Lucien Wong and Lee Kee Yeng at Allen & Gledhill LLP offer their highly sought after expertise on privatisations in Singapore.
Amid the lingering uncertainties over the economy and the easing valuations in the market in 2009 and 2010, 33 companies, with an aggregate market capitalisation of approximately S$15.4 billion, were privatised and delisted from the Singapore Exchange. While the list of privatisations included strategic acquisitions led by sovereign wealth funds such as ATIC’s acquisition of Chartered Semiconductor Manufacturing Ltd (which was delisted from the Singapore Exchange in December 2009) and Khazanah’s offer for Parkway Holdings Limited (which was delisted from the Singapore Exchange in November 2010), a significant number of privatisations were initiated by major shareholders seeking to capitalise on lower valuations, as listed companies continued to trade below their 2007 peaks. Market observers anticipate that more such privatisations and delistings may be in the pipeline for 2011 as acquirers continue to take advantage of current valuations and the recovery in the credit markets.
Companies go public in order to raise funds from the market but a listing also requires a company to continually meet its regulatory obligations. Companies seeking to delist often cite illiquidity, costs of compliance and lack of operational flexibility as the key motivations for privatisation. In addition, many Chinese companies who had previously sought an overseas listing are now tempted by the prospect of re-listing closer to home at higher valuations. Such companies hope to benefit from greater investor interest in exchanges in China or Hong Kong, where shares may trade at higher multiples and investors may be more familiar with their brand names. Oft-cited examples of such “success stories” include Want Want Holdings Ltd (a Singapore company with its principal operations in Taiwan and China), which delisted from the Singapore Exchange in 2007 and was subsequently listed in Hong Kong at three times the value of its privatisation offer, and Man Wah Holdings Limited (a Bermuda company with its principal operations in China), which delisted from the Singapore Exchange in 2009 with a market capitalisation of S$200 million and was subsequently listed in Hong Kong with a market capitalisation of S$1.2 billion.
A Singapore-listed company (both foreign as well as Singapore incorporated) can be taken private in several ways: (i) a voluntary delisting; (ii) a scheme of arrangement (for a Singapore incorporated company); (iii) a general offer; and (iv) an amalgamation (for a Singapore incorporated company). Each of these is briefly considered below.
Under its listing rules, the Singapore Exchange will permit a Singapore-listed company to be voluntarily delisted if: (i) the delisting is approved by more than 75 per cent of shareholders present and voting with not more than 10 per cent of such shareholders objecting; and (ii) (following the approval of the delisting) an exit offer is made to the shareholders, which must normally be in cash or include a cash alternative. If the delisting is approved, the company will be delisted whether or not shareholders choose to accept the exit offer. Acquirers who are already major shareholders of the company can vote their shares to approve the delisting together with the minority shareholders. As this can significantly reduce the execution risk for the transaction, a voluntary delisting is generally the route taken by existing major shareholders seeking to privatise a company.
In order to protect minority shareholders, the Singapore Exchange requires a “reasonable” exit offer to be made to the remaining shareholders of the company. The board of directors of a delisting company is required to take into account the interests of all shareholders as a whole and must ensure that the exit alternative is a reasonable proposal when making its recommendation for a delisting. The company must appoint an independent financial adviser to opine on whether the exit offer is reasonable and such opinion must be clear and unequivocal without reference to diverse investment horizons.
Whether an exit offer is reasonable continues to be a sticky issue in the market, especially in relation to shares that trade below their net asset value. Acquirers should therefore remain sensitive to shareholder reaction as to the consideration offered. While the delisting transactions for 2009 and 2010 have generally offered a premium above the closing share price prior to the transaction announcement date, some of the delisting transactions were made at a price lower than the net asset value of the company. This has been a hotly debated issue in a number of voluntary delistings, where minority shareholders objected voraciously. Whether rightly or wrongly, the net asset value of the company will remain a benchmark for some shareholders as reflecting the “true” value of the shares and major shareholders looking to privatise must be prepared to defend their valuations.
Although the use of a voluntary delisting does not guarantee the buy-out of the minorities, once the delisting is approved, there is the disadvantage of remaining as a shareholder of illiquid shares in an unlisted company, and this often provides the motivation for minority shareholders to accept the exit offer. If minority shareholders do not accept the exit offer, the company will still be delisted, with minority shareholders remaining in the company. Acquirers using the voluntary delisting route must therefore assess whether their post-delisting objectives can be achieved with minority shareholders in place, and the potential exit strategies for these minority shareholders thereafter.
Schemes Of Arrangement
Where obtaining 100 per cent of the shares is key to the acquirer’s plans for the company post delisting, a scheme of arrangement may be preferred as it provides the comfort of a binary outcome – either compulsory buyout of all shareholders if the scheme is successful or the acquirer does not have to acquire any shares. A Singapore-listed and Singapore incorporated company may enter into an implementation agreement pursuant to which it agrees to undertake a scheme of arrangement for the acquisition by the acquirer of all its issued shares in accordance with section 210 of the Companies Act (chapter 50 of Singapore, the Companies Act). The scheme requires the approval of the majority in number of shareholders present and voting, representing 75 per cent or more in value of the shares voted. The scheme is also subject to approval by the High Court of Singapore.
Major shareholders looking to privatise may be disadvantaged in a scheme of arrangement as, unlike a voluntary delisting, they would not be permitted to vote on the scheme and the decision would be entirely in the hands of minority shareholders. In addition, as a scheme must be approved by a majority in number present and voting on the scheme, the transaction could be defeated by a large number of shareholders holding a very small number of shares.
Voluntary delistings, schemes of arrangement and amalgamations (discussed below) require the co-operation of the target company. If this is not expected to be forthcoming, an acquirer would need to consider implementing the privatisation by way of a general offer for the company. In addition, where there is substantial interloper risk, a general offer structure allows an acquirer to retain greater flexibility in its ability to respond to a competing bid. Where the intention is to privatise, the offer should be conditional upon the acquirer receiving acceptances for more than 90 per cent of the outstanding shares of the company. If the acquirer holds more than 90 per cent of the company, the listed company would no longer meet its free float requirement and the Singapore Exchange would direct that the company be delisted if the acquirer does not restore the free float after the close of the offer. In addition, if the acquirer receives sufficient acceptances to exercise its rights of compulsory acquisition under the Companies Act, it can squeeze out the minority shareholders who have not accepted the general offer.
Where the Singapore-listed company is also a Singapore incorporated company, the privatisation could take place by way of an amalgamation under section 215A of the Companies Act. Amalgamations are akin to US-style mergers in which a merging entity is absorbed into an acquiring entity. The acquirer and the listed company would enter into an agreement to implement an amalgamation of the two companies with the acquirer as the surviving company or with both companies merging into a new company. The amalgamation must be approved by not less than 75 per cent of the shareholders of each amalgamating company, and the board of directors of each amalgamating company must give a solvency statement, stating its belief that the amalgamated company will remain solvent for the next 12 months. On completion of the amalgamation, the Singapore-listed company will be delisted and cease to exist as a separate legal entity and all its property, rights, privileges, obligations and liabilities will be transferred to and vest in the amalgamated entity.
The provisions for amalgamations under the Companies Act were introduced in Singapore in 2005. While amalgamations have been used to effect internal restructurings, we have yet to see a privatisation in Singapore being implemented by way of an amalgamation. There are several possible reasons for this. First, acquirers remain understandably reluctant to be the test case for a new acquisition structure. In addition, directors on the board of a public company are likely to be wary of providing a forward looking solvency statement for the amalgamated company on a consolidated basis, as they are personally liable for such statements. Lastly, as with a scheme, major shareholders looking to privatise would not be permitted to vote on the amalgamation and this invariably increases the execution risk of the transaction.
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Delistings are part and parcel of a functioning capital market. As companies continue to review their valuations in the aftermath of the financial crisis, and look to strategically reposition themselves for better market conditions, privatisation will remain a key option for consideration. In determining the most appropriate transaction structure, acquirers must assess which structure allows them to adequately manage their execution risks while achieving their objectives for delisting.