THE lowball privatisation offer for construction engineering company TTJ Holdings was declared unconditional earlier this month, as the level of acceptances pushed the offeror&rsquo s stake past the 90 per cent threshold.

 

It was clear to investors from the outset that the offer price of S$0.23 per share was not only inadequate, but that TTJ&rsquo s executive chairman Teo Hock Chwee was exploiting a loophole in the law which would enable him to more easily reach the compulsory acquisition threshold.

 

The Companies Act allows an offeror to exercise the right of compulsory acquisition once it obtains 90 per cent of a target company&rsquo s shares that it and its related companies did not already own.

 

But Teo made the offer through a special purpose vehicle called THC Venture, which allowed his 84.4 per cent stake in TTJ to count towards the 90 per cent acceptance threshold.

 

So, THC Venture only needed to obtain a further 5.6 per cent of TTJ&rsquo s shares before forcing holders of the remaining 10 per cent to give in.

 

One TTJ shareholder grumbled in a letter to The Business Times that the structure of the offer effectively circumvented the requirement for exit offers to be fair and reasonable.

 

Another TTJ shareholder said in a separate letter that the Securities Industry Council, which administers Singapore&rsquo s takeover code, ought to intervene.

 

In response, the Accounting and Corporate Regulatory Authority (Acra) said it has reviewed several areas of the Companies Act, and will be proposing amendments to address the concerns raised about the compulsory acquisition framework.

 

That&rsquo s cold comfort to many minority shareholders of TTJ &ndash who will now have to part with their shares at S$0.23 each, versus the company&rsquo s book value as at Jan 31 of S$0.37 per share.

 

This episode may well leave some of them feeling that Singapore&rsquo s market regulators prioritise form over substance.

 

If it is clear to everyone that a certain market practice violates the spirit of the law &ndash and, indeed, is commonly referred to as a &ldquo loophole&rdquo &ndash surely market regulators ought to immediately stop it.

 

Role of IDs

 

Another aspect of the TTJ offer worth examining is the role played by its independent directors (IDs) &ndash namely, Leong Yee Yew, Lim Yian Poh and Ling Chien Yien.

 

Together with executive director Chiong Su Been, they recommended minority shareholders of TTJ reject the offer.

 

This was based on the advice of their appointed independent financial adviser (IFA) Zico Capital, which said the offer was neither fair nor reasonable.

 

Zico Capital had considered the offer from a variety of angles, including the one that was on the minds of investors &ndash that the offer price was well short of TTJ&rsquo s net asset value (NAV) as at Jan 31.

 

The IFA said after making adjustments for the sale of certain assets in Malaysia, completed after Jan 31, and marking TTJ&rsquo s real estate assets to their &ldquo market value&rdquo , the company&rsquo s NAV would notionally be S$0.46 per share.

 

A major part of this adjustment related to TTJ&rsquo s real estate asset at 57 Pioneer Road. Zico Capital ascribed a value of S$36 million to this asset, based on an estimate by Knight Frank &ndash which was 2.9 times the property&rsquo s carrying value as at Jan 31 of S$12.4 million.

 

The IFA ultimately put the estimated value of TTJ shares between S$0.37 and S$0.46 &ndash or, as much as twice the offer price.

 

This column said last month that the pro-minority investor stance taken by TTJ&rsquo s recommending directors and their IFA was remarkable.

 

IDs generally have little to gain personally by opposing a company&rsquo s controlling shareholder. Moreover, the perceived independence of IDs tends to wane the longer they serve on any particular board.

 

All 3 of TTJ&rsquo s IDs have served for more than 9 years, and had been re-elected following 2-tier shareholder votes.

 

The lesson here is perhaps that the actions of IDs ought to count for something in determining their supposed independence. If factors like the amount of time they have served on a board matter, so should their track record in acting in the best interests of investors.

 

Value unlocking

 

In the end, the recommendation of TTJ&rsquo s IDs did not stop the lowball offer from succeeding.

 

While TTJ&rsquo s share price briefly spiked above the offer price to close as high as S$0.25 on Jun 27, it soon fell back down. This was due in large part to the offeror stating on Jun 29 that it would not increase the offer price.

 

On Jul 7 &ndash just 1 day before the original close of the offer &ndash the offeror had secured 88.72 per cent of TTJ&rsquo s shares. The offer period was extended till Jul 22.

 

The following day, on Jul 8, the offeror managed to secure 90.26 per cent of TTJ&rsquo s shares.

 

While the compulsory acquisition loophole certainly contributed to minority shareholders not being adequately compensated for their shares, another important factor was the lack of action by the company over the years to address the undervaluation of its shares.

 

The offer price was 37.5 per cent less than TTJ&rsquo s book value per share, but it was 36.1 per cent above the stock&rsquo s last traded price before the offer announcement and 12.2 per cent higher than the stock&rsquo s highest traded price during the preceding 2 years.

 

TTJ&rsquo s board should have considered options to unlock value for all its shareholders. For instance, it could have tried to crystallise the value of its key property at 57 Pioneer Road. The board could also have considered distributing some of the cash on its books &ndash which amounted to S$29.2 million as at Jan 31.

 

Questions should have been asked about the size of Teo&rsquo s stake in the company &ndash which increased significantly in 2015 &ndash and the extent to which that might have been contributing to the illiquidity and undervaluation of its shares.

 

While the privatisation of TTJ will enable minority shareholders to cash out at a premium to market value, many of them would probably have preferred it if Teo and TTJ&rsquo s board had worked to unlock the immense underlying value of the shares over time.

THE voluntary conditional cash offer to privatise TTJ Holdings from THC Venture &ndash an investment holding company held solely by TTJ&rsquo s executive chairman Teo Hock Chwee &ndash has turned unconditional, the company announced in a bourse filing on Saturday (Jul 9)

 

The total shares owned, controlled or agreed to be acquired by the offeror and its concert parties amounted to some 90.26 per cent of total number of TTJ shares as at 6pm on Friday, or an aggregate of some 315.4 million shares. 

 

This includes valid acceptances of the offer received from the concert parties, amounting in aggregate to some 295.3 million shares, which represent about 84.49 per cent or the total number of issued shares. 

 

TTJ&rsquo s shares held by the public as at the date of the unconditional announcement stands at about 9.74 per cent, which is less than the requisite 10 per cent free float requirement of the listing manual. 

 

Back in May, THC Venture sounded its intention to privatise the company at an offer price of S$0.23 in cash per share. 

 

In a surprising move, 4 directors of TTJ &mdash executive director and chief financial officer Chiong Su Been, lead independent director Lim Yian Poh, as well as independent directors Ling Chien Yien and Leong Yee Yew &mdash recommended that shareholders reject the offer. 

 

The directors said they concur with the independent financial adviser (IFA) Zico Capital which advised shareholders to reject the offer on the grounds that it is &ldquo not fair and not reasonable&rdquo . 

 

The IFA had cited a number of reasons for its judgment. Some of the reasons include the hefty discounts that the offer price had from the company&rsquo s unaudited net asset value (NAV), adjusted NAV and revalued adjusted NAV as at Jan 31. These discounts range from 37.5 per cent to 50.1 per cent. The offer price is also lower than Zico Capital&rsquo s estimated value range of between S$0.37 and S$0.46 per share. 

 

Zico Capital had also noted that Teo has been holding about 84.4 per cent of the company&rsquo s total share capital since September 2015. This means TTJ is just 6 percentage points shy of crossing the 10 per cent free float threshold required by the Singapore Exchange&rsquo s listing manual. 

 

THC Venture, which has made a bid to privatise structural steel specialist TTJ Holdings : K1Q 0%, does not intend to raise its offer price of S$0.23 per share, it said in a Wednesday (Jun 29) bourse filing.

 

The offeror is solely owned by TTJ&rsquo s executive chairman Teo Hock Chwee. Its update comes after 4 directors of TTJ recommended that shareholders reject the offer &ndash namely, executive director and chief financial officer Chiong Su Been, lead independent director Lim Yian Poh, and independent directors Ling Chien Yien and Leong Yee Yew, according to TTJ&rsquo s website.

 

The directors said that they concur with the independent financial adviser Zico Capital, which advised shareholders to reject the offer for being &ldquo not fair and not reasonable&rdquo . The offer price is lower than Zico&rsquo s estimated value range of between S$0.37 and S$0.46 per share.

 

Zico Capital also noted that Teo has been holding about 84.4 per cent of the company&rsquo s total share capital since September 2015 &ndash just 6 percentage points away from the 10 per cent free float threshold required by the listing manual.

With the pro-minority investor stance that TTJ IFA and recommending directors are unexpectedly taking, it would be a shame if regulators choose to continue sitting on their hands.

Boss Teo is playing to his advantage because regulators not doing enough.

WED, JUN 29, 2022 - 5:50 AM

BEN [email protected]@BenPaulBT

  skp-sgx232.JPG

The trajectory of TTJ' s SGX-listed shares could determine whether the company' s controlling shareholder hikes the offer price. THE STRAITS TIMES

MINORITY shareholders of TTJ Holdings might have been surprised to learn last week that the company&rsquo s board is recommending they reject the cash offer of S$0.23 per share from THC Venture, a privately held company owned by TTJ&rsquo s controlling shareholder and executive chairman Teo Hock Chwee.

 

The recommendation is based on the advice of Zico Capital &ndash the independent financial adviser (IFA) to the recommending directors &ndash which said the offer is neither fair nor reasonable.

 

In a nutshell, the IFA said TTJ is a profitable structural steel company with an ungeared balance sheet and the offer price is significantly less than the value of the assets on its books.

 

 

This is something many minority shareholders of TTJ already know, of course. But Zico Capital has arguably stoked opposition to the lowball offer from THC Venture with its advice and the analysis that accompanied it.

 

For instance, many investors were already aware the offer price is nearly 37.5 per cent less than TTJ&rsquo s net asset value (NAV) of S$0.37 per share as at Jan 31. But the IFA said after making adjustments for the sale of certain assets in Malaysia completed after Jan 31 and marking TTJ&rsquo s real estate assets to their &ldquo market value&rdquo , the company&rsquo s NAV would notionally be S$0.46 per share.

 

The IFA ultimately put the estimated value of TTJ shares between S$0.37 and S$0.46, noting the wide differential is attributable to the revaluation surplus of the company&rsquo s properties.

 

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When comparing the valuation ratios implied by the offer price with comparable companies, the IFA was careful to highlight their inferior qualitative attributes. For instance, the IFA pointed out that the peer companies had been loss-making and were geared. Moreover, TTJ had a higher current ratio than any of them.

 

The IFA also seemed to obliquely blame TTJ&rsquo s controlling shareholder Teo for the depressed market value of the company&rsquo s shares.

 

It noted that Teo held 234.5 million shares when TTJ was listed back in 2010, representing a 67 per cent stake in the company. In 2015, Teo bought 400,000 shares in the market at S$0.34 per share and a further 60 million shares in off-market trades at S$0.345 per share.

 

He now holds a deemed and direct interest in 294.9 million TTJ shares, representing an 84.4 per cent stake in the company. &ldquo The reduction in the free float may have had a bearing on the subsequent share price performance and trading liquidity of the shares,&rdquo the IFA said, in its letter to the recommending directors.

 

Long-serving IDs

 

Rightly or wrongly, investors often assume that boards of tightly controlled companies &ndash and, consequently, their advisers too &ndash are of the same mind when it comes to major corporate actions.

 

The position that Zico Capital has taken is all the more remarkable given that 3 of the 4 recommending directors are independent directors (IDs) who have served on TTJ&rsquo s board for more than 9 years &ndash the threshold at which their perceived independence must be tested in a 2-tier shareholder vote.

 

Lim Yian Poh and Ling Chien Yien were appointed IDs way back in 1996, according to TTJ&rsquo s last annual report. Leong Yee Yew was appointed in 2010.

 

Ling and Leong were re-elected under 2-tier votes on Nov 4, 2020, with 100 per cent support from minority shareholders who voted. Lim was re-elected on Nov 30, 2021, under a 2-tier vote with almost unanimous support from minority shareholders.

 

Interestingly, the fourth recommending director &ndash Chiong Su Been &ndash is an executive director of TTJ and the company&rsquo s chief financial officer. She has declared that she intends to accept the offer with respect to all the TTJ shares she owns. (She holds more than 1.1 million TTJ shares, representing a 0.32 per cent stake in the company.)

 

Offer price revision?

 

What does all this mean for investors? Are minority shareholders of TTJ headed for a big payday?

 

The trajectory of TTJ&rsquo s share price could determine what happens next.

 

On Monday (Jun 27), the first trading day after the circular with the IFA letter was published, TTJ surged above the offer price to hit an intraday high of S$0.28 before falling back. On Tuesday (Jun 28), the stock closed at S$0.245 &ndash some 6.5 per cent above the offer price.

 

If TTJ&rsquo s share price remains significantly above S$0.23 in the days ahead, Teo might well raise his current offer price.

 

But if the stock goes back down to the S$0.23 level, Teo might be inclined to just sit tight and bet that minority shareholders will come across in sufficient numbers to enable him to exercise the right of compulsory acquisition and take TTJ private.

 

The Companies Act allows an offeror to exercise the right of compulsory acquisition once it obtains 90 per cent of a target company&rsquo s shares that it and its related companies do not already own.

 

But Teo is exploiting a loophole in the law that enables individuals who are controlling shareholders of listed companies to have shares they own count towards the 90 per cent acceptance threshold by setting up a special purpose vehicle to make the offer.

 

Teo has provided an irrevocable undertaking to accept the offer from THC Venture with respect to his 84.4 per cent stake. This means THC Venture will only have to obtain a further 5.6 per cent of TTJ&rsquo s shares before reaching the 90 per cent threshold that will enable it to compulsorily acquire the rest of TTJ&rsquo s shares &ndash which is not a big hurdle.

 

The offer &ndash which is conditional on THC Venture garnering 90 per cent of TTJ&rsquo s shares &ndash is scheduled to close on Jul 8 at 5.30 pm.

 

The Business Times said last month that it seems strange Singapore&rsquo s market regulators have felt unable to challenge this market practice, which is clearly not in keeping with the spirit of the law.

 

With the pro-minority investor stance that TTJ&rsquo s IFA and recommending directors are unexpectedly taking, it would be a shame if regulators choose to continue sitting on their hands.

 

 

WHEN the first Code of Corporate Governance was released in March 2001, it was against the backdrop of the East-Asian financial crisis, and the move from a merit-based to disclosure-based approach to regulation. The Corporate Governance Committee formulated the Code based on the shareholder model and adopted the &ldquo comply or explain&rdquo approach pioneered by the United Kingdom.

 

It is clear that this approach has not worked as well as hoped. One of the reasons is that our environment is different from that of the UK, where institutional investors play an important role in challenging corporate governance disclosures and practices of companies. Shares of UK-listed companies are mostly held by institutional investors, and such investors therefore have considerable influence there.

 

This is not the case in Singapore. There has been little pressure on institutional investors here to exercise their stewardship role, notwithstanding the adoption of a stewardship code. The chief executive of one listed issuer recently told me that only foreign asset managers ask them questions about corporate governance, not the domestic ones. Domestic institutional investors have therefore, in my opinion, been a disappointment.

 

When we moved to a disclosure-based regime, we also failed to strengthen regulatory enforcement and private enforcement by shareholders against disclosure breaches. How can we trust disclosures and explanations by companies under the disclosure-based regime and the &ldquo comply or explain&rdquo approach if there is little or no accountability for lack of disclosure or false or misleading disclosure?

 

The shareholder model is also under challenge. While there has been an increasing focus on the interests of other stakeholders and sustainability in the Code and listing rules over the past decade, changes to the Code may be needed.

 

Some questions we can ask are:

 

Should the responsibilities of directors be enhanced with respect to environmental and social issues?

Should provisions on board composition encourage consideration of competencies that are more relevant to wider stakeholders&rsquo interests?

Should the remit of remuneration committees include ensuring pay equity throughout the company?

Should disclosure of remuneration be expanded to include disclosure of the ratio of CEO to median employee pay?

Should companies be encouraged to consider introducing employee share ownership plans to improve employee engagement and inclusion, rather than only consider share-based incentives for executive directors and senior management?

Should there be a stronger focus on environmental and social risks?

Codes of corporate governance and corporate governance rules around the world have generally failed to address governance issues relating to company groups &ndash that is, how parent companies should govern subsidiaries, joint ventures, associates and other entities within the group, and how to address conflicts that often arise in company groups. Only financial regulators have paid some attention to this issue for financial institutions like banks and insurance companies.

 

In 2014, I co-authored a report on governance of company groups. Over the years, I have collaborated with my co-author to offer programmes on this topic for Malaysian directors. In many corporate scandals, the problems arose in a group entity that was often many layers below the ultimate parent company. Our experience is that parent and subsidiary companies&rsquo directors in our programmes recognise this as an important issue and are looking for more guidance.

 

During the consultation of the 2018 Code, the company secretary of a large company group asked me why this topic was not considered in the revision of the Code. Perhaps Singapore should take the lead when it next revises the Code and incorporate certain principles, provisions and guidance in the governance of company groups. Or perhaps there should be separate guidance relating to governance of company groups.

 

The mix and quality of companies have also changed over the past 20 years. The &ldquo S-chip&rdquo wave started in the mid 2000s, and we have never really dealt satisfactorily with the challenges faced by this group of companies. The number of such companies is now less than half compared to at its peak, with some delisted because of corporate governance or accounting scandals. More are unravelling, and I wonder how many will be left in a few years.

 

With up to 150 Chinese companies listed in the United States that could be forced to delist in the next 3 years due to the Holding Foreign Companies Accountable Act (HFCAA), some may land on the Singapore Exchange (one has already, through a secondary listing).

 

It is hoped that this will not lead to a repeat of the problems we have seen with the S-chips. If a market as sophisticated as the US is worried about the governance risks of these companies and their ability to properly regulate them, we should approach the listing of such companies here with great caution.

 

Many of these companies have variable interest entity (VIE) structures, which carry additional risks. We already have at least 2 Chinese companies listed here with a VIE structure: GHY Culture & Media and Nio (with Nio being a secondary listing). Nio and another secondary listing here &ndash AMTD Idea (formerly AMTD International) &ndash are only required to comply mainly with Cayman Island rules. We should ensure that at least one reputable market is properly regulating secondary listings listed here otherwise, we better ensure that they have to comply with our rules.

 

The other significant change over the past 15 years is the increase in proportion of companies listed on Catalist since its launch. These are generally smaller and lower-quality companies, with limited institutional investor following. They are regulated under a sponsor-based regime. I am sceptical about the sustainability of the Catalist regime and believe that it should be reviewed. To put it bluntly, I do not see sponsors looking out for the interests of public shareholders in many cases.

 

I proposed in a recent article for the SID Directors Bulletin a taxonomy approach to regulating different types of companies, which takes into account their different risks. We are fond of saying that one size does not fit all. So should one Code fit them all?

 

On June 24, ZICO Capital, the independent financial adviser to TTJ Holdings&rsquo independent directors has recommended that they should recommend minority shareholders to reject the offer. One of the reasons is that the amount needed to take TTJ private is less than the net cash position of the company.

 

On May 20, TTJ Holdings&rsquo major shareholders via THC Venture made a voluntary conditional offer (VCO) for the shares in TTJ it doesn&rsquo t own at $0.23 cents per share. Teo Hock Chwee owns 84.4% and his daughter 0.1% of TTJ.

 

Teo has undertaken to accept the offer in respect of all his shares, as has Chiong Su Been, TTJ&rsquo s executive director and CFO.

 

Based on TTJ&rsquo s balance sheet as at Jan 31, 2022 (TTJ&rsquo s 1HFY2022), its net asset value (NAV) per share stood at $0.37, unchanged from July 31, 2021. Based on some assets held for sale, the adjusted NAV (ANAV) is estimated at $0.373. However, based on the net revaluation surplus of $30.8 million in a valuation undertaken by valuers, the revalued ANAV (RANAV) works out as $0.46 as at Jan 31, 2022.

 

According to ZICO Capital, TTJ was in a net cash position as at Jan 31, 2022, and this would have represented 26.7% of the offer price. Following the completion of the disposal of land and factory in Johor for $13.5 million completed on March 29, 2022, net cash/share component is expected to constitute approximately 43.2% of the offer price. Hence 21.6% of TTJ&rsquo s RANAV would also comprise cash, ZICO Capital estimates.

 

The offer price represents a 50% discount to RANAV, and 0.62x NAV, which ZICO Capital reckons is what some asset-backed stocks including developers are trading at.

 

Using enterprise value (EV), the EV/Ebitda ratio of the Group of 4.71x as implied by the offer price, is below the range of the EV/Ebitda ratios of the comparable companies which are trading at a median of 13.89x. For TTJ&rsquo s EV/Ebitda to approach 13.89x, its share price would be $0.56.

 

" As an illustration on the acquisition cost for all shares not held by the offeror and Mr Teo as at the latest practicable date, we note that the acquisition cost by the Offeror would amount to approximately $12.6 million, which is significantly lower than the group&rsquo s net cash of $34.8 million. We note that there is no indication that the offer is a final offer from the offeror,&rdquo ZICO Capital points out.

 

&ldquo Having considered carefully the information available to us as at the latest practicable date, and based on our analyses, we are of the opinion that the financial terms of the offer are on balance, not fair and not reasonable. Accordingly, we advise the Recommending Directors to recommend shareholders to REJECT the Offer,&rdquo ZICO Capital advises.

 

Patrick Wright, a shareholder who said that the privatisation offer of 23 cents was too low, now thinks that minority shareholders should not accept anything outside the valuations indicated by ZICO Capital. " The IFA&rsquo s valuation is 37 cents to 46 cents. I don&rsquo t see why minority shareholders should accept anything outside of this range. I note 37 cents would still represent a 19.5% discount to RNAV," Wright points out.

IN A surprising move, 4 directors of structural steel specialist TTJ Holdings are recommending that shareholders reject the recent privatisation offer of S$0.23 in cash per share made by THC Venture, an investment holding company held solely by TTJ&rsquo s executive chairman Teo Hock Chwee.

 

The directors in question are, according to TTJ&rsquo s website, executive director and chief financial officer Chiong Su Been, lead independent director Lim Yian Poh, as well as independent directors Ling Chien Yien and Leong Yee Yew. 

 

Buried in a lengthy 222-page circular document posted to the bourse on Friday (Jun 24), the directors said they concur with the independent financial adviser (IFA) &ndash Zico Capital &ndash who advised shareholders to reject the offer on the grounds that it is &ldquo not fair and not reasonable&rdquo . 

 

The IFA had cited a number of reasons for its judgment. Some of the reasons include the hefty discounts that the offer price had from the company&rsquo s unaudited net asset value (NAV), adjusted NAV and revalued adjusted NAV as at Jan 31. These discounts range from 37.5 per cent to 50.1 per cent. 

 

The offer price is also lower than Zico Capital&rsquo s estimated value range of between S$0.37 and S$0.46 per share. 

 

Other reasons include the fact that the offer price is below the historical trailing NAV per share during the reference period, and the shares consistently trading at a discount to the historical trailing NAV per share from Sep 26, 2017. 

 

Zico Capital noted that Teo has been holding about 84.4 per cent of the company&rsquo s total share capital since September 2015. This means TTJ is just 6 percentage points shy of crossing the 10 per cent free float threshold required by the Singapore Exchange&rsquo s listing manual. 

 

&ldquo The reduction in free float may have had an effect on the share price performance and trading liquidity of the shares,&rdquo said Zico Capital. 

 

Teo has also provided an irrevocable undertaking to accept the offer, and with some 294.9 million shares to his name, Zico Capital said it is &ldquo highly unlikely&rdquo that there will be any competing offer from a third party. However, it noted there is no indication that the offer is a final one from Teo.

 

As far as TTJ&rsquo s business goes, the IFA noted that the group is in a net cash position and reported relatively robust current ratio of 5.5 times as at end-January. TTJ also has no bank or other borrowings as at the latest practicable date, and its core steel structure business remained operationally viable and financially sound during the Covid-19 pandemic. 

 

The group&rsquo s revenue in FY2020 and FY2021 remained relatively consistent, compared with its performance in FY2019, noted the IFA, adding that the company has a consistent track record of paying dividends to its shareholders from FY2018 to FY2021. The average dividend per share over the last 4 fiscal years was about S$0.006.

 

&ldquo We wish to highlight that such asset-based analysis of the Group only provides an estimate of the value of the group based on a hypothetical liquidation scenario, and has not taken into consideration other factors that may affect the value that can ultimately be realized by the group,&rdquo said Zico Capital. 

 

The IFA also highlighted that the acquisition cost for all the shares not already held by Teo and the concert parties would amount to S$12.6 million, which is &ldquo significantly lower&rdquo than the group&rsquo s net cash of S$34.8 million. 

 

Shareholders could also be disadvantaged in the context of the offer. Zico Capital noted that Teo and the concert parties have &ldquo effective statutory control&rdquo over the company with an aggregate shareholding of 84.5 per cent of the total shares. 

 

This places the parties in a position to &ldquo significantly influence&rdquo the management, operating and financial policies of the company, as well as the ability to pass all ordinary or special resolutions at the group&rsquo s general meetings where they are not required to abstain from voting.

 

The privatisation offer will close at 5.30 pm on Jul 8.

 

WE REFER to the letters, &ldquo Takeover loophole disadvantages minority shareholders of TTJ Holdings&rdquo by Mano Sabnani published on May 25, &ldquo TTJ privatisation offer &lsquo unfair&rsquo &rdquo by Patrick Wright published on May 26, and the commentary &ldquo Compulsory acquisition loophole back in the spotlight as TTJ minorities get lowball offer&rdquo by Ben Paul published on May 30.

 

We thank the writers for their views and feedback.

 

As part of the Accounting and Corporate Regulatory Authority (Acra)&rsquo s efforts to ensure Singapore&rsquo s corporate laws and regulatory framework stay competitive, Acra has reviewed several areas in the Companies Act, through a Companies Act Working Group, comprising members from local and international law firms, and industry regulators and associations.

 

One of the areas reviewed included matters relating to the compulsory acquisition framework, and in particular exclusions of the shares of persons and corporations which may influence or control the offeror, from the computation of the 90 per cent threshold which must be obtained before an offeror can exercise the right of compulsorily acquisition.

 

We will be proposing amendments to the compulsory acquisition framework, with a view to addressing the concerns raised while ensuring that our requirements do not make it onerous for companies to restructure.

While amendments to the Companies Act have been recommended, regulators have not challenged a market practice that&rsquo s clearly not in keeping with the spirit of the law

 

HERE we go again. On May 20, TTJ Holdings announced that its controlling shareholder is making a voluntary cash offer for the company at a steep discount to its book value and that the offeror will exploit an often-used loophole to reach the compulsory acquisition threshold more easily.

 

The offer &ndash if it succeeds &ndash will wrest shares in the structural steel specialist from minority shareholders at a price well below their intrinsic value, and further erode confidence in the effectiveness of Singapore&rsquo s market regulators when it comes to protecting small investors.

 

Under Section 215 of the Companies Act, an offeror can exercise the right of compulsory acquisition once it obtains 90 per cent of a target company' s shares that it and its related companies did not already own.

 

The problem is the wording of the law enables individuals who are controlling shareholders of listed companies to have shares they own count towards the 90 per cent acceptance threshold by setting up a special purpose vehicle to make the offer.

 

In the case of TTJ, the company&rsquo s executive chairman Teo Hock Chwee is using a privately held shell company called THC Venture to make the offer. Teo holds a direct and deemed interest of 84.4 per cent in TTJ, and has provided an irrevocable undertaking to accept the offer from THC Venture.

 

This means THC Venture will only have to obtain a further 5.6 per cent of TTJ&rsquo s shares before reaching the 90 per cent threshold that will enable it to compulsorily acquire the rest of TTJ&rsquo s shares.

 

In effect, Teo &ndash through THC Venture &ndash would only need to obtain 35.9 per cent of TTJ shares held by minority shareholders before being able to force all other minority shareholders to give in.

 

Not surprisingly, the terms of the offer are hardly generous. THC Venture is offering to pay only S$0.23 per TTJ share. The offer price may be reduced in the event of dividend payouts, and the offer itself is conditional upon THC Venture and its concert parties crossing the 90 per cent threshold.

 

While the offer price of S$0.23 is 36.1 per cent above TTJ&rsquo s market price just before the offer announcement, it is nearly 37.5 per cent below the company&rsquo s net asset value of S$0.368 per share as at Jan 31.

 

TTJ also appears to have a pristine balance sheet, with S$29.2 million &ndash or S$0.083 per share &ndash in cash and cash equivalents and no bank borrowings.

 

On top of that, the company said on March 29 that it had completed the sale of certain property, plant and equipment in Malaysia for a further RM41.7 million (or approximately S$13.4 million).

 

At the offer price of S$0.23 per share, Teo would have to fork out about S$12.6 million to purchase the 54.6 million TTJ shares he doesn&rsquo t already own &ndash that&rsquo s less than half the amount of cash the company held as at Jan 31.

 

Addressing the loophole

 

Of course, Teo is only doing what any sensible businessperson would do in the same position.

 

The more important issue is why Singapore&rsquo s market regulators have not closed the loophole that so many major shareholders have used to take their companies private on the cheap.

 

My own understanding of their position is that the Companies Act needs to be amended in order to close the loophole.

 

This column noted last year that the Companies Act Working Group (CAWG) set up by the Accounting and Corporate Regulatory Authority (ACRA) in 2018 to review several areas of the Companies Act has in fact recommended changes that will address the loophole.

 

There is, however, no certainty that the changes will be accepted by Singapore&rsquo s lawmakers.

 

Still, it seems strange that the authorities have felt unable in the meantime to challenge a market practice that is clearly not in keeping with the spirit of the law.

 

As an investor, it makes no sense to me that major shareholders can have the shares they own count towards the 90 per cent acceptance threshold if they make an offer via a special purpose vehicle, but not if they make the offer directly.

 

IDs should step up

 

Under the circumstances, it is all the more crucial that TTJ&rsquo s independent directors (IDs) recognise the interests of Teo and the company&rsquo s minority shareholders are now no longer aligned.

 

The IDs should scrutinise statements by the offeror and ensure that minority investors have information necessary to act in their best interests.

 

For instance, one stated rationale for the offer is that minority shareholders will have the opportunity to cash out at a premium to market price at a time when the construction sector is beset by rising costs and labour shortages. Among other things, the offer announcement said &ldquo output of the construction sector is expected to remain below pre-pandemic levels throughout 2022&rdquo .

 

Teo&rsquo s tone was more optimistic in a press release on Mar 11 trumpeting several new contracts that pushed the company&rsquo s order book to S$187 million. &ldquo While constraints on foreign labour and headwinds such as global inflationary pressures and rising material costs weigh down the outlook for the immediate term, we believe the construction sector will continue to normalise as Singapore gradually opens its economy and its borders,&rdquo he said.

 

The offer announcement also said taking TTJ private would provide its management with more flexibility to implement strategic initiatives and operational changes that might achieve greater efficiency and competitiveness.

 

Yet, there were no specific examples of these possible initiatives or any explanation of why they could not be implemented if TTJ remained a public-listed company.

 

It&rsquo s probably fair to say that many holders of TTJ shares are patient investors who believe the stock is deeply undervalued. When the offer was announced, they had endured a 5-year total return of minus 50 per cent and 3-year total return of minus 33 per cent.

 

The IDs of TTJ ought to ensure that all information provided in relation to the offer is relevant to such long-term, value-oriented investors and that any potentially misleading corporate finance boilerplate is appropriately addressed.