The move by Tradewinds (M) Bhd to seek a waiver — on the grounds of national interest — from having to undertake a mandatory general offer (MGO) in its acquisition of Padiberas Nasional Bhd (Bernas) has sparked a debate.

Tradewinds had triggered an MGO under the Malaysian Code on Takeovers and Mergers 1998 when its stake in Bernas passed the 33% threshold.

Many are of the view that such a waiver is unlikely to be granted as there is no justification that Bernas is being acquired because of national interest. An exemption would be perceived as a political move.

Apart from that, any waiver could also send the wrong message to the investing public, especially when Bursa Malaysia Securities Bhd is sparing no efforts to be promote the local stock market as a regional bourse.

One argument against an exemption for Tradewinds is that Bernas was in no danger of coming under the control of foreigners. Various  clauses prevent foreign shareholders from seeking board representation while the golden share held by the government gives it significant powers.

To recap, Tradewinds had announced on Aug 28 the acquisition of a 53.76% stake in Bernas, comprising the takeover of a 31.52% stake or 148.28 million Bernas shares from Hong Kong-based Wang Tak Co Ltd, and an indirect holding of 22.24% or 104.6 million Bernas shares held by Gandingan Bersepadu Sdn Bhd. The total cost is RM526 million or RM2.08 per Bernas share. The counter was traded at RM1.91 last Tuesday.

Although Wang Tak, a unit of public-listed Lee Hing Development Ltd, is the single largest shareholder in Bernas, the rice distributor has never been controlled by a foreign company as some have perceived. Lee Hing is a Malaysian-controlled company whose controlling shareholder is Tan Boon Seng, a member of the Tan family of IGB group fame. Tan owns a 36.7% stake in Lee Hing.

Under the 1996 privatisation agreement signed with the government, Bernas has to maintain a sufficient supply of rice at reasonably fair and stable prices. It must also maintain the national rice stockpile, disburse padi subsidies to farmers and act as a padi buyer of last resort at a guaranteed minimum price. The group’s principal activities involve the procurement, importing, buying, processing and selling of rice, rice by-products and padi. It has also been given the rights to import rice until early 2016 under certain terms and conditions.

Despite the opposition to a waiver for Tradewinds, we cannot deny that the company has a right to apply for the exemption.

However, while some minority shareholders may want to take a ride with the new controlling shareholders, there must be an avenue for those who want to exit.

Minority Shareholder Watchdog Group’s CEO Rita Benoy Bushon is among those who concur that an exemption should not be given.  Minorities, she says, should be given the opportunity to exit as there is no issue of national interest in this deal.

For Bursa to become a stock market of choice, investors must feel that they are getting a fair shake when it comes to their  investments. That won’t be the case if frequent exemptions are given for certain transactions.

To be fair to the local reghere, few waivers have been given on the basis of national interest over the years.

Two exemptions perceived to have been granted on such grounds happened during the 1997 regional financial crisis.

One was the acquisition by United Engineers (M) Bhd of a 32.6% stake in its parent company, Renong Bhd, at an average price of RM3.24. The other was Malaysian Resources Corp Bhd’s purchase of shares in  New Straits Times Press (NSTP) and Sistem Televisyen Malaysia Bhd (TV3) at RM15.20 and RM5.20 respectively.

Minority shareholders and fund managers were unhappy about the waivers granted in these two deals as they were not given an opportunity to exit.

It is not easy to define national interest. A better option is to be more specific about the exemptions granted in each case. Companies should also list any issues involving national interest from the start, when they are being listed, and not after they have gone public for some time.

To most people, national interest would mean strategic assets are involved. But what are these strategic assets? These could be companies or assets related to defence, utilities, food, transport, telecommunications, banking and finance, and even Felda schemes.

With the ongoing liberalisation of the economy, foreigners are allowed to buy into these assets as such companies are opened to foreign ownership. Once liberalised, it is difficult to continue to claim national interest.

Another point to note is that not everyone, especially foreign investors, may be aware that companies they have invested in have some element of national interest. If a waiver is given when it comes to such deals, this could make the stock market less attractive and hinder its regional aims.

Take Bernas. If the rice trader is meant to be a national asset, it should have, from the beginning, controlled its foreign shareholding, and could then be allowed to get a waiver.

A fundamental issue is that there is nothing wrong in having to launch a GO, especially if a buyer is willing to acquire more than  50% in a company. It is not a bad thing to have the GO unless the price offered is “wrong”.

Perhaps the minority shareholders should be allowed to vote on their investment and decide whether the new controlling shareholder should be granted a waiver. This could be a good starting point and be fairer to minority shareholders. They could vote at an EGM, while those involved in the deal abstain from the voting process.

The issue of national interest in a takeover deal is not an easy subject. However, companies that make such claims must be prepared to play by the rules of a free market.

Toh Lye Huat is associate editor at The Edge. Comments: [email protected].

This article appeared in The Edge Malaysia, Issue 772, Sep 14-20, 2009.