Apollo Investment Management

The Vard saga continues

UPDATE 25 July 18:
Vard held another marathon EGM, again lasting more than four hours: turnout was even higher than at the last one. Fincantieri voted to delist the company: all other shareholders voted against, and they have the cheek to call the resultant delisting 'voluntary'. Our analysis of the voting is here: we find it useful to look beyond the company's own presentation of the figures. We have not seen comparable figures for the independent turnout and percentages of the independent votes cast in other contested cases: if they are not already being collated, reformers may wish to start.

An honourable option was available to Fincantieri: to abstain, and allow a free vote. It didn't. An honourable option was available to Vard directors: the market has changed, the cycle turned up, think independently, acknowledge the change. They didn't. Minority shareholders asked directors for their logic, their deliberations, their understanding of the principles and spirit of the rules, and received no satisfactory answers. If these directors are capable of exercising independent judgment, or of understanding the concerns of minority investors, there has been no such sign: they looked constantly at their large team of lawyers, and at hand signals provided. Reformers may wish to start a blacklist of directors who have been subject to large negative votes by independent shareholders.

Singaporean investors pointed out the new order intake. In the 3+ months since the last report at end-March, new orders have exceeded NOK14bn, more than doubling the entire previous order book. (85% of these contracts were signed after the rescinded EGM.) The order book now matches prior highs, raising confidence in the cyclical upturn which might have taken the share price to new highs in the S$2-3 range, 8-12x the derisory Exit Offer. Some shareholders are considering whether to stay on as minority investors in the delisted company. Compulsory acquisition by Fincantieri would require it to achieve 90% takeup of its offer, calculated from the Despatch Date of 13 April - not just to take their accumulated holding to over 90%. By our calculation, it is quite likely that they will not achieve this, and that investors wishing to hold the delisted shares may continue to do so, with fewer than 20m shares or 1.7% sufficient to block the possibility of compulsory acquisition. We would not necessarily recommend this, with a highly leveraged and contract-specific business in many countries, and controlling shareholders and directors behaving as above. However, we have been told that investors in an unlisted Singapore-registered company have the right to review related party transactions individually, and that this may - theoretically - provide some leverage for investors actively exercising their rights under Singapore companies law to obtain a better price. Theoretically, we would also have expected Singapore's regulatory framework to provide better protection to investors while the company was listed. We expect that most investors will end up coerced into acceptance of the unfair Exit Offer - as were most of those who accepted it or sold in the market earlier in the expectation of this outcome - but we mention it as a possibility, in case activists with the requisite skills and risk appetite wish to pursue the delisted route.

UPDATE 9 July 18:
Vard called another EGM for 24 July, to vote again on 'voluntary' delisting, without any improvement in its derisory Exit Offer. Its new circular is updated but pays little heed to the concerns expressed by minorities. The IFA and the directors agree that the Exit Offer is unfair, but explain that Fincantieri wants to delist and is not required to abstain. We suggested that Fincantieri should voluntarily abstain: this suggestion has gone unacknowledged. The resultant situation remains blatantly unfair, and the main change since April is the ticking of more boxes.

The essential problem is that the deal is proceeding according to detailed consideration of individual rules, without abiding by their spirit, or key principles. Rule 1309 of the Singapore listing rules requires any delisting to be accompanied by "a reasonable exit alternative". However the IFA on page I-39 of the circular (pdf-page 73) draws attention to the Practice Statement of the Securities Industries Council which suggests that "reasonable" is not to be interpreted as meaning "fair", but takes into account other factors - in this case the regulation which allows the one controlling shareholder to vote for delisting, and to prevail even if thousands of independent shareholders all vote against. This allows the controlling shareholder to force out shareholders at a fraction of the price which they might voluntarily accept. The two companies, and their directors, should be held to their fiduciary responsibilities, and to the general principles of the Singapore Code on Takeovers and Mergers. These general principles (p.19, pdf-page 22) state that they must be observed in spirit and not just with reference to precise wording. General principle number 4 is that "rights of control must be exercised in good faith and oppression of the minority is wholly unacceptable". Market action, and successive AGM/EGM votes, show that Fincantieri has been unable to persuade minority investors to sell voluntarily at the current price and is relying on coercion. Squeezing out long-term investors at the bottom of a cycle is not acting in good faith; in our view it certainly constitutes oppression. It is time to go back to first principles.

As and when the regulations can be updated, we summarise our recommendations here:

Allowing squeeze-out delistings adds unnecessary risk to any investment in Singapore. Many investors have been surprised to learn that Singapore's protection of minority investors is as weak as shown by this case. Until and unless it is addressed, we will doubtless all be that little bit warier about future investments in Singapore, especially in cyclical companies. Better protections would allow investors to participate with more confidence. This would contribute to longer-term thinking, and to greater efficiency in the mobilisation and allocation of capital for the long-term health of Singapore's economy. Minority shareholders have been very poorly treated in this case, but at least it shows very clearly the simple improvements required.


1 July 18:
Vard belatedly held its 2017 AGM, having tried to avoid publishing an annual report and holding an AGM while Fincantieri seeks a squeeze-out delisting and privatisation on the cheap. A new Exit Offer is awaited, so the AGM was a sideshow, but minority investors had a chance to question directors, and remain unimpressed. All resolutions were passed, but only because Fincantieri was in most cases allowed to vote its dominant 84% shareholding. The results were announced, conventionally, as percentages of the votes cast for-and-against. In cases of disagreement, we find it interesting to look at the votes of the independent shareholders. Fincantieri voted for the re-election of CEO Roy Reite as a director; only 3% of independent shareholders agreed. We guess that some of the latter may have worried unnecessarily about losing his services as CEO. (We assume that he is competent in that role: the business performance of recent years can be explained by the severity of the cyclical downturn, and should improve now that the cycle is turning up.) Anyway, 97% of the independent shareholders voted against his reelection as a director. Mr Reite still considers himself independent when advising minority shareholders to sell to his employer at one fifth of the price he thought inadequate in 2012, and has yet to explain his change of view.

The 'lead independent director' Keen Whye Lee was unable to give any clear account of questions raised or issues considered in board meetings, and 100% of independent shareholders voted against him (again). Shareholders were then asked if we wished to give this board the authority to issue new shares: Fincantieri voted in favour, and almost everyone else against. The opinion of independent shareholders on this board's conduct of their duties was reflected in a protest vote of 100% against the payment of their 2018 fees.

We set out the voting results here. Most of us do not have time to make such calculations every time we read voting results, and it would be useful if independent votes were routinely presented in this way. We continue to recommend that independent directors should be appointed by independent shareholders, and that directors rejected for any listed company should be disqualified from serving at others. Meanwhile, there is no point in paying boxtickers who show no independence of judgment, and their views should be discounted.

Fincantieri was required to abstain on one resolution, for interested party transactions which do in this case seem necessary in the routine course of business; this was approved. It is bizarre that Fincantieri was allowed to vote in the recent EGM on delisting the whole company in order to squeeze out the minorities at a fraction of book value and one fifth of its earlier offer price, when the conflict of interest was huge and the issue of such fundamental importance. We were glad to see that EGM vote set aside due to irregularities. Now that the unfairness has become evident, and the dangers to long-term investors and the efficiency of national capital allocation apparent, we hope that the regulations will be improved in due course, and that future privatisations will be based on prices sufficient to attract voluntary acceptance.

  Vard shares and oil price

The Vard share price has been too long repressed by the threat of forced takeout and the resultant support-and-cap that has kept the price flatlined. With the oil price soaring, investors might reasonably have expected a bungee-jump rebound in the share price, rather than a cutting of the cord after the first bounce. Vard shares and the oil price bottomed out simultaneously in early 2016, and the attached chart suggests that with a commensurate cyclical upswing the shares might now be around S$1.00, with Fincantieri's previous purchase price of S$1.22 well within reach (this was the level which Roy Reite previously thought undervalued). New highs might be expected: the previous high was $1.70. (We understand that many current shareholders have held for longer, so implicitly decided not to sell at that price.) The white line and the right-hand axis show the Vard price in S$ since listing, the green line and the left-hand axis show the crude oil price in US$, and the purple line is the ratio between the two.

What baffles me is why Fincantieri, having once been willing to buy Vard at a reasonable price, is now faffing around wasting time in this way. Having demonstrated how closely Vard could be integrated into its worldwide operations, and explained why it wishes to take it private for even greater cost efficiencies, surely it should bid a sensible price and get on with creating value, rather than wasting time bullying pensioners and negotiating one cent at at time. Even if reputational risk is of no concern, the time sink should be. The additional cost of a fair bid for the remaining minorities would be insignificant in the overall cost of the Vard acquisition; a lawsuit from the larger group of shareholders who have sold out at anomalous prices because of the threat of forced exit might claim a much larger amount. Rather than inviting legal case history, it would surely be better to focus on decision-making for the future of the business. Caution may have seemed appropriate in 2016, but in 2018 the oil majors are investing again, Vard's customer base has been broadened, and new opportunities seem clear. The letter we sent to Fincantieri and to the CEO and directors of Vard in April went unanswered, so we will just post our current suggestion here.

To Fincantieri: Since you now wish to privatise, consider the respect due to investors who accepted earlier assurances of long term partnership and good governance, and from whom you requested patience. You seem to think that your reputation in Singapore does not matter, but you have employees, customers, and bankers in many countries, and global investors in the Italian company, for all of whom the corporate culture is relevant. Do you really want more bad publicity? Seek regulatory permission for an immediate increase in the Exit Offer, bid a price that minority investors will voluntarily accept, and focus once again on business, and on the opportunities ahead.


We reproduce below some earlier comments posted originally on the 'What's New' page, for the convenience of readers reviewing the case and the issues of corporate governance raised.

3 May 18:
Citigroup was forced to backtrack on its premature announcements on behalf of Fincantieri after the Vard EGM, while SGX reviews the disgraceful conduct of the EGM and other issues, to determine whether shareholders' approval for delisting was properly obtained.

Vard shareholders have long memories. Some have held the shares since listing in 2010. They referred to the circular issued in February 2013, a little over five years ago, when Fincantieri extended a General Offer at S$1.22, after buying its initial 50.75% at that price in late 2012. Vard CEO Roy Reite was among the directors advising shareholders then that this offer was inadequate, and recommending that they hold on. The CEO should know the business better than anyone. He declared himself qualified to be deemed an independent director to advise on the proposed delisting and Exit Offer. If he is independent, he should be able to explain - but was asked, and could not - why he thought that investors should sell now at 25c when he previously thought they should hold at five times the price, and why they should not only sell but vote to delist in order to force this decision on all other shareholders.

The authorities now face ticklish decisions. Reconvening the EGM to run it again but allowing the controlling shareholder to vote would add only cost and delay, leaving the aggrieved minorities even worse off. However, the 100% no-vote from independent shareholders, and their evident fury, has highlighted the unfairness of the current rules, and the flagrant contempt for minorities shown by Fincantieri and its advisers seems hard to ignore. On the other hand, Fincantieri had previously been considered a responsible parent, and confidence in its good intentions must now have been badly battered. Fincantieri wants to privatise; if it could persuade 39% of the remaining independent shareholders to sell voluntarily it could move to compulsory acquisition. Remainers who had wished to hang on for the upcycle would be disappointed, but no longer so aggrieved. The additional cost would add little to Fincantieri's overall cost of the Vard acquisition (already so much cheaper than the price it was originally happy to pay), and all could move on. An approval by the Securities Industry Council for an immediate improvement in the Exit Offer to a price that seems fair, and an indication that the authorities might then overlook any deficiencies in performance of fiduciary duties, might lead to this acceptable outcome.

1 May 18:
The Vard EGM culminated in a vote for "voluntary" delisting - recorded as 96.54% to 3.46% of the votes cast. What this fails to note is that one controlling shareholder voted in favour, and that everyone else voted against. The 982.67m yes votes equate to Fincantieri's shareholding as of the middle of last week (between the figures for Tues & Wed; they had tucked away a few more by Friday) - so they failed to persuade or confuse many other people that delisting would be in their interests. Effectively 100% of independent shareholders whose votes were counted were against delisting. There were also shareholders whose votes were not counted, including some who were present for the whole acrimonious four-hour-plus meeting and still on their feet asking questions when the vote was conducted electronically without announcement - so the Singapore Exchange is reviewing the conduct of the meeting.

This case has highlighted a number of points of corporate governance worth reconsidering, and also points of confusion. The IFA was invited to comment only on the Exit Offer, and noted correctly that in the event of delisting it would be the best option available. On this basis the "independent" directors recommended that independent shareholders should vote for delisting, a view resoundingly rejected by the independent shareholders when it came to that vote. The terminology in relation to "independent" directors appears extremely confusing in several different respects, and it would be best if they were not so described. It would probably be best to dispense with directors' advice on voting, and leave investors to make up their own minds. I reiterate the suggestion that directors whose judgment is rejected by independent voters should be disqualified from serving as independent directors - and that these disqualifications should be published, which might encourage some to take their fiduciary duties more seriously. The most important point however is that controlling shareholders should not be allowed to vote on delisting. The 35.19m NO-votes cast in this EGM represented 100% of the minorities who managed to vote, and 18% of the remaining free float. If this were a Hong Kong company, it would remain listed. If the controlling shareholder wishes to privatise, it should have to bid a price that investors accept voluntarily. What has happened in the Vard case should be labelled a forced and unfair delisting, not as a voluntary one! Serial impoverishment of patient long-term investors is not good for markets, for price discovery, or for the efficiency of capital allocation in an economy. Singapore regulators, please upgrade your rules urgently on this point: the squeeze-out delisting should not be a phrase that your investors need to know, or a risk that we have to discount in Singapore company valuations.

15-20 April 18:
See 'Forced and unfair delistings: the Vard case'.


Home Investment philosophy Fund performance Reports & articles *What's new?*
Why Apollo? Who's Claire Barnes? Fund structure Poetry & doggerel Contacts