Saturday, 29 September 2012

The independent adviser challenge

Excellent article by P. Gunasegaram in The Star.

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 over 4% 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%.

This is indeed puzzling, and the same point has been made in The Edge of September 17 2012 (page 5), titled "Surprise! Surprise" . It appears to be the duty of the frontline regulator, Bursa Malaysia, to investigate this. But I can not remember that this has ever happened, despite many dubious deals "miraculously" been voted through, with the majority shareholders abstaining. Is it possible that PAC's (Parties Acting in Concert) have been "underreported", that there were much more shareholders aligned to the PAC's? Bursa Malaysia should step up its enforcement in this particular field and at least be transparent about it.

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.

This is indeed a serious matter, Hwang DBS definitely should have mentioned this in their report. The last valuation was done in 1998, not only 14 years ago, but also in the midst of the Asian crisis. That valuation hardly looks relevant nowadays.

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.

Although the new practice note seems to be an improvement, I still think that the old rules were good enough to take action against errant independent advisors.

We have seen much too many independent reports that looked very biased in favour of the majority shareholders and it is puzzling why the authorities have not take any action whatsoever against those biased advisers. Here is one example from the past, and here another (but there are really dozens of similar cases). In both cases the authorities are well aware of the situation, they should be transparent to the public why no action has been taken and explain their non-action.

The advice to more or less randomly assign independent advisers looks good. But surely the authorities should also very much increase enforcement in this area. It is long overdue.


  1. I'm going off topic here. What is your view of the newly announced Malaysian budget? Going forward, how does it benefit the economic growth of the country?

  2. Understandable and expected, but I am not in favour since they have been running deficits for almost 2 decades. There is no free lunch here, it all has to be paid by someone sometime.

  3. Any reasonable person would regard HwangDBS's mistake as negligent or worse since they were supposed to be acting as an independent advisor (experts)...either the SC should reprimand them or the market/industry should blackball them. Reminds us of how the rating agencies were negligent & even COMPLICIT in (mis)rating CDOs, CDS, on behalf of their client-sponsors eventually leading this unethical practice to be a major cause of the GFC. SC better buck up!

  4. Yes, I agree, only thing I can add is that it probably wasn't HwangDBS's worst independent advice.

  5. Interesting article. What are your views on the KFC Holdings (Malaysia) BHD situation? This deal has been dragged out for almost a year, in which time Malaysian peers’ share prices have rallied between 70% to 80%, dividends at KFC have been halted, and in Affin Investment Bank’s Independent advice they use comparable multiples based on last prices from 13th December 2011, highly illogical and against conventional market practice. Surely minority shareholders are getting a raw deal here and would be better off voting the deal down? I am surprised that this has not received much attention in Malaysia, this is another example of poor corporate governance.

  6. Thanks for the information, if true (and I dont doubt you) then very starnge indeed. Information provided needs to be timely, otherwise not much use.