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Will revelation foil Pangolin's bid to block delisting?

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Two weeks before an anticipated showdown that will determine if Challenger Technologies will stay on as a listed company, the party making the exit offer has played what it hopes is its trump card.

TWO weeks before an anticipated showdown that will determine if Challenger Technologies will stay on as a listed company, the party making the exit offer has played what it hopes is its trump card.

Digileap Capital, which is offering to delist and privatise Challenger, revealed last week that Pangolin Investment Management, the purported "resistance leader" that is championing the interest of minority shareholders, had earlier expressed a desire to cash out.

Pangolin is asking shareholders to vote against the voluntary delisting deal because it deems the offer too low. But according to Digileap, Pangolin made an unsolicited offer to sell its stake to the majority shareholder in October 2017 at S$0.435 per share. It made another offer to sell in March 2018 but without stating a price.

Why would the offeror disclose this new piece of information at this juncture? Is it to sow mistrust among the dissenting minority shareholders at a time when Pangolin is furiously attempting to amass the 10-per-cent vote it needs to block the deal? Given the revelation, it is natural for minorities to wonder if Pangolin is really on their side or just looking after its own interests. To be sure, it is possible to do both at the same time.

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On June 12, the same day that the delisting circular was despatched, Pangolin said it was already close to obtaining votes for the 10 per cent share required to block Digileap's S$183 million exit offer for the electronics retailer. This includes the 2.94 per cent stake that Pangolin already owns in Challenger. Of course, whether or not the shareholders will turn up to vote or secure proxies to vote on their behalf on the day itself remains to be seen.

This is the inherent difficulty for minorities looking to veto against a voluntary delisting. Such a delisting has to be approved by 75 per cent of the shareholders present and voting, and not opposed by 10 per cent or more.

Another obstacle is also the fact that the company directors and controlling shareholders can vote as well. In this regard, the Loo family group and majority shareholder Ng Leong Hai collectively hold about 78.64 per cent of Challenger, which already makes the first condition of the voluntary delisting an easy one to meet. Indeed, the Loo family group and Mr Ng have already obtained irrevocable undertakings to vote all their shares in favour of the delisting resolution and accept the exit offer.

What remains to be seen is whether dissenting shareholders can band together to amass the 10-per-cent block to vote it down. But while Pangolin has said that it has received e-mails from fellow minority shareholders pledging to vote against the exit offer, in reality, any kind of administrative carelessness or unexpected events - for instance, proxy forms not submitted in time, or shareholders unable to attend the June 27 extraordinary general meeting (EGM) at the last minute - could cause them to fall short, and consequently cause the voluntary delisting to go through.

In last week's announcement, the offeror also made an implicit warning when it said that if the delisting is not approved by shareholders, the exit offer will lapse and the offeror and its concert parties will not be able to make another offer for the shares for 12 months from the date the exit offer lapses.

That means 12 more months of thin trading liquidity, languishing share price, and uncertainty as the company undergoes its business restructuring. Can shareholders accept that?

The situation

As it is, Digileap, which is 70 per cent owned by the Loo family, and 30 per cent by Dymon Asia Private Equity, is offering S$0.56 per share before the FY18 final dividend of S$0.02 per share (or S$0.54 per offer share after the dividend was paid out on June 3, 2019).

Pangolin is arguing that a fair valuation for the share buyback should come at S$1.15 a share, given the excessive cash the company has on its balance sheet - about S$66 million as at end-March 2019, or about S$0.19 per share.

In a statement last week, Loo Leong Thye, director of the offeror, and Challenger's executive director and chief executive officer, said he only began exploring the possibility of a delisting after receiving the two unsolicited offers from Pangolin, because he wanted to make an offer to all shareholders rather than enter into a transaction with just one.

This is a kind of role reversal in making the statement, a plot twist that swops the role of the bad guy to the good guy.

In its defence, Pangolin said that it was merely "sounding out" Challenger as to whether it had a buyer, as part of the fund's day-to-day operations in weighing any investment. It said that it did not actually make a firm offer.

Regardless, it is true that shareholder activism has been on the rise in recent years, in some cases led by sophisticated institutional investors with industry knowledge leading the charge.

Take, for example, Noble Group. When the troubled commodity trader revealed its rescue plan to restructure some US$3.5 billion debt, Abu Dhabi-based investment firm Goldilocks Investment baulked at the unfairness of the plan and took the company to court. That was arguably a win for minority shareholders.

But not all activist-led challenges were successful. Apollo Investment Management tried to amass a 10 per cent block vote to prevent a voluntary delisting of Vard Holdings by its controlling shareholder Fincantieri Oil & Gas. It didn't succeed, managing only to get a 3.57 per cent share of those present and voting to oppose. This was despite a marathon four-hour EGM and much effort expended to rally others to oppose the vote before the meeting.

Challenger's June 27 EGM will be interesting to watch.

Will Digileap's attempt to cast doubt on Pangolin's motivations win the day or will dissenting shareholders prevail, regardless?