It's unlikely that McCarthy minorities can keep the share listed

Time of article published Dec 5, 2003

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Bidvest's stealthy takeover of McCarthy, which was discussed in this column on November 22 ("Poison for McCarthy shareholders is food and drink for Bidvest"), needs to be revisited in the light of the huge upsurge in shareholder emotions around the issue.

Just to recap: As a result of the recapitalisation of McCarthy, a consortium of banks ended up with control of the company, holding about 85 percent of the shares and 88 percent of the voting rights. This change of control did not result in an offer being made to minority shareholders.

The banks have decided that they are not long-term investors and accepted an offer of 33 cents per share from Bidvest that could result in the shares of minorities effectively being expropriated at the same price and McCarthy being delisted.

Many McCarthy shareholders are incensed, because they paid a far higher price for the shares. They argue that they have held the shares through the bad years and would like a bite of the cherry in the good times they believe beckon.

So what can disgruntled shareholders do? The Companies Act is key to the protection of minorities when control of a company changes hands. It is argued that the Act offers insufficient protection for minority shareholders who wish to lobby for support to block certain decisions (such as the case in point). It is also true that in shareholder democracy, the majority rules.

McCarthy is an unusual case, as the banks became large shareholders by default and not design. The banks also hold an unusually large block of shares that virtually shuts out the remaining minority shareholders - a tiny group that has been further reduced by Bidvest acquiring shares in the open market.

So what happens next? The terms of the offer for McCarthy could take one of two forms. The deal could either be done under Section 311 or Section 440K of the Companies Act.

Most potential buyers wanting to effect a takeover prefer to do so under Section 311, which requires only a 75 percent majority vote. It is very difficult to propose a hostile 311 offer, because it generally requires a compliant board. Directors faced with an offer may be tempted to support it in return for retaining their jobs, but the offer must be sanctioned by the High Court.

The agreement threshold under Section 440K is much higher, requiring 90 percent of shareholders to accept an offer before minorities can have their shares expropriated. The Section 440K transaction does not require High Court sanction, but it does allow for minority shareholders to seek court relief within six weeks. This is probably the way shareholders will have to go forward. But, although there is a mechanism under Section 440K for minorities to apply to court for an order protecting them against expropriation when an offer is unfair, a court will not easily rule against the majority.

This is particularly so because McCarthy was on the verge of bankruptcy and the net asset value of McCarthy at the time of the offer was only 23c - and the market price shot up to 49c only after the cautionary notice about the offer was issued.

This may be a noble cause, but one that, I fear, has only one conclusion. Even if in the unlikely event that minorities can keep the share listed, they will be whittled away over the next few months or years to the point that McCarthy will certainly delist.

It may well be that discretion is the better part of valour, and perhaps the olive branch held out by Bidvest last week should be accepted. Brian Joffe, the executive chairman of Bidvest, said he would consider making an equivalent offer to McCarthy shareholders using Bidvest shares instead of cash, so that shareholders could indirectly participate in the group's expected recovery.

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