During the recent wave of takeovers in 2013 and 2014, minority shareholders and market commentators raised issue with the clarity and utility of several independent financial advisers’ (IFA) opinions issued in connection with takeovers. In an attempt to address these concerns, Singapore’s takeovers watchdog, the Securities Industry Council (SIC), issued a Practice Statement on 25 June 2014 (the Practice Statement) concerning IFA opinions in relation to takeover offers, ‘whitewash’ waivers and ‘special deals’ in takeover situations involving disposals of assets. The Practice Statement is to apply to all transactions announced on or after 9 July 2014.
Requirement for ‘Fair and Reasonable’ Opinion in Takeovers
Under the Singapore Code on Take-overs and Mergers (the Code), the board of the target is required to advise target shareholders on the takeover offer, obtain independent financial advice and make the advice known to target shareholders. The Code applies to takeovers involving a Singapore-listed company or certain qualifying unlisted Singapore incorporated companies.
In the Practice Statement, SIC stated its expectation that an IFA should opine on whether an offer is ‘fair and reasonable’. The Practice Statement also states that the terms ‘fair’ and ‘reasonable’ represent two distinct concepts.
The fairness of an offer is determined based on an objective consideration of the offer price, as compared to the value of the securities subject to the offer (the Offeree Securities). This can be measured by several benchmarks, such as the average or median premia over market prices for takeover offers made for comparable companies. The Practice Statement provides that an offer is fair if the offer price is “equal to or greater than the value of the Offeree Securities”.
The reasonableness of an offer is determined by considering matters other than the value of the Offeree Securities (such as the market liquidity of the Offeree Securities, the offeror’s and its concert parties’ voting rights in the target company and the irrevocable undertakings, if any, given by the controlling shareholder(s) to the offeror to accept the offer).
Under this approach, an offer can be ‘fair and reasonable’, ‘not fair but reasonable’, ‘not fair and not reasonable’ or ‘fair but not reasonable’. Logically, if an offer is fair, one would expect the offer to also be reasonable. However, the SIC has indicated that there may be circumstances where an IFA may give an opinion of ‘fair but not reasonable’, though only where there are ‘strong and exceptional grounds’.
In all situations, the IFA is expected to explain clearly the bases for its conclusion.
SIC also expects the IFA’s advice to be clear and unequivocal. So, for example, the SIC will view advice that is qualified by the different investment horizons of shareholders (such as advice which recommends different actions, depending on whether shareholders take a long-term view or a short term view) to be insufficiently clear.
Application of ‘Fair and Reasonable’ Requirement to ’Whitewash’ Waivers
’Whitewash’ waivers are waivers sought, by an existing or incoming controlling shareholder from the independent shareholders of a target company, of the obligation to make a general offer for the target company when new shares are issued by the target company to the controlling shareholder. ‘Whitewash’ waivers may be obtained in rights issues or in reverse take-overs (RTO). Under the Code, the SIC would normally grant its approval for the controlling shareholder to seek a ‘whitewash’ waiver on condition that, amongst others, an IFA issues an opinion that the transaction that is the subject of the ‘whitewash’ waiver is ‘fair and reasonable.’
The Practice Statement states that, as in the case of takeover offers, the terms ‘fair’ and ‘reasonable’ also embody two distinct concepts in a ‘whitewash’ waiver situation. While the SIC declined to define what would be ‘fair’ and ‘reasonable’ in the different types of ‘whitewash’ waiver scenarios, it has provided some guidance on the application of the ‘fair’ and ‘reasonable’ concepts in an RTO situation. In determining whether an RTO is ‘fair’, the IFA may perform an objective evaluation of (i) the price of the assets being injected into the listed company, and (ii) the issue price of the shares to be issued by the listed company in consideration of the acquisition of the assets. In determining whether an RTO is ‘reasonable’, the IFA may take into account other factors such as the financial situation of the listed company.
Application of ‘Fair and Reasonable’ Requirement to ‘Special Deal’ Situations
Under the Code, if a shareholder in the target company seeks to acquire certain assets in the target in which the offeror has no interest (a Collateral Transaction), there is a possibility that the terms of the Collateral Transaction may confer a benefit only to that shareholder, to the exclusion of all other shareholders of the target. SIC would normally consent to such a transaction on condition that an IFA publicly states in its opinion that the terms of the acquisition are ‘fair and reasonable’.
The Practice Note reiterates that the SIC will require an IFA to opine that the terms of the Collateral Transaction are both ‘fair’ and ‘reasonable’, using the concepts applicable to takeover offers.
The Practice Note further sets out that an IFA is expected to consider the merits of the Collateral Transaction independently of the takeover offer or the transaction that is subject of the ‘whitewash’ waiver (the Main Transaction), even if the Main Transaction is conditional upon the Collateral Transaction.
Prior to the publication of the Practice Statement, Singapore did not have any guidelines on how IFAs are to opine on a transaction. This led to a proliferation of opinions, especially in takeover offers, setting out views such as ‘not compelling but fair’ or ‘fair but not reasonable’. A large number of the recommendations in IFA opinions also advised shareholders who hold one set of beliefs to accept the offer, but advised that other shareholders who hold another set of beliefs to reject the offer. Such recommendations should be discouraged in light of the Practice Statement.
We welcome the clarity introduced by the Practice Statement, which applies standards that are broadly consistent with those found in Practice Note 111 published by the Australian Securities and Investment Commission (ASIC).