Soft 99 was subject to an agreed management buyout at a 55% premium to the undisturbed market price, when an activist announced a hostile bid, topping management’s offer by more than 60%.”
This is an extremely interesting test case, as it involves an offer at a large premium to an agreed deal, which the Board has nevertheless rejected. The MBO deal also has almost half the register having tendered or agreed to do so. Conceivably, we could end up in a stalemate situation, with Effissimo gaining 40% or so of the register, and the CEO & his family just under half.
Directors (or their advisors like lawyers Nishimura & Asahi) are having to get creative in how they justify rejecting takeover offers when they are clearly a better deal for shareholders. Ultimately, directors must answer to shareholders, but if allegiant shareholders control most of the register, the remaining shareholders have little recourse. Potentially in a case this egregious litigation could achieve an outcome, but it is an uncertain one at best.
Interestingly, with only two outside directors on the board of 9, the directors who approved the bid included five executives who were supposedly not “interested” in the transaction, with only two (including the President) excluded from voting. I imagine it would be a brave executive who votes against his President and major shareholder at the board level in order to favour the interests of outside shareholders.
So what has actually happened?
In late September, Soft99’s Board officially rejected Effissimo’s offer, stating that it is bad for corporate value. Particularly contemptible was that the special committee refused to meet with Effissimo despite being requested to prior to Effissimo making its tender offer.
The reasons for the board’s rejection were as follows:
- 48.61% of outstanding has already entered tender agreements for the MBO offer. If Effissimo were to acquire its minimum amount tendered for (28.61%), when added to its existing holding, it may be impossible for the company to conduct a post-tender squeeze out of shareholders (2/3 ownership required) and the free float will fall below the TSE’s required level, resulting in a forced delisting and hurting corporate value and shareholder interests.
- The President might resign if Effissimo’s tender were successful, so the offer’s success would not contribute to enhancement of the group’s corporate value (?!?!).
“Corporate Value” is defined very specifically in METI’s Takeover Guidelines as the present value of the sum of the company’s future cash flows. Note, that this is not the same thing as the present value of the future share price!
Following recent trends in similar situations, the directors got creative to reject the offer while being able to argue they did their duty to the company, making a clear distinction between corporate value and share price. They maintained their support for the MBO as they viewed it as good for “corporate value”, but withdrew their recommendation that shareholders tender into it – instead saying shareholders should decide for themselves.
This course of action had the added benefit of keeping the tender agreements pre-signed with other major shareholders in place, as they are subject to board approval of the MBO.
The tender period has since been extended multiple times, and last week the offer price for the MBO was increased – from ¥2,465 to ¥2,680 – still far below Effissimo’s offer of ¥4,100. Clearly non-management-aligned shareholders have not been excited to tender into the low-ball offer.
The share price is currently trading at ¥3,255, implying a 26% arbitrage premium available for someone buying at market and tendering immediately to Effissimo, assuming Effissimo’s 28.61% tender threshold is met. The annualised return if successful would likely be significantly better due to a very short holding period.
We will continue to follow developments as they unfold and keep you updated.
