SINGAPORE (Apr 27): S Nallakaruppan owns 220,800 shares in shipbuilder VARD Holdings and plans to vote against the resolution to delist the company at its extraordinary general meeting (EGM) scheduled for April 30. But he knows there is very little chance of blocking the resolution.

As at April 25, Fincantieri Oil & Gas, the controlling shareholder of VARD, had already amassed 982.7 million shares in the company, representing an 83.28% stake, which is more than the 75% required to pass the resolution. And, the Singapore Exchange says it has “no objection” to the delisting proposal. The only way the resolution can be blocked now is if shares representing at least a 10% stake in VARD vote against it. That is equivalent to 118 million shares. The two largest registered shareholders of VARD after Fincantieri O&G are MVN Asset Management and Third Avenue Management, which hold 30 million shares (2.54% stake) and 14.3 million shares (1.21% stake) respectively.

“[Fincantieri O&G] knows there is no way we can gather 118 million shares. A lot of the shares are in CPF. It is cumbersome for them to vote. They know all these issues,” Nallakaruppan tells The Edge Singapore over the phone. But that has not stopped individual investors like him from seeking out one another and working together to make their plight known in the hope of getting the authorities to look into the process of privatisations and delistings. “We just want to tug [at] the heartstrings of the people. Is this really fair to the minority shareholders? It is not fair play.”

As part of the delisting exercise, Fincantieri O&G — a subsidiary of Italy-listed shipbuilder Fincantieri — is making an exit offer for all the shares in VARD it does not already own at 25 cents each. In 2016, it made a voluntary unconditional general offer for VARD, at 24 cents a share. When the offer closed then, it held 74.45% of VARD. Fincantieri O&G first appeared on the scene in 2012, when it agreed to acquire a 50.75% stake in VARD from STX Europe at $1.22 a share. VARD was known as STX OSV Holdings at the time. A mandatory unconditional cash offer at $1.22 a share was extended to all other shareholders at the time, but was spurned by the company’s independent directors.

Investors such as Nallakaruppan are disappointed that the exit offer is only one cent more than what Fincantieri O&G was willing to pay in 2016, when the offshore and marine sector was in a deep slump. CIMB Bank, which was appointed the independent financial adviser, deems the exit offer price to be “not fair but reasonable” to minority shareholders. CIMB points out that the offer price is 14.9% less than VARD’s net asset value per share of 29.4 cents as at Dec 31, 2017. The premium of the offer price to VARD’s market price at the time of the announcement was also “significantly lower” than that of other takeover offers for Singapore-listed companies, according to CIMB.  

Furthermore, minority shareholders of VARD would miss out on the turnaround in financial performance that appears to be unfolding at the company if they accept the exit offer. CIMB notes that VARD’s revenue and earnings before interest, tax, depreciation and amortisation have improved in FY2017 ended Dec 31. CIMB says VARD has successfully diversified into new fields, such as building vessels for exploration cruises, fishing and aquaculture. When VARD was listed, its business was largely building offshore support vessels for the oil and gas sector.

Yet, in the current circumstances, CIMB sees little reason for minority investors to hold on to their shares in VARD. CIMB says Fincantieri O&G has a commanding stake in VARD, which gives it statutory control of the company, with the ability to pass resolutions on pretty much all matters. CIMB also says VARD has paid no dividends since 2012, adding that there is no assurance that dividends will be paid in the future. Moreover, it is likely that Fincantieri O&G’s purchase of VARD shares in the market and its exit offer are supporting VARD’s current stock price, CIMB says.

“Accordingly, we advise the independent directors to recommend that shareholders either accept the exit offer or sell their shares on the open market if they can obtain a price equal to or higher than the exit offer price (after deducting related transaction expenses) in the event that the delisting resolution is passed and they do not intend or are not prepared to hold unlisted shares,” CIMB says in the VARD circular to shareholders.

Minority action

Now, Nallakaruppan and many other minority shareholders of VARD have joined a Telegram chat group to organise a resistance movement. As at April 25, the group had a list of 137 shareholders, representing 0.7% of the total shareholding in VARD.

One of their key priorities over the past week was to gather proxy votes against the delisting resolution within the relatively short notice period that was given for an EGM. The date of the EGM was announced only on April 13, leaving just over two weeks for them to coordinate with one another. “We met up yesterday [April 22]. A lot of them, poor guys, come to file their proxy forms. They can’t attend the meeting. We met at Raffles place at the coffee house,” Nallakaruppan says.

To be clear, the proposal to delist VARD has not actually breached any rules currently in force to protect minority investors. Indeed, that is the advice that some members of the Telegram chat group have been given. Yet, many of them feel they are being treated unjustly. “Nobody protects the rights of minority shareholders. Their rights are trampled [on] right, left and centre,” Nallakaruppan grumbles.

So, what action can these disgruntled shareholders take? One option is to file for protection under Section 216 of the Companies Act by demonstrating unfairness of the takeover. Nallakaruppan says, however, that such legal action is unfeasible because of the costs it would entail. Farhana Siddiqui, a partner at legal firm Withers KhattarWong, says, “This tool is unlikely to be effective for shareholders in a public-listed company, given that they have the option of selling in the market.”

While it will not help their particular case, the minority investors of VARD could also lobby the authorities for a revision of the takeover rules. In particular, the authorities could require parties with commanding stakes to abstain from voting at the EGM. “Perhaps the threshold should be 80% or more to enable shareholders to allow minorities in danger of actually being excluded from actively voicing their views,” says Siddiqui, conceding that it would take a long time for such new rules to be introduced.

Mak Yuen Teen, associate professor of accounting and co-director of the Corporate Governance and Financial Reporting Centre at the National University of Singapore Business School, says Singapore “urgently” needs to re-examine the existing system and how to better protect minority shareholders. “Unfor­tunately, there is little that minority shareholders can do in this situation in Singapore. Access to justice for minority shareholders is poor in Singapore, as there is no contingency fee-based class action, making legal action [for minority oppression] costly,” Mak says.

He suggests that minority shareholders be allowed to sue at little or no upfront cost, similar to the US system or the modified UK system of contingency fee-based class action. Regulators could also sue on their behalf, he adds.

Mak goes on to say that regulators need to be more proactive and nimble in their efforts to protect minority shareholders. “Even in cases where no clear rules may be broken, regulators should be more proactive in expressing their displeasure at actions that are clearly against the spirit of good corporate governance and minority shareholders’ rights,” he says.

Of course, major shareholders have rights too, Mak acknowledges. “As a matter of principle, we should have a system that fairly balances the rights of different shareholders, including minority and major shareholders. So, we don’t want a system that allows controlling shareholders to trample over the rights of minority shareholders. But, at the same time, we don’t want a small group of minority shareholders [to] hold a company and its controlling shareholders hostage or have a tyranny of the minority.”

Riding the industry upturn

The takeover attempt of VARD by Fincantieri O&G is perhaps not surprising. As crude oil prices are firming up, the company is poised to ride the upturn in the offshore and marine industry. In addition, the company has diversified into building car and passenger ferries, fishing vessels, expedition cruise vessels, a research expedition vessel, freight-and-service vessels and offshore fish farming operation platforms.

At as Dec 31, 2017, VARD had an order book worth NOK13.23 billion ($2.2 billion) compared with NOK12.65 billion in the year before. This comprised 48 vessels, of which 37 will be of VARD’s own design. VARD says it expects to deliver 32 vessels in FY2018 ending Dec 31, 15 vessels in FY2019 and the remaining vessels in FY2020. For FY2017, VARD reported an 8.9% y-o-y rise in revenue to NOK8.6 billion, while losses widened to NOK233 million from NOK163 million a year ago.

“VARD is well positioned in the growing expedition cruise vessel market. In fisheries and aquaculture, the group is strengthening its market position through valuable cooperation with clients. The offshore market is still considered challenging, but there are positive signs of recovery in the medium to long term in the broader oil and gas industry. However, risks are still inherent in the group’s existing offshore project portfolio. The group postponed delivery of some projects amid ongoing financial restructurings of clients in the offshore segment,” the company says in the circular to shareholders.

VARD has not reported its financial results for 1QFY2018 ended March 31. It is unclear whether it will do so before the EGM on April 30. A strong earnings report for the quarter might well incentivise more minority investors to attend the meeting, and vote to maintain the company’s listing.

This article appears in Issue 828 (Apr 30) of The Edge Singapore which is on sale now

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