SGX RegCo to relook exit offers, voting requirements for delistings

Singapore

DELISTING offer prices may have to be both fair and reasonable in future, and the voting requirements tweaked, if proposed changes being considered by the Singapore Exchange Regulation (SGX RegCo) come to pass.

SGX RegCo is planning to put up these proposals for formal public consultation by year end.

"Currently our rules require an offer to be reasonable, but they don't require it to be fair. We are considering whether we should require the price to be both fair and reasonable," Tan Boon Gin, chief executive officer of SGX RegCo, said in reply to queries by The Business Times.

BT reported in June that SGX RegCo was mulling new rules to protect minority shareholders in delistings, specifically whether controlling shareholders should vote, and whether exit offers are too low.

Currently, approval for the delisting must be received from 75 per cent of the shareholders present, with not more than 10 per cent disagreeing with the move. Critics say under present rules, even if minority shareholders who vote are unanimous in rejecting the proposal, it may pass anyway unless the voting turnout is unusually high.

"We need to look at the balance of interests, and put in place rules that would align the controlling shareholder's interest with incentives for minority shareholders to take action," Mr Tan added.

Delisting has come under heavy criticism by corporate governance experts and minority shareholders who complain about squeeze-outs by controlling shareholders at unattractive prices.

Majority shareholders of listed companies beset by low valuation have been tempted to take their businesses private. Other reasons to delist are a lack of liquidity, an injection of private equity funding, a desire to retain family control in a private setup and other strategic impetuses, noted Adrian Koh, EY's Asean growth markets leader, in the group's "Board Matters Quarterly" report.

Examples this year included Italy's Fincantieri's privatisation of Singapore-listed subsidiary, Vard Holdings; Wheelock & Co's offer for Wheelock Properties; and LTC's controlling shareholders' offer for the steel trading firm.

Minority shareholders have bemoaned the confusing terms of "fair" and "reasonable" and their inherent subjectivity. They question the usefulness of independent financial advisers' (IFA) opinions issued, especially when an offer is said to be "not fair but reasonable", "fair but not reasonable" or "fair and reasonable" even when the exit offer is at a hefty discount to the latest net asset value (NAV) of the delisting target.

"Fair" and "reasonable" are two different concepts defined by the Securities Industry Council (SIC). According to Singapore's takeovers watchdog, an offer is regarded as "fair" if the value of the offer price is equal to or greater than the value of the securities that are the subject of the offer. In considering whether an offer is "reasonable", the IFA need to consider other matters as well as the value of the securities. These include the existing voting rights in the company held by the offeror and concert parties as well as the market liquidity of the securities.

"Exit offers should be required to be fair as well as 'reasonable'. The definition of 'reasonable' should be revisited, and circular logic removed," Masya Spek, a consultant analyst at Apollo Investment, had told BT previously.

Retail investors have argued that a delisting should not be used as a threat to put pressure on or force minority shareholders to accept an offer that is at a deep discount to the underlying asset value of the company concerned.

Ong Cheng Kian, a 78 years old retail investor, asked: "Who will be there to champion the rights of small shareholders like myself in the face of such 'below NAV valuation' offer by big shareholders that is greatly disadvantageous to us?"

Academics and retail investors argue that listing rules here should bar controlling shareholders from a vote, like in Hong Kong, where the regulators disallow directors, chief executives, controlling shareholders and their associates from voting on a voluntary delisting move in order to prevent squeeze-outs. Without a similar restraint in Singapore, the odds are stacked heavily against minority shareholders.

When majority shareholders are allowed to vote, the notion that independent directors have a key role in safeguarding the interests of minority shareholders can be laughable. Take the example of Vard, in which Fincantieri had already amassed more than 80 per cent of the shares. It can be argued that the independent directors' recommendation, whether in favour or against, would not have made a difference and Vard's delisting was, in reality, a fait accompli.

Adrian Chan, head of the corporate department and a senior partner at Lee & Lee, said the question of whether the majority shareholder should be allowed to vote in a delisting can be contentious.

"The rules currently allow him to vote but minority shareholders are rightfully aggrieved that if he is permitted to vote, the delisting is invariably pushed through. On the other hand, since the shareholder resolution deals strictly with the delisting, which is a neutral subject that treats all shareholders equally, the majority shareholder can argue that he should not be disenfranchised by denying him his votes and he should be treated the same as the other shareholders.

"At the end of the day, however, since there is a requirement for there to be an exit offer at the same time, there could be a good basis to say that the offeror and its associates should not be allowed to vote," Mr Chan said.