Crossing 33% at a Premium: Mandatory Offer, Price and What Can Still Be Bought
Jernih Capital Partners holds 30.5% of Kinta Fibre Optic Bhd (KFO), a Main Market issuer whose shares last traded at RM2.35. On 3 March Jernih bought 3.0% from a retiring executive director at RM2.90 per share, payable in cash, taking it to 33.5%. Its only other purchase in the past year was 1.2% bought on-market at RM2.40 in early November. Jernih's investment committee tells you it intends to keep buying 'quietly' in the open market up to 40% before announcing anything, is not interested in compulsory acquisition, and wants any offer to be conditional on 60% acceptances. KFO has an employees' share option scheme covering 4% of outstanding shares, of which 1% vests in June. Jernih has RM180 million of committed bank lines and RM40 million of cash against an estimated RM520 million cost to buy out the remaining 66.5% at RM2.90. The retiring director retains 2% and has signed a consultancy agreement with Jernih.
1. Does a mandatory general offer obligation arise, at what price, and from when? Set out the analysis step by step.
Read the worked answer
Step 1 - does the trigger apply? Yes, twice over. A person acquiring 33% or more of the voting shares of a listed company must make a mandatory offer. Jernih moved from 30.5% to 33.5% on 3 March. Separately, a holder already between 33% and 67% that acquires more than 2% in any six-month period is also caught - 3.0% in one transaction satisfies that limb on its own.
Step 2 - when does the obligation arise? On completion of the 3 March acquisition, not when Jernih chooses to announce. The obligation is immediate. The 'quiet accumulation to 40%' plan is not a lawful option; it is a course of dealing that would compound the breach.
Step 3 - what price? The offer must be at not less than the highest price paid by the offeror or any person acting in concert with it in the six months before the announcement. That is RM2.90 - the November RM2.40 purchase is lower and does not set the floor, but it is within the six-month window and must be documented. Because Jernih paid cash within the relevant period, the offer must be in cash, or accompanied by a full cash alternative, at RM2.90.
Step 4 - process. Announce immediately, then despatch the offer document within 21 days of the firm-intention announcement; the offer must remain open for at least 21 days.
Step 5 - concert-party check. The 2% retained stake, the consultancy agreement and the premium paid to the retiring director (23% over market) all support an inference of acting in concert. If so, the 2% counts toward Jernih's holding and the offer price for any future purchase is calibrated against the same RM2.90 floor.
2. Can Jernih keep buying in the market before and during the offer, and can the offer be made conditional on 60% acceptances? Explain the constraints.
Read the worked answer
Buying before announcement. No. Once the obligation arises, further acquisitions outside the offer are restricted. Buying 'quietly' to 40% before announcing is precisely what the Code is designed to stop: the market is trading at RM2.35 without knowing that a purchaser with a RM2.90 obligation is in the market.
Buying during the offer. Limited market purchases are permitted, but subject to hard constraints:
- Purchases must not be at prices above the offer price. Any purchase above the offer price obliges Jernih to increase the offer to at least that price, and that increase applies to everyone.
- Purchases must be announced, and the offer document must disclose the intention to purchase and the maximum price.
- Purchases must not be on terms more favourable than the offer.
- The offer must remain open to all shareholders on the same terms, and shareholders who accepted before an upward revision are entitled to the higher price.
The 60% acceptance condition. An offer must be conditional on the offeror obtaining more than 50% of the voting shares. A higher threshold such as 60% is generally acceptable if it is disclosed at the outset, is not subsequently raised, and is realistically capable of satisfaction. Jernih must remember two things: the 4% ESOS pool increases the total share base as options are exercised, mechanically making any percentage condition harder to hit, and the 1% vesting in June falls inside the offer timetable - so the condition should be defined against a clearly stated share base and the treatment of options must be disclosed. If 60% looks unachievable on the register, a 51% condition is more honest than an offer designed to lapse.
3. Jernih asks whether it can avoid making the offer by getting KFO's board to pass a resolution, or by cutting its stake back below 33% before it announces. Advise.
Read the worked answer
Neither route works, and proposing either is itself a regulatory risk.
A board resolution is irrelevant. The obligation is imposed on the acquirer by the Code, not created by the offeree board. KFO's directors have no power to waive it, and their views on whether the offer is desirable do not affect Jernih's duty. What the board does control is the appointment of an independent adviser to advise shareholders once an offer is made.
Selling down is not a cure. The obligation crystallised on completion of the 3 March purchase. Disposing of shares afterwards does not retrospectively undo the trigger, and selling to a friendly party to stay under the threshold is an arrangement to circumvent the Code - the substance is tested, not just the registered holder. The same applies to splitting the position across connected vehicles or nominee accounts.
The only legitimate dispensation is a waiver. A waiver of the mandatory offer obligation is granted by the SC in limited circumstances - typically an issue of new shares for cash that pushes a shareholder over the threshold, where independent shareholders (excluding the applicant and its concert parties) approve the transaction. Even then the waiver is conditional, and the SC's practice is to scrutinise why the obligation arose.
Here a waiver is not available. The obligation arises from a deliberate on-market-adjacent purchase from a director at a large premium, not from a new share issue. Jernih should be told plainly: announce, make the offer, and fix the concert-party question. If the consultancy arrangement with the retiring director has not been disclosed, that should be addressed in the same announcement rather than left to surface later.