SIC raps A&G, DBS for whitewash bungle, but it was Mapletree sponsor that gave sweeter terms

FOR many investors, the most significant aspect of the merger of Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT) nearly two years ago was the intervention of their sponsor, Mapletree Investments, to appease disgruntled minority investors.

On Feb 15, however, the Securities Industry Council (SIC) revealed an intriguing backstory to the transaction when it publicly upbraided Allen & Gledhill (A&G) and DBS for breaching the Singapore Code on Take-overs and Mergers in their role as advisers to the manager of MCT.

The merger involved MCT acquiring MNACT in exchange for new units and cash, and then renaming itself Mapletree Pan Asia Commercial Trust (MPACT). Mapletree Investments had provided an undertaking to exchange its 38.1 per cent stake in MNACT entirely for new units in MCT.

This made it likely that Mapletree Investments, which already held a 32.6 per cent stake in MCT, would acquire more than 1 per cent of MCT’s units under the merger.

SIC said MCT’s manager had been wrongly advised by A&G during a meeting on Nov 24, 2021, that a whitewash waiver for Mapletree Investments having to make a general offer for MCT was unnecessary.

Relying on A&G’s advice, MCT’s manager did not apply to the SIC for a whitewash waiver before the merger was unveiled on Dec 31, 2021.

MCT’s manager subsequently reviewed the transaction, and asked A&G about the need for a whitewash waiver again on Jan 6, 2022. At that point, A&G advised MCT’s manager that it was indeed necessary.

Meanwhile, DBS had advised MCT’s manager that a whitewash waiver was necessary in an e-mail on Oct 18, 2021, said SIC. But DBS did not raise any issue with the advice A&G subsequently gave MCT’s manager during the meeting on Nov 24, 2021.

“The Council is of the view that on this occasion, both A&G and DBS have fallen short of the standards expected of advisers. Accordingly, the Council finds both A&G and DBS to have breached the Code,” said SIC in its Feb 15 statement.

Lengthy investigation

What exactly prompted SIC to look into the MCT-MNACT merger? Why did it take so long to reach a conclusion on the matter? And why did A&G and DBS face no consequences other than being named and shamed in a public statement?

On the face of it, SIC became aware of the problem from the course of events. After all, MCT applied for the whitewash waiver only after the merger was announced; and SIC itself had granted the waiver subject to it being approved by minority unitholders of MCT.

An amendment to the deal to include a whitewash condition was announced on Jan 28, 2022.

SIC also said on Feb 15 that MCT’s manager, A&G and DBS had been invited to make submissions on whether they had complied with the Code with respect to the omission of a whitewash condition in the initial merger announcement.

In the end, SIC decided not to take further action against A&G and DBS, as the advisers had taken prompt action to mitigate their breaches of the Code and improved their internal processes and controls to prevent similar incidents from recurring.

The partner at A&G responsible for giving incorrect advice to MCT’s manager had also volunteered to abstain from Code-related work for approximately 12 months from Jan 13, 2022.

As for why SIC has only just finished dealing with breaches of the Code that it must have known about for more than two years, one reason may be that it chose not to begin its inquiries until the merger was completed in July 2022.

The modification of the merger to include a whitewash condition took place when the deal was in its early stages; and the merger was already subject to the approval of MCT’s minority unitholders.

Under the circumstances, SIC may have thought it better to allow the merger to run its course before investigating the breaches.

Moreover, once the investigations were under way, SIC may not have limited itself to the matter of the whitewash waiver. It may have looked at whether other elements of the merger were in compliance with the Code.

Sponsor sweetened deal

Whatever the case, this episode holds lessons for investors who sometimes call for market regulators to intercede when faced with deals that are disadvantageous or unfair.

Unless there are serious and very obvious breaches of the rules, those investors are probably barking up the wrong tree. They should instead focus their efforts to obtain better terms on lobbying the parties who really call the shots.

The MCT-MNACT transaction was the last of a string of mergers involving real estate investment trusts (Reits) with common sponsors.

These deals were premised on the notion that the larger combined entities would be able to raise funds more effectively and grow more quickly. But they often left minority unitholders on one side of the transaction or the other feeling shortchanged.

More importantly, there was doubt that the mergers were genuine arm’s length transactions as the managers of Reits being merged were owned by the same corporate groups.

In the MCT-MNACT case, there was minority-investor discontent on both sides of the deal. Some minority unitholders of MCT felt MNACT had an inferior portfolio of assets and was being valued too richly under the deal.

On the other hand, activist investor Quarz Capital grumbled that MCT was opportunistically acquiring MNACT with its overvalued units, and called on the Monetary Authority of Singapore to ensure MNACT’s manager obtained better terms.

The pressure from minority investors eventually led to Mapletree Investments intervening.

Almost three months after the merger was announced, unitholders of MNACT were given the added option of receiving the consideration for their units – which were equivalent to MNACT’s book value – entirely in cash.

MCT obtained the funds for this “all-cash option” through a more than S$2 billion preferential offering of new units, backed by Mapletree Investments.

The move won over minority investors, and led to Mapletree Investments now holding a 55.7 per cent stake in the combined entity, MPACT.

It also arguably set a new level of investor expectations for sponsors of locally listed Reits that could not have been achieved with tougher rules or regulations.