How minority shareholders have scuttled takeover bids at NSE

According to revised CMA guidelines all shareholders have a right to a secure method of transfer and registration of ownership of their shares and during this process the boards of companies should ensure that all shareholders, including minority and foreign shareholders are treated in an equitable manner. FOTOSEARCH 

In Summary

• Minority shareholders who have long been dancing to the tune of major shareholders, now have a voice in major decisions affecting the operations of their companies.
• Kenya became the first country in the region to witness failed takeovers after minority shareholders of listed logistics firm Express Kenya and flour maker Unga Goup Plc refused to sanction the deals due to poor pricing.
• Last year, East African Community member states agreed on rules that give minority shareholders powers to reject hostile takeovers.

By JAMES ANYANZWA
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The failure of two takeover bids of Kenyan companies in July, the first of its kind, has illustrated the growing influence of minority shareholders in the running of listed companies.

Minority shareholders who have long been dancing to the tune of major shareholders, now have a voice in major decisions affecting the operations of their companies, including transfer of ownership, raising of new capital and business restructuring, thanks to new laws that give them powers and protection from dominant shareholders.

Kenya became the first country in the region to witness failed takeovers after minority shareholders of listed logistics firm Express Kenya and flour maker Unga Goup Plc refused to sanction the deals due to poor pricing.

This could mark a turning point for minority shareholders who, in the past, have watched in despair as their investments went down the drain due to bad business practices and poor corporate governance attributed to majority shareholders.

“The directors of companies should listen to what the minority say. It is important that their voices are heard because they are many and even if they do not have the voting power, they have the numbers,” said Job Kihumba, executive director in charge of corporate finance at Standard Investment Bank.

Hector Diniz, chief executive of Express Kenya, had bid to buy the troubled firm, but the deal turned sour after he was unable to gather the support of the minority shareholders to increase his shareholding from 61.64 per cent to at least 75 per cent.

Mr Diniz had hoped to acquire the 38.36 per cent stake owned by minority shareholders, but a number of them rejected the offer, reckoning that the firm could fetch much more based on the value of its 15.7 acres in Nairobi’s Industrial Area, compared with the acquisition price of Ksh5.50 ($0.05) per share.

If the deal were to go through, Express would have been delisted from the Nairobi Securities Exchange.

Means of redress

Another failed takeover bid involved Unga Group and the American firm Seaboard Corporation.

Seaboard, a global food, energy and transportation firm, had expressed confidence that its offer to buy the minority shares in Unga Group with the objective of eventual delisting from the bourse would bear fruit.

The firm sought to buy out the 46.15 per cent shares held by minority shareholders at a price of Ksh40 ($0.4) per share.

The bid failed after the minority shareholders released only 16.05 per cent of their shares, saying that the offer price was too low, compared with the market value of the firm, estimated at Ksh67.19 ($0.67) per share.

As a result, Seaboard’s shareholding in Unga Group only increased to 69.9 per cent after failing to garner the 75 per cent minimum threshold of taking over the firm.

“All shareholders have same rights and no shareholder no matter how big should benefit more than the other shareholders,” said Eric Munywoki, an analyst at Genghis Capital.

Voice in decisions

According to Daniel Kuyoh, an analyst at Alpha Africa asset managers, minority shareholders now have a voice in decisions affecting the strategic direction of companies and should not be taken for granted by majority shareholders.

The Kenya Capital Markets Authority has prepared corporate governance guidelines protecting minority shareholders from any adverse actions by the controlling shareholders, acting either directly or indirectly.

According to the revised guidelines (2015), all shareholders have a right to a secure method of transfer and registration of ownership of their shares and during this process the boards of companies should ensure that all shareholders, including minority and foreign shareholders are treated in an equitable manner.

According to the guidelines company boards should recognise, respect and protect the rights of shareholders.

“There should be shareholder participation in major decisions. The board should, therefore, provide the shareholders with information on matters that include, but are not limited to, major disposal of the Company’s assets, restructuring, takeovers, mergers, acquisitions or reorganisation,” say the CMA guidelines, adding:

“Shareholder rights and investor protection are key factors to consider when determining the ability of companies to raise the capital they need to grow, innovate, diversify and compete effectively. If the legal and governance framework does not provide such protection, investors may be reluctant to invest unless they become the controlling shareholders. It is critical that the governance framework ensures the equitable treatment of all shareholders, including the minority.”

Last year, East African Community member states agreed on rules that give minority shareholders powers to reject hostile takeovers.

The states have up to October this year to pass and ratify laws to cement regulations that will allow minority shareholders owning less than 50 per cent of the total shares of companies challenge decisions on mergers and acquisitions taken by majority shareholders.

The directives were gazetted in October last year.

“The objective of this directive is to establish minimum guidelines for the conduct of takeover bids and mergers and ensure an adequate level of protection for holders of securities throughout the Community,” said Dr Haji Ali Kirunda Kivejinja, Chairperson of the Council of Ministers and Uganda’s Minister for East African Affairs.

'Oppressive' conduct

According to the directive, all shareholders holding the same class of shares in a company shall be treated equally and the boards of these companies will be required to give all shareholders equal chance to decide on the merits of a takeover bid.

“The board of an offeree company (company selling the shares) shall act in the interests of the company as a whole and shall not deny the holders of securities the opportunity to decide on the merits of the bid,” said Dr Kivejinja.

According to the EAC gazette Notice dated October 27, 2017, the partner states would be required to ensure that the interest of minority shareholders in listed firms is protected.

Currently, minority shareholders find it difficult to protect themselves against the “oppressive” conduct of majority shareholders since the latter have an advantage in annual general meetings where key decisions are made by the majority.

In Kenya, minority shareholders at auto dealer Cooper Motors Corporation lost their investment in 2011 due to unethical business practices by major shareholders.

In 2012, major shareholders of the oil marketer Kenolkobil entered into a deal to sell their shares to a Swiss petroleum firm, Puma Energy against the wishes of the minority shareholders.