In March 2014, an American private equity firm announced plans to take over the world’s largest supplier of intermediate bulk containers.
The takeover was mooted in March 2014, and the deal was finally struck at a 6.8% premium to the last traded price a few months later.
The concern for the target company’s minority shareholders lies with the way this deal has been structured. The takeover structure chosen is a “scheme of arrangement”, which means that as long as three-quarters of all those attending the EGM consent to the deal – either by voting in person or by proxy – the PE firm has successfully bought over the target company. The deal is sealed even if a large minority at the EGM are opposed to it.
The above consequence shows just how crucial the statement “those present and voting” is, especially so when major shareholders vote in favour of a deal. In this case, its founder who controls about 32% of its shares, and has agreed to sell his shares to the PE firm, will almost certainly help to push the deal through.
This proposed deal is a privatisation as the PE firm has said that it intends to delist the target company if its scheme of arrangement is approved. But the founder, who has been managing the company, will not be leaving. Besides getting some US$360mil in cash in return for all his shares, he and his management team will be offered management incentives, including an offer to buy into a new holding company on terms that have not been disclosed to the other shareholders, as well as to take part in a share option plan whose terms are opaque too. All this would still be acceptable if the founder was barred from voting on the proposed takeover; but he will be among the voters, and with his vote, the deal is close to being considered done.
As it is, the local regulator, has already advised that the proposed management incentives for the founder and his team does not violate rules of their code on takeovers and mergers, which lays out what are special deals, against which shareholders must stand.
Instead of resorting to a takeover via a “scheme of arrangement”, the more transparent approach would have been to just make a straight, all-cash offer for the company – and then leave it to each shareholder to decide whether to go with it. There are other provisions in the Companies Act for the PE firm to delist the target company if its takeover bid is successful. The voting threshold under these provisions, however, is 90%.
The approach taken by the PE firm leads us to assume that the demanding threshold is perhaps why the PE firm opted for the “scheme of arrangement” proposal in the first place. The PE firm has gone a step further to ensure that this trade goes through by including a “switch option” that allows it to change the deal to a voluntary cash offer should there be a competing offer.
In the event that it exercises the switch option, the PE firm has stated that it will offer equivalent or improved terms than the terms offered in the current scheme, which could possibly include a higher price per share.
We can presume that the PE firm is willing to pay a higher price for the target company however, will only do so, if they are faced with a competing bid; not because they encourage the target company or Founder to look for an alternative bid. The deal details get more interesting as there is also a “no shop” provision that will require the target company to pay up to US$10mil in fees to the PE firm in the event that an alternative bid emerges that is higher. The founder has also an irrevocable acceptance of the PE firm’s current offer, which states that the founder is not allowed to accept any alternative offer, despite the fact that an alternative offer comes at a better price.
The final lock down with the founder, is that should the PE firm switches its offer to a cash offer, the founder is required to follow suit and accept their new terms and conditions.
This details in the offer clearly indicates that the PE firm has structured the deal in a manner that has blocked the founder to look at any other competing offer which of course, means that the minority shareholders are the ones left with ultimately, no real choice.
We have seen a notice that the regulator has stated that an independent financial adviser’s opinion is required, and that this opinion must clearly point out that minorities will give up the opportunity of a full general offer should they accept this “scheme of arrangement” offer.
In other jurisdictions, the regulators there have come up with rules known as the “negative vote” which prevent unscrupulous major shareholders or privatisations to take place at unfair takeover prices which are generally always at the expense of minority shareholders. Any jurisdiction that ignores having this “negative vote” requirement, is paving the way for deals that really don’t protect the smaller investors. So much for improving corporate governance?
© CORSTON-SMITH ASSET MANAGEMENT SDN BHD 2014