BIL ignores small holders

By Peter V O'Brien

Thursday 17th April 2003

The latest statement from BIL International about its bid for the 54.2% of UK hotelier Thistle Hotels raises questions over the company's consideration of minority shareholders' interests.

BIL issued a press statement on April 1 (perhaps appropriately) in response to a Thistle announcement confirming the latter company's discussions "with certain unnamed parties who may, or may not, be considering either a possible competing offer for Thistle or the acquisition of certain of Thistle's hotel assets."

The investment company reiterated a statement in its offer document that it would not dispose of its Thistle shareholding, "even if a competing offer were made." BIL's April 1 statement added: "For the avoidance of doubt, the BIL Group confirms that it will not accept any competing offer in respect of its Thistle shares, regardless of the terms of such offer," for at least 12 months.

Irrespective of various legal requirements designed to stop bidders for companies indulging in "fishing expeditions," BIL's bald statement could be construed as ignoring minority interests.

Assume a counter-bidder came in at the unlikely figure of twice BIL's offer. According to BIL, the effective controlling shareholder would not accept it.

Thistle has been a prickle in BIL since the latter was forced to make a full offer for the hotelier after breaching a trigger holding under UK rules. The full offer was apparently pitched at a price designed to deter acceptance. It may have backfired because acceptances were substantial.

The issue is yet to be settled but it raises a wider general issue. New Zealand law (s131, Companies Act 1993) requires a company director, when exercising powers or performing duties, to act in good faith and in what the director believes to be the best interests of the company.

Several of those terms are subject to judicial interpretation, including "good faith," "believes" and "best interest." Interpretation of good faith and best interests always create a conflict of the subjective and objective among people exercising powers or performing duties and among the judiciary.

Realism suggests judges, while trying to be impartial, are unable to avoid the human frailty of subjectivity affecting objectivity. There is also a conflict between the best interests of a company and the best interests of shareholders.

A company is a statute-approved fiction, in the sense that legislation gave personality to something without personality. Companies have a legal existence apart from the individual, or collective, existence of shareholders. Companies would not exist without shareholders.

Protection is available for "oppressed" minority shareholders but directors have power to reject takeovers, subject to shareholders deciding to sell holdings to a bidder.

The issue gets complex when minority shareholders must decide to accept or reject a takeover offer when:

* directors oppose it;

* independent valuations say the price is too low but the offeror has a majority shareholding or effective control;

* there is unlikely to be a potential counter-bidder; and

* the offer is more than market price.

No law, legislative nor judicial, can resolve that issue.

Most of New Zealand's major listed companies have majority, or effective minority, controllers, most based overseas. They could attempt to take out local and overseas minorities. It is a fair bet that any price would be under "real" value, although possibly above historic market sales. That would depend on matters unrelated to New Zealand operations.

For example (and it is only a theoretical example), if International Paper was in strife, a sale of its majority holding in Carter Holt Harvey could be high on a restructuring programme. A buyer of the holding could, subject to appropriate approvals, move on the remaining shares.

Earnest independent valuations might say the price was too low, but given CHH's recent share price performance the offer could be attractive. Everything has its attractive price.

Whether BIL's offer for the rest of Thistle is attractive to remaining shareholders remains to be seen. Whether it's in the interests of BIL small holders is an open question.

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