When the two largest shareholders of a company — the executive chairman and managing director, to be precise — vacate their positions and dispose of their substantial equity holdings to new shareholders who also assume the vacated executive posts, the question that often crops up is, has control of the company changed hands?

If control has indeed changed hands, shouldn’t a takeover offer be made — as the regulations prescribe — to allow all other minorities the chance to exit on similar terms on which the new shareholders had come into the company?

That is probably a question some minority shareholders could be asking, considering the goings-on at Sequoia Holdings Bhd (formerly G.A. Blue International Bhd).

Sequoia is currently run by Goh Kok Beng and Goh Kok Heng, who emerged as tsubstantial shareholders on Jan 9 this year after acquiring 32% of Sequoia at 50 sen apiece, a 39% premium to the counter’s five-day volume weighted average price of 36 sen. Sequoia’s shares had traded between 37.5 and 39 sen on the open market that same day. The co-founders of Body Glove (M) Sdn Bhd, Kok Beng and Kok Heng, were appointed executive chairman and managing director, respectively, the same day.

Kok Beng took over as executive chairman, a post vacated by Kan Ah Chun, who sold the Goh brothers the 32% block for RM20 million. Kan, whose deemed holdings dropped to 0.22% after the disposal, was redesignated non-executive director the same day, stock exchange filings showed.

Similarly, Sequoia’s second largest shareholder, Hong Kong-based Kwan Siu Cheung, had emerged as the company’s substantial shareholder on Jan 20 this year, after buying 20 million shares or a 16% stake off market for RM10 million or 50 sen apiece from Datuk Yeap Beow Chong and his wife Lim Tiam Eng. The disposal pared the couple’s indirect holdings to 15.87 million shares or a 12.69% stake.

Yeap was a long-time managing director of Sequoia, a post he had held since joining the company in December 2003. He was subsequently redesignated executive director in June 2007 and resigned in February 2008.

Last Monday, stock exchange filings showed that Lim and Yeap were no longer substantial shareholders of Sequoia after disposing of 15.4 million shares or a 12% stake at 39 sen each, a 13% discount to the 45 sen it ended at on the same day. The buyer of the shares is unknown at press time.

In short, Sequoia in January saw 48% of the company’s shares change hands in two blocks from its two largest shareholders then (Kan and Yeap) to two new major shareholders (Gan brothers and Kwan). However, unlike the Gan brothers, Kwan is not on Sequoia’s board, despite having paid RM10 million for his 16% block.

The Gan brothers, with their 32% block, is not the first party to have assumed management control of the company after buying a block of shares that is just a shade under the 33% trigger for a mandatory takeover offer (MGO).

The age-old 33% trigger for a MGO was supposed to drop to 30% last year, soon after the Capital Markets and Services Act 2007 (CMSA) comes into force in September 2007. However, the caveat is that the new definition of control under CMSA is parked under takeover provisions (Division 2 Part IV), which have yet to come into effect. This is because the provisions are intended to take effect together with the revised Code on Takeovers and Mergers, which is still pending due process.

In the meantime, existing rules say any party that has obtained control in a company shall make a takeover offer, according to the letter of the law, and comply with any ruling the Securities Commission (SC) makes. As such, the key question  is, how does the SC define “control”?

It is unclear whether the board changes at Sequoia since the emergence of the Gan brothers as the largest shareholders nine months ago, can be construed as suggesting that an acquirer has obtained control of the target company under Practice Note 2.4 of the Malaysian Code on Takeover and Mergers.

Under the Practice Note, changes in half the board’s composition, with a change in hands of a substantial stake, constitute a change in control. Also, a change in at least one-third of the board membership, including the CEO, with a change in hands of a substantial block, also constitutes a change in control. And a change in control spells MGO under the takeover code.

Were two such instances prevalent in Sequoia since the emergence of the Gan brothers with a 32% block? The answer is “no”.

Sequoia’s CEO is still Lim Say Leong, who was appointed in June 2007, the same time Yeap was redesignated executive director from managing director. The managing director’s post has since been vacant, even after Yeap stepped down from the board in February last year, and was only filled on Jan 9 after the Gans’ entry.

Kok Beng took over from Kan as executive chairman, but one could argue that there is no change in the board composition, given that all four Sequoia’s directors are still boardroom members at press time. The difference is that there are now an additional two members — making it a six-member board — instead of four before the Gans’ entry.

Even if there is little change on board composition, Practice Note 2.4 also states that “control may be established” if there is significant change in the company’s business direction or policy within 12 months of the emergence of a new substantial shareholder, holding more than 20% but less than 33% equity, and there are “reasonable grounds” to believe that the board acts according to the directions of the new shareholder.

An SC spokesman told The Edge in January that it was “engaging with relevant parties to review the transaction by the Goh brothers [via Extreme Lifestyle Sdn Bhd] in its entirety and will decide on the appropriate course of action once [it has] completed [its] assessment”. It is not immediately certain if the SC had concluded its assessment. That said, it has been only nine months since the new substantial subholders emerged at Sequoia.

Nevertheless, what about the argument that the takeover code had been violated even if there is no clear breach in the letter of the law?

So far, in Corporate Malaysia, hardly any MGO has been  invoked when less than a 33% block of shares changes hands and when management quietly gains control. For instance, when DRB-Hicom Bhd changed hands with a block of less than 16% that came with management control, there was no MGO.

This is something that lawmakers perhaps need to consider as they come up with the new takeover code. As for now, it would seem that minority shareholders will just have to work harder to present their case to the authorities and protect their rights, should they believe that they have been short-changed.




This article appeared in The Edge Malaysia, Issue 777, Oct 19-25, 2009.