Money Markets
CMA tightens takeover rules for listed firms to curb insider trading
CMA has also revised the unconditional clause that was behind the drawn-out dispute between it and BOC over the Carbacid takeover bid. Photo/FILE
The capital markets regulator has crafted new company takeover rules aiming to plug the legal loopholes that have exposed acquisition deals to BOC, Carbacid-type disputes and facilitated insider trading in the stock market.
The draft guidelines, to be debated next week by the Association of Kenya Stockbrokers and Investment Banks (AKSIB), are particularly targeted at the grey area of venture capital and equity funds and their role in the capital markets that many investment experts have seen as disruptive.
Such concerns arise from the fact that existing capital markets regulations restrict how much stake short term foreign investors are allowed to take in listed companies and how long they can hold onto it before moving out.
Investment bankers argue that rigidity of the rules has made it impossible to pull through any listed company transactions involving venture capitalists without seeking numerous exemptions from the Capital Markets Authority.
That was the case two years ago when UK based Helios acquired a 24.9 per cent stake in Equity Bank and Stanbic Bank made a takeover bid for CFC Bank.
The new rules define significant shareholding in a listed company as 10 per cent, meaning any purchase of a stake above this threshold would require formal disclosure of intentions.
It will now be mandatory for anyone acquiring or selling 10 per cent or more of a listed company to notify the CMA within hours of doing so but not later than 9am on the dealing day following the date of the acquisition or disposal.
CMA’s proposals have sparked intense debate in the stock brokerage and investment banking fraternity with most players describing them as aimed at stopping market intermediaries from taking positions in listed companies.
“The new rules appear to target some people and institutions, especially brokers and investment banks, with a view to stopping them from buying shares regularly in the listed companies,” Peterson Mwangi, the managing director of Africa Investment Bank, said.
Investment analysts described the new rules as impractical, saying it would be hard for the Nairobi Stock Exchange to monitor compliance.
NSE and CMA did not respond to our questions on the matter.
“We need to find a way of accommodating foreign clients who want to take more than 10 per cent of a listed company and to harvest their investments as soon as they deem fit,” said Lucas Otieno, the managing director of African Alliance.
The rule suggests that one shall report if “as a result of the acquisition he comes to hold, with any shares or rights over shares already held by him, shares or rights over shares representing 10 per cent or more but less than 35 per cent of the voting rights in a company.”
CMA has also revised the unconditional clause that was behind the drawn-out dispute between it and BOC over the Carbacid takeover bid.
Should the rules come into force, the terms of offer would be revised even after the 60 days during which a bid is valid allowing the suitors to evaluate their positions based on market realities or the trading environment.
CMA’s fear of litigation is seen to have been behind its involvement in the prolonged dispute that went to court before it was finally resolved out of court.
Cabarcid’s profitability also changed after the takeover bid was first made making it necessary for the parties to reconsider their positions.
The new rules will be particularly difficult for companies such as Equity Bank, which has expressed interest in buying a substantial stake in the National Bank of Kenya during the planned government divestiture of its 22.5 per cent, and the National Social Security Fund’s 48 per cent in the bank.
Potential liabilities
Already, Equity holds a 24.99 per cent of Housing Finance, just falling short of the 25 per cent minimum of the mortgage lender to be considered a controlling shareholder.
The proposed rules will also require companies to clearly show the state of their finances going back several years, including the level of indebtedness and potential liabilities that can arise from transactions done before declaring intention of takeover.
If brought into force, investors will also have to keep tabs on any market moves made by their close relatives.
The rule, which defines close relative as spouses, siblings and parents, aims to check against acting in concert.
Similar rules will apply for actions in associated companies defined as ones in which the other party holds more than 20 per cent.
The nature of disclosures made by both the offerror (the one intending to take over another firm) and the oferree (the target company for acquisition) are spelt out.
It targets well-heeled investors who have sometimes made offers to selected members of the management and board of other companies without immediate disclosure to other shareholders, planting seeds for insider trading and manipulation of share prices.
The new rules demand that information be made available to all shareholders as soon as there is a reasonable appreciation that a company is the subject of a takeover attempt.
In the two most notable acquisitions in the last three years, the parties sought waivers from the CMA that allowed them to proceed without making offers to all the shareholders.
The deals involved the Sh19 billion acquisitions of CFC Bank by Standard Bank of South Africa to form CFC Stanbic Bank and the acquisition of 24.99 per cent of Housing Finance by Equity Bank and the British American Asset Managers.
The boards of the targeted company will be required to advise shareholders of actual or likely offers.
The new rules also require the boards of directors not resist any takeover bids before evaluating the merits with its shareholders in terms of better equity value and share price performance.
To avoid creating a false market for the shares of companies that are subject to takeover bids, a formal announcement will have to be made by the takeover target once a firm intention from the suitor is made, irrespective of the bid’s merits.
Similar announcement will also be made when there is market speculation over an impending acquisition, wild movement in share or huge volume trades.
Private company
Were the rules in force, ARM would have been required to make an announcement three weeks ago when Bamburi sold 12 per cent of its shares in the company.
Kenya Power and Lighting Company would also have been required to make similar announcement four years ago when the NSSF sold its four per cent shareholding in the company, momentarily changing the status of the power distributor from a parastatal to a private company.
In the two events the transactions were stumbled upon by the media as shareholders sought answers on their import.
The rules also protect listed companies against speculative bids meant to influence the target’s share price.
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