Published September 5, 2009

Be reasonable in exit offers, says SGX

Responsibility for this rests on board, independent financial advisers

By JAMIE LEE

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AGAINST the backdrop of recent grumbling by minority investors over paltry delisting offers, the Singapore Exchange (SGX) has reminded companies that they must make exit offers that are deemed 'reasonable' to all shareholders.

This responsibility falls on the board of directors and the independent financial advisers (IFAs), SGX said in its regulator's column yesterday.

'The board should take into account the interests of shareholders and ensure that the exit alternative is not prejudicial to shareholders as a whole,' SGX said.

'The board of directors is responsible for ensuring that the exit alternative for the delisting proposal is reasonable to all shareholders,' it added.

SGX in August rejected the offer from Kingboard Chemical to take Elec & Eltek International Company private, after a report from the IFA, DMG & Partners Securities, said that the exit offer was 'neither fair nor reasonable under current market conditions'. Kingboard Chemical had provided three options - cash consideration, a share exchange or a combination of both - in May. Its US$1.20 per share offer was a 1.64 per cent discount to the price of shares last traded before the announcement.

This is a rarity as most delistings proposed recently at companies such as CK Tang, Man Wah Holdings and Kingboard Copper Foil Holdings, were approved.

The board should also ensure that the appointed IFA's opinion 'is clear and unequivocal'.

'Opinions qualified by diverse investment horizons do not meet the requirements of the rules,' said SGX. For example, IFAs cannot make two recommendations based on a short-term view or a long-term horizon. The appointed IFA should have the required experience and expertise to exercise professional judgement in assessing all relevant factors, said SGX.

SGX did not define such factors, but based on some IFA reports, these could include trading liquidity of the shares, the offered premium in comparison with premiums in other offers, the rationale for the delisting and the outlook of the business.

President of Securities Investors Association (Singapore) David Gerald said that there remains a lot of subjectivity over the definition of a reasonable offer.

'The offer should not be below the net tangible asset of the company,' Mr Gerald said.

'It must be a reasonable offer for everyone, so there must be a consensus.'

Robson Lee, a partner at law firm Shook Lin & Bok, noted that directors are now likely to require IFAs to declare that the offer is not prejudicial to the shareholders as a whole.

SGX also reminded companies going private that the IFA's opinion on the exit offer must be included in the company's submission to the exchange and that this should be clearly disclosed in the shareholders' circular.

'The IFA's advice should be given to shareholders as early as possible in order to provide them sufficient time to make an informed decision on the delisting proposal,' SGX added.

No timeframe was specified by SGX. In recent delisting cases, the IFA reports were issued about three weeks before the extraordinary general meeting.

The exit offer should usually be in cash and if the offer is in the form of securities or assets, a reasonable cash alternative is also required, said SGX.

When firms are forced or 'directed' by SGX to delist, they do not require shareholders approval. But these delistings still need a reasonable cash alternative.