Compulsory acquisition loophole back in spotlight as TTJ minorities get lowball offer

HERE we go again. On May 20, TTJ Holdings announced that its controlling shareholder is making a voluntary cash offer for the company at a steep discount to its book value; and that the offeror will exploit an often-used loophole to reach the compulsory acquisition threshold more easily.

The offer – if it succeeds – will wrest shares in the structural steel specialist from minority shareholders at a price well below their intrinsic value, and further erode confidence in the effectiveness of Singapore’s market regulators when it comes to protecting small investors.

Under Section 215 of the Companies Act, an offeror can exercise the right of compulsory acquisition once it obtains 90 per cent of a target company's shares that it and its related companies did not already own.

The problem is the wording of the law enables individuals who are controlling shareholders of listed companies to have shares they own count towards the 90 per cent acceptance threshold by setting up a special purpose vehicle to make the offer.

In the case of TTJ, the company’s executive chairman Teo Hock Chwee is using a privately held shell company called THC Venture to make the offer. Teo holds a direct and deemed interest of 84.4 per cent in TTJ, and has provided an irrevocable undertaking to accept the offer from THC Venture.

This means THC Venture will only have to obtain a further 5.6 per cent of TTJ’s shares before reaching the 90 per cent threshold that will enable it to compulsorily acquire the rest of TTJ’s shares.

In effect, Teo – through THC Venture – would only need to obtain 35.9 per cent of TTJ shares held by minority shareholders before being able to force all other minority shareholders to give in.

Not surprisingly, the terms of the offer are hardly generous. THC Venture is offering to pay only S$0.23 per TTJ share. The offer price may be reduced in the event of dividend payouts, and the offer itself is conditional upon THC Venture and its concert parties crossing the 90 per cent threshold.

While the offer price of S$0.23 is 36.1 per cent above TTJ’s market price just before the offer announcement, it is nearly 37.5 per cent below the company’s net asset value of S$0.368 per share as at Jan 31.

TTJ also appears to have a pristine balance sheet, with S$29.2 million – or S$0.083 per share – in cash and cash equivalents and no bank borrowings.

On top of that, the company said on March 29 that it had completed the sale of certain property, plant and equipment in Malaysia for a further RM41.7 million (or approximately S$13.4 million).

At the offer price of S$0.23 per share, Teo would have to fork out about S$12.6 million to purchase the 54.6 million TTJ shares he doesn’t already own – that’s less than half the amount of cash the company held as at Jan 31.

Addressing the loophole

Of course, Teo is only doing what any sensible businessperson would do in the same position.

The more important issue is why Singapore’s market regulators have not closed the loophole that so many major shareholders have used to take their companies private on the cheap.

My own understanding of their position is that the Companies Act needs to be amended in order to close the loophole.

This column noted last year that the Companies Act Working Group (CAWG) set up by the Accounting and Corporate Regulatory Authority (ACRA) in 2018 to review several areas of the Companies Act has in fact recommended changes that will address the loophole.

There is, however, no certainty that the changes will be accepted by Singapore’s lawmakers.

Still, it seems strange that the authorities have felt unable in the meantime to challenge a market practice that is clearly not in keeping with the spirit of the law.

As an investor, it makes no sense to me that major shareholders can have the shares they own count towards the 90 per cent acceptance threshold if they make an offer via a special purpose vehicle, but not if they make the offer directly.

IDs should step up

Under the circumstances, it is all the more crucial that TTJ’s independent directors (IDs) recognise the interests of Teo and the company’s minority shareholders are now no longer aligned.

The IDs should scrutinise statements by the offeror and ensure that minority investors have information necessary to act in their best interests.

For instance, one stated rationale for the offer is that minority shareholders will have the opportunity to cash out at a premium to market price at a time when the construction sector is beset by rising costs and labour shortages. Among other things, the offer announcement said “output of the construction sector is expected to remain below pre-pandemic levels throughout 2022”.

Teo’s tone was more optimistic in a press release on Mar 11 trumpeting several new contracts that pushed the company’s order book to S$187 million. “While constraints on foreign labour and headwinds such as global inflationary pressures and rising material costs weigh down the outlook for the immediate term, we believe the construction sector will continue to normalise as Singapore gradually opens its economy and its borders,” he said.

The offer announcement also said taking TTJ private would provide its management with more flexibility to implement strategic initiatives and operational changes that might achieve greater efficiency and competitiveness.

Yet, there were no specific examples of these possible initiatives or any explanation of why they could not be implemented if TTJ remained a public-listed company.

It’s probably fair to say that many holders of TTJ shares are patient investors who believe the stock is deeply undervalued. When the offer was announced, they had endured a 5-year total return of minus 50 per cent and 3-year total return of minus 33 per cent.

The IDs of TTJ ought to ensure that all information provided in relation to the offer is relevant to such long-term, value-oriented investors; and that any potentially misleading corporate finance boilerplate is appropriately addressed.