Sale of 65% holding in listed company

[Star]

Five persons holding 65% shareholding in a listed company want to dispose off all their holdings to general public.

Kindly narrate the procedure and applicable Rules or Regulations or law!!!!!!!!!!!!!!!

Regards,

*

[awaisaftab]

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by Star</i>
<br />Five persons holding 65% shareholding in a listed company want to dispose off all their holdings to general public.

Kindly narrate the procedure and applicable Rules or Regulations or law!!!!!!!!!!!!!!!

Regards,

*
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

Dear Star,

In my opinion you should ask this question at "Corporate Governance" forum. Anyhow, if a person/shareholder, who holds more than 10% share of a company, wants to sale his holdings to general public then the provisions of Companies (Issue of Capital)Rules 1996 are applicable on such person under Rule 3 of the said rules .

Rule 9 of Companies (Issue of Capital)Rules 1996 lays down the procedure and legalities in case a person holds more than 10% shares of a listed company wants to sale shares to general public

Rule 9 is as follows

"A person who holds more than ten percent of the shares of a company may offer such shares for sale to the public subject to the following conditions; namely;--

(i) The size of the capital to be offered to public through offer for sale shall not be less than one hundred million rupees or twenty-five per cent of the capital, which ever is less;

(ii) no premium shall be charged unless the company has profitable
operational record for at least one year;

(iii) in case a premium is to be charged on the sale of shares, the offer shall be fully underwritten and the underwriters, not being the associated companies, shall include at least two financial institutions including commercial banks and investment banks and the underwriters shall givefull justification of the amount of premium in their independent due diligence reports.

(iv) due diligence reports of the underwriters shall form part of the materialcontracts and

(v) full justification for the premium shall be disclosed in the offer for sale.

Regards,

Awais Aftab

[awaisaftab]

If a person, who holds less than 10% holdings ,wants to sale his holdings not to general public then the provisions of Companies (Issue of Capital)Rules 1996 shall not be applicable.

[kamranACA]

Star

The incidents of selling such a huge holding of listed company (owned by a single person) to general public are very rare in Pakistan. I am not sure due to lack of insight, yet, there may be no case at all like this, in practical terms.

Since the Companies (Issue of Capital) Rules, 1996 do not specifically mention as to which company the Rule 9 is applicable; there is an outright need to get the clarification from SECP regarding the nature of the company that falls under this rule.

For example the Rule 9 uses the words "A PERSON WHO HOLDS MORE THAN 10 PERCENT SHARES OF A COMPANY MAY OFFER SUCH SHARES TO PUBLIC". Now the nature of the company is undefined. As per my apprehension the shareholders of Private companies cannot sell their shares to public unless the private company has been converted to the public company by making necessary changes in memorandum and articles of association and obtaining various approvals, before such offering. Therefore, the term “COMPANY” appears to be vague and needs to be elaborated by the regulators.

The listed public companies presumably are already held with public even if there is substantial concentration of holding/owning some where. It is deemed to have already been issued to public. Further, there is a secondary market (stock exchanges) available for selling such shares (say in trenches of less than 10 percent) and one will rarely need to offer such shares to PUBLIC ONCE AGAIN unless the scrip is so poor that no body is wishing to buy it at the stock exchanges.

If the market is active, any one can sell such holding in the stock exchanges in trenches of lesser than 10 percent and no rule will apply on him at all. So, the purpose of rule dies at once and no one will even have any authority to make an inquiry.

Further to above, if the owner of such shares wishes to change hands with some one (an identified party) else specifically interested to get into the buying deal, there will be no PUBLIC OFFER FOR SALE at all. It would simply be one-to-one deal between a buyer and a seller and will not be construed as a public offer. However, in such cases there will be invoked the requirements of Listed Companies (Substantial Acquisition of Voting Shares and Take-overs) Ordinance, 2002 on the buyer (and not on the seller).

In my view, the person owning 65% stake of a listed company and wishing to sell it should concentrate on How he wishes to sell the scrip; either in stock exchange or to some one else through a deal or to a larger public following the Rule 9 of Companies (Issue of Capital) Rules, 1996. This will provide a base point to take further decision. He can sell his stake over a period on stock exchanges through smaller trenches and one off sale transactions to avoid all confusions. He can also get into deal with single investor and there will probably be no applicability of Rule 9 on him.

However, if Offer to Public is aimed at (of which I am not sure), he should first obtain clarification from SECP regarding the applicability of this rule to listed companies; then contact some brokerage house of a good repute and put the transaction forward trough the modalities that may be advised.

If you get to know details or some specific advice, please do share with us since it would be quite informative for all.


Regards,


KAMRAN.

[awaisaftab]

Rule 3 of Companies (Issue of Capital)Rules 1996 deals with the applicability of these rules. Rule 3 is as follows

"(3) They shall apply to-
(i) the companies proposing to offer share capital to the public;
(ii) listed companies proposing to increase share capital through rightissue or bonus issue;
(iii) all companies proposing to issue shares for consideration otherwise than in cash; and
(iv) certain persons offering shares for sale to the public."

Furthermore a private limited company cannot invite general public (in large) to subscribe its share under Clause III of Sub Section 28 of Section 2 of Companies Ordiance, 1984. So in my opinion Rule 9 of Companies (Issue of Capital) Rules deals with listed companies moreover the first sentence of Rule 9 states
"person who holds more than ten percent of the shares of a company may offer such shares for sale to the public subject to the following conditions; namely" . It means here listed companies are being discussed.
But if there is still ambiguity then the benefit of ambiguity goes to a person effecting from it.

[kamranACA]

The Rules do not so crudely and straightforwardly apply to listed companies only, in my view; and it gets clarified from the sub-clause (i) of rule 3 where public offering by Companies (and not by a person) is discussed.

Further, all the four subclauses of Rule 3 are independent of each other and every one has to be concentrated separately.

Rule 9's first line no where mentions of a listed company; and public offering can be given for unlisted public company as well.

Regardless of above, I understand that these rules do apply to listed companies as well since the term COMPANY has been used; yet a clarification is needed because regardless of whatever has been mentioned elsewhere in the Ordinance the term COMPANY even includes the private limited companies which will not make sense to be included in Rule 9's ambit.

Further, if a person can sell his shares in secondary market in small trenches without doing anything; why he should go for a long list of things to be done?

Let me assure you that a big transaction (even only between two parties) can be routed through stock exchanges without invoking these rules, (even on agreed prices that are not driven through market forces), if a proper planning and arrangement is available.

In case of a single buyer the only requirement would be to comply with rules pertaining to substantial acquisition (buyer's responsibility).

However, since rules are there, and the procedure mentioned has to be followed in case of public offering, it is advisable to get a clarification from SECP before entering into a public offer.


Regards,

[Star]

Thanks for the worthiest comments.

I personally agree with the views and interpretation of Kamran Sahab. The meaning of company in the Rules is not clear and required inerpretation.

I also agree with the suggestion that the person with controlling stake in the company, may sell the shares in the market. But the continous sale of shares in the market, will definately impact the share price negatively. This would not be beneficial for the seller. If the market value of shares is say 26 Rs. at the start of selling, it may fall upto even low than 50% by such a huge volume of selling.

Regards,


*

[kamranACA]

Star

If some buyer is already identified and terms are agreed, everything remains managable and this happens always. It does not even affect the market capitalization and even in some historic cases we have seen cases where price moved upwards.

SECP and exchanges view such transactions seriously however. That's why substantial acquisition rules are there.


Regards,

[Star]

Kamran Sb

If a buyer is already identified then there will no impact on price and it will be off-market transaction.

But the sale of share in market will definately affect the price negatively.

Regars,

*

[awaisaftab]

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by Star</i>
<br />Thanks for the worthiest comments.

I personally agree with the views and interpretation of Kamran Sahab. The meaning of company in the Rules is not clear and required inerpretation.

I also agree with the suggestion that the person with controlling stake in the company, may sell the shares in the market. But the continous sale of shares in the market, will definately impact the share price negatively. This would not be beneficial for the seller. If the market value of shares is say 26 Rs. at the start of selling, it may fall upto even low than 50% by such a huge volume of selling.

Regards,


*
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Dear Star,

The most prominent features of a private company are restriction on the transfer of shares by its member and a private company cannot offer its share to general public. As you may see the definition of private company given in the Companies Ordianance, 1984 (see Clause 1 of sub section 28 of section 2). For more clarity consult the other definitions of Private Company in Legal Dictionaries, General Books written on corporate laws and definition mentioned by prominent legal personalities including judges.

Some definition are as follows

Private company means a limited company that does not issue shares for public subscription and whose owners do not enjoy an unrestricted right to transfer their shareholdings Compare public company


A private company limited by shares, usually called a private limited company (though this can theoretically also refer to a private company limited by guarantee), is a type of company incorporated under the laws of England and Wales, Scotland, that of certain Commonwealth countries and the Republic of Ireland. It has shareholders with limited liability and its shares may not be offered to the general public, unlike those of public limited companies. (Wikpedia)


If a private limited company itself cannot issue share to general public how a member of private company can issue shares to general public. Issuance of shares to general public means that hundreds of people can purchase shares of a company but the maximum number of members of private limited company is fifty (50) see sub section 28. Additionally under section 45 of Companies Ordinance if a private company wants to issue its share general public then it shall must be converted into public company.
In my opinion it is crystal clear that Rule 9 of Companies (Issue of Capital) Rules, 1996 deals with the public companies.
A person holds the share of a listed company at any time can sale them in stock exchange or any buyer. But law facilitate the persons who holds huge holdings (for instance more than 10%) in a public company.
I agree with you that if huge shares of a company are offered for the sale in the market then the prices may fall. But at the same time there may be possibility that price or value of share will remain stable. Besides this statement can also be given regarding subsequent issue of shares by a company to general public. Another factor of the entire scenario is that law facilitates all groups of society in case a person who has invested huge funds in a company is facilitated by law to sale out his holdings to general public. <b>In my opinion the law protects the prices of shares of a company by giving a right to a shareholder (who holds more than 10% shares of a company) to sale out them to general public . Contrarily if such huge shares are taken in market for sale then the price of shares of the company will definitely effected adversely.</b>

Regards,

Awais Aftab

[kamranACA]

Dear Star

The student who starts learning CO84 from the very first day comes to know what private limited company is and whether or not its shares can be offered to general public. There is nothing new to be clarified.

That's why it has been pointed out that term COMPANY used in Rule 9 is quite vague and there is a need to get clarification in this regard. Certainly the term COMPANY includes the PRIVATE LIMITED COMPANIES (and even Guarantee companies who do not have share capital at all); and of course PRIVATE LIMITED COMPANIES cannot offer their shares to public unless converted to public limited.

So, in my view COMPANY has to be clarified although I know it is not applicable to private limited companies. However, there are two categories in public limited as well which cannot be ignored.

Regardless of above, I do believe that this rule is for all public companies including unlisted ones. In a recent case this has been done while listing of a power sector company (previously unlisted one) at KSE.

I am only pointing out an ambiguity in law and also sharing my idea that the purpose of such transaction can be met without going for such an effort.

.................................

As far as affect on market capitalization is concerned, normally the customers are pre-identified where such a huge holding is being sold. In such cases, since rate is decided after proper due diligence and advices, the market rates normally increase because of market sentiments witnessing hot deals.

Further, if this is not a case, even then a well planned sell out strategy focussing the market demand of the scrip can preserve the market value and can even enhance it. The necessity is only to manage the inside information and keep in focus the demand/supply ratio.

Of course we have discussed that such sales must be made in trenches and over a specific period so that no legal issue arises.

Regards,

[Star]

Dears,

It is clear from the initial threads that the word company in referred Rule does not include private company as its definition restricts to offer the share to public.

Discussable problem was only whether or not Rule 9 would be applicable on the person holding 65% shareholding in listed company..!!!

If a person holds the same shareholding 65% in a private company & wants to disinvest it. Other members do not have sufficient personal resources what would be the way out?

Regards,

*

[awaisaftab]

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by Star</i>
<br />Dears,

It is clear from the initial threads that the word company in referred Rule does not include private company as its definition restricts to offer the share to public.

Discussable problem was only whether or not Rule 9 would be applicable on the person holding 65% shareholding in listed company..!!!

If a person holds the same shareholding 65% in a private company & wants to disinvest it. Other members do not have sufficient personal resources what would be the way out?

Regards,

*


<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

Dear Star,

Your query was relating to Listed Company and it was replied accordingly. Although SECP is responsible for smoothness in capital market but in my opinion CO,1984 and Companies Rules(all company rules) do not deal in large with the effects of market forces on the value of shares of companies rather SECP ACT and SECP Ordinance lay down provisions in this regard.

As far as your second query is concerned the law put restriction on the transfer of shares by the members of private company. If a person who wants to sale his 65% holdings in a Private Company wants to disinvest his investment in the company and the other members do not have sufficient resources then new investors are invited with the consensus of other members. The second option is that the company can be converted into Public Company.
However, your this query has more decisional aspects than legal aspects.