Privatisation scheme with a 9% activist against
Asia Digital holds 68% of Dynamic Telecom, a Main Board issuer with 1 billion shares. It proposes to privatise Dynamic by a scheme of arrangement at HK$6.50 per share, a 28% premium to the last close of HK$5.08. The independent financial adviser values Dynamic at HK$5.00 to HK$6.20 per share. Lion Fund, an activist, holds 9% and has publicly said it will vote against. The remaining 23% is held by dispersed retail investors. Asia Digital wants to vote its 68% at the scheme meeting and avoid a general offer. The company has no other material litigation. The scheme document will include a valuation report and a note that the offer is above the IFA's upper range.
1. Can Asia Digital vote its 68% at the scheme meeting? Explain the approval thresholds and whether Lion Fund can block the scheme.
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Asia Digital should not vote its 68%. The Takeovers Code requires the offeror and concert parties to abstain and the scheme to be approved by independent shareholders. The statutory scheme test is 75% by value of votes cast and a majority in number, but the Executive's practice for privatisations also requires independent approval and normally a 10% dissent limit. If all independent shareholders vote, Lion's 9% is 28.1% of the 32% independent block; the for votes would be 71.9%, below 75%, so the scheme fails by value. Lion also exceeds 10% of independent votes. The headcount test might still pass, but that is not enough.
2. What alternatives does Asia Digital have if the scheme fails, and what are the differences between a scheme and a general offer?
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If the scheme fails, Asia Digital can make a general offer. A general offer does not bind dissentients unless it reaches 90% acceptance and compulsory acquisition is available; otherwise Asia Digital may remain a majority shareholder and Dynamic stays listed. A scheme binds all shareholders once approved by the statutory majorities and sanctioned by the court, but it needs the court hearing and the independent vote. A general offer can be conditional on acceptances and is not court-sanctioned. Asia Digital should compare the certainty and cost of each route.
3. What ethical and valuation issues arise from the IFA's range and the parent's voting intention?
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The IFA's range of HK$5.00 to HK$6.20 is below the HK$6.50 offer, which supports fairness, but the IFA must still be independent of Asia Digital and must explain its valuation method. It should consider the control premium, the minority discount, the company's cash flow and any synergies. Asia Digital's wish to vote its 68% is a conflict: it should abstain, and the board should not pressure the IFA. Any fee or indemnity to the IFA must be disclosed. If Lion Fund is offered a side deal, that would be a special deal and could taint the scheme.