Ruias’ open offer for Essar Energy likely to succeed

On November 15 last year, Eurasian Natural Resources Corporation, a Kazakh mining group, delisted from the London Stock Exchange on which it had listed six years earlier.

Its share price had tumbled from £5.67 to £2.17 over that period as a mix of boardroom disputes, a Serious Fraud Office investigation and other controversies took their toll.

Minority investors had protested the delisting move, with an independent committee of the board concluding that it “materially” undervalued the company. However, with minority investors holding just around 19 per cent, they had little option but to finally accept the offer.

Regulatory requirement The UK’s Companies Act 2006 requires 75 per cent of shareholders in a general meeting to pass a special resolution, while current UK Listing Authority (UKLA) regulations require a minimum of 75 per cent of shareholders to back a delisting.

Less than six months on, developments at Essar Energy bear a striking resemblance. Essar Energy saw its share price plummet from 420 pence when it listed in London in May 2010 to 66 pence a share on February 14, when the Ruias’ EGFL made an offer of 70 pence a share to minority shareholders, who hold around 22 per cent of the group.

While an independent committee of the board concluded that the offer undervalued the firm and its prospects, the bid has since turned hostile, with an Essar Global Fund Ltd (EGFL) subsidiary reiterating the same offer to share and bond holders.

Offer likely to succeed While the independent committee is calling on shareholders to take no action on the offer, with the Ruias’ holding comfortably passing the 75 per cent threshold, the offer is likely to pass eventually.

The two cases have increased focus on whether the UK’s listing rules are too lax, and whether rules designed to attract foreign money to the city could instead harm its long-term reputation.

Free float norms Among the issues under focus is the minimum number of shares that must be freely floated, under rules set by the UK Listing Authority, which is part of the financial regulator, the Financial Conduct Authority. It offers two kinds of listing: standard ones that meet basic EU rules, and premium ones that meet higher transparency and corporate governance standards, and are a requirement for inclusion in FTSE indices.

According to UKLA rules that have been in place since 2002, firms wishing to go for a premium listing, as Essar did, must have a free float of at least 25 per cent, though the UKLA has the discretion to waive this threshold and allow a small free float, if the company is sufficiently large to ensure liquidity. There are currently no plans to raise the free float requirement, despite calls from investor groups.

The FTSE Group maintains its own requirements for companies wishing to be included in its indices, including a free float of at least 50 percent for foreign firms. However, those incorporated in the UK, such as Essar, only had to meet a lower domestic requirement of 15 percent.

New FTSE norms The FTSE Group has recently revamped its rules, requiring, as of March, all firms to have a free float of 25 per cent (irrespective of a UKLA waiver). Essar is exempt from the requirements until the current bid situation is resolved.

Also at issue are the protections for minority shareholders, again set by the UKLA. The FCA last year published a consultation paper on plans to enhance the rules, and in particular protections for minority shareholders.

These would include establishing a relationship agreement between a company and a controlling shareholder to ensure business could be conducted independently. They would also require minority shareholders to approve independent members of a board of directors separately.

And crucially it could include requiring a majority of independent shareholders, as well as 75 per cent of shareholders, to support a delisting.

The UKLA is yet to announce when these could be introduced, but in all likelihood they will prove too late for Essar Energy’s disgruntled minority investors.

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