Aabar delisting highlights need for a roadmap

With Aabar Investments Board deciding on Thursday to hold a shareholder meeting on July 26 to discuss its proposed delisting from the Abu Dhabi stock exchange, it means the public shareholders have simply to wait and watch.

Press reports in the past week said that investors are nervous and many are unsure whether to hold on to the shares or to sell them. If they hold on, what possible prices would the company offer and if they do not agree to the compulsory buy out, do they have a choice are some of the questions in their minds.

Possibilities

As reported by Reuters, some industry observers have pointed to the possibility of the company trying to take advantage of its relatively low share price. Aabar's shares have declined more than 13 per cent this year and down eight per cent in the last one year.

Aabar, which is a majority shareholder in Daimler, said in statement that the purpose for its voluntary delisting is to give it operational flexibility. Government owned International Petroleum Investment Corporation (Ipic) holds majority share, with 71 per cent stake.

As the company proceeds on converting itself to a private joint stock company, the larger issue for the market and its shareholders, is where do Emirates Securities and Commodities Authority (ESCA) or the stock exchange stand on buy out offer rules and investors' rights. Do the regulator and the exchange have procedures in place to ensure a satisfying exit route for the public shareholders?

Though the circumstances under which ESCA may cancel the listing of shares of a company are well delineated (see box), when it comes to questions of propriety and procedure to buy out the remaining shareholders the delisting rules are not much of help, legal analysts say.

"The problem in the UAE is that there is no roadmap for how the process of a company transforming from a public company to a tightly controlled company should happen," says Gary Watts, head of corporate commercial law, Al Tamimi & Company. "So basically what is badly needed is a rule book on how to buy out the shareholders in a public company."

Delisting is a blow for shareholders in a public company, says Watts. The reason is the shares lose their market, they lose their liquidity and shareholders lose a lot of information about the company. This can occur because the number of shareholders have fallen to a very low level or because the company's share prices have fallen to extremely low level. It is usually the end of a long process where a company's character changes from that of a publicly listed company to one with a smaller number of shareholders.

"Provided the requisite shareholder majority is achieved to delist, the company can be delisted without any legal obligation on the majority to offer to purchase the shares of the minority," says Andrew Lewis, partner at Norton Rose (Middle East). "However, it is not uncommon for such an offer to be made in recognition that the minority shareholders will no longer be in a listed vehicle."

The importance of a roadmap becomes all the more evident in these financially challenging times, says Watts.

"This [lack] ought to be addressed because there is a lot of need and lot of interest for companies to be restructured, given the last couple of years of difficult circumstances, and change in shareholding is an important part of that picture," Watts explains.

The guiding principles in some of the more developed jurisdictions are: first, shareholders have reasonable time to consider the proposals, so that they don't get ambushed by the raid on the market; second, all shareholders get an opportunity to participate in the offer; third, all shareholders get information given to them by their board as to what their shareholdings are worth.

And fourth, if the bidder follows the rules and gets a very high level of acceptances, the bidder has the comfort of knowing that there is a "squeeze out" provision that says that if there is a high level of acceptance — say around 90 to 95 per cent, he can force the ones who have not accepted because they are unhappy with the offer or they did not answer the mail to sell their shares to the bidder.

"That's a very attractive thing that encourages people to make bids. So it might look as if its bad for smaller shareholders, but in another way it's good for shareholders. It encourages people to get into the market and make offers," Watts says.

Circumstances

In the context of the UK, Philip Jolowicz, head of Financial Services and Regulatory at Hadef and Partners adds, company delistings most often arise in circumstances where a takeover offer is made to all shareholders and whereby once the statutory threshold of ownership and acceptances is reached, any residual shares are subject to compulsory purchase.

"Thus, all shareholders receive the same valuation for their shares in accordance with the Companies Law and the Take-over Code. In the UK, the threshold of ownership that triggers the mandatory offer requirements is 30 per cent. Delistings can also occur as a result of Exchange action or, of course, in the case of bankruptcy."

The problem in the UAE is there is no pathway to facilitate the process and this is an urgent policy priority, Watts says. "It's good policy to facilitate legislation to permit and regulate orderly and fair takeover offers."

In relinquishing their shares, the kind of exit opportunity offered is important, he says, for various reasons.

Shareholders are often looking for opportunities to liquidate their holdings on fair and reasonable terms. Also, shareholders should be given a chance to sell their shareholdings if there is a change in control on the share register which would change the board and the management.

Then there are situations where the company should become a private company — for example, the company is in difficulty and needs support from major shareholders and they are unwilling to put in money or guarantees without capturing all the equity.

In addition, there are other cases, where bidders want to come in and merge the company's business with their business and capture the synergies and are prepared to pay the minority shareholders a fair price for doing that.

"In all these situations it's good and it's healthy," he says. "It's good for the value of the company and its long-term share price if the possibility of these things is always there."

At the moment the talk of delisting is not the real issue.

Changes

"We should accept there will be changes in ownership and control of listed public companies and we should write the rule book to make sure that minority shareholders are protected," Watts says.

Watts outlines the ways of protection. First, having legislation that would give them more information including valuations. Second, give them time to consider the offer — for example, make sure the offer has to be open for a minimum period of 30 days to accept the offer so that they can not be caught at a disadvantage because they happen to be in hospital or on vacation.

Thirdly, give them some protection against unfair discrimination with the big shareholders being paid a much higher price per share than the smaller shareholders. So that even the smaller shareholder gets an opportunity to share in the premium when there is a change in control.

To get delisting when the company wants to wind up its operations, the company needs the approval of 75 per cent of its shareholder vote being in favour under the existing law.

Under the law, there are notification requirements. When someone is buying up shares in a company, they have to notify with every 5 per cent increase in their holdings — to the exchange — ADX or DFM. They have to get an approval to place an order that would take their stake above 20 per cent. That approval has to come from the exchange and ESCA.

"But there are no guidelines on where, when and in what circumstances that approval would be given," says Watts.

There is no clearly recognised pathway for what's called in other jurisdictions a ‘tender offer,' he adds. A tender offer is an off market offer where you mail out a written offer to all the shareholders and say they have 30 days to respond to it. There is no provision for that at all.

The law provides that all trades have to take place on the floor of the financial market unless you get permission from the regulator.

The role of the board comes in for scrutiny too, especially when it comes protecting minority rights.

It is the responsibility of the board to look protect the interests of the minority shareholders and that is well established both under the UAE law and under the specific corporate governance regulation applying to public joint stock companies that ESCA has enacted, Watts points out.

"The problem is there's no rules for the takeover game and no rule guidance given to boards.

"Where someone makes a takeover offer, the board should be required to get a valuation and send the valuation to every shareholder. There's nothing specific like that."

i) If the company is wound up voluntary by the adoption of an extraordinary general assembly resolution. This may be due to the fulfillment of the company's objects, expiry of its term or sustaining heavy losses where the remainder of the capital is not sufficient to carry out its activities;

ii) If the company substantially changes its core business or main objects for which it was incorporated initially. The change of the main objects of the company should be disclosed to the UAE financial markets in order to procure proper conduct of the business on the UAE financial markets and to protect the relevant investors. Such substantial change of activities is deemed to be a material change in the main business activities of the company in which the shareholders invested in, or the new activities may be against some shareholders' principles (e.g. change from Islamic Finance to Conventional Finance practices);

iii) If the company merges with another company or companies which results in liquidating both companies and incorporating a new company and assigning the liabilities of both liquidated companies to the newly incorporated company. The merger should be adopted by an extra ordinary general assembly resolution by a majority of three quarter of the shareholders present in such meeting;

iv) If the company ceased carrying out its business due to being distressed, without being declared insolvent or being liquidated; and v) if the listing of the company's securities has been suspended in the UAE financial markets for a period of six months or more.

Courtesy: Hadef and Partners, www.hadefpartners.com