Unlocking higher offers: How company funds can boost prices for delisting

Straits Times

2 days ago

SINGAPORE – Over the past few years, companies that wished to privatise and delist have adopted one of three possible routes: a voluntary delisting, a scheme of arrangement, or a voluntary offer coupled with compulsory acquisition.
All three have their advantages and disadvantages, and the rules have been tweaked to try and preserve minority rights as far as possible.
Yet in most cases, there is the problem of 'low-ball' offers that are typically pitched to buy out minority shareholders – at prices that are seen to be exploitative and unfair.
It stands to reason that offerors, who are usually major shareholders, would table low prices, since as buyers, they would quite naturally want to pay as little as possible to achieve their goals.
But what if the funds to take the company private come from the company itself and not the offeror? Would this make a difference?
Selective capital reduction as delisting method
Enter a fourth delisting route, known as a selective capital reduction (SCR), which has begun to make an appearance in the local market, and deserves scrutiny. It was employed by beauty products maker Best World, which delisted in 2024 via an SCR.
An SCR in a delisting involves cancelling a portion of a company's share capital, specifically targeting shares held by minority shareholders, while the shares of the majority shareholders remain unaffected.
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This mechanism allows the company to return capital to minority shareholders in exchange for their cancelled shares, effectively facilitating a delisting and privatisation.
Like in some of the other delisting routes, a special resolution, typically requiring a 75 per cent majority vote of eligible shareholders present and voting (excluding the bidder and their related parties), is needed to approve the SCR at an extraordinary general meeting.
Court approval is required, and the offer price has to be fair and reasonable. Also, as in the case of the other delisting methods, an independent financial adviser (IFA) has to be appointed to deliver an opinion on fairness and reasonableness.
Could using this method mean better offer prices?
On paper at least, going the SCR route has one major advantage – the money to buy out minority shareholders comes from the company and not the major shareholder, which might then in theory lead to a better offer price.
There is a second important feature though, which is that in an SCR delisting, the action would have been initiated by the company and not the major shareholder – at least in theory.
What minority shareholders should consider
Herein lies the key issue which minority shareholders have to consider when presented with a privatisation-cum-delisting via an SCR – did the company arrive at the decision to use its cash to buy out and cancel the shares of minority shareholders independently, and is the action of going private truly in the company's best interests?
A related issue, of course, is whether paying off small shareholders is really the best use of the company's funds. In Best World's case, for example, the company used $375.37 million, or 62 per cent, of its cash of $608 million to buy out its minority shareholders – which is a significant amount of money, no matter which way you look at it.
A question to ask would quite naturally be: What was the degree of involvement of the controlling and/or majority shareholder in arriving at the decision to delist via an SCR? Was there any undue influence placed on the board by the controlling shareholder? Equally important would be how the offer price was determined. It should be close to net asset value (NAV) in order to be fair, since all shareholders are supposed to be equal, and in a liquidation, are therefore entitled to receive their pro-rata share of a company's assets.
Implications for independent financial advisers
Since an IFA opinion on fairness and reasonableness is required, going the SCR path has implications for IFAs. For instance, if the price is way below NAV, then the IFA would have its work cut out for it to justify the valuation method that was used to derive the price.
Furthermore, finding comparable companies as benchmarks might prove challenging, given that the majority of delistings here have proceeded under the other three routes outlined above.
Last, but by no means least, IFAs should note that an SCR is subject to court approval, which means heightened scrutiny and therefore added pressure to provide truly independent advice.
To summarise, SCRs could become more common in future, given that the funds to take the company private come from company coffers and not offerors.
While this holds the possibility of better offer prices, shareholders should be aware of the issues, the most important being whether the decision to go private was truly arrived at independently, and whether it really is in the best interests of the company.