearly 92 per cent of Sunvic and said it would compulsorily acquire the rest of the company.

Opportunistic lowball offer

There is, of course, a big difference between Sunvic and GL.

Sunvic has suffered significant losses in recent years. It was also placed on SGX's watch list for financial criteria in June 2018. Trading in its shares has been suspended since 2019, over concerns related to corporate guarantees to "purported third parties".

By contrast, although GL's key hospitality and oil & gas businesses are facing major headwinds, the company is in good financial shape. Moreover, a strong recovery could unfold once Covid-19 is under control.

As The Business Times reported on Feb 20, however, Bermuda-registered GL could be compulsorily acquired more easily by Guoco Group than a similarly tightly controlled Singapore company.

In a circular last week, shareholders of GL were told the offeror intends to exercise its rights under Bermuda's Companies Act to effect a compulsory acquisition if it receives valid acceptances for 90 per cent of the shares in the company; or if it ends up holding 95 per cent of the company whether through valid acceptances or otherwise.

The offer is conditional upon the offeror obtaining not less than 90 per cent of GL's shares. A wholly-owned unit of Guoco Group called GuocoLeisure Assets Limited (GAL), which owns 73.67 per cent of GL's shares, has irrevocably undertaken to accept the offer.

In my view, minority shareholders of GL should carefully consider the advice of the company's independent directors alongside the tighter standards SGX introduced two years ago for delistings.

In the end, the efforts of independent directors and regulators notwithstanding, investors have to rely on their own agency to protect themselves from opportunistic lowball offers.

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