Lessons from the “unquestionable questionable” NMH share transaction

The FSC may consider diluting rules which increase market concentration in the hands of big companies. The more diverse the shareholding of the biggest companies, the more it may help increasing the bigger private companies’ public accountability in terms of selective employment and allocation of contracts

In a circular letter to leftover shareholders of New Mauritius Hotels (NMH) dated 31st January 2017, ENL Land Ltd (ENL) and its subsidiary, Rogers and Co Ltd. (Rogers) have offered them to buy up their shares held in NMH at a per share price of Rs 21.

Having previously acquired shares from other shareholders from time to time, ENL and Rogers’ combined voting shares in NMH amounted on 19th January 2017 to 30.019% of NMH’s total.

In financial regulatory terms, an acquisition of this order puts such a shareholder in “control” of the company. When a shareholder of a listed company (NMH is one) acquires 30% or more of a company’s shareholding, Rule 33(1) of the Takeover Rules made by the financial regulator, the Financial Services Commission (FSC), is triggered. It requires such a shareholder to make an offer to buy up remaining shareholders’ shares unconditionally.

This Rule also requires the now “controlling” shareholder to offer to buy up the shares held by the rest of the company’s shareholders at a price which is the higher of the last price paid by the acquirer on a previous share transaction and the average price at which the share was traded on the Stock Exchange during the preceding six months. ENL/Rogers know this Rule. The relevant share price in this case was that of a share transaction conducted jointly by ENL and Rogers on 19th January 2017, viz., Rs 21. So, the offer has been made with reference to this transaction at Rs 21 per share.

The FSC’s Takeover Rules also require the take-over bidder (here, the related parties, ENL and Rogers) not to put under obligation the other shareholders to sell off their shares to it. The latter are free to engage in the proposed transaction at the offer price or decline to do so. ENL and Rogers make this clear in their letter of offer: other shareholders are under no compulsion to enter into the proposed transaction.

On its part, the target company of ENL/Rogers’ take-over bid, that is, NMH, also has duties to comply with, under the same FSC Takeover Rules. It is under a duty to recommend to the concerned shareholders to accept or reject the share purchase offer on the basis of an independent evaluation of the price on offer.

NMH has recommended against, which seemingly puts it at cross-purposes with the interest of ENL/Rogers to acquire the rest of the company. On the basis of an independent valuation of the NMH’s share price by KPMG, at the behest of NMH, the Board of Directors of NMH (which includes three directors from ENL/Rogers who abstained from the decision-making) has stated that the other shareholders should not accept the offer from ENL/Rogers. KPMG has evaluated the current share price of NMH at Rs 30.96, much higher than the ENL/Rogers’ offer price of Rs 21 per share.

Some preliminary lessons

Should the stand taken by NMH’s Board not to recommend the sale of their shares to ENL/Rogers at the stated price (Rs 21) be interpreted as a disavowal by it of an unfair transaction?

The problem is there were three NMH Board members, also board members of ENL/Rogers, who were present when the issue of the share price on offer from ENL/Rogers was debated by NMH Board, even though they abstained from voting on the issue. How can such Board discussions be at arm’s length? There is a lot of scope here for insider information and situations like this are embarrassing, to say the least. The distance that ought to have been respected was not much.

A strengthening of existing FSC Rules may not be out of place if there are doubts that their application in fact may give rise to undermining the independence with which boards should operate. Mauritius has significant cross-company directorships which may not be conducive to good governance, especially when it comes to taking decisions having overlapping mutual interests.

On the other hand, some in the media exceeded the bounds of decency to start inferring without the least evidence that the Ag. CEO of the FSC was being sacked, had resigned or had left the country in the wake of this transaction. We must stop harming our international good standing by demeaning our public institutions, as it was done by an indelicate minister publicly rubbishing the CEO and Chairman of the FSC in the wake of the BAI affair. Let’s not be childish and totally irresponsible towards the country again.

There is also a public perception that the share price would have been manipulated to help ENL/Rogers acquire the remaining NMH shares at a lower price than what they are really worth to consolidate ENL/Rogers’ hold on the hotel company. This perception implies that ENL/Rogers would be getting the commanding shareholding position in NMH through a colourable device. It does no good to either the concerned companies or to Mauritius as a jurisdiction.

The FSC Rules base themselves on the assumption that there is a market for listed shares on which share prices are freely determined by a large number of buyers and sellers. There is no mechanism by which the traded price of a share may be determined other than the floor of the Stock Exchange of Mauritius. If demand and supply conditions on the Stock Exchange were thin during the relevant period so as to influence a cheap takeover of NMH by ENL/Rogers, the Rules appear to be blind to this risk. The NMH share was traded in earlier 2016 at close to Rs 30. However, the peak share price dipped to only Rs 21 subsequently when the ENL/Rogers transaction came on the table.

Given this, the offer price mechanism might need to be reviewed and balanced against a fair independent secretly kept price (possibly in the concurrent custody of the FSC) before the offer was made by ENL/Rogers. Not after. So, the prices are not seen as unfair to remaining shareholders faced with some sort of take-it-or-leave-it-at-your-own-cost situation.

The FSC should make the discovery of devices, if any, used by interested parties to influence the share price before acquisition better than what it is at present. Action is needed.

It would not be out of place to also consider some public interest issues pertaining to a deal which has aroused so much controversy. For example, is it good to allow consolidation of concentration of shareholding in key companies of the country by the ‘acquisition of control’ Rule? Besides, should holding companies, not offering their block of shares for public trading, use them for influencing the official share price for their private convenience at public cost? Exceedingly thin volumes of share trading on certain shares can cause share prices to swing in opposite directions or barely change despite sound company fundamentals. Action to overcome this weakness would not be out of place.

The FSC may consider diluting rules which increase market concentration in the hands of big companies. The more diverse the shareholding of the biggest companies, the more it may help increasing the bigger private companies’ public accountability in terms of selective employment and allocation of contracts.

Murli Dhar

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