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Our capital market also needs to be in line with other jurisdictions

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Louise Jardin
Louise Jardin has been in Asia for twelve years and written for a series of journals and newspapers including the Japan Times in Tokyo, CFO Asia and a number of financial journals across Asia. She now lives in Hong Kong.

IN any discussion about the capital markets and their viability as instruments of value accretion, investors need always be cognisant of their ability to cushion themselves against shocks.

In the case of minority shareholders, that objective is even more important, as they are on their own without the institutions backing in most cases.

In the first instance, investors should always conduct their own in-depth research and their transactions with certified professionals. Beyond that, once their money is committed, they are then exposed to the vagaries of the share market which, in this day and age, is highly unpredictable.

And, as Malaysia’s capital market matures and progresses, regulatory protection of minority rights becomes more important, not just because retail participation is necessary for growth, but also because foreign institutional funds buy and sell Malaysian shares, though not necessarily in sufficient quantities to acquire control.

In addition, our capital market needs to be in line with other jurisdictions such as Hong Kong, Thailand and New Zealand, where the threshold of approval under the assets and liabilities method for mergers and acquisitions had been increased recently. Hence this discussion. And in this instance, let us make the point more real, by highlighting the predicament facing Hong Kong-based private equity fund Primus Pacific Partners.

Primus owns 20.2% stake in EON Capital Bhd (EON Cap), which is the subject of a takeover offer by larger banking group Hong Leong Bank Bhd. But because the offeror in this instance has chosen – legally, under present rules – to acquire EON Cap by purchasing its assets and liabilities, it needs only to secure a bare majority to complete the transaction.

In EON Cap’s case, its major shareholders bar Primus are keen to agree to this transaction probably because they are already in the money. Yet, because the current rules allow a bare majority to complete the deal, other minority shareholders, who had been aggrieved due to the pricing, have no other right of recourse unless there is an alternative bidder. Or, in this case, other minorities in addition to Primus make sufficient ministrations to regulators or through legal process to intervene on equitable grounds.

This loophole has in recent years allowed the offering party an avenue to circumvent the Takeover Code, where the threshold to take over a company and de-list it is higher at 90% acceptance of shares outstanding. By bypassing the code, the offeror is then in a position to offer a price that while it is comfortable with, but might prove deleterious to small shareholders in the acquiree company.

The case of EON Cap is not isolated. The 2006 acquisition by Bumiputra-Commerce Holdings Bhd of Southern Bank was also completed via an acquisition of its assets and liabilities. In that particular instance too, the offer price was criticised as too low, and was only raised (marginally, by 5.4%), following intense lobbying.

Yes, Malaysia’s banks do need to consolidate: We have far too many and this country is overbanked. Yes, mergers do create value and a lower threshold for completion can and does spur mergers and acquisitions. But we do need to step back and consider the ramifications of our actions.

Institution like the Minority Shareholder Watchdog Group does not exist to impede business. It is not in MSWG’s interest to obstruct deals. Indeed, we acknowledge that in many takeovers, minorities benefit greatly, and do exit their investments with considerable profit.

But this only happens when the offeror’s valuations are broadly in line with the expectations of the minority. In this instance, we would like to cite the twin privatisation deals, firstly in 2007 of Maxis Communications, and by its sister company Astro All Asia Networks this year that have attracted very little criticism.

Investment banks do need to realise that minorities are not protected in every single merger or acquisition. Nor, might we add, is value created in every mergers and acquisitions either, as evidenced by Citigroup, or DaimlerChrysler’s case.

But investment banks are paid every single time they advise on these transactions – whether or not the transaction succeeds or fails. That is the crucial difference.

But where the MSWG is concerned, the protection of minority rights is our raison d’etre, come rain or shine.

And in so doing, we raise the profile of our capital market and investors are afforded a sense of security, a comfort level that their purchase of stocks will not one day go awry, out-muscled by the will of a larger group.

As Tan Sri Zarinah Anwar of the Securities Commission (SC) has been quoted recently as saying: “Poor governance has played a significant role in most financial crises. Steps to reduce systemic risk, protect investors and uphold fairness and efficiency in the capital market will come to naught if they are not coupled with the practice of strong governance.”

Therefore, the SC’s agenda for 2010 is premised on the belief that the quality and future success of our capital market rests greatly on how well its stakeholders govern themselves.

It is this mandate which has prompted the regulators and MSWG to speak as one, to ensure that takeover transactions as well as other transactions, which in substance result in the same effect as takeovers, are regulated in the same manner so that investors are afforded the same level of protection.

Thus we have, and continue, to welcome the SC’s proposal to raise the shareholder approval level in an acquisition via assets and liabilities, to be aligned with other modes of privatisation. In addition, if we compare the past privatisations, overall, the ones that went through other than the assets and liabilities route commanded higher premiums.

If these proposed amendments are passed through the Listing Require-ments as proposed by the SC, we might move into a situation where the interests of acquiring parties are more closely aligned with the minorities!

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