The absence of legislative codes is helpful in some ways and very troublesome in others

AKD Securities & Safe Deposit Company Ltd.
Nov 16 - 22, 1996

In western stock markets talk of takeovers and mergers gets the investment bankers' creative juices going. Hostile takeovers are the stuff of best sellers. The logic is that fear of takeovers keeps managements performing and being nice to shareholders. In a large shareholders democracy driven by professional managements rather than owner entrepreneurs, dividend records and share price performance becomes the primary object of corporate policy. In the takeover jungle, performance less than the market is a crime and 'punishment' through a takeover is fair revenge by shareholders. Takeovers encourage companies to perform and directors to be mindful of all the shareholders' interests — not just their own. Also, takeover activity is a catalyst in turning round depressed over-sold markets. In the UK and USA takeovers and mergers have been all the rage for nearly twenty years. Europe has been a bit slow, while in Japan the tradition of cross-holdings and cosy corporate relationships means that takeovers are actually frowned upon.

In Pakistan take-over and merger activity is still in its infancy and the total deals done so far can be counted on the fingers of one hand. Two of these have been carried out by AKD Securities of which I must confess at the outset, I am a director and founding member. My limited experience in this market has thrown up the several serious problems which stand in the way of takeovers becoming a significant market force. Currently, I estimate there are over 300 companies trading below or equal to net asset value. Of these, almost half are trading at less than half their NAV. There are some very good 'discount to assets' situations. But there is no way the shareholders can benefit from these discounts. The reasons are to do with market structure and lack of a regulatory frame-work.

J Most companies in Pakistan are still run by owner entrepreneurs which generally means that over 51% shares are held by the sponsors. That is no bad thing in itself but unfortunately it is often bad news for the minority shareholders.

J There are no guide-lines or legislative codes on takeovers and mergers. This is actually helpful in some ways (building up stakes on the quiet) and very un-helpful in others, (changing management control).

J Consolidation of accounts is not allowed in Pakistan. This makes it extremely cumbersome to have a 'holding company' or a Hanson style conglomerate.

J There is no clear legislation on changing the board of directors. The Companies Act 1984 only provides for elections every three years. This means that for a bidder, removal of the board of directors is not possible through an EOGM until the next election date. Of course an irate board could destroy the target company during the intervening time. This is ridiculous given that a sitting Prime Minister can be removed through a vote of no confidence anytime during his/her tenure. Yet the shareholders cannot remove the CEO/director or other directors by calling an EOGM. If a bidder waits till the election are near, he runs the risk of being victim to fouling tactics of the target company. The case of Dadabhoy Cement is well known where the shares of a major stake acquired openly and legally from Pak-Kuwait were not transferred in the name of the new owners through delay tactics until after the directors had been elected. Clearly, if the takeovers are going to be possible, shareholders should be able to call an election through an EOGM at any time and vote a new board in. This is one of the most fundamental rights of the shareholders currently not protected by law. The Companies Act 1984 should be amended.

Who should make the policy

The competent authority to do this job can be the KSE itself but it is likely that it would need the backing of the CLA. In the UK there is very little legislative support for the City Code on Takeover and Mergers which works largely through self-regulation. The code is administered by the Panel on takeovers and mergers set up in 1968 on the initiative of the Bank of England, (Dr. Yaqub please take note!). The City code defines the etiquette of all the key players in a takeover or a merger situation in great detail. Its key features:

J that all shareholders of the offeree company must be treated equally both in terms of the information available to them and the price offered. This usually requires the bidder to make a 'public offer' and publish a prospectus.

J The board of the offeree company may not do anything to frustrate the offer. The directors cannot play foul with the offer, for example, by making a rights issue or by causing delays in registration of the shares in the bidders name. Both tactics have been used in Pakistan.

Much of the takeover code will not apply particularly with owner entrepreneurs running the show. India's SEBI has already adopted a takeover code.