Hong Leong Bank Bhd’s offer to buy EON Capital Bhd’s assets and liabilities has lapsed, but it is too early to write the merger off, going by the latest developments at EONCap.

Last Tuesday (Feb 2), EONCap’s board rejected HLBB’s offer of RM7.10 a share, saying it undervalues the banking group which is emerging from a major transformation drive. But the decision was not unanimous. It is understood that at least two board members — Rin Kei Mei and Tan Sri Tiong Hiew King — voted for the deal.

In a move indicating that he is still keen to sell, Rin, one of EONCap’s five major shareholders and also a director of the banking group, has called for an extraordinary general meeting to be held on Feb 22, with the objective to appoint eight new directors to the board, all of whom would, presumably, be friendly parties. Currently, the majority of EONCap’s board members are said to be on the side of Primus Pacific Partners, which owns 20.2% of the banking group and which is resisting the takeover bid.

Sources say Rin, once he has put a new board in place, will be in the driver’s seat to reopen merger talks with HLBB. It is believed that Rin is looking at a higher price of RM7.70.

Industry observers say Rin has made a shrewd move because with another eight directors to bring the board members to the maximum of 15 to ensure a more balanced vote, should the offer be renewed, there is no way  Primus can appoint more directors to tip any voting in its favour.

Although Rin appeared to be willing to part with his 15.4% stake in EONCap for the RM7.10 per share offered by HLBB when he voted against a rejection of the deal, sources close to the low-profile businessman say he is in fact unhappy with the offer price. “He is looking at a price tag of RM7.70. However, Rin knows that the banking industry is very much regulated and moving forward, banks will need to set aside more capital.

“The landscape has changed and there’ll be no more proprietary trading or trading in any derivatives… banks must go back to their original function of lending and therefore, their margins will be squeezed. Thus, no one is going to pay two or 2.5 times book nowadays for a bank,” says a source.

If Rin does not agree with the offer price, why did he vote for the board to table HLBB’s offer to shareholders last Tuesday?

A source says as the board is controlled by Primus — EONCap’s single largest minority shareholder — Rin knew the board was bound to reject the offer. “Rin is not on Primus’ side. At the same time, he believes he ought to get a higher price for his stake in the banking group. He is ready to sell his stake. So, he is letting the board fight for a higher price for him.”

Sources close to Rin say he does not favour ugly boardroom tussles. Neither does he want to upset Khazanah Nasional — a shareholder with a 10% stake in EONCap — which, it is said, also does not want to see a boardroom tussle.

“That is why Rin is seeking more board representation via the eight new directors. He is not removing any directors, but at the same time, he is holding the board accountable to add value to EONCap since they say the offer from HLBB is too low,” says a source.

Nevertheless, shareholders will have to vote for or against the eight new directors coming on board. The appointment of the new directors also depends on the approval of Bank Negara Malaysia, which can take up to a month or more.

This is not the first time major shareholders have attempted to appoint new directors to the board to push through a takeover offer from a rival bank.

In the Southern Bank Bhd (SBB) takeover battle in 2005/06, shareholders of Ramuda Sdn Bhd had called for an EGM to appoint a third director to its board. Ramuda owned a 32% stake in Killinghall, which in turn had a 16% stake in SBB. There was also an attempt to remove four board members from SBB.

Similarly, in the EONCap takeover deal, CIMB first began talks with two major shareholders — Sultan Sharafuddin Idris Shah and Datuk Syed Yusof Syed Nasir (who sits on Killinghall board) — who wanted to exit the bank. Its other shareholders — SBB chairman Tan Sri Tan Teong Hean, the Yeap family and Straits Trading — did not.

Following Killinghall’s requisition of an EGM, a major shareholder and board member of Killinghall, believed to be Tan’s wife, filed for an originating summons in court to challenge the validity of the resolutions proposed by Killinghall. Tan filed for an injunction to stop the Ramuda EGM but was rejected by the courts.

What swung the deal in CIMB’s favour eventually was when Straits Trading sold its block to Chua Ma Yu, a party friendly to CIMB.

The ball, it appears, is now in Primus’ court. Industry observers now predict that Primus may apply for an injunction to stop Rin from holding the EGM to appoint the new directors.

A corporate lawyer says Primus may apply for an injunction from the courts on various grounds. “Whether or not it is granted the injunction, one thing for sure is that Primus will be able to buy time to delay the takeover,” he says.

This article appeared in Corporate page of The Edge Malaysia, Issue 792, Feb 8 – 14, 2010