Monday, March 27, 2006

Mergers and Acquisitions on the Ghana Stock Exchange - A Legal Analysis

Mergers and Acquisitions On The Ghana Stock Exchange (GSE) and Rule 1(4) of the GSE Takeovers and Mergers Rules– A Case Study of the Legal Basis of the Offer for the Shares of Ghana Breweries Ltd by Guinness Ghana Breweries Limited

Mergers and acquisitions on the Ghana Stock Exchange (GSE) are
essentially guided by the GSE’s own Rules on Takeovers and Mergers. The
said Rules apply only to listed companies or companies who have
notified the GSE of intended acquisitions activity involving themselves and
a listed entity such that the Rules would become applicable. However,
the apex regulator, the Securities and Exchange Commission (SEC) is also
working on Draft Regulations on Mergers and Takeovers which would be
applicable to all public companies in Ghana engaged in mergers and
acquisitions, pursuant to the Securities Industry Law, 1993 (PNDCL 333), as
amended. The promulgation of the SEC’s Regulations on Takeovers and
Mergers will automatically be the demise of the GSE Rules on Takeovers
and Mergers.

The acquisition of Ghana Breweries Limited (GBL) by Guinness Ghana
Limited (GGL) in 2004 (which changed its name to Guinness Ghana
Breweries Limited, GGBL) has thrown up very interesting legal questions
that necessarily must be answered to guide the entire market in future M
& As. In this article, I would attempt an assessment of the legal basis for
the acquisition as expressed in the Offer Circular and postulate an opinion
on the legalities underpinning the particular transaction. Ghana’s stock
market is a fast-growing emerging market and there are strong indications
that major M & As will happen on the market in the near future. Currently, Total Outré Mer S.A. of France is in the process of a takeover offer to shareholders of Mobil Oil Ghana Limited. It is noteworthy that the Total acquisition is by way of a tender offer, having expressly disclosed in the circular that it will only acquire shares up to a defined percentage. The tender offer technique is a means of buying a substantial portion of the outstanding shares or stocks of a company by making an offer to purchase all shares, up to a specified number, tendered by shareholders within a specified period at a fixed price, usually at a premium above the market price. A tender offer is often the first step in acquiring a company, since the company making the tender offer may follow the tender offer with a merger proposal. The Total Offer is a good example. It is therefore important the ground rules are made clear to avoid the controversy that has accompanied the acquisition of GBL by GGBL.

Takeovers Vrs. Mergers
Takeovers and mergers have been used interchangeably and especially
regarding the acquisition by GGBL of GBL, the general population may still
be unclear as to what has actually taken place and whether the
transaction was a merger or a takeover. In June 2004, GGL launched its
Offer Circular in which it detailed the terms of an offer to the ordinary
shareholders of GBL to purchase all the outstanding ordinary shares of
GBL. This followed Heineken’s Irrevocable Undertaking to offload its shares in GBL to Diageo Plc, the parent company of GGBL. Irrevocable Undertakings are essentially binding promises on the part of the holders of the relevant shares to offer them to the offeror provided certain agreed conditions are satisfied. Ultimately GGBL was able to acquire 99.7% of GBL’s outstanding shares. Currently, there are about 1000 shareholders of GBL, which pursuant to undertakings in the Offer Circular has been delisted from the GSE. It must be pointed out that delisting does not mean liquidation. GBL has not been liquidated and still exists. It is however unclear whether the workers of GBL are aware of the legal implications of their present conditions of service where they do not know whether they still work for the entity that employed them or have metamorphosed into workers of GGBL by virtue of the acquisition. In all the scenarios, major legal implications exist for both employer and employee.

According to the Concise Oxford Dictionary (9th Edition), a merger is “the
combining of two commercial companies etc into one.” A takeover is
defined as the “assumption of control (especially of a business); the
buying out of one company by another.

It will be necessary to set out in full, rule 1 of the GSE Rules on Takeovers
and Mergers as a guide.

Rule 1: Substantial Acquisition of Shares:
1. (1) Where any person acquires or agrees to acquire any
shares and the number of shares so acquired or agreed
to be acquired, together with the total number of
shares already held by such a person, exceeds or shall
exceed in the aggregate 15% of the voting
capital of the company, the company and the acquirer shall notify the Exchange within 2 days of such acquisition or such agreement for acquisition.

(2) Where any person holds shares which in the aggregate carry less than 25% of the voting rights in the Company, he shall not acquire any shares which, when aggregated with the shares already held by him, shall carry 25% or more of the voting rights unless he notifies the Exchange and fulfills the conditions specified in rule 2.

Provided that nothing in this sub-rule shall apply to a person who on an
application to the Council is specifically granted exemption.

(3) A listed company which has any information on the transactions mentioned above which has or is likely to have any effect on:

a. the company's assets and liabilities;

b. its financial position; or

c. the general course of its business

leading to substantial movements in the price of its
shares shall make this information known to the
Exchange within 7 days.

(4) The above requirements shall not be applicable to an acquisition by a person who has announced his firm intention to make an offer to a listed company and has also notified the Exchange.

Legal Basis/Conditions of the Offer
The Offer Document submitted by Guinness stated that the Offers were being made under Rule 1(4) of the GSE Takeovers Rules because GGL is not a registered shareholder of GBL at the time of the Offers. This was also sanctioned by both the GSE and the SEC. At the time the announcement of the transaction was made through the GSE, a firm intention to make the offer had been made by GGBL and the GSE notified. Could those three characteristics, namely:
a. status as non-shareholder of GBL
b. announcement of firm intention to make an offer to GBL, and
c. GSE notification
imply that the Rules were not applicable? What rules guide an acquisition in that regard? The Offer Circular stated clearly that “As Guinness Ghana is not currently the registered holder of any Ghana Breweries shares, the Offer is being made pursuant to regulation 1(4) of the Ghana Stock Exchange Rules on Takeovers and Mergers. In addition, the Transaction does not constitute an arrangement or amalgamation for the purposes of Part S of the Companies Code.”

Part S of the Companies Code concerns arrangements and amalgamations. Section 229 of the Code defines what the terms mean. Under s229(a), “the expression ‘arrangement’ means any change in the rights or liabilities of members, debenture holders or creditors of a company or any class thereof or in the Regulations of a company, other than a change effected under any of the foregoing sections of this Code or by the unanimous agreement of all the parties affected thereby. S229(b) defines “amalgamation” as “any merger of the undertakings or any part of the undertakings of two or more companies or of the undertakings or part of the undertakings of one or more companies and one or more bodies corporate”. Prof. Gower, the brain behind Ghana’s Companies Code of 1963, admitted in the Final Report of the Commission of Enquiry Into The Working and Administration of Present Company Law of Ghana (usually referred to as “Gower’s Report”) that an arrangement could include a compromise with creditors or members which is to bind all concerned in the corporate entity even though all may not have agreed. An amalgamation would necessarily involve the merger of undertakings.

The relevant rules for the purpose of this discussion are sub-rules (1) and (2) of rule 1 of the GSE Takeovers and Mergers Rules. Sub-rule 2 states that where any person holds shares which in the aggregate carry less than 25%, such a person cannot acquire more such that will hold 25% or more unless the GSE is notified and also fulfils conditions under rule 2 which is the core conditions underpinning takeovers on the GSE. The caveat applies to persons who already hold shares. I therefore submit that the exemption under sub-rule 2 would apply to such persons.

Rule 1(4) states that the requirements in rules 1(1),(2), are not applicable to acquisitions by persons who have announced a firm intention to make an offer to a listed company and have also notified the GSE. It is instructive that rule 1(1) states “acquires or agrees to acquire” an aggregate of 15% of voting capital. This implies that under that sub-rule, a notification that a person intended to acquire up to 15% or more should suffice. I wish to submit that a close reading shows that an agreement to acquire 15% could trigger rule 1(1). Thus the first threshold for communicating to the GSE in respect of acquisitions is 15%. However, unless there is an agreement to acquire more shares such that the person’s aggregate holdings would exceed 25%, the “real’ takeover rules are not triggered. Thus one can acquire shares below 25% and not trigger the takeover rules of the GSE but would necessarily have to send a notice to the Exchange at the 15% threshold. Acquisitions can continue so far as they remain less than 25%.

Rule 1(2) does not present such ambiguities. It states that where any person holds shares less than 25%, he cannot acquire more such that the person holds 25% or more unless the GSE is notified and the person fulfils the conditions in Rule 2 (emphasis mine).

The essential characteristic under rule 1(2) to my mind is that one must already hold shares of the entity. “A person” in the exemption refers to persons clothed with a certain characteristic: “…holds shares which in the aggregate carry less than 25% of the voting rights….”

The interpretation of the position that the transaction was done pursuant to rule 1(4) would seem to necessarily imply that exemptions had to be granted by the GSE in respect of:
● precondition of being a shareholder in the first instance before rule 1 (2) is invoked and
● requirement of notification to GSE (admittedly a moot point in this case) and
● fulfilling conditions in rule 2.

The position on this matter is informed by the fact that in the GBL Acquisition, GGBL had secured irrevocable undertakings in respect of the Heineken holdings in GBL. Heineken could therefore not be able to resile from the undertaking to transfer its stake in GBL to GGL. From these irrevocable undertakings therefore, GGL had “agreed to acquire” approximately 76% of GBL. In the circumstances, all things being equal, I wish to submit therefore that the applicable rule to the transaction would be rule 2, unless the GSE had expressly granted an exemption from the said rule. However, a close study of the Offer Circular does not make any specific reference to any such exemption.

It is therefore my considered submission therefore that it is only in respect of acquisitions between 15% and 24.99% which would not trigger rule 2. In the event that exemptions become necessary, it is important in the circumstances for such exemptions, if any, to be clearly stated in the Offer Document (emphasis mine). If the GSE and/or the SEC had granted an exemption, it should have been expressed and the reasons therefore clearly given in the Offer Document.

I respectfully wish to submit that rule 2 is invoked by virtue of the provisions of rule 2(1)(b) of the Takeover Rules. Rule 2(1)(b) states that where “any person secures the control or management of a company by acquiring or agreeing to acquire, irrespective of the voting capital, the securities of directors or other members who by virtue of their holdings of securities together with the holdings of their relatives or nominees control or manage the company”, the applicable rules under rule 2 are invoked. It seems to me that this particular provision best describes the antecedents to the transaction and therefore looks to be the most applicable trigger for the invocation of rule 2 of the GSE Takeovers Rules.

Rule 1(4) states that certain requirements shall not be applicable in case of a person who has announced a firm intention to make an offer to a listed company. The major question is which requirements are the exemptions applicable? Respectfully, rule 1(1) is not in contention as it is obviously not applicable. The relevant clause for interpretation is rule 1(2). Is it the requirement not to make the acquisition without prior notification to the GSE? A close reading of rule 1(2) and (3) seems to suggest that notification is not waived. Therefore is it in respect of fulfilling the conditions specified in rule 2? It may be necessary for these knotty legal issues to be clarified.

A close reading of rule 1(2) seems to indicate that where the acquisition is more than 25%, the requirements of rule 2 which are the essential disclosure requirements in that regard has to be complied with. Conventionally, regulators would only grant such exemptions where it is in respect of corporate actions such as rights issues where mini-prospectuses may be required because the targeted persons are either already members of the company or are privy to the information. My submission is that in this case where GBL shareholders were being solicited to invest in GGBL, all relevant information necessary for informed decisions as defined under rule 2 are applicable. Any deviation therefrom must be clearly pursuant to exemptions expressly granted by the regulators and the Offer Circular must denote as such. I further submit that in the philosophy of regulation, it should not be possible for any regulator to grant an exemption from disclosure requirements obligated by law which shareholders need in order to make an informed investment decision (emphasis mine). In this particular instance therefore, the regulators seem to be signalling that there were no rules that guided that transaction on the stock exchange. That, respectfully cannot be the position. If a transaction can be done under rule 1(4), which by the definition of the regulators technically ousts the invocation of rule 2 which contains all the necessary requirements on disclosure for the protection of investors and the Offer Document further states that the “Transaction does not constitute an arrangement or amalgamation for the purposes of Part S of the Companies Code”, the billion-cedi question is therefore under what rules or law was the transaction premised?

Legal Effect
The major question that confronts all students of securities law in Ghana should be, what standards of disclosure are guaranteed in this regard. Does the Offeror then have power to cherry-pick what disclosures to make in the Offer Circular? Does the regulator strike a deal with the Offeror to keep material information, necessary and indeed warranted under law, out of the Offer Circular? What does the Securities Industry Law, 1993, as amended and the LI 1728 say on disclosures? When a statute demands disclosure, can the GSE suo motu or even with the fiat of the SEC, sanction an abdication from fulfilling statutory disclosure obligations? (emphasis mine).

The situation becomes even more intriguing when available records on the Transaction indicate that when the original Offer was made by Guinness to the GBL Board, Guinness was in clear breach of its disclosure requirements on the GSE.

The provisions in Part VII of the GSE’s Listing Regulations bind the Offeror as a listed company. However the reporting regimes in the market have been fundamentally altered by the promulgation of the SEC Regulations, 2003 (LI 1728). Regulation 55(1) of LI 1728 is instructive. Under the old GSE reporting regime, listed companies were obliged to disclose half-year results not later than 3 months after the end of the relevant period. Preliminary financial results were to be published not later than 3 months after the end of the relevant financial year. A fully audited annual report was expected to be published not later than 6 months. But the old order hath changeth! Under LI 1728, an annual report was to be published not later than 3 months from the end of the relevant financial year (regulation 54 of LI 1728). However, regulation 55 introduced a new quarterly reporting regime such that quarterly financial statements in defined form were to be filed with the regulators and published not later than one month from the end of the relevant quarter. What this means is that where a firm’s quarter ended in March, if the SEC did not receive the quarterly unaudited results by May 1, defined sanctions must necessarily be applied.

It is significant to note that LI 1728 does not mention half-year results as was the case in the GSE Listing Regulations. This is because the reporting format was such that the second quarter results would automatically reflect the position at half-year. The more important point to note however in respect of the new reporting regimes is in terms of content. It also differs fundamentally from the old regime. It is also important to note that where the GSE Listing Regulations conflict with LI 1728, it is my submission that LI 1728 would prevail. The reporting requirements under LI 1728 entail a much more detailed disclosure regime than under the requirements of the GSE Listing Regulations. Note reg. 52(1) entails all listed companies to comply with the Rules on Takeovers and Mergers of the GSE.

Guinness’ financial year ends on June 30. Thus ordinarily, its first quarter results for financial year 2004 should have been published latest by October 1, 2003. LI 1728 clearly states that after a month’s grace period has expired, a company would be in default and is liable to pay ¢2million for each day the default continues. Till date, the Offeror’s first quarter results have never been disclosed yet the SEC and the GSE approved a major transaction involving a corporate entity that was essentially in breach of the disclosure rules on the market. Ultimately, the Offeror’s half-year results for the period in question were published as GSE Press Release No. 021/2004. This obviously went some way to cure the lacunae in information that the market needed in order for informed investment decisions. But did the half-year results published through the GSE actually set out to provide badly needed information or was a cosmetic attempt at financial disclosure?

A cursory look at the mode of disclosure by Guinness in respect of the half-year results also gives cause for concern. As outlined earlier, LI 1728 has broadened the depth of information to be provided under the Continuing Obligations of listed companies. Reg.56 on contents of quarterly financial statements provides as follows:

(1) “The quarterly financial statements shall comprise either a complete set of financial statements or a set of condensed financial statements but the statements shall include at least
a. A balance sheet
b. An income statement for the period on a year to date basis;
c. A statement where relevant showing either
i. Changes in equity
ii. A statement of recognized gains and losses, changes in equity,
except those arising from capital transactions with owners
and distribution to owners;
iii. selected explanatory notes as specified in this regulation; or
iv. a condensed cash flow statement.”

However it seems that the Offeror used the old format under the GSE Listing Regulations in purported compliance with LI 1728. What this means is that essential details of financial information that would have been captured under the applicable regulation which is the LI 1728, were conveniently missing in the format adopted. Was it deliberate? Was it inadvertent? Were the regulators aware of this? Did the regulators grant an exemption to make disclosure as provided under LI 1728? Again, it seems both the GSE and the SEC have allowed breaches of fundamental disclosure obligations to pass. This however does not absolve SEC and the GSE from potential lawsuits alleging complicity in the breach of the securities laws, which could possibly be interpreted as calculated to deny full disclosure in respect of a major transaction such as under review.

Having evaluated all these situations, I have been concerned about the continued insistence on rule 1(4) as the legal basis for the transaction. In the light of the foregoing, more disclosure, not less, was necessary. The irony in the particular situation was that the Offer Document fundamentally and in a very large measure, attempted to comply with rule 2 of the GSE Rules on Takeovers and Mergers. I therefore do not see any utility in tagging the transaction under rule 1(4) as it served no purpose but to heighten doubts about fundamental disclosures in respect of the deal.

In the light of the foregoing, I am not comforted by the fact that both the Offer letter and the Offer Document indicated that both the GSE and SEC were satisfied with the Transaction and the disclosures made pursuant thereto. I submit that takeovers are legally done under rule 2. The non-applicable requirements should not be interpreted to imply total abdication from the provisions of rule 2. That may give too much room to Offerors to determine what disclosures to make, leading to potential breaches of our securities laws, ironically sanctioned by the very ‘policemen’ who have been tasked with protecting the integrity of the market and investors. After all, the cardinal principle in disclosures is “material information necessary for informed investment decisions”. Thus, if the information is material and is necessary for informed investment decisions, any regulator who grants an exemption from disclosure would either have been acting to guarantee a potentially ‘fat’ listing fee or would have inadvertently sanctioned a clear breach of Ghana’s securities laws, for which all parties involved ought to be held accountable. Does that account for the loud silence of the Total Offer Circular on what particular provisions were applicable to the transaction?

A word to the wise…

Joe Aboagye Debrah Esq.
CEO, ThinkGhana, Accra

Partner, 1stLaw
Former Company Secretary/Legal Adviser, Ghana Breweries Limited
Former Legal Adviser, Ghana Stock Exchange



Blogger Pastor Alexander said...

Mr ThinkGhana,

Keep up the good leadership work. In the words of Osagyefo Dr Kwame Nkrumah "We prefer self-government in danger to servitude in tranquility". Please keep reminding Ghanaians the struggle to be independence was fought by MEN with tenacity - backbones - not weaklings, mempeme ho asem political leaders. They stood against Western resourceful imperialistic domination to make us GHANAIANS instead of GOLD COASTERS.
Many hear the word GOLD and think OH! we will have been better off as "slaves" in our own country.
Servitude is not humane; that is why crasy revolutionaries got support when they cry FREEDOM.


11:35 AM  
Blogger john essien said...

Mr ThinkGhana,
Keep up the good work you are doing, am a level 400 student studing banking and finance in central university college.Mr ThinkGhana can i please get any information on why the merger of the two companies, and which state there were before the merger.The way forward after the merger.thanks

11:33 AM  
Blogger Jacob said...

hi,rules gave help to understand m&a, Merger And Acquisition , thanks

1:34 AM  
Blogger mergersandacquisitions said...

Mergers and acquisitions are not as simple as getting into the market, hitting an fascinated customer and promoting off a organization. Non-financial factors such as the a good reputation taken by a organization also be a factor in guaranteeing the right deal.

Mergers Acquisitions

10:18 PM  

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