Good follow up article in The Star about independent advice. Some comments by me in red.
The task of producing independent advice to shareholders is never an easy one. There is a lot of subjectivity involved, and just like many other issues faced in life, there's always a variety of views on any one subject or circumstance.
The key word here, though, is “independent”. That means the view of the advisor has to be free from any other influence, other than putting the interests of minority shareholders at the heart of the advice.
But recent analysis by StarBiz (see StarBiz, Jan 29, 2013, page 5) on independent advice shows one odd fact that in many of the buyout cases where the offeror was seeking to maintain the listing status of the target company, the independent advisor (IA) had recommended that shareholders reject the offer. And conversely, where the buyer was seeking to privatise the listed company, the advice to shareholders was to accept the offer. Is this merely coincidental, namely, that the offers by those wanting to keep their target companies were not compelling?
And that in cases where the buyers wanted 100% of their target companies, the offers were attractive enough to nudge the advisors to suggest to shareholders to just take the offer on the table?
Or are the IAs merely dishing out advice which is aligned to what the offerors in those deals wanted?
Unfortunately, this has been going on for a very long time, a huge majority of the advice is indeed aligned to the majority shareholders.
It's difficult to say, either way. What can be assessed, though, is the quality of analysis contained in the independent advice. Over the years, some progress has been made with IA reports, the most notable being the initiative by the Securities Commission (SC) in 2010 to decouple the fair and reasonable tenets of the IA. Now, advisors can talk about valuation issues under the “fairness” umbrella, and all other elements under the “reasonableness” provision.
It does seem that there's less of an issue with the “fairness” part of the advice there are textbook measures to look at this, ranging from book values, multiples of earnings and peer comparisons.
But it's the “reasonableness” part of the analysis that has room for improvement. Some background to this: StarBiz had already highlighted in our Jan 29 article that since the SC had revamped its IA guidelines in 2010, the “not fair but reasonable, and therefore accept the offer” outcome has been the most dished out recommendation by IAs.
The fear is that this is fast becoming the de facto advice, a sort of easy way out to justify the advice to “accept the offer” in cases where the offeror wanted to de-list the target company.
Hence, to ensure that this perception isn't correct, independent advisors would need to put in more effort on the “reasonableness” part of their report. For instance, to merely say that the offer is reasonable because the shares of the target company are illiquid is, to put it mildly, irrelevant. If the shares were illiquid, then the right thing for the company to do would be to address this by issuing more shares, or for the controlling shareholder to place out some of its shares.
Another is the oft-used scare tactic by offerors, reinforced by the independent advisor, that the company would be de-listed once the public spread was no longer met. Whether a company is de-listed due to not meeting its public spread is entirely in the hands of Bursa Malaysia and not automatic.
Excellent comments. Interestingly enough, there is a rule that minority shareholders should not be disadvantaged or pressured in these kind of corporate exercises. I claim that that rule can actually be used in these cases. The worst cases are those where the controlling shareholders first cut the dividend, making the shares even less attractive. The authorities should really look into these issues.
This, of course, is not to be confused with the compulsory acquisition rule, where under the Takeover Code, the offeror can compulsorily acquire the remaining shares once he already had acceptances from 90% of the minority shareholders.
More attention needs to be focused, for example, on the prospects of the business or new regulations that put the target company in a precarious spot. That's the kind of information that would resonate better with shareholders who have to decide if they are going to bandy together to fight a buyout exercise or give in, because the offer on the table is the best prospect they have.