Take Over Voting Thresholds

Author Lost in Lao Date posted Wednesday 16:59 I have absolutely no desire to get involved with the current level of “Intellectual debate” (LMAO) taking place on this BB. However, there have been suggestions that the current declining share price will expose GKP to a low-ball offer. My initial reaction to that is . . . bring it on. Any offer would be welcome at the moment since I believe that an offer will flush out all potential players, who will need to place their cards on the table. As we have seen before, even the rumour of an offer will have a dramatic upside effect on the current share price. I would also say, that a low ball offer (or any offer for that matter) is merely that . . . an offer to acquire the shares in GKP….. For the offer to have the necessary effect of forcing all shareholders to hand over their shares to the proposed acquirer certain shareholder voting thresholds must be met. Now I fully acknowledge the basic rules of supply and demand, and that those rules suggest that the declining share price is the result of an over supply of shares to the market (too many sells) and a lack of demand for the purchase of those shares at a certain price (not enough buys); and dropping the share price is the usual market mechanism of enticing buyers into the market. Various BB participants have given their own views as to why many shareholders are selling and why there is a need to drop the price to entice buyers (from TK / BOD trust issues to business operational issues). There are also those BB participants who say the situation is more complex than a straight forward application of the laws of supply and demand; that there is something more sinister going on with share price manipulation / possible share accumulation by say a potential buyer or an entity with significant means (not a Private Investor) who will ultimately benefit from the eventual sale of GKP. I have no doubt that there are shareholders selling because of GKPs operational performance / TK / BOD issues. I am also sure that those very same issues are putting off buyers (both PI and Institutional Investors) in the market. But I am also conscious that we are talking about oil here (a major global expensive commodity required in ever increasing amounts) that GKP have found in an extraordinary quantity; that it has been found in a region of political instability and where such quantity of oil (not just with GKP, but in the entire Kurd region) is a major political chess piece in the region (for Kurd financial independence) and worldwide (in terms of securing futures oil resources). I do not for one minute believe that those trading in the GKP shares are ONLY small time private investors spending their retirement fund / life savings. I think such a view would be naïve. I do think there are some BIG players at work here, but for obvious reasons, they wish to remain under the radar. The importance of GKP is such that I cannot see how GKP can be ignored (irrespective of any opinions of the personal qualities of TK / BOD and any perceived operational failings) However, this is only my personal opinion based on my life experience; I can provide no “evidence” to support my opinion, so there is no point in asking for it! So, back to the real purpose of this message - I do think it would be useful to remind ourselves of the issues that will come into play should an offer for GKP be made (whether it is considered low-ball or otherwise). Many moons ago I posted some details on take over voting. I think it might be useful to revisit that issue now. This is quite a long note, for which I apologise, but if you would like to understand the various voting thresholds, I do think it is worth taking the time to read. For those that do not have the time or inclination to read this full note, you can always read the summary of my conclusions set out below. Summary There would seem little point in making an offer for the shares of GKP unless the acquirer could obtain the necessary percentage of acceptance votes needed to “squeeze out” any dissenting minority and take total control of the company. In order for a take over of GKP to take place: (a) The KRG must have given consent in advance of the change of control of GKP (and that consent will, in my opinion, have to be sought / given before any offer is made public). (b) That if the offer was made as a straight forward offer for the shares, the offer would have to be so attractive that it would enable the acquirer to obtain the agreement to the terms of the offer from at least 90% of the holders of the shares in issue. (c) That if the acquisition was structured as an Amalgamation, it was supported by the majority of the GKP Board and was also approved by a MAJORITY of votes cast at a general meeting of the company. (d) That if the acquisition was structured as a Merger or a Scheme of Arrangement, there was a resolution passed by at least 75% of those voting at a shareholders’ meeting of the target company (note this is not 75% of all shareholders, but 75% of those voting at the meeting). That in taking into account the votes that could be cast at the meeting, regard would need to be had to any failure by a shareholder in complying with the disclosure provisions contained within the GKP Bye-Laws, which would render inoperative the voting rights attached to the shares held by them. KRG Consent The first matter I need to deal with is KRG consent. Clauses 39.7 and 45.2 of the PSC have the combined effect of requiring the KRG consent to any change of control of GKP otherwise the contract (the PSC) may be terminated, although the KRG must not unreasonably withhold consent. A take over of the company would give rise to a change of control. Would any acquirer wish to take the risk of the PSC being terminated for failing to obtain KRG consent? I don’t think so. Therefore, any bid (whether hostile to the company – e.g. the bid does not have the support of the GKP Board - or otherwise) will reasonably require the acknowledged KRG support before any bid is made public. Take Over Options AND The Requisite Voting Thresholds Under Bermuda law, there are a number of recognised legal mechanisms for acquiring or otherwise combining different companies, including amalgamation, take-over and scheme of arrangement. Also in December 2011 the Bermudan Companies Law was amended by providing an additional option of a merger. (a) The Offer to Purchase Shares Perhaps the most obvious way of mounting a takeover approach would be where a company (whether incorporated in Bermuda or not) makes an offer to the target company’s (GKP) shareholders to acquire all of their shares and, if necessary, utilising the powers under the Bermudan Companies Act to acquire any shares held by the target company’s dissenting shareholders not accepting an offer approved by a majority. The problem with any takeover structured as a straightforward offer for shares under Bermudan law (as in many other jurisdictions) is the considerable limits on what are often referred to as the “Squeeze Out” provisions (e.g. the compulsory acquisition of the shares held by the dissenting shareholders). Section 102(1) of the Bermudan Companies Act provides that where an offer is made by a company for shares (or any class of shares) in a Bermuda company and, within four months of the offer, the holders of NOT LESS THAN 90% of the shares which are the subject of that offer accept it, the bidder can, by notice, require the remaining shareholders to transfer their shares under the terms of the offer (this is a very broad summary of a quite complicated provision). So what is considered by some to be a low-ball offer is made – 90% of the shareholders must agree to that offer before the offer has the require effect. (b) The Amalgamation / The Merger An alternative approach to acquiring a target company under Bermudan laws is the amalgamation / merger (the concept of the merger was introduced in 2011, but is essentially the same in effect as the amalgamation save that with a merger there will be a surviving legal entity and a non-surviving legal entity – although you do not need to worry about this for the purpose of this note). I understand from my off-shore contacts that this is a popular method of structuring a corporate “takeover” since the “squeeze out” provisions are more generous under the Bermudan Companies Law. Unless the bye-laws of the target company or the acquisition vehicle provide otherwise, a resolution passed by at least 75% of those voting at a shareholders’ meeting of the target company, and the acquisition vehicle, is required to approve the amalgamation or merger (see Section 106(4A) of the Bermudan Companies Act 1981). However, this approval threshold is varied under the GKP Bye-Laws (at least in relation to amalgamations, since the Bye-Laws were written before the concept of the merger was introduced into Bermudan Law) and so the approval requirements are different as they apply to GKP. Bye-Law 165 states that “Any resolution proposed for consideration at any general meeting to approve the amalgamation of the Company with any other company, wherever incorporated, shall require the approval of 165.1 the Board, by resolution adopted by a majority of Directors then in office; AND 165.2 the Shareholders, by Resolution passed by a majority of votes cast at such meeting and the quorum for such meeting shall be that required in Bye-Law 60” namely two shareholders present in person or by proxy. Therefore, as far as shareholder approval is concerned, what is required is a resolution passed by a MAJORITY of votes cast at a general meeting of the company. The risk of a lowball offer going through would be whether it was possible to rally the support of sufficient dissenting shareholders in order to win any vote (against the amalgamation) at such a general meeting. The only comfort that I can take away from the provisions of Bye-Law 165 is the requirement that the amalgamation must also be approved by a majority of the board (and, under the provisions of the general law, those board members must act in accordance with the duty of care owed by them to the company). I believe the board is now constituted as follows: Todd Kozel (CEO/ Executive Director) John B. Gerstenlauer (Chief Operating Officer – Executive Director) Ewen Ainsworth (Finance Director – Executive Director) Simon Murray (Non-Executive Chairman) Lord Gutherie (Non-Executive Director) Mark Hanson (Non-Executive Director) Jeremy Asher (Non-Executive Director) John Bell (Non-Executive Director) Philip Dimmock (Non-Executive Director) Thomas Shull (Non-Executive Director) Andrew Simon (Non-Executive Director) So from the board of 11 members, at least 6 would need to approve the terms of any amalgamation – could this be an explanation for the appointment of the M&G4? In relation to a proposed merger (as opposed to an amalgamation), it would appear that the changes made to the Bermuda Companies Act 1981, by Bye-Law 165, would not apply, and so there would need to be a resolution passed by at least 75% of those voting at a shareholders’ meeting of the target company (note this is not 75% of all shareholders, but 75% of those voting at the meeting). This could be quite crucial when it comes to crunching the numbers. (c) The Scheme of Arrangement In this case, where an application is made by a company or any of its members, Section 99(1) of the Companies Act empowers the Supreme Court of Bermuda to order a members' meeting to consider a proposed arrangement or compromise between a company and its members (or any class of them). If the proposed scheme is then approved by a majority of the members (or class of members) in number representing at least 75% of the value of shares held by those members present and voting at the meeting (either in person or by proxy), the proposed scheme will be binding on the members (or class of members) and the company provided it is subsequently sanctioned by the court. So again, a Scheme of Arrangement could be put to the courts for approval if at least 75% of those shareholders present and voting at the meeting (either in person or by proxy) approve the proposed Scheme of Arrangement. Again, this is not 75% of all shareholders, but 75% of those voting at the meeting. This could be quite crucial when it comes to crunching the numbers. Take Over Voting – The GKP Bye Laws We know that at the 2011 AGM certain amendments were made to the GKP Bye-Laws that had the effect: of bringing into effect certain protections provided by the City Takeover Code by replicating certain provisions in the Company’s Bye-Laws. In particular, the Bye-Laws were amended so that shareholders are obliged to comply with notification and disclosure requirements equivalent to those set out in Chapter 5 of the DTR (Disclosure and Transparency Rules (as amended from time to time) of the UK Financial Services Authority Handbook). http://fshandbook.info/FS/html/handbook/DTR/5 Because GKP is a non-UK issuer, I understand that the reporting thresholds are 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75% Under the provisions of the amended Bye-Laws, if GKP determines that a holder of shares has not complied with the notification and disclosure requirements with respect to some or all of such shares held by such holder of shares, GKP shall have the right (at the full discretion of the board) to serve a restriction notice on such person which notice shall (amongst other things) suspend the right of such person to vote those shares in person or by proxy at any meeting of GKP. Therefore, if any entity is “accumulating” shares in order to assisting with the making of a successful a take over bid for GKP, the voting rights of those shares could be rendered useless if there is a failure to make the appropriate reporting to GKP once the reporting thresholds have been breached. Clearly, if the board supports the bid of any potential acquirer who has failed to make the required disclosure, the board could waive the disclosure requirement and allow the voting rights to be retained. However, if the bid was not supported by the board, those voting rights could be withdrawn. Now, there has been discussions previously with regard to whether acquiring a significant quantity of shares and taking them out of any vote would assist an acquirer, and this is something I think it would be worth revisiting by looking at some figures, assuming it could be done in a mature manner! The Hostile Bid The example would be as follows: Company B has decided it would like to take control over target company A and is prepared to offer $X but the board of company A is not prepared to support the offer (although the offer would need to be put to the company shareholders, which could include the potential acquirer holding a significant number of the target company shares). As I have explained before, the first and perhaps the biggest problem with hostile bids is that the due diligence in a hostile bid situation is limited to information that is publicly available. Clearly the board of a target company in a takeover attempt that is not endorsed by the board, is not going to open its books for any due diligence inspection. The interesting point with GKP is that there is a raft of information available in the public domain which does suggest quite strongly that GKP is sitting on the mother of all oil finds and that valuations can be quite reasonably calculated based on the information in the public domain. However, is there enough of such information for an acquirer to make a speculative acquisition (speculative in the sense that a full due diligence exercise has not been carried out)? The Bye-Laws certainly seem to prevent a hostile “takeover” (e.g. a takeover not having the board’s approval) based on the amalgamation strategy or, in all other cases, make such a takeover a little more difficult based on the boards ability not reinstate voting rights in relation to shares acquisitions that have not been properly disclosed. Furthermore, even with the GKP board’s approval, there is significant possibility that a sufficient number of dissenting shareholders could frustrate any straightforward offer, amalgamation, merger or scheme of arrangement proposal at any general meeting should the terms of the proposal not be attractive. Conclusion I do not know the split of shares that are not in public hands, are held by PIs or held by Institutional investors, but I would suggest that the offer must be extremely attractive to gather the support of 90% of the shareholder base. It would certainly appear that the amalgamation approach is more favourable in terms of the “squeeze out” provisions (requiring only a majority of the votes of the shareholders for the amalgamation to be approved – and subject to the court approval) but such an approach also requires the backing of a majority of the directors in office, and so such a takeover strategy could only work with the backing of the majority of the board and the directors could only give their approval if such was consistent with their individual duty of care to the company. I hope this note helps investors to understand that there are certain difficulties with a lowball bid and that any bid that is made, would, in my view, need to be attractive to a considerable majority of those holding shares in GKP. LIL