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Essar Energy: Majority v/s Minority!

Published on Mon, May 05,2014 | 18:55, Updated at Wed, May 21 at 16:20Source : CNBC-TV18 |   Watch Video :

The majority owns 78%; the remaining 22% is scattered between different groups of minority shareholders.

The majority wants to de-list; the minority is opposing it

The majority says the offer price is fair; the minority says they are getting a raw deal!

Another week, another majority-minority spat….only this time, it’s playing out in the UK. Payaswini Upadhyay reports on Essar Energy’s takeover offer, its curious timing and remedies available to minority shareholders.   

In 2010, the Ruia and Essar group led Essar Energy listed on the London Stock Exchange. It raised via an IPO 1.27 billion euros at a price of 420 pence per share.

Since then it’s had mixed fortunes, with project delays leading to a fall in the stock price to 60 pence. It’s only now that things are looking up for some of its projects. Meanwhile a FTSE imposed rule required all constituent companies to ensure a minimum 25% free float by March 2014. That would have entailed a 3% reduction in stake for Essar Energy's promoters.

Instead, in February this year the promoters decided to take the company private. They could’ve done it in two ways- via a cancellation of listing or delisting offer which requires a 75% shareholder approval. Given the promoters 78% stake, this offer would have easily passed except that it would have left the 22% minority with unlisted shares. So the Ruia’s chose instead to announce a takeover offer to purchase that 22% minority stake at 70 pence a share.

Nilufer Bismarck
Partner, Slaughter & May
“If a company decides to de-list, the rules require the company to send a Circular to the shareholders and requires a vote of 75% of those voting. Now if the company is taking over, the percentage is the same i.e. 75% but there is no requirement for the company to send a circular or to have a shareholder vote because effectively shareholders are voting by accepting the offer.”  

Peter King
Partner, Weil, Gotshal & Manges
“It would reflect badly on the corporate governance at Essar if they did not give minority shareholders a chance to exit while proposing a delisting. It would be very unusual to propose a delisting without giving minority shareholders an exit even if it’s at a low price.”    And it’s this low price that has faced stiff opposition from the Association of British Insurers or ABI – one of the largest shareholder groups in the UK. ABI represents minority shareholders owning 8.6% stake in Essar Energy and has been agitating against the offer price, especially as it believes the company's prospects are finally improving. And so ABI has made representations to the UK government and the Indian High Commissioner saying Essar’s move will damage the integrity of the UK market and Indian companies. Essar's promoters counter that they are e offering shareholders a 17% premium to the market price but ABI remains unconvinced by the price and the process."

Robert Hingley
Director- Investment Affairs
Association of British Insurers
Representing Essar's Minority Shareholders
"One of our principal concerns is that the disclosure in the original prospectus did not make it clear that the majority shareholder will be able to de-list even if there was a failed offer. That is precisely our problem.”    

ABI has the backing of none other than the Independent Committee of Essar Energy's Board. In response to Essar’s offer, the Committee of Independent Directors has said the offer by the promoters materially undervalues the company and its prospects. It has recommended Essar’s shareholders take no action on the offer.

Peter King
Partner, Weil, Gotshal & Manges
”At this stage, there aren’t many remedies available as Essar has acted entirely within the rules here. There is a possibility of applying to the Court that Esssar’s majority shareholders are behaving in a manner which is oppressive to the minority but that sort of challenge is extremely rare in the context of a public company in the UK where the majority shareholders have acted in accordance with the Listing Rules and the Takeover Code which Essar has been very careful to do here.”

It’s not the first time that minority shareholders in the UK have been aggrieved by a delisting done via a Takeover Offer.   Just last year, Eurasian Natural Resources Corp or ENRC successfully de-listed from the London Stock Exchange in spite of minority opposition to the Takeover Offer price. With its largest shareholder Kazakh government on board, ENRC’s founders managed to de-list the company.

Nilufer Bismarck
Partner, Slaughter & May
“It was a very similar scenario in which the Independent Committee of the Board was against the offer and wrote a very similar Circular to the one that has been written by the Independent Board Committee of Essar asking shareholders to reject the offer. But interestingly they also warned of the risks of rejecting the offer that if the company was de-listed, you would end up with shares in an unlisted company with no liquidity, no real control and no governance as such- and that offer actually ended up getting through.”   

The ENRC offer went through but it also prompted the UK’s Financial Conduct Authority to rework its de-listing rules. To protect the interests of minority shareholders in companies with a controlling shareholder, the FCA has proposed stringent conditions for both cancellation of listing or delisting offers and Takeover Offers."

Under the new rules, if a company wants to de-list, not only does it need 75% shareholder approval, it also needs approval from a majority of independent shareholders. Takeover Offers will also need approval from the majority of the minority except in the case where the offeror has more than 80%. Interestingly, these changes will become effective May 16th and hence may impact Essar’s offer as well if it hasn’t closed.

SECURING MINORITY INTEREST!
New Rules

Delisting
-    Approval of majority of at least 75% of those voting on the resolution
-    And approval of majority of independent shareholders

Takeover Offer
-    Similar threshold as delisting based on acceptances
-    No approval if offeror's stake more than 80

Robert Hingley
Director- Investment Affairs
Association of British Insurers
Representing Essar's Minority Shareholders
"It was expected that the FCA rules will come into force later in the year; probably by autumn. The fact is that the FCA Board has accelerated consideration of this and this will come into effect by 16th May and they will be caught by the 80% rule”  

Even with the regulators on their side, it seems like a tough battle for minority shareholders. There are 3-4 possibilities going forward- Essar extends the Takeover Offer as the rules allow it to do so up to 60 days from the time the offer was made; two- even if Essar extends the offer, the minority shareholders do not tender their shares and the offer fails. Three, after a failed offer, Essar may try to acquire 2% shares to reach the 80% threshold which I am told will not be an uphill task given that the funds that have invested in Essar Energy would want to exit the stock lest it becomes illiquid. Or 4- Essar ups its offer price and salvages its image. We’ll know what option Essar chooses soon as it is likely to make an announcement in the next couple of days.

In Mumbai, Payaswini Upadhyay

 
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