SINGAPORE (Apr 23): In recent years, there have been a number of cases in which controlling shareholders have used the threat of delisting to force out minority shareholders at unfairly low prices. We prefer to invest in businesses in which we are treated as long-term partners and are unhappy about the way Fincantieri is trying to privatise its Singapore-listed subsidiary, Vard Holdings.

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This has been a disappointment, as Fincantieri has been operationally helpful, facilitating diversification after the severe downturn in the oil and gas sector, assisting in keeping the yards busy and the skilled workforce as intact as possible, and broadening the pool of managerial talent.

We understand why Fincantieri might wish to privatise Vard, now more integrated with its group operations. It was happy to make a general offer at $1.22 a share in 2012. Now that Vard has survived the down cycle and its prospects are improving, we understand why Fincantieri has wished to buy as many shares as it can at 24 cents in 2016 and 25 cents in 2017. We understand that the group operations are now more integrated: It would save costs and management time for Fincantieri if it controlled 100%. What we object to is being forced to sell at a price we consider unfair, and this may well happen under the current rules.

We therefore set out here our immediate recommendations to Vard shareholders, a question and the general issues illustrated by this case.

Shareholders of Vard Holdings, please note the extraordinary general meeting (EGM) called for on April 30 to vote on delisting, and ensure that you vote against it. The timetable is ­unusually tight and a high turnout of independent investors is required to keep the shares listed. The company’s performance is improving as the cycle for its specialist shipbuilding turns up. Fincantieri wishes to take it private, at just 20% of the price at which it failed to get take-up for a general offer in 2012, and 15% of that year’s share-price high. (It was then widely owned as a yield stock; at that ­general offer level, the historic dividend yield was 12%.) Keep it listed and wait for the upturn.

The independent financial adviser correctly describes the exit offer at 25 cents a share as not fair, but if the shares are delisted, many investors will be holding stakes in an unlisted company, and that is very likely to take Fincantieri’s shareholding up to the 90% level, at which it can compulsorily acquire the rest. The free float is now less than 17% and it requires 10% of the votes cast to veto delisting. Therefore, at least 55% of ongoing investors must vote against delisting to avoid this fate, and the percentage turnout required will rise with each additional share that Vard ­manages to buy. No minority shareholder who has held on for this long would vote for delisting: ­Anyone wishing to exit could have sold at the same price or higher for most of the last 18 months and taken their money immediately. Ongoing shareholders clearly wish to hold on for the cyclical upturn, which is already under way. The danger, however, is that many may not vote if they do not hear about the EGM in time, or fail to realise the urgency. If the turnout is insufficient to block delisting, there will still be time to accept the exit offer, and then receive payment within seven days.

Fincantieri seems to have been trying to starve investors into submission with an exceptionally prolonged period of uncertainty, which has now lasted for 1½ years (a cheeky lowball general offer, creeper purchases and yet another general offer at a mere 4% higher, although the fundamentals have improved by far more).

As this lengthy period wore on, fresh interest in the stock was minimised by Fincantieri’s threat of a later compulsory purchase. Even though the fundamentals have improved significantly, the share price has been capped by that threat. This has been dragged out for an inordinate length of time — and now the pace has suddenly been accelerated. The minimum permitted notice period has been given for the EGM and a 328-page circular published, most of which relates to the exit offer (instead of the rationale for an exit offer, that is, at a discount to net asset value, and an improving order book) — rather than what shareholders need to act on immediately, which is the EGM vote on delisting. The company is behaving as if delisting is certain, providing no 2017 annual report and scheduling no annual general meeting (AGM). This behaviour may confuse. Delisting is not inevitable. Vote for your right to hold and to exit at a time and price of your choosing.

Shareholders should vote against coercion, and against delisting.

‘Independent’ director?

Vard CEO Roy Reite is apparently deemed “independent for the purposes of making recommendations to Shareholders in respect of the Exit Offer”, according to Pages 4 and 19 of Vard’s circular on the delisting proposal. I find this extraordinary and cannot find any reference in the document to a rule on which this claim might be based.

Issues and suggestions for improvement

1. Tweak the required voting percentages

A delisting proposal should be rejected if opposed by holders of 10% of the unconnected votes cast. The controlling shareholder and connected parties should be disqualified from voting on delisting, as in Hong Kong (Rule 6.12 of the Listing Rules). Under Singapore’s current rules, even if the independent shareholders who vote are unanimous in rejecting the proposal, it may be passed anyway unless the voting turnout is unusually high. Not voting does not mean the shareholders do not care. Reasons for not voting include custodian paperwork delays, postal delays, holidays, hospitalisation, probate and dauntingly thick and confusing documents — the rules may have been devised for an earlier era of mostly local shareholders, holding shares in their own names, with efficient postal services and usually at home. In the current conditions, achieving a high turnout with two weeks’ notice may be challenging. If we snooze, we lose. If others snooze, we may also lose — so if you know people who own or have the voting authority for Vard shares, please ask them to vote too.

Timetables should be reviewed to ensure that the period of uncertainty caused by the threat of delisting is not unduly prolonged. Vard’s ability to drag this out over a period of about 18 months has, in our view, depressed the market price and discouraged other buyers from entering, precisely because of the sustained threat of delisting and the risk of forced sale at a low price. No threat, no price depression. Short-lived threat, short-lived price impact, followed by normalisation. Eighteen-month threat, especially with the price both underpinned and capped: Brokers stop following, analysts drop coverage and investors lose interest.

i.             On Vard’s second offer, it should have been required to set out the timetable, agenda and required majorities for critical meetings promptly, rather than many months later.

ii.            Other information in the circular, such as the report of the independent financial adviser, could follow later.

iii.           Are property valuation reports essential, or should the requirements for these be tailored to the type of company? Vard’s circular contained detailed descriptions and valuations of each of its dockyards around the world, a total of 212 pages. I inspected these with astonishment, thinking about the amount of work that must have gone into compiling them all, and the limited impact I envisage on anyone’s decision — indeed, I wonder how many people will read them at this stage. (There is much more detail here than in the IPO prospectus or annual reports, where it might have been useful.) With other types of company, the property may indeed be key to the valuation, but assets like these have a limited market and a business like this is all about the profits and cash flows that the assets can generate. If there were a possibility for windfall gains from land use change, it would be good to ensure that all shareholders had relevant information, but perhaps in that case, it could be provided more succinctly?

iv. The hundreds of pages of documentation in these categories relate to the valuation of the business, and the (lack of) merit in the exit offer, rather than to the delisting vote, which is more urgent, and which may make all of that irrelevant. Do readers find this confusing? Should it be separated, for clarity?

v.            Annual reports and standard information should be provided according to the normal schedule for as long as a company is listed. (For example, Vard can see its share register while the rest of us can only see the version from 13 months ago.) AGMs, too, should be held as normal.

vi.           Does the wording of resolutions lead to confusion? Does the For/Against direction make a difference? Are guidelines needed? I suspect it might elicit slightly different responses if the question were: “Do you wish your shares to remain listed on the Singapore Stock Exchange?” rather than the more complicated resolution presented for the EGM, which requires a negative vote for a positive outcome, and refers to a “Voluntary Delisting” although no independent investor should volunteer for it.

4. ‘Independent’ directors

If a significant majority of independent votes cast disagrees with the recommendation of the “independent” directors, the latter should be disqualified from serving as independent directors of any company for a period of several years. Vard’s “independent” directors recommended investors to vote for delisting, on logic I cannot entirely follow. (If the shares are delisted, then our best bet will be reduced to the exit offer. Should we volunteer to commit suicide now by voting for delisting even though we can fight for a better outcome and wait and see what happens?) To me, this calls into question either their judgement or their independence. However, that is my subjective view; assessment on the basis of majority voting would be objective, fair and efficient.

The CEO of Vard, who has spent at least the last 19 years at the company, which is a subsidiary of Fincantieri the offeror, is now trying to take it private on the cheap at the bottom of the cycle. Can he be deemed independent? If the rules do allow this, they clearly need changing.

We hope that Vard investors will vote in large numbers and avert delisting. We also hope that writing about this particular case may assist in improving market practice for the future, and submit these proposals as our small contribution to that discussion.

Claire Barnes is principal and fund manager at Apollo Investment Management, which owns shares in Vard Holdings

Forced and unfair delistings: the Vard case

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