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SEC
flaw in takeover code hurts small shareholders Capital Development and Investment Company (CDIC) which owned 75.8 percent of NDB Lanka sold a 58.4 percent stake to international insurance giant Aviva, making the latter the 51 percent majority shareholder of Eagle Insurance. “This is because NDB Finance Lanka holds 87 percent of Eagle Insurance and the Aviva stake in turn comes to 51 percent,” an analyst said. He said that this has prompted industry analysts to examine past such sales and the alarming frequency at which they are happening, where listed firms are acquired through non listed companies who own them, while the minority shareholders are not offered the highest price for a share traded during the previous year the trade took place. “Through such sales, the companies avoid the requirement for a mandatory offer,” a stock analyst said. He said the important issue is whether the SEC has recognised this ambiguity in the Takeovers and Mergers code. “We have to be sure whether SEC sees this as an issue in the first place,” he said, adding that the main objective of the code is to protect minority investors. The SEC however takes the view of ‘what is good for the common market’ as opposed to protecting the minority shareholders. “The concept of a mandatory offer is to protect the minority shareholders and practise ‘equality’, but we have to consider ‘what is good for the market at large,” an SEC source said. He said that takeovers and mergers cannot be ‘compelled (forcing the code) extensively’, because in turn the cost of these become very high. But the analyst said that takeover codes should protect minority investors and make sure that their interests are looked after. “It is sensible to examine whether the Sri Lankan really achieves this, especially if such loopholes are present. SEC and CSE should act on these matters that are integral to investor confidence in the market,” he said. The SEC doesn’t consider this weakness as a loophole. “We are veering towards facilitating conglomerates and compelling (forcing) the takeovers and mergers code is not sustainable in a small market such as ours,” the SEC source said. Last year's acquisition of Namunukula Plantations (NPL) resulted in 58.7 percent of it being acquired by Richard Peiris, who did not to make a mandatory offer, as they bought 100 percent of the privately held Keells Plantation Management Services (KPMS) that owned 58.7 percent of NPL. However, had Richard Peiris directly bought the 58.7 percent of NPL in the market, it would have had to put forward a mandatory offer. The essence of both transactions is essentially the same as it appears inconsistent that they are treated differently. A similar situation occurred last year at Browns as the privately held Engineering Services and Masons Mixtures owned over 42 percent of Browns, with other Cooray family-owned entities also owning further minority stakes. An acquirer thus effectively gained control of Browns by purchasing these private companies and was not required to give a mandatory offer under the current SEC Takeover and Mergers Code. Under the UK's City Code on takeovers and mergers for instance, such a situation is covered by the 'chain principle', wherein the reasons for acquiring the intermediary (holding) company are explicitly considered, and the assets and profits of the ultimate company are also considered relative to the holding company in determining whether a mandatory offer is required. Under such a rule for example, a takeover of JKH would not likely require a mandatory offer for Asian Hotels (82 percent owned by JKH) for example but a takeover of KPMS would have likely required a mandatory offer for NPL (59 percent owned by KPMS). |
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