Takeover activity shows the need for regulator

The UAE could use a forum to settle merger and acquisitions issues.

Aabar owns a stake in Daimler, maker of Mercedes-Benz cars.

Takeovers of public companies are usually cordial. Occasionally, though, they turn into all-in brawls, fights for control mediated by the courts and regulators and involving such colourful tactics as poison pills, greenmail and the so-called Pac Man defence. Just take the offer by Novartis, a Swiss pharmaceutical giant, to buy out the minority shareholders of Alcon, an eye care company also based in Switzerland. Novartis wants to buy 77 per cent of Alcon from Nestle and then take over full ownership of the company. The thing is, the minority shareholders in Alcon aren't too pleased with the bid, given that Novartis wants to pay them US$153 (Dh561) a share - 15 per cent less than the $180 Nestle is getting for its Alcon shares.

The case would seem clear-cut at first glance: the minority shareholders do not appear to be getting a fair shake. In the world of takeover law, though, the waters are more murky. Regulators have to balance the commercial rights of the bidder, Novartis in this case, with the claim from shareholders that they should get more money. Novartis's offer could ultimately be judged fair because the Nestle price had been agreed to earlier, when market conditions were different. Shareholders, on the other hand, could prevail on the basis that their shares entitle them to the same compensation as all fellow owners, including Nestle.

Whichever argument wins, Novartis and Alcon at least have a forum in which to debate and reach a settlement: the Swiss and US court systems. The UAE lacks a similar legal framework, a fact that was exposed this month after a majority-shareholder takeover bid in Abu Dhabi, leading to confusion and uncertainty that would never have cropped up in Europe, the US or other jurisdictions with long-established regulations covering mergers and acquisitions.

That case, of course, was the International Petroleum Investment Company's (IPIC) bid to acquire the remaining shares of Aabar Investments, a company listed on the Abu Dhabi Securities Exchange (ADX). IPIC acquired about 70 per cent of Aabar through a bond that converted into shares starting early last year. The injection of funds helped Aabar grow into one of the emirate's most visible investment vehicles, acquiring 9.1 per cent of the German car giant Daimler and 32 per cent of Virgin Galactic, Sir Richard Branson's commercial space flight venture. But IPIC's generosity also pushed Aabar's existing shareholders, some of whom had owned part of the company since its founding as a small oil exploration and drilling company in 2005, to the margins. Aabar issued millions of new shares to IPIC, turning its existing shareholders into a minority and stripping them of much of their say in the company's decisions.

Then Aabar announced on June 25 that its board was proposing to give IPIC 100 per cent of the company and delist it from the ADX. The companies did not discuss the fate of minority shareholders at the time; they did not advance a buyout offer, nor did they name a price at which shares could be redeemed if the deal went through. They did that this week, after Aabar's board of directors met and approved the plan. The price: Dh1.45 per share, roughly where Aabar shares were trading.

Is Dh1.45 fair? By some metrics, it would appear to undervalue the company. Aabar's shares traded at more than Dh2 just weeks ago, suggesting that its recent fall to about Dh1.45 might be more of an anomaly brought on by the uncertainty surrounding minority investors since the takeover announcement than an accurate reflection of appetite for the company's shares. The Dh1.45 price, moreover, values the company at less than half of its book value, or what it is worth on paper.

While there may be plenty of counter-arguments to these views, there is no real precedent - or indeed, any established legal forum - to weigh their merits. The Emirates Securities and Commodities Authority (SCA) is looking at the offer and is expected to make a ruling soon on whether it is fair. There is no law, however, that requires it to do so. It would be unreasonable to expect the 10-year-old SCA to already have regulations in place as modern as those in the US, where takeover rules date to the 1930s, or the UK, where they date to the 1960s. In the UK, a body called the Panel on Takeovers and Mergers holds sway, mandating that bidders offer at least the highest price the takeover target traded at in the three months prior to its announcement. The code also requires any shareholder who acquires 30 per cent or more of a company's voting rights to make a bid for the rest of the shares.

In the US, takeovers are typically adjudicated through courts in the state of Delaware, where most public companies are incorporated. Given the SCA's youth, the IPIC takeover of Aabar could be a formative deal. Whatever the outcome, the transaction will certainly be an important one. Minority shareholders' rights are fundamental to markets' health. Many investors, especially large institutional ones, simply won't put money in markets where they feel their interests might not be protected, a dynamic the Ministry of Economy appeared to recognise in April when it announced new laws that would strengthen shareholders' rights.

What's needed most in cases like IPIC's Aabar takeover, though, is a court or regulatory body to adjudicate shareholder disputes. If that is part of the plan, it will represent a clear step in the right direction for shareholders of all stripes. [e-mail]