This article first appeared in The Edge Malaysia Weekly on March 4, 2019 - March 10, 2019

THE merger between JF Apex Securities Bhd — a unit of locally listed Apex Equity Holdings Bhd — and Mercury Securities Sdn Bhd has turned bizarre.

Last Tuesday, in a bourse filing, Apex Equity disclosed that the Securities Commission (SC) had only granted conditional approval for the proposed merger as the commission requires ACE Investment Bank Ltd — currently the largest shareholder of Apex Equity — to fully dispose of its entire 25% stake within six months of the merger completion date. In addition, ACE IB is to step down from the board of Apex Equity upon completion of the deal.

Although the SC did not provide a reason for setting the conditions, it is learnt that its reservations over ACE IB stem from previous breaches of securities regulations by its parent, ACE Holdings Bhd, which had led the SC to censure the latter and ban it from fundraising activities.

ACE IB, which emerged as a substantial shareholder of Apex Equity in September 2017, has said it is not agreeable to the SC’s conditions. At the same time, an application by JF Apex for ACE IB to be its controlling shareholder has also been rejected by the commission, prompting a request last Thursday by JF Apex for the SC to remove the conditions imposed “that are not within the control of JF Apex”.

The situation has now become more complicated with a suit filed last Monday by Concrete Parade Sdn Bhd against Apex Equity over the proposed merger. Concrete Parade owns 4.68% of Apex Equity.

JF Apex and Mercury Securities are two of a few remaining non-bank-backed stockbroking firms licensed by the SC. But it appears that the SC does not want ACE IB to be part of the enlarged Apex-Mercury group.

Even so, what is the regulator’s rationale for the conditions?

A quick check of the SC’s list of administrative actions last year shows that ACE Holdings had breached Section 354 (1)(a) of the Capital Market and Services Act 2007 (CMSA) by providing false or misleading information in two information memorandums dated Sept 8, 2015, and Jan 5 last year.

As a result, ACE Holdings was reprimanded by the SC on Dec 11 last year. According to its official website, ACE Holdings is an investment holding company and the ultimate parent to the entities in the ACE Group of Companies.

Pursuant to its breach, the company was directed to ensure corrective disclosure to all the subscribers of the affected securities and required to provide the subscribers with updated and accurate information on their investment. Moreover, ACE Holdings was restrained from conducting any marketing or fundraising activities unless it had obtained the SC’s prior written approval.

Founded in 2016, ACE IB is an investment banking and investment management firm licensed by the Labuan Financial Services Authority. However, sources familiar with the matter tell The Edge that unlike Mercury Securities, the ACE group’s previous black mark could render it unsuitable to run the stockbroking business of Apex Equity.

“ACE IB has a few interesting characters. They are not the normal capital market people whom you usually meet,” says an observer.

“In normal practice, anybody in their right mind in the capital markets will talk to the regulators before buying a major stake in a bank or stockbroking firm. But ACE IB did not. Inevitably, when the regulator found out, ACE was asked to sell down,” says a source familiar with the group.

ACE IB emerged as a substantial shareholder of Apex Equity following the death of its founder and executive chairman, Chan Guan Seng.

The Edge learnt that when ACE IB was asked to sell down its stake, the management of Apex Equity had explained that the stake would eventually be sold to Mercury Securities.

In other words, Apex Equity was expecting the entry of a new shareholder that would dilute ACE IB’s shareholding, and negate its control of the stockbroking firm.

“Apex Equity’s management had indicated that ACE IB has been in talks with a potential new owner. Therefore, the regulator chose not to intervene at that point in time while things were still evolving,” says the source.

“The regulator chose to wait for the change of major shareholder to happen. But following the announcement of the proposed merger, it is learnt that ACE IB would still remain as a major shareholder of Apex Equity, although Mercury Securities would displace it as the single largest shareholder. That is why conditional approval was given,” a capital market player explains.

Mercury Securities is set to emerge as the single largest shareholder of Apex Equity, owning 31% of the merged entity, under a business merger agreement signed last year between Apex Equity to take over Mercury Securities’ stockbroking, corporate advisory and other related businesses for RM140 million and transferring the businesses to JF Apex. Apex Equity was to pay RM48 million in cash and the balance RM92 million via the issue of new Apex Equity shares.

The SC had earlier approved a change in controller for JF Apex under the proposed merger, variation of the JF Apex licence to include corporate finance advisory as well as the appointment of Chew Sing Guan as chief executive and licensed director of JF Apex.

As things stand, the management of Apex Equity will have to decide whether it wishes to proceed with the merger. And even if the merger does not materialise, it is unclear if ACE IB will still be required to reduce its stake in Apex Equity.

At press time, The Edge was unable to get comments from ACE Group and Apex.

Concrete Parade marches into the picture

To complicate matters, Concrete Parade has brought a legal case against the company and 15 others, including its board of directors, JF Apex, Mercury Securities and seven individuals.

Concrete Parade is seeking a declaration that the heads of agreement between Apex Equity and Mercury Securities on Sept 21 last year and the business merger agreement between JF Apex and Mercury Securities on Dec 18 last year are illegal, unlawful and void.

Former banker Lim Beng Guan owns 95% of Concrete Parade. In his affidavit, Lim stated that he was advised by his solicitors that the execution of the agreements was illegal as it was carried out oppressively and in disregard of shareholders’ rights and interests.

He pointed out that Section 223 of the Companies Act 2016 requires shareholders of the company to approve the proposed merger prior to the signing of the agreements and that the directors of Apex Equity had failed to table these proposals at the annual general meeting or extraordinary general meeting, which they could have convened.

“The plaintiff’s (Concrete Parade) right and interests as a shareholder of the company have been wrongly prejudiced, disregarded and oppressed. The affairs of the company and the powers of the current directors have been conducted in a manner oppressive or prejudicial to the plaintiff as a shareholder, with such right of the plaintiff being disregarded,” Lim concluded.

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