How the big guys are squeezing out minorities

WE have witnessed some companies in Zimbabwe unbundling and rebundling amid various strategic objectives.

From a rebundling perspective, in this common strategic business practice, what seems to be a general strategic acquisition has often turned out to be a hostile takeover from the point of view of the minority shareholders of the acquired firms.

This has resulted in minority shareholders raising issues over prejudice, which has also led to a global introduction and amendments of various legislations.

Several jurisdictions around the world have laws meant to protect and enable minorities to exercise their basic rights.

The IOSCO Technical Committee Task Force on Corporate Governance together with Organisation for Economic Cooperation and Development (OECD) did a research on the protection of minority shareholders in listed issuers on 18 OECD member States.

The taskforce identified a mechanism that formed an OECD principle which states that “minority shareholders should be protected from abusive actions by, or in the interest of, controlling shareholders acting either directly or indirectly; and should have effective means of redress”.

Where there is change of control transaction such as mergers and acquisitions, the rules and procedures governing the transactions should be clearly articulated and disclosed so that investors understand their rights and recourse.

Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class.

Derived from some of the OECD member laws, the report further highlights that when an offer is being made by a substantial or controlling shareholder or an insider, there are additional obligations and requirements that can arise.

Key among these is the review of the transaction by a committee of independent directors and approval by the minority shareholders.

Furthermore, where a substantial or controlling shareholder undertakes a transaction to acquire the remaining outstanding securities of a publicly reporting issuer, heightened disclosure requirements apply, including disclosure relating to the terms of the transaction and details about negotiations, agreements, opinions and appraisals.

In Zimbabwe, the Companies and Other Business Entities Act was gazetted on November 15 2019 and came into effect in February 2020.

More specifically, the paper states that exit and appraisal rights should be identified and given content, to provide smaller investors the ability to make informed choices where they are unable to influence company direction and decisions effectively or to pursue private actions against the company in civil courts.

However, according to legal experts, the lack of a clear statutory definition of fair value in the Act is likely to result in disputes on the interpretation of this term and the effectiveness of the appraisal remedy is likely to be diluted.

This, therefore, may result in underutilisation of the Act by minorities who are hesitant to pursue their rights when the opportunity comes given the uncertainty of the outcome based on lack of particularity on the term fair value.

Zimbabwe has witnessed a fair share of companies unbundling and rebundling.

The Africa Sun Ltd (ASL) — Dawn Properties Ltd (DPL), Zimre Property Holdings Ltd (ZHL) — Zimbabwe Property investments (ZPI) and ZHL — Fidelity Life Assurance (FLA) are some of the most recent cases which come to mind.

The motives and benefits of re-bundling are skewed towards the acquiring company’s shareholders and largely fleecing the minorities in the acquired company.

This is so because when a company undergoes unbundling, the company retains a controlling shareholding in the new separate entity basing on the potential of future success.

It is this controlling shareholding that is exploited, leading to re-bundling settlement deals that disadvantage the minorities.

ZHL held 64,3% in ZPI and an influential 20,57% shareholding in FLA which it had unbundled in 2003.

ZHL sought to increase its shareholding to 55,66% to become the majority shareholder after purchasing NSSA’s 35,09 % stake in FLA.

Arden Capital Limited which controlled ASL, used its majority shareholding of 52% in Dawn Property to influence the resolution on the ASL acquisition of DPL.

These controlling shareholdings left the minorities with no voting influence whatsoever in rebundling resolutions and settlement offers.

Using their muscle, the controlling shareholders implement the Tag Along — Drag Along or make use of the legal provisions of section 238(1) of the Companies and Other Business Entities Act to squeeze out any minority shareholders who do not take up the acquisition offer.

The rebundling settlement deals, offers and share pricing are highly questionable and have come under spotlight from the regulator.

They are usually structured to benefit only the majority and predominately undermine the minorities.

Under a share swap, DPL shareholders where set to receive one ordinary share in ASL for every 3,988075746 held.

On paper, DPL had a higher NAV which stood at $1 435 582 243 as at December 31, 2019, while ASL’s NAV was only $660 671 510, according to ZFN.

This meant DPL shareholders were supposed to get a share in ASL for a lesser number of shares already held in DPL compared to what was being offered. Despite the Securities Exchange Commission’s suspicion of a possible under-pricing of shares against the ruling market price, the ASL-DPL offer remained.

Similarly, ZHL offered one share for every 2,78 shares held by ZPI minorities as the group targeted acquisition of a 100% stake in the property firm.

Considering the share swap Volume Weighted Average Price (VWAP) basis of ZHL shares of $0,8388 against a VWAP of ZPI shares $0,2409 plus 25% premium, it seemed like a fair deal for minorities which was also supported by independent financial advisors, Akribos.

However, the biggest prejudice faced by the ZPI minority shareholders as well as those of FLA was the erosion of the shareholder value unlocking proposition that emanated from the initial unbundling.

In defiance of basic investment logic, DPL minority shareholders were forced to commit their investments in ASL which is in the tourism industry that is hardest hit by the COVID-19 pandemic.

However, the investment in properties would remain since the ASL acquired a properties company, but the shareholders for DPL’s value locking in fixed asset proposition is diluted by the crippled tourism and hospitality industry.

The best catch for minorities who are forced to invest in an industry they are not interested in is to take up the offer and then sell off the new shares at the ruling market price.

For instance, as advised by ASL, after the acquisition, the total net asset value per share would increase from 9,9 cents to 127,89%.

Although this may not benefit the minorities of DPL, the NAV per share leap would trigger a share market price growth of a possible similar proportion which the minorities can take advantage of and sell their newly held ASL shares in the capital markets and invest in another industry.

Other general minority protection mechanisms prescribed by various researchers, legal practitioners and scholars are via the articles or a shareholders’ agreement.

The Companies Act provides limited statutory rights to minorities but amendments to the articles or a shareholders’ agreement is not limited and is the best way to enhance minority rights.

These may include timeous access to financial records by minorities, protection on share dilution, power of veto that can be used to block actions unless the minority consents particularly on mergers and acquisitions, and including a dispute resolution clause in the shareholder agreement.-newsday