Saturday September 29, 2012
The independent adviser challenge
A QUESTION OF BUSINESS
By P. GUNASEGARAM
BY all accounts what happened recently at Glenealy Plantations (Malaya) Bhd raised more than a few eyebrows and plenty of questions over how valuations should be done and why minority shareholders don’t seem to be exercising their rights.
There are two aspects to this and both warrant further action and investigation by the Securities Commission and Bursa Malaysia. First, despite the very vocal opposition of the minority to the privatisation offer of RM7.50 per Glenealy share eventually only just over4% voted against it. Second, why was the plantation land not revalued as part of the valuation process?
On the first point, perhaps minority shareholders thought if they did not accept the offer, there would be nothing else for them.
But really a premium of about 15% over the market price then prevailing in January this year when the offer was first made is not that much especially if it is a plantation company with undervalued land and which gives good dividend yields.
Besides, the broad market has moved up much since then, reducing the premium although some of this would have been made up by the 52.75 sen dividend the company paid out just before the meeting to approve the offer earlier this month.
Considering that just 331 shareholders held some 85% of the shares not controlled by the majority shareholder, the Samling group, it would be appropriate to trace the ownership to see when the shares had been acquired to ensure that everything is above board.
Together with this and other shareholders, just over 94% of shareholders voted for the privatisation, four percentage points more than the required 90%.
The second and perhaps more important question was why there was no revaluation of the plantation assets for 14 years. Between the first announcement of the offer in January and the meeting in September, there were more than six months for this to have been done.
Some minority shareholders charged that if the plantation assets had been revalued, Glenealy would have net tangible assets per share of over RM10.
A revaluation would have clearly established if that was the case and removed all doubt. It would also have been material to the entire valuation process.
Independent adviser Hwang DBS made no comment on the valuation of the plantation land in its executive summary in the offer document and so shareholders did not have that piece of information to evaluate if they should accept the offer.
The Securities Commission has now come with changes to Practice Note 15 of the Malaysian Code on Takeovers and mergers by inserting 28 new paragraphs. The most significant of this is that in takeover offers independent advisers must analyse the terms “fair and reasonable” as two separate criteria.
An offer can only be considered fair if the offer price is higher or equal to the market price and the value of the securities of the target company. Otherwise, it is not fair.
If an offer is not fair, the independent adviser has some explaining to do. “Generally, a takeover offer would be considered ‘reasonable’ if it is ‘fair’.
“Nevertheless, an independent adviser may also recommend for shareholders to accept the takeover offer despite it being ‘not fair’, if the independent adviser is of the view that there are sufficiently strong reasons to accept the offer in the absence of a higher bid and such reasons should be clearly explained,” the practice note says. Fair enough.
The new practice note also says the independent adviser has to consider and select the most appropriate valuation method and consider more than one valuation technique. It should compare the results and justify its choice, preferably a range which is as narrow as possible.
Generally, those new practice notes go a much longer way but do not go long enough in one particular direction. As the Minority Shareholders Watchdog Group has pointed out, the new notes don’t make a revaluation of assets mandatory. A revaluation should be mandatory if there had been none for the last three years.
Even if all these were done, how does one ensure the independence of minority advisers? How does one ensure that they are not chosen based on an understanding that they will make the appropriate recommendation the board wants?
Tough problems call for radical solutions. Simply make it unnecessary for independent advisers to market for the job. All of them will simply be put on a queue by ballot and take the next job that comes along.
The fees will be on a scale according to the size of the job and the SC will remind them sternly that the recommendations will be purely professional and independent. Those advising the particular company on the deal will be disqualified.
Companies may object that they are paying for someone they did not choose but in this instance that’s precisely what is needed to ensure that independent advisers are indeed independent.
P Gunasegaram is an independent adviser – oops, consultant – and writer.