More cases deemed ‘not fair but reasonable’

PETALINGJAYA: Since the Securities Commission (SC) revamped its guidelines for independent advice, “not fair but reasonable” has emerged as the most oft-used recommendation dished out by independent advisers, a study by StarBiz revealed.

According to the independent advice circulars for some of the more contentious takeovers that have taken place over the past one year (see table), as many as five had deemed their corporate exercises “not fair but reasonable”, urging shareholders to accept or vote in favour of the proposals.

In the case of Tradewinds (M) Bhd, its independent adviser had said last Friday in a circular that the firm’s privatisation at RM9.30 per share by Tan Sri Syed Mokhtar Al-Bukhary and his joint-offerors was “not fair” but “reasonable”.

The independent adviser, M&A Securities, noted that the offer was not fair because Tradewinds had a fair value of between RM9.60 and RM11.10 per share as well as an indicative realisable net asset value of RM10.

However, it believed the offer was reasonable due to the counter’s poor liquidity, the company’s prospects, the intention of the joint-offerors to delist the stock and the absence of a competing offer.

It, therefore, told shareholders to accept the offer, as it provided an opportunity for them to exit at a higher price than what Tradewinds had historically traded at.

In another instance, the takeover of Bandar Raya Developments Bhd by Ambang Sehati Sdn Bhd at RM2.90 per share and RM1.80 per warrant was also seen by its independent adviser as “not fair” yet “reasonable”.

Amlnvestment Bank pointed out that the offer was “not fair” in light of its 24% discount to the property developer’s estimated revised net asset value of RM3.81, but said it, nevertheless, allowed shareholders to realise their investment and put the cash proceeds into other assets, which could potentially generate a higher income yield.

All buyout offers, including related party transactions that require shareholder approval, must seek independent advice to ensure the proposal is in the best interest of shareholders.

Prior to the SC’s tweaking of the rules relating to independent advice, investment bankers were limited to only two options.

An offer could either be “fair and reasonable”, in which case shareholders were then told to accept it; or “not fair and not reasonable”, which meant shareholders ought to reject the proposal.

In March 2010, the SC had - in an effort to raise the standard of independent advice by getting independent advisers to conduct deeper analysis and disclose more information to shareholders - issued a consultation paper that led to the additions to Practice Note 15 of the Code on Takeovers and Mergers 2010.

The revised guidelines took effect from Nov 1 last year.

The new rules essentially decoupled the terms “fair” and “reasonable” as two distinct criteria, with “fairness” referring specifically to valuation and “reasonableness” to elements other than valuation.

“The decoupling of the terms will further ensure that independent advice circulars are more easily understood, transparent and provide clear bases to justify a recommendation,” the SC had said.

For a deal to be viewed as “fair”, the offer price should be equal or higher than the market price and also equal to or higher than the value of the securities.

If the offer price is equal to or higher than the market price but lower than the value of the securities, a takeover is considered “not fair”.

In effect, an offer can be seen as “not fair” but still “reasonable” after taking into account factors such as the ability of the offeror to pass special resolutions, liquidity of the offeree securities and other qualitative considerations.