Exit Offers – Weigh Your Options Objectively

Foreword from ShareInvestor

This article “Exit Offers – Weigh Your Options Objectively” by Goh Eng Yeow was first published in The Straits Times on 21 Aug 2017 and is reproduced in this blog in its entirety.

Should investors holding on to shares of delisted firms accept offers to buy them out?

When a stock is delisted and there is no open market for its shares any more, the remaining minority shareholders can become very emotional when they get an offer by the company or its controlling shareholder to buy them out.

Many may feel that they are being forced to sell their shares against their wishes and at unattractive prices – especially if they have held on to the shares for years.

One of the longest holdouts I have encountered involves retailer C.K. Tang. Minority shareholders in 2011 voted down a selective capital-reduction scheme offering them $2 a share – $1.30 from the company and 70 cents from its major shareholders – two years after the company was delisted.

Even though the offer was a 156 per cent premium over a previous privatisation effort of 83 cents a share before the company’s 2009 delisting, many shareholders believed the offer failed to take into account the redevelopment potential of Tang Plaza, partly owned by the company.

This week, minority shareholders of Auric Pacific and Aztech Holdings will vote on whether to accept the selective capital-reduction schemes proposed by their respective companies to buy them out.

Not surprisingly, emotions are running high before the meetings and those unhappy with the offer have clogged up my e-mail inbox with their grievances.

But emotions aside, I believe that investors should take an objective look at what is being put on the table, rather than simply reject an offer outright.

A selective capital-reduction scheme, as its name suggests, is an effort by a company to buy back shares from certain of its shareholders and cancel the shares after that.

The typical reason behind such an exercise after a company is delisted is to give the remaining shareholders an opportunity to realise their investment, given the lack of a public market for the shares and the many inquiries the company received as to how the shares can be sold off.

For the scheme to proceed, it needs the approval of 75 per cent of shareholders at a meeting where the controlling shareholder and parties related to him are not allowed to vote. Court approval is also required.

So, if a company has 10,000 shares, for instance, a controlling shareholder who owns 80 per cent of the shares – or 8,000 shares – will not be allowed to vote at the selective capital-reduction meeting.

Of the shareholders who hold the remaining 2,000 shares, not all may show up at the meeting. If, say, those holding a total of 1,500 shares turn up, the scheme will go forward only if shareholders holding 75 per cent of the shares, or 1,125 shares, approve the plan.

There is a further safeguard: The company must appoint an independent financial adviser (IFA) to advise the minority shareholders on the merits of the offer.

Aztech, which will hold its selective capital-reduction meeting at 10am on Friday in Suntec City, is offering minority shareholders 42 cents a share – the same as the takeover price offered to them before it was delisted in February.

At that time, some Aztech shareholders had been surprised that the company was allowed to delist because when the takeover offer closed, majority shareholder Michael Mun won control of only 81.23 per cent of the shares, instead of the required 90 per cent.

However, the company had won at an investors’ meeting in January unconditional approval to delist – with 93.8 per cent of the votes.

Under the rules for voluntary delisting, a firm must get at least 75 per cent of votes in favour of the proposal, with not more than 10 per cent voting against it.

At that meeting, the controlling shareholder and directors were allowed to vote, unlike at the coming selective capital reduction.

No doubt, some of Aztech ‘s minority shareholders are aggrieved by the turn of events – their shares are no longer publicly traded and they are being asked to sell their stakes back to the owner at a fraction of the company’s break-up value.

One Straits Times reader, Mr Francis Tay, wrote in to describe the complaint of an elderly woman at Aztech’s annual. She said shareholders had been left with bones and, even after that, they were still not spared.

Mr Tay wrote: ” She had 10,000 shares and, after a 10-for-one share consolidation, was left with 1,000. She (had) bought them for $1 per share and paid $10,000. Now, she is being forced to accept $420 for them – a loss of $9,580.”

But some may say that in the stock market, you win some, you lose some, and one should not let emotions get in the way.

To be sure, the 42-cent offer is a 57 per cent discount to Aztech’s revalued net asset value (NAV).

But the IFA, Stirling Coleman Capital, has noted that the “NAV/NTA may not be fully realisable at its book value, or revalued value, especially within a short time frame, given that the assets held by the group are very specialised”.
(NAV and net tangible assets, or NTA, are measures of the underlying value of a company.)

But before the Aztech meeting , Auric Pacific will meet shareholders on Thursday at 9am at the Orchid Country Club to decide on its selective capital-reduction scheme.

It is offering to buy out the 2 per cent of shares still in public hands after the successful takeover by its major shareholder to take it private in April. The offer price of $1.65 a share is the same as the takeover price.

The IFA, MS Corporate Finance, noted that the offer is pegged at a 16.5 per cent premium over the revalued net asset value per share.

Still, there are shareholders who feel that Auric Pacific may be worth more than that as its business prospects appear to be brightening.

The company returned to the black last year with a bottom-line gain of $7.3 million, compared with a loss of $40.88 million in 2015 due to impairment charges. It also sits on a cash pile of $88.1 million as at end-December. That works out to 70.1 cents a share.

Still, as in all offers made by companies after they have been delisted, shareholders should remember that if they fail to approve the selective capital reduction, there may not be another offer in future to buy out their shares.

Should they take the money and move on to more profitable investment opportunities instead of hanging on to shares they can no longer trade in the stock market?

Not turning up for the meeting will be an unwise move as it allows other people to dictate the outcome, which may not be in the absentees’ interest.

Just ask the 500 or so investors still holding on to their C.K. Tang shares. Six years after rejecting what looked like a knockout offer, they are still waiting for a better offer to come along.

It is proving to be a very long wait.