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Often, delistings or takeover offers present perplexing choices to minority shareholders. The advice of the company-appointed independent financial adviser (IFA) is supposed to be a good guide.... but as a recent offer involving listco LCD Gobal(formerly known as L.C. Development) shows, the IFA's recommendations can be controversial. We asked Robson Lee, a partner at the legal firm of Shook Lin & Bok, for his take on the matter. He cites cases involving offers for STX OSV, Singapore Land, Capitamalls Asia, Hotel Properties, and CK Tang. |
What is the role of the IFA in a take-over? What is contained in the IFA’s advice or opinion?
Robson: In general, an independent financial adviser (“IFA”) is required in a general offer (including an exit offer to delist) of a listed company, and in a reverse takeover (“RTO”) which requires whitewash approval from the listed company’s non-interested shareholders.
The IFA is responsible for providing the board of directors (the “Board”) of the target listed company with objective and professional analysis of the proposed offer. The Board will then evaluate the transaction and advise the shareholders.
The Securities Industry Council (“SIC”) recently issued a Practice Statement (“Practice Statement”) on the Opinion Issued by an IFA in Relation to Offers, Whitewash Waivers and Disposals of Assets under the Singapore Code on Take-overs and Mergers (“Code”).
Robson Lee, a partner in the legal firm of Shook Lin & Bok, has acted in the takeover offer for Youyue International and delisting offers for companies such as Man Wah Holdings, China Lifestyle Food and Beverages Group and China Precision Technologies.
Photo by Sim Kih
This applies to such transactions announced from 9 July 2014. The Practice Statement provides guidance on the advice given by an IFA as to whether a takeover offer, a whitewash transaction, or a disposal that constitutes a special deal in a takeover situation, is “fair and reasonable”.
IFA’s opinion in a takeover offer
The Practice Statement requires the IFA to conclude in its advice whether an offer is “fair and reasonable” when advising the Board on a takeover offer.
The term “fair and reasonable” comprises two distinct concepts. The term “fair” relates to an opinion on the value of the offer price or consideration compared against the value of the securities subject to the offer. An offer is “fair” if the price offered is equal to or greater than the value of the securities.
In considering whether an offer is “reasonable”, the IFA should consider matters other than the value of the securities. Such matters include the existing voting rights in the offeree company held by the offeror and its concert parties and the market liquidity of the securities. Hence, an offer can be:
(i) fair and reasonable;
(ii) not fair but reasonable;
(iii) not fair and not reasonable; or
(iv) fair but not reasonable.
In all cases, the IFA must explain the bases for its conclusion.
The Practice Statement requires the IFA’s opinion to be clear and unequivocal. For example, statements that are qualified by different investment horizons of shareholders should not be included. However, the IFA’s opinion may highlight that the IFA has not considered the specific investment objectives of individual shareholders.
The Practice Statement sets out certain guidelines for offer considerations that are non-cash. Where the offeree company will be receiving consideration in the form of securities which represent a minority interest, the IFA should compare the value of the consideration securities on an enlarged group basis (allowing for a minority discount), against the value of the securities which is the subject of the offer.
If the IFA uses the market price of the offeree securities as a measure of the value of the consideration securities, it should consider and comment on the depth of the market for the offeree securities, the volatility of the market price and whether the market value is likely to represent the value if the takeover succeeds.
IFA’s opinion in a whitewash transaction
The term “fair and reasonable” should be analysed as two distinct concepts in relation to whitewash transactions. However, the SIC recognises that it would not be practicable to define what these concepts would entail in different whitewash transactions.
In comparison to a takeover, in a RTO which is subject to a whitewash resolution, the IFA may consider: (i) the price of the assets being injected into the offeree company; and (ii) the issue price of the new shares, in assessing whether the terms are fair. In assessing whether the terms of the RTO are “reasonable”, the IFA may consider factors such as: (i) the financial situation of the offeree company; and (ii) whether the offeree company has any other alternative investment opportunity.
IFA’s opinion where there is a special deal in a takeover situation involving the disposal of assets in favour of certain shareholder(s) of the target listed company
Where there is a disposal of assets belonging to the target listed company in favour of certain shareholder(s) of the target listed company which would amount to a special deal, the Practice Statement requires the IFA to consider the merits of the disposal independently of: (i) the general offer, even if the takeover offer is conditional upon the disposal; and (ii) the whitewash transaction (if applicable), even if the completion of the whitewash transaction is conditional upon the disposal.
What role does a lawyer have in a takeover?
Robson: The general scope of legal advisory work involved in a takeover would include advising on the legal issues in relation to the takeover offer, undertaking legal due diligence, reviewing and commenting on regulatory issues, and drafting documents such as the offer document issued by the offeror and the circular issued to the shareholders of the offeree company.
Lawyers have the responsibility to ensure the accuracy of their clients’ takeover documents.
In Re Jade Technologies Holdings Ltd, which involved documents issued in a takeover, the SIC held that there is an independent duty by the lawyers to review underlying documents of their clients when they are put on notice that certain proposed disclosures may not be accurate. The SIC will censure all professionals, including lawyers, if they fall short of their duty of care to prevent false or misleading statements in the takeover documents. Hence, lawyers should take reasonable care to ensure that the contents of the takeover documents are true and accurate.
What about the board of directors?
Robson: Generally, the Board must ensure that proper arrangements are in place to enable it to monitor the conduct of a takeover offer, pursuant to Rule 6.1 of the Code. However, the Board may still delegate day-to-day conduct to certain individual directors or a committee of directors.
In addition, Rule 8.3 of the Code requires each takeover document addressed to shareholders to include a directors’ responsibility statement. The statement should stipulate that the directors of the company issuing the document have taken all reasonable care to ensure that the facts stated and opinions expressed therein are fair and accurate and no material facts have been omitted. It should also state that the directors jointly and severally accept responsibility for the document.
Note 1 to Rule 8.3 of the Code requires the SIC’s consent to be obtained where any director wishes to be excluded from the directors’ responsibility statement. The SIC will typically exempt a director of the offeree company who is, or has entered into an agreement to become, a director, employee or nominee of the offeror or a person acting in concert with the offeror from assuming responsibility for any recommendations that the Board may make to its shareholders pursuant to Rule 24 of the Code. However, the director must still assume responsibility for the accuracy of facts stated in takeover documents which the offeree company sends to its shareholders.
In addition, Rule 6.2 of the Code requires directors who face conflicts of interests in situations other than those set out in Note 1 to Rule 8.3 of the Code to consult the SIC on whether they should assume responsibility for any recommendations that the Board may make to the shareholders.
Under General Principle 8 and Rule 7 of the Code, the Board also has a duty to obtain competent independent advice on an offer and to make such advice known to the shareholders. In advising the shareholders, General Principle 13 of the Code states that the Board should consider the interests of the shareholders as a whole. The Board should also have regard to its general fiduciary duty to act in the best interests of the offeree company.
The IFA may be inclined to form a recommendation in line with the view of the hiring company -- do you agree with this oft-cited criticism?
Robson: The issuance of the Practice Statement is a timely response to the recent commentaries on IFAs’ opinions in relation to takeovers. The Practice Statement provides guidelines to improve the clarity and consistency of the advice given by IFAs in relation to offers, whitewash transactions and disposals which fall within the ambit of the Code.
This ensures that shareholders will obtain meaningful independent advice to allow them to arrive at an informed decision in relation to an offer.
Early this year, the IFA to the takeover of WBL Corporation, KPMG Corporate Finance, rejected Straits Trading Company's offer as "not fair from a financial point of view". What other cases have there been of the IFA recommending against a proposed corporate action?
Robson: In February 2013, the IFA to the independent directors of STX OSV Holdings Limited (“STX”), the offeree company, opined that the offer price by the offeror, Fincantieri Oil & Gas S.p.A., was not attractive and advised the independent directors to recommend that the shareholders reject the offer.
The independent directors of STX eventually concurred with the IFA’s advice.
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In the event that a significant percentage of minority shareholders disagree with the IFA's view, what can they do about the situation? Robson: In the case of a takeover, the market price of the securities of the offeree company is likely to adjust based on market forces and with reference to the terms of the offer. Shareholders of the offeree company may thus freely trade their securities without having to rely on the IFA’s opinion. Alternatively, shareholders of the offeree company who disagree with the IFA’s view may wish to raise their disagreements through letters to the press and through theSecurities Investors Association of Singapore (“SIAS”). However, previous cases have yielded varying results.
In UIC Enterprise Pte. Ltd.’s (“UIC”) offer to acquire all the shares in the capital of Singapore Land Limited (“Singland”), the Singapore Exchange (“SGX-ST”) directed the independent directors of Singland to request the IFA to explain whether the offer price of S$9.40, which was a 33.1% discount to Singland’s net tangible assets, was fair and reasonable. The IFA stood by its opinion that the terms of the offer were fair and reasonable, and UIC did not revise its offer price. UIC garnered acceptances exceeding 90% of Singland’s total number of issued shares excluding treasury shares, and Singland was eventually delisted.
68 Holdings Pte. Ltd. (“68 Holdings”) revised its offer price for Hotel Properties Ltd (“HPL”) twice from S$3.50 to S$4.05 per share, which enabled it to successfully receive acceptances representing 9.5% of the issued share capital of HPL. This allowed 68 Holdings, together with its concert parties, to eventually hold a 57.73% stake in HPL. Minority shareholders should take note that when the offeree company is a Singapore listed company, the offeror has the legal right under section 215 of the Companies Act to effect a compulsory acquisition of all shares which had not been tendered for acceptance when the offeror has received acceptances of not less than 90% of the total number of shares (excluding treasury shares) of the offeree company, other than shares already held by the offeror as at the date of the offer. To effect the statutory right of compulsory acquisition, the offeror may by notice require the dissenting shareholders to sell their shares to the offeror on the terms of the offer, provided that such notice is sent within two months of the satisfaction of the 90% threshold. |
What chances do they have in voting successfully against a proposed delisting?
Robson: In a takeover, where the offeror succeeds in garnering acceptances exceeding 90% of the offeree company's total number of issued shares excluding treasury shares such that the percentage of such shares held in public hands falls below 10%, the SGX-ST will suspend trading of the listed securities of the offeree company at the close of the takeover offer pursuant to Rule 1303(1) of the listing manual of the SGX-ST (“Listing Manual”). Shareholders of the offeree company should take this into consideration when deciding whether to accept the offer.
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Under Rule 1307 of the Listing Manual, a listed company can also apply to voluntarily delist from the Mainboard of the SGX-ST if the resolution to delist the company has been approved by at least 75% of the total number of issued shares excluding treasury shares held by the shareholders present and voting, on a poll, and has not been voted against by 10% or more of the total number of issued shares excluding treasury shares held by the shareholders present and voting. In the case of C.K. Tang Limited, it only successfully delisted from the SGX-ST in 2009 after minority shareholders had successfully voted against earlier delisting attempts.
What powers does the Singapore Exchange or any other authority in Singapore have to block a takeover offer that is unfair or unreasonable?
Robson: The SIC administers the Code, which seeks to ensure that takeovers are conducted in accordance with good business practice for the fair and equal treatment of all shareholders. However, the SIC does not evaluate the commercial merits of takeovers, which should be considered by shareholders of the offeree company.
In the event of a breach of the Code, the SIC may reprimand, censure or even deprive the offender of its ability to enjoy the facilities of the securities market. If evidence of a criminal offence is found under the Companies Act, the Securities and Futures Act or other relevant law, the matter will be referred to the appropriate authority. Professional advisors who breach the Code may be ordered by the SIC to abstain from Code-related work for a stipulated time period.
The issuance of the Practice Statement is likely to go a long way in raising the standards of disclosure and improving the consistency of IFAs’ opinions in relation to a takeover.
What scope do shareholders have in taking action against an IFA for a breach of its duty of care (in its advice on a takeover)? Has there been such a case overseas, if not Singapore?
Robson: Although an IFA’s advice in a takeover is typically provided to the independent directors of the offeree company, Rule 24.1(b) of the Code requires that the substance of such advice must be made known to the shareholders. As it is envisaged that the IFA’s advice should be accessible to the shareholders, shareholders may potentially bring a claim against the IFA under the common law in respect of a breach of its duty of care towards the shareholders.
In March 2014, the Delaware Court of Chancery (“Delaware Court”) in the United States found Rural/Metro Corporation’s (“Rural”) financial advisor, RBC Capital Markets (“RBC”), liable for aiding and abetting Rural’s board of directors in the breach of its fiduciary duties in connection with the acquisition of Rural by Warburg Pincus LLC.
During the process, RBC failed to provide Rural’s board of directors with any formal valuation analysis of the company until shortly before the board meeting approving the deal. The Delaware Court found that RBC engineered the fairness opinion to make the US$17.25 offer per share appear reasonable by misrepresenting how market analysts treated certain one-time expenses and manipulating other aspects of their analysis.
RBC also met with Warburg Pincus to convince it to use RBC for its financing needs in connection with the acquisition, without informing Rural of such conflict of interests. The Delaware Court held that RBC should thus be liable under Delaware corporate law to pay damages to Rural’s shareholders for its conduct.
What best IFA practices are established in other jurisdictions that Singapore may adopt?
Robson: Singapore may wish to consider adopting established IFA practices that have been developed in other jurisdictions. For example, in the United States, there is a market practice for IFAs to make financial projections on the offeree company’s growth prospects or the economic benefits that may be reaped from the takeover. Such assessments would be helpful to minority shareholders when deciding whether to accept the offer. In jurisdictions such as Hong Kong and Australia, there exists a code of conduct for IFAs to follow in evaluating if a takeover offer is “fair and reasonable” to shareholders.
Robson Lee at Tsinghua University, Beijing in Oct 2013 to attend an Executive Management course. Singapore may wish to consider implementing these measures to ensure consistency in the IFAs’ approach when rendering advice in relation to a takeover.
Currently, IFAs typically assume that all the information given to it is accurate. Hence, the SIC may also wish to consider providing guidelines in the Code relating to the level of due diligence and investigation that an IFA has to do before issuing its opinion, such as independently verifying the accuracy of the data about the company.
Which are the takeover transactions that you have advised in recent years?
Robson: I recently acted for Youyue International Ltd, which is listed on the Mainboard of the SGX-ST, in the mandatory general offer made by City Green Build Technology Pte Ltd. I have also been involved in the successful delisting of several companies listed on the SGX-ST, including Man Wah Holdings Limited, China Lifestyle Food and Beverages Group Limited and China Precision Technologies Limited.
I had also advised offerors which had successfully terminated takeover offers that had been announced to the market.
Here is the Chinese version of the above article.
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