Khazanah Nasional Bhd's on-going divestment of its 32.21% stake in Pos Malaysia Bhd has thrown into the limelight the issue of parties surreptitiously wresting control over listed companies. The issue is this: are parties who secure significant stakes in listed companies below the 33% mandatory general offer threshold, doing something unfair by gaining control without the obligation of offering other minority shareholders the chance to exit or an enjoyment of the premium being paid?
The issue is not new. In the past, there had been concerns that certain parties had secured control over listed companies this way.
Among the examples was Tan Sri Tajudin Ramli's 1994 acquisition of a 32% stake in Malaysia Airlines (MAS) via his vehicle Naluri Bhd. There was also the perceived control that the late Tan Sri Yahaya Ahmadseemed to have had over national car-maker, then known asPerusahaan Otomobil Nasional Bhd (Proton). Yahaya's control was achieved through a complex web of indirect and cross shareholdings, never triggering the 33% threshold at any point.
And how about Primus Pacific Partners Ltd in 2008, which paid a whopping 55% premium to market, for its 20.2% block in EON Capital Bhd? Didn't that indicate that Primus was paying a premium as it believed it was going have significant influence over how EON Bank was going to be managed?
Back to the Pos Malaysia example, since the divestment process has required bidders to submit detailed business plans of how they intend to add value to the company, it seems only logical to deduce that this party is going to be in control of the company.
What amounts to control?
But the determination of control is a very complex and subjective issue.
For starters, here's the current position of control as far as rules in Malaysia are concerned. The rules are enshrined in the Takeover Code of 2010.
At the onset, the rules are clear about one thing: that in Malaysia, a numerical test is the basis used to determine control. That's the 33% trigger point.
So the Takeover Code only kicks in cases where a new party buys a block of under 33% shares from another party which has more than 33%.
The rationale for this? A seller that didn't have control (because it didn't own more than 33%) cannot pass on something it did not have.
That clearly vindicates Khazanah in this case, as it does not own anymore shares in Pos Malaysia other than the 32.21% block it is selling.
Indeed, it is learnt that in no communication by Khazanah to the potential bidders for the Pos Malaysia stake is Khazanah alluding that it is passing over control.
Then why is Khazanah asking bidders for their business plans for Pos Malaysia and rigorously vetting them?
It is learnt that Khazanah's rationale for this is to allow for a “responsible exit” from Pos Malaysia. Furthermore, Khazanah probably wants a concrete business plan from the successful bidder as Pos Malaysia's services have an impact on all Malaysians, especially those living in rural areas who still rely on postal services for some measure of communication.
Is it unfair?
While the rules may be clear, the question still arises if unfairness is being permitted. First is the issue of premium. Should blocks of shares of listed companies, of less than 33%, continue to change hands at huge premiums to market prices, without minorities enjoying the same benefit. Worse, what if the parties buying these stakes are able to wield significant management and directional changes behind the scenes of the company they have bought into?
Hence the second issue is this: should an investor be forced to accept the changes that ensue in his company when a new party has emerged as the single largest shareholder with an under-33% stake? After all, the same investor had put his money into that company when this new party wasn't in the picture. Shouldn't then the investor be offered an exit opportunity now that the dominant shareholder has changed?
Consider this: what if the Khazanah's 32.21% stake goes to a party who is radical in its approach and is able to dominate the board of Pos Malaysia, directing the company to take on risks that some investors don't approve of?
But a head of research however says that the situation isn't necessarily unfair. “It is buyer beware. The rules are clear and in place. The prevailing share prices of companies have already factored in the fact that minority shareholders will not have an exit opportunity via a general offer when stakes below the 33% threshold change hands,” he says.
Perhaps the rules need to be changed. Perhaps the authorities need to step in when control has seemingly passed to a party who has accumulated a block below 33% and has managed to wrest control over the board of the company.
Interestingly, this was the approach taken by Britain and Hong Kong in the past. In other words, both jurisdictions had tried a non-numerical test for control, looking into the position of the acquirer and whether they exercised the ability to control the company. This was tried in Britain during the early years of Britain's panel for takeovers. But it proved to be an arduous task as it involved the examination of the position of the acquirer by the panel in each case.
The same thing happened in Hong Kong which resulted in some high profile court cases on the issue of control.
Both countries then decided to opt for a numerical 30% threshold.
A corporate lawyer explains that this is why it is difficult to have a change in the rules.
“One has to accept that countries like Malaysia have adopted a numerical test for control, possibly because that makes it clear, unambiguous and provides certainty in dealings. While the adoption of a definitive quantitative control threshold may not be perfect, it provides clarity and certainty, unlike the qualitative test which has inevitably proven to be uncertain and confusing.”
Aberdeen Asset Management Sdn Bhd managing director Gerald Ambrose takes a realistic approach to the matter.
“Actual control can sometimes pass despite the new party holding below the 33% level and in such instances, minority shareholders have a dilemma: do they hold on (to their shares) in anticipation of the stake going to a party who will be of benefit to the company or sell in anticipation of the opposite (happening)?”
He says to help the minorities decide, any stake being sold should ideally have “a proper and transparent process so that minorities can assess the bidders and make an informed decision”.
Aberdeen has over 6% of Pos Malaysia and is a shareholder which will likely be making a decision on whether to keep that block or divest it depending on who the new 32.21% shareholder is going to be.
To be fair to Khazanah, it has sought to be as transparent and fair as possible in its sale of its block in Pos Malaysia.
One of the most sound arguments against concerns of parties taking control with under 33% of listed companies (in Malaysia's case) is that there are the other 67% of shareholders in the company who can prevent that.
“On any given day, the other shareholders can not only oust such a party, but they can also put in new board members and empower them to take all the necessary action if the previous controlling shareholder (with the less than 33% stake) had done any wrong.
That's the democracy of shareholding. What we really need is more proactive shareholder activism,” said an investment banker.
An analyst adds: “This is where bodies like the Minority Shareholder Watchdog Group (MSWG) can play an active role,” says an analyst. MSWG has yet to respond to queries from Starbiz.
An official from one of the regulatory bodies in the capital market said that the “devil is more in the undisclosed shareholding connections (of listed companies).”
He explained that there are instances where a chain of different shareholders control the company but that this is not disclosed and very hard to prove.
Adds a fund manager: “I won't be surprised if some of these companies have more than 50% of shareholdings linked to one group of shareholders but it isn't disclosed as such and no GO will ever get triggered.
“That's why some fund managers shy away from (investing in) smaller companies.”
Clearly this is a separate issue as it involves how effectively the regulator is able to conduct its surveillance and investigative activities.
For now though, all eyes will be on the new shareholder who will emerge as the new 32.21% owner of Pos Malaysia. The question is, will the rest of the minority shareholders of Pos Malaysia allow this party to call all the shots at the postal company?