A different spirit of the law in OSIM takeover

You own some shares in a company. The founder wants to buy everybody out. You resist, claiming his price is too low.

But you cannot do much if the founder happens to also own such a big chunk of the company that he could - if he is able to quickly gather enough shareholders' acceptances - legally enforce compulsory acquisition at his bid price.

Is this unfair? The OSIM privatisation saga has dragged up a recurring issue in Singapore corporate law on how much power should be given to dissenting minority shareholders in a takeover.

Given the way the law is written now, minority shareholders faced with the prospect of their shares being compulsorily acquired can resist more easily when a corporate is seeking to take its subsidiary private.

It is far harder to resist, legally speaking, if the offeror is the founder-CEO, who already holds a significant individual stake.

Two different cases

To understand the matter, one needs to look at the law under Section 215 of the Companies Act, which states that an offeror can exercise its right to compulsory acquisition once it gets 90 per cent of shares that it and its related corporations did not own.

The emphasis here is "related corporations".

Since Mr Sim was privatising his company while owning OSIM shares as an individual, he only needed to set up a special purpose vehicle (SPV) as the offeror, which would obviously hold zero shares in OSIM when set up. In this case, founder Ron Sim and his family members already owned 69.25 per cent of the company at the time of offer. The compulsory acquisition threshold to acquire all remaining shares in this case is 90 per cent and not 97 per cent [69.25 + (0.9 x 30.75], as many market players wrongly believed, the reason being that the Sim family stake doesn't come under "related corporations".

When Keppel Corp sought to privatise Keppel Land in 2015, it needed to own 95.5 per cent to hit the compulsory acquisition threshold. It started with 54.6 per cent already owned and needed to get 90 per cent acceptances for the remaining 45.4 per cent stake - making it 95.5 per cent in total to hit the compulsory acquisition threshold. In this case, Keppel Corp the parent company was the offeror, not a fresh SPV, as was the case in OSIM. Hence the 95.5 per cent threshold. As it turned out, it did not manage to hit this level despite a sweetened offer in the event that the compulsory acquisition threshold was reached.

To recap, Ron Sim's shares do not count towards being a "related corporation". And since the offeror for OSIM, the newly set-up SPV, effectively started from zero, it needed to get just 90 per cent to hit the minority squeeze-out level. The Sim family's 69.25 per cent stake, held mostly under Mr Sim's name, could be tendered to make up the 90 per cent needed.

Thus Mr Sim, who has not tendered his stake yet, just needed to get another 20-odd per cent to hit the compulsory acquisition threshold. This threshold was effectively reached last week, likely after some big funds capitulated.

Once upon a time, it was the case that companies could set up a subsidiary, which owned nothing, to circumvent the "90 per cent of shares the offeror does not own" requirement.

But in 2002, the government accepted recommendations to supposedly make companies comply with the spirit of the law. Companies executing takeover transactions could no longer set up subsidiaries to circumvent their own holdings.

What is the spirit of the law?

Yet what is the spirit of the law, exactly? The spirit, apparently, does not proclaim that minorities can easily block compulsory acquisition.

As the OSIM example shows, if entrepreneur-CEOs ever want to privatise their firms, they just need to hit 90 per cent, and it is game over for minorities.

There is a different spirit at work here: The spirit of efficiency. We catch a glimpse of this spirit by examining the latest move to change this law.

In 2011, a committee reviewing the Companies Act suggested that "associates" be excluded in calculating the "90 per cent unaffiliated shareholders" compulsory acquisition threshold. This is the approach taken by the UK, a jurisdiction Singapore has looked up to for company law.

Under this new regime, it is not clear if Mr Sim and other founder-CEOs like him holding substantial stakes in their companies would be able to reach the squeeze-out level at the 90 per cent mark.

In any case, the Ministry of Finance in 2012 rejected the suggested change. It cited worries that the UK definition of associate was too wide and could potentially lead to uncertainty.

"Although it is conceptually sound to exclude parties not independent of the offeror in calculating the 90 per cent acceptances, the present provisions have not given rise to any particular concerns," it said.

It said the UK definition of "associate", when applied here, "will make it more difficult for an offeror to obtain full ownership, especially if the offeror already has a substantial shareholding when the offer is made".

"For a healthy functioning financial market, it is important to ensure that our requirements are not overly stringent or make it difficult for companies to restructure. In case of unfairness, dissenting minority shareholders can apply to court under section 215."

So we glimpse the spirit of the law through the government's words. Its arguments, in short, seem to be for the status quo to remain for the sake of efficiency.

And perhaps the same spirit might deem that the 97 per cent mark was too high a bar for Mr Sim to hit.

After all, in every company there could also be a few percentage points of shareholders who are deceased or whose descendents have forgotten they own the stakes. Mr Sim should not have to face too many obstacles in order to squeeze them out.

A tormented spirit

The spirit is somewhat tormented, however. The government did acknowledge that the UK definition was conceptually sound.

And we are still left with a contradiction where a set of laws applies for corporations in a situation like that of Keppel Land and different rules seem to apply for cases of privatisation by founder-CEOs like Ron Sim. There is scope for the law to be tweaked.

Ultimately, the takeaway, for minorities, is a simple and harsh one.

Minorities are minorities for a reason, for their collective stakes often add up to a powerless percentage of a company's shares.

And for the minority among OSIM's minority shareholders today who still think their stake is valued more than what is put on the table, they could have resisted compulsory acquisition only if an insider holding a substantial stake was on their side and refused to tender.

Yet the offer might then close with the public float falling under 10 per cent. This leads to a trading suspension, and an inability to easily offload one's shares.

There is no good way out if few people agree with you.

If you bought OSIM at its highs two years ago, it does seem unfair that you cannot hold on indefinitely in the hope of recouping your investment.

But perhaps taking a sure loss will end up as the better decision, rather than waiting for a gain that might never come.

This article was first published on May 6, 2016.
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