By Errol Oh, executive editor of The Star
In some assessments of potential corporate offers or deals, independent advisers are discombobulating investors with seemingly ambivalent advice. It all boils down to the definition of two words.
Soon, the capital market and investors may require the expertise of etymologists, given the recent string of cases of independent advisers (IAs) concluding that proposed corporate exercises are ‘not fair but reasonable’.
Who can blame the minority shareholders of listed companies for feeling confused and powerless when presented with seemingly ambivalent advice? The IA tells them an offer for their shares or a deal is unfair, but in the same breath, it recommends that they accept the offer or vote for the deal because it is deemed reasonable.
It all began in March 2010 when the Securities Commission (SC) issued a consultation paper on offer documentation for take-over and mergers. In it, the SC noted that IAs have evaluated the fairness and reasonableness of offers as a matter of market convention, and that in Malaysia ‘fair and reasonable’ was treated as a composite term. It was also pointed out that there was no definition for the term.
The SC says, ‘The Commission is of the view that since the standard of ‘fair and reasonable’ is used to determine whether an offer should be accepted or rejected, it is important that such a standard be clearly defined and interpreted in a consistent manner.’
Through the paper, the SC proposed to advise IAs on the interpretation of what is ‘fair and reasonable’. Last November, the proposed changes became part of the SC’s Practice Note 15 (PN15) of the Malaysian Code on Take-overs and Mergers 2010. A key difference is that the term ‘fair and reasonable’ is now two distinct criteria.
Assessing fairness of a take-over offer is quantifiable: if the offer price is equal to or higher than market price, but lower than the value of the securities that are the subject of the offer, the offer is considered ‘not fair’. Conversely, a fair offer is when the offer prices are equal to, or higher than, the value of the securities. Reasonableness is a bit more challenging to establish. Say the PN15: ‘In considering whether a takeover offer is ‘reasonable’, the IA should take into consideration matters other than the valuation of the securities that are the subject of the take-over offer.’
The PN15 specifies five factors that IAs should consider when evaluating reasonableness, but it also reminds IAs that they are expected to take into account ‘all relevant factors’. The decoupling of ‘reasonable and fair’ has paved the way for IAs to recommend acceptance of an offer or approval of a proposed transaction even if it is considered not fair but reasonable. This is how it is explained in PN15: ‘Generally, a takeover offer would be considered ‘reasonable’ if it is ‘fair’. Nevertheless, an IA may also recommend for shareholders to accept the take-over offer despite it being ‘not fair’, if the IA is of the view that there are sufficiently strong reasons to accept the offer in the absence of a higher bid than such reasons should be clearly explained’.
Even with explanation it is hard for most investors to digest advice that they should support something that is described as unfair yet reasonable. IAs are meant to safeguard the interest of shareholders by enabling them to make informed decision on certain transactions. However, when investors find it difficult to take independent advice, it is neither a fair nor reasonable solution.
This article first appeared in Accounting and Business magazine, May edition, 2013.