ROLE OF BANKS AS INDEPENDENT ADVISER IN TAKEOVERS AND MERGERS IN PAKISTAN
A thesis submitted in fulfilment of the requirement for the degree of Doctor of Philosophy in Laws
Ahmad Ibrahim Kulliyyah of Laws International Islamic University Malaysia
Takeovers and mergers are the strategies persuasive to change the competitive structure of a market radically. In Pakistan, takeover and merger activity is still in its primitive stage, due to the various regulatory and transactional constraints. Comprehensive amendments are required in Pakistan’s corporate laws, especially the laws governing takeovers and mergers, to bring them on par with laws of developed countries. The research suggests to include provisions in Pakistan’s corporate laws to ensure that the shareholders shall be given sufficient information and expert advice to enable them to reach an informed decision regarding a takeover or merger offer. This research analyses the role of independent advisers to the companies involved in takeovers and mergers, to provide their shareholders with expert advice on the merits of the offer. Unlike developed countries, in Pakistan, the role of the independent adviser is entirely neglected. Companies involved in takeovers and mergers are not under any regulatory duty to appoint an adviser to give independent expert advice to its shareholders. In this study, Malaysia’s laws governing takeovers and mergers are selected as a benchmark to compare with the corporate laws of Pakistan due to the various similarities between the two jurisdictions, namely: market structure, concentrated shareholding pattern etc.
Malaysia’s corporate laws offer provisions to endorse the role of investment banks as independent advisers in corporate restructuring, including takeovers and mergers.
Whereas, in Pakistan, the corporate laws are silent as to the role of the investment banks as an adviser in takeover and merger transactions; neither restricting nor encouraging their participation. It is high time that Pakistan’s corporate laws introduce the role of the independent advisers on takeovers and mergers, with an emphasis on the investment banks. The research suggests that in takeovers and mergers, the Islamic banks having adequate expertise of scholars can play an instrumental role as independent adviser to ensure that the transaction shall remain Shariah-compliant and shall serve to further Maqasid al-Shariah. Results of this study contribute to understanding the current mechanism of takeovers and mergers in Pakistan, laws and regulations governing takeovers and mergers activity, the prospective role of independent advisers in such transactions with an emphasis on investment banks, and reforms required in corporate laws for more conducive takeovers and mergers. It is the very first study on the role of independent advisers in takeovers and mergers in Pakistan.
لاو ،ايًّرذج اًيريغت قوسلل يسفانتلا لكيلها يريغت لىإ يمرت تايجيتاترسإ جامدنلااو ءلايتسلاا تايلمع ُدعُت هذه طاشن لازي تلاماعلما ىلع دويقلاو ةيميظنتلا دويقلا ببسب ةيئادبلا هتلحرم في ناتسكبا في تايلمعلا
تيلا ينناوقلا اميس لاو ،تاكرشلا ينناوق ىلع ةلماش تلايدعت لاخدإ لىإ ناتسكبا جاتتح ذإ ؛ةيراجتلا ةمدقتلما نادلبلا في ينناوقلا ةءافك في اهلعلج ؛جامدنلااو ءلايتسلاا تايلمع مُك حتح ثحبلا اذه مدقُي ؛هيل عو ،
،ددصلا اذه في ناتسكابل اًيفاك اًعجرم ُرِفوُت ةيزيلالما ينناوقلا نأ لىإ يرشيو ،عوضوملل ًنًراقم اًضارعتسا اكحأ جاردإ حترقيو ةيناتسكابلا تاكرشلا ينناوق في م
ي اميف حضاو رارق لىإ لصوتلا نم مهنيكمتل ؛ قلعت
لليحو ،جامدنلاا وأ ءلايتسلاا ضرعب في ةعلاضلا تاكرشلل ينلقتسلما نيراشتسلما ةناكم اًضيأ ثحبلا اذه
فراصلما ةناكم ثحبلا شقانيو ،ضرعلا يًّازم في ةروشلمبا مهسلأا ةلحم ديوزتل جامدنلااو ءلايتسلاا تايلمع ؛اًماتم ةلمهُم ناتسكبا في لقتسلما راشتسلما ةناكم نأ كلذ ؛الاقتسم اًراشتسم اهِ دعب ةيرامثتسلاا بخ
ينيعتب يميظنت بجاو ِ يلأ جامدنلااو ءلايتسلاا تايلمع في ةعلاضلا تاكرشلا عضتخ لاو ،ةمدقتلما نادلبلا ا يمدقتل لقتسم راشتسم اايلمعو ،اهيهماسم لىإ ةروشلم
اكرشلا ينناوق حلاصإ نم َّدُب لا ؛كلذ مغرو ، ت
تاقفص في راشتسلما ةناكم ىلع يسمرلا عباطلا ءافضلإ ؛تاكرشلا ةلكيه ةداعبإ ةقلعتلما ةيناتسكابلا مدقي نأ يئاهنلا فدلهاو ،اتهامازتلاو اتهايلوؤسم ديكتأو ،اهتيللاقتسا يرياعم ديدتحو ،جامدنلااو ءلايتسلاا ولقتسلما نوراشتسلما ةساردلا هذه فيو ،ينهماسملل ةمزلالا تاداشرلإاو ةروشلما ءلاؤه ن
يرتخا ينناوق ت
ةيزيلالما تاكرشلا يرثكلا هباشتلا تلااح ببسب ؛ةيناتسكابلا تاكرشلا ينناوق عم ةنراقملل اًرايعم
،ينتيئاضقلا ثتسلاا فرصلما ةناكم دييأتل اًماكحأ ةيزيلالما تاكرشلا ينناوق رفوتو
م الاقتسم اًراشتسم هِ دعب ي را
في ،جامدنلااو ءلايتسلاا تايلمع و
نأ فراصملل ةناكلما كلت ءازإ تمصلا مزتلت ةيناتسكابلا تاكرشلا ينناوق
امدنلااو ءلايتسلاا تاقفص في ةيرامثتسلاا اهعجشت وأ اهتكراشم ديقت لاف ،ج
بلا يرشيو ، نكيم هنأ لىإ ثح
ا تابرلخا تاذ ةيملاسلإا فراصملل ءلايتسلاا تايلمع في لقتسلما راشتسلما ةفيظو يدؤت نأ ةيفاكل
جهنلما يرتخا ،اهرداصم زيزعت ىلع لمعت نأو ،ةيملاسلإا ةعيرشلا عم ةقفاوتم ةقفصلا نأ نامضل ؛جامدنلااو ذه في يعونلا تلاباقلما لىإ دنتسي ذإ ؛ثحبلا ا
و ، ثحابلا ناك "ةلاح ةسارد" ًاضيأ ثحبلا نمضتي امك
ًاكراشم ناتسكبا في جامدنلااو ءلايتسلاا تايلمعل ةيلالحا ةيللآا مهف في جئاتنلا مهسُتو ،اهيف ًارشابم
في جامدنلااو ءلايتسلاا تايلمعب ةقلعتلما ةحاتلما ةليلقلا ةقباسلا تاساردلل ةعجاربم ئراقلا ثحبلا شقانت تيلا اهعون نم لىولأا ةساردلا ثحبلا اذه دعي امك ،ناتسكبا في لقتسلما راشتسلما ةناكم
.ناتسكبا في جامدنلااو ءلايتسلاا
The thesis of Fakhara Rizwan has been examined and approved by the following:
Mushera Bibi Ambaras Khan Supervisor
Aiman Nariman Mohd Sulaiman Co-Supervisor
Aiman Nariman Mohd Sulaiman Internal Examiner
Ruzita Bt Azmi External Examiner
Saim Kayadibi Chairman
I hereby declare that this thesis is the result of my investigations, except where otherwise stated. I also declare that it has not been previously or concurrently submitted as a whole for any other degrees at International Islamic University Malaysia or other institutions.
Signature ……… Date: August 26, 2019
INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA
DECLARATION OF COPYRIGHT AND AFFIRMATION OF FAIR USE OF UNPUBLISHED RESEARCH
Copyright © 2019 Fakhara Rizwan and International Islamic University Malaysia.
All rights reserved.
ROLE OF BANKS AS INDEPENDENT ADVISER IN TAKEOVERS AND MERGERS IN PAKISTAN
I declare that the student and IIUM jointly own the copyright of this thesis.
No part of this unpublished research may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without prior written permission of the copyright holder except as provided below.
1. Others may use any material contained in or derived from this unpublished research in their writing with due acknowledgement.
2. IIUM or its library will have the right to make and transmit copies (print or electronic) for institutional and academic purposes.
3. The IIUM library will have the right to make, store in a retrieved system and supply copies of this unpublished research if requested by other universities and research libraries.
By signing this form, I acknowledge that I have read and understood the IIUM Intellectual Property Right and Commercialization policy.
Affirmed by Fakhara Rizwan
Signature Date: August 26, 2019
I dedicate this research to my parents
& Rubab – the blessings
I am thankful to Almighty Allah, who bestowed me, and I could not have flourished in my life without his mercy. My sincere thanks are due to many people who have given me their support, encouragement and interest over the course of my study.
First and foremost, I wish to express my sincere appreciation to my parents and my family for giving me moral support, space and time to achieve what I set out to do.
Thanks to my little girl, Rubab who has been waiting patiently for the day when her mother completes her study.
Many thanks to International Islamic University Malaysia, which has changed my approach to life. Special thanks to Professor Mushera Ambaras Khan for her positive and efficient guidance at all time and extending all possible support, unconditionally.
I am thankful to Mr Khalid Mirza, former Chairman of SECP and CCP, which are principal governing agencies to regulate corporate takeovers and mergers in Pakistan, for his extensive guidance.
I also place on record, my sense of gratitude to one and all, who directly or indirectly, have lent their hand in this venture. Without all those individuals, I would not have been able to complete this study.
TABLE OF CONTENTS
Abstract ... ii
Abstract in Arabic ... iii
Approval Page ...iv
Declaration Page ... v
Copyright Page ...vi
Dedication Page ... vii
Acknowledgements ... viii
Table of Contents ...ix
List of Statues ... xv
List of Abbreviations ... xvi
CHAPTER I: INTRODUCTION ... 1
1.1 Background of the Research ... 1
1.2 Statement of the Problem ... 10
1.3 Purpose of the Research ... 11
1.4 Research Objectives ... 13
1.5 Research Questions ... 13
1.6 Research Hypothesis ... 14
1.7 Significance of the Research ... 14
1.8 Scope of the Research ... 15
1.9. Literature Review ... 17
1.10 Research Methodology ... 28
1.10.1 Qualitative Research ... 31
1.10.2 Case Study ... 31
1.10.3 Interviews ... 32
1.10.4 Data Collection Procedures ... 38
1.11 Chapter Summary ... 39
CHAPTER II: OVERVIEW OF CORPORATE TAKEOVERS & MERGERS . 41 2.1 Overview of Chapter ... 41
2.2 Basic Concept of Takeovers and Mergers ... 41
2.3 Corporate Takeovers Vis-À-Vis Mergers ... 44
2.4 Classification of Takeovers and Mergers ... 46
2.4.1 Business Perspective ... 46
188.8.131.52 Horizontal Takeovers and Mergers ... 46
184.108.40.206 Vertical Takeovers and Mergers ... 47
220.127.116.11 Conglomerate Takeovers and Mergers ... 47
18.104.22.168 Consolidation Takeovers and Mergers ... 48
2.4.2 Financial Perspective ... 49
22.214.171.124 Takeovers and Mergers for Cash Consideration... 49
126.96.36.199 Stock-swap Buyouts ... 59
188.8.131.52 The Leveraged Buyouts... 50
184.108.40.206 Managerial Buyouts ... 51
2.4.3 Legal Perspective ... 51
220.127.116.11 Friendly Takeovers and Mergers ... 51
18.104.22.168 Hostile Takeovers and Mergers ... 52
22.214.171.124 Reverse Takeovers and Mergers ... 52
126.96.36.199 Backflip Takeovers and Mergers ... 53
2.5 Rationales for Takeovers and Mergers ... 54
2.5.1 Strategic Reasons for Takeovers and Mergers ... 54
188.8.131.52 Growth and Performance ... 54
184.108.40.206 The Scale of Operations ... 55
220.127.116.11 The Transformation ... 55
18.104.22.168 Competition ... 56
22.214.171.124 Thriving Market Share ... 57
126.96.36.199 Strategic Alignment ... 57
188.8.131.52 To Acquire the Right Size ... 58
184.108.40.206 To Control Supply Chain ... 59
220.127.116.11 To Control Production and Distribution ... 59
18.104.22.168 Synergy Rationale ... 60
22.214.171.124 Core Competence ... 60
126.96.36.199 Diversification ... 61
188.8.131.52 Removal of Excess Capacity from Industry ... 61
184.108.40.206 To Enter New Markets ... 62
2.5.2 Political Reasons ... 62
2.5.3 Financial Reasons ... 63
220.127.116.11 Investment of Surplus Funds ... 63
18.104.22.168 Revenue Growth ... 64
22.214.171.124 Tax Benefits ... 64
126.96.36.199 Increase in Cash Flow ... 65
188.8.131.52 Increase in Share Value ... 65
184.108.40.206 Bootstrapping Earnings ... 66
2.5.4 Organisational Reasons ... 67
220.127.116.11 Management Driven Takeovers and Mergers ... 67
18.104.22.168 Removal of Inefficient Management ... 68
22.214.171.124 Emergence as a Conglomerate ... 68
126.96.36.199 Acquisition of Cost-Effective Skills & Technologies ... 69
2.6 Key Players of Corporate Takeovers and Mergers ... 69
2.6.1 The Shareholders ... 70
2.6.2 The Board of Directors ... 71
2.6.3 The Management ... 74
2.6.4 The Advisers ... 75
2.7 Common Reasons For Failures ... 76
2.7.1 The Pre-Transaction Errors ... 77
188.8.131.52 Overestimation of Target’s Value ... 77
184.108.40.206 Non-comprehensive Planning ... 79
2.7.2 The Post-Transaction Errors ... 80
220.127.116.11 Non-comprehensive Integration Plan ... 80
18.104.22.168 Inappropriate Relative Size of the Target... 81
22.214.171.124 Lack of Synergies ... 82
126.96.36.199 Managerial Issues ... 82
188.8.131.52 Technological Nonconformity ... 83
184.108.40.206 Failure to Consider External Constraints ... 84
220.127.116.11 Cultural Diversifications ... 84
18.104.22.168 Inability to Implement Change ... 85
22.214.171.124 Lack of Accountability ... 86
2.8 Avoiding the Transaction’s Pitfall ... 87
2.9 Chapter Summary ... 88
CHAPTER III: ROLE OF ADVISERS IN TAKEOVERS AND MERGERS ... 91
3.1 Overview of Chapter ... 91
3.2 Introduction to Independent Adviser ... 91
3.3 Appointment of Independent Adviser ... 95
3.4 Types of Adviser ... 96
3.4.1 Takeovers and Mergers Advisory Firms ... 97
3.4.2 Accounting and Corporate Law Firms ... 98
3.4.3 Investment Banks ... 100
3.5 The Role of Acquirer’s Adviser ... 101
3.6 The Role of Target’s Adviser ... 104
3.7 The Criteria to Determine Independence of an Adviser ... 106
3.7.1 The Adviser Must Not Be the Interested Party ... 108
3.7.2 The Adviser Must Exhibit Transparency ... 108
3.7.3 The Adviser Must Not Have Financial Ties with Parties ... 109
3.7.4 Must Not Have Access to the Confidential Information ... 110
3.7.5 Must Not Be Strategic Adviser to the Parties ... 111
3.7.6 Must Not Have Cross Shareholdings or Directorship ... 111
3.7.7 The Adviser Must Be Competent to Advice ... 112
3.8 Due Diligence ... 113
3.9 Types of Due Diligence ... 116
3.9.1 Commercial Due Diligence ... 117
3.9.2 Legal Due Diligence ... 117
3.9.3 Financial Due Diligence ... 118
3.9.4 Strategic Due Diligence ... 119
3.10 Process of Due Diligence ... 120
3.11 Due Diligence Report ... 123
3.11.1 Structure and Status... 123
3.11.2 Legislative and Regulatory Compliance ... 124
3.11.3 Financial Matters ... 124
3.11.4 Related Party Transactions ... 125
3.11.5 Contractual Obligations ... 125
3.11.6 Contracts and Benefits of Employees ... 126
3.11.7 Insurance and Taxes ... 127
3.11.8 Litigation and Product Liability ... 127
3.11.9 Intellectual and Technological Property... 129
3.11.10 Assets and Property ... 129
3.11.11 Customers and Sales Base ... 129
3.11.12 Marketing Arrangements ... 130
3.11.13 Strategic Fitness ... 130
3.12 Independent Adviser’s Report ... 130
3.13 Mandatory Contents of the Adviser’s Report... 131
3.13.1 Corporate Information ... 132
3.13.2 Cross Shareholding ... 132
3.13.3 Key Issues ... 132
3.13.4 Views of Independent Adviser ... 133
3.13.5 Acquirer’s Plan for the Target Company ... 134
3.13.6 Acquirer’s Plan for Target’s Employees ... 134
3.13.7 Material Contracts ... 135
3.13.8 Arrangement Affecting Directors ... 135
3.13.9 Cash Consideration ... 135
3.13.10 Consideration Other Than Cash ... 136
3.13.11 Valuation Methodology ... 136
3.13.12 Assumptions ... 137
3.13.13 The Range of Values ... 137
3.13.14 Reasonable Basis to Rely on Information ... 138
3.13.15 Perspective Financial Information ... 138
3.13.16 Additional Matters in Case of Partial Offers ... 138
3.13.17 Additional Matters in Case of Mandatory Offers ... 140
3.14 Chapter Summary ... 141
CHAPTER IV: CORPORATE TAKEOVERS AND MERGERS IN PAKISTAN ... 143
4.1 An Overview of Chapter ... 143
4.2 Challenges to Takeovers and Mergers in Pakistan ... 143
4.2.1 Less Synergistically Operating Economies ... 144
4.2.2 Lack of Motivations from Shareholders... 146
4.2.3 Small Industrial Base ... 147
4.2.4 Lack of Leveraged Buyouts ... 148
4.2.5 Insider Trading ... 149
4.2.6 Information Constraints... 151
4.2.7 The Complexity of the Process ... 152
4.2.8 Inaccurate Valuations ... 153
4.3 Legislative Framework in Pakistan ... 153
4.3.1 Companies Act 2017 ... 154
4.3.2 Takeover Ordinance 2002 ... 155
4.3.3 Takeover Regulations 2017 ... 157
4.3.4 Competition Act 2010 ... 159
4.3.5 Competition Merger Control Regulations 2016 ... 160
4.3.6 Securities Act 2015 ... 161
4.4 Regulatory Framework in Pakistan ... 162
4.4.1 Securities and Exchange Commission of Pakistan ... 162
4.4.2 Pakistan Stock Exchange... 163
4.4.3 State Bank of Pakistan ... 164
4.4.4 Competition Commission of Pakistan ... 166
4.4.5 Court of Law ... 168
4.4.6 Other Regulatory Authorities ... 169
4.5 Shareholders’ Approval in Takeover or Merger ... 171
4.6 Applicability of Breakup Fee ... 173
4.7 Conditional Takeover Offer ... 173
4.8 Requirements of Cross-Border Transactions ... 174
4.9 Labour Regulations ... 175
4.10 A Comparative Analysis of Legislative Framework ... 175
4.11 Chapter Summary ... 185
CHAPTER V: CASE STUDY ... 188
5.1 Overview of Chapter ... 188
5.2 Background ... 188
5.3 Foreseeable Benefits of the Merger ... 191
5.4 Chronological Events ... 192
5.5 Observations ... 297
5.6 Chapter Summary ... 299
CHAPTER VI: ROLE OF INVESTMENT BANKS AS INDEPENDENT ADVISER ... 202
6.1 Overview of Chapter ... 202
6.2 Role of Investment Banks as Independent Adviser ... 202
6.3 Conflict of Interest When Investment Banks Provide Takeover and Merger Advisory Services... 205
6.4 An Overview of Pakistan’s Banking Sector ... 208
6.5 Prospective Role of Investment Banks as Adviser in Pakistan ... 210
6.6 Prospective Benefits of Engaging Investment Banks as Adviser ... 212
6.6.1 One-window Advisory Services ... 212
6.6.2 Comprehensive Pre-Merger and Post-Merger Planning ... 214
6.6.3 Higher Certainty of Deal Completion ... 214
6.6.4 Diversification and Competition in Advisory Services ... 215
6.6.5 Encouraging for Strategic Takers and Mergers ... 216
6.6.6 Reduction in Transaction Cost... 216
6.6.7 Encouraging for Cross-Border Takeovers and Mergers ... 217
6.6.8 Compatibility of Legal and Regulatory System ... 218
6.6.9 Decision Making in an Informed Manner ... 219
6.6.10 Expertise and Skills of Human Resource ... 219
6.6.11Strict Accountability in case of Defective Advice ... 220
6.7 Chapter Summary ... 221
CHAPTER VII: TAKEOVERS & MERGERS–AN ISLAMIC PERSPECTIVE ... 223
7.1 Overview of Chapter ... 223
7.2 Shariah (Islamic Law) ... 223
7.3 Maqasid Al-Shariah and Islamic Law ... 224
7.4 Maqasid Al-Shariah ... 225
7.5 Aspects To Considered in Takeovers & Mergers for Compliance with Maqasid Al Shariah ... 229
7.5.1. Justice, Fairness and Welfare ... 232
7.5.2 Rational Competition ... 234
7.5.3 Hoarding ... 236
7.5.4 Monopoly ... 238
7.5.5 Business of the Target Company ... 242
7.5.6 Financial Viability of the Target ... 243
7.5.7 Modes of Financing ... 244
126.96.36.199 Commodity Murabaha... 244
188.8.131.52 Musharaka ... 245
184.108.40.206 Modaraba ... 246
220.127.116.11 Bai Salam... 246
18.104.22.168 Sukuk ... 247
7.6 Role of Independent Shariah Adviser ... 248
7.7 Chapter Summary ... 250
CHAPTER VIII: CONCLUSION AND RECOMMENDATIONS ... 252
8.1 Overview of Chapter ... 252
8.2 Findings of the Research ... 253
8.3 Recommendations... 255
8.4 Further Research ... 259
REFERENCES ... 261
APPENDICES ... 292
APPENDIX A –DETAILS OF MERGING COMPANIES ... 292
APPENDIX B –LIST OF INTERVIEWEES... 296
1. EXECUTIVES OF REGULATORS ... 296
2. PARTNERS OF LAW FIRMS ... 297
3. PARTNERS OF ACCOUNTANT FIRMS ... 297
4. BANK’S EXECUTIVES AND INVESTMENT BANKERS ... 297
5. SHARIAH ADVISERS OF ISLAMIC BANKS ... 298
6. SHAREHOLDERS ... 298
7. BOARD MEMBERS/DIRECTORS ... 299
APPENDIX C–REQUEST FOR PARTICIPATION IN RESEARCH ... 300
CONSENT FORM ... 302
BACKGROUND QUESTIONS ... 303
APPENDIX D (I)–QUESTIONNAIRE FOR SECP’S EXECUTIVES ... 304
APPENDIX D (II)–QUESTIONNAIRE FOR CCP’S EXECUTIVES ... 306
APPENDIX D (III)–QUESTIONNAIRE FOR SBP’S EXECUTIVES ... 309
APPENDIX D (IV)–QUESTIONNAIRE FOR MEMBERS OF JUDICIARY .. 312
APPENDIX D (V)–QUESTIONNAIRE FOR PARTNERS OF FIRMS ... 314
APPENDIX D (VI)–QUESTIONNAIRE FOR BANKERS ... 316
APPENDIX D (VII)–QUESTIONNAIRE FOR SHARIAH ADVISERS ... 319
APPENDIX D (VIII)–QUESTIONNAIRE FOR SHAREHOLDERS ... 321
APPENDIX D (IX)–QUESTIONNAIRE FOR DIRECTORS ... 323
LIST OF STATUTES
Banking Companies Ordinance 1962 (Ordinance 57 of 1962, Pakistan) Competition (Merger Control) Regulations 2016 (Pakistan)
Contract Act 1872 (Act 9 of 1872, Pakistan)
Foreign Exchange Regulation Act 1947 (Act 7 of 1947, Pakistan) Insurance Ordinance 2000 ( Ordinance 36 of 2000, Pakistan)
Industrial and Commercial Employment (Standing Orders) Ordinance1968 (Ordinance 6 of 1968, Pakistan)
Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Ordinance 2002 (Ordinance 103 of 2002, Pakistan)
Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations 2008 (Pakistan).
Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations 2017 (Pakistan)
Companies Act 2017 (Act 19 of 2017, Pakistan)
Electronic Media Regulatory Authority Ordinance 2002 (Ordinance 13 of 2002, Pakistan)
Securities Act 2015 (Act 3 of 2015, Pakistan)
Securities and Exchange Commission of Pakistan Act 1997 (Act 42 of 1997, Pakistan) Stock Exchanges (Corporations, Demutualization and Integration) Pakistan Act 2012 (Act 15 of 2012, Pakistan)
Stock Exchange Rules Book 2018 (Pakistan)
State Bank of Pakistan Act 1956 (Act 33 of 1956, Pakistan) Capital Market and Services Act 2007 (Act 671,Malaysia) Companies Act 2016 (Act 777, Malaysia)
Competition Act 2010 (Act 712, Malaysia) Code on Takeovers and Mergers 2016 (Malaysia)
AAOIFI Accounting and Auditing Organization for Islamic
AGM Annual General Meeting
ABPL AlBaraka Bank Pakistan Limited
BBL Burj Bank Limited
CCP Competition Commission of Pakistan
CMSA Capital Market and Services Act, 2007
CAR Capital Adequacy Requirement
CEO Chief Executive Officer
FDIs Financial Development Institution
FDA USA’s Food and Drug Administration
EBITDA Earnings Before Interest, Tax, Depreciation and
EGIBL Emirates Global Islamic Bank Limited
EGM Extraordinary General Meeting
IPO Initial Public Offering
MCR Minimum Capital Requirement
MFBs Micro Finance Banks
NBFIs Non-Banking Financial Institutions
PKR Pakistani Rupees
SBP State Bank of Pakistan
SECP Securities Exchange Commission of Pakistan
UK United Kingdom
USA United State of America
$ United State Dollar
CHAPTER I INTRODUCTION
1.1 BACKGROUND OF THE RESEARCH
The modern world has seen the formation of companies as a mechanism of integration, enabling individuals with an entrepreneurial approach to establish companies and invest their capital and expertise to further their business objectives. In today’s fast-changing business world, companies must strive hard to achieve quality and excellence in their field of operation. The now developed takeover and merger strategies which we hear about have not been invented in recent times. Instead, the first time takeovers and mergers got commerciality at the end of the 19th century.1 Since then, cyclic waves have been emerging due to radically different strategic motivations.
It can be stated with reasonable certainty that the prime objective of all companies is growth, which is possible internally as well as externally. Internal growth can be achieved either through the process of introducing or developing new products or by expanding or enlarging the capacity of existing products or sustained improvement in sales.2 On the other hand, external growth can be achieved by companies through multiple avenues, such as the acquisition of an existing business through takeovers and mergers being the primary modes. Takeovers and mergers have received attention from different walks of life, for the changes that these have brought to the market structure.
1 Jansen D Jonathan. Mergers in Higher Education: Lessons Learned in Transactional Context, (Pretoria:
Unisa Press, 2002), 133.
2 T. Mallikarjunappa and Panduranga Nayak, “Why do Mergers and Acquisitions Quite Often Fail,” Aims International, vol. 1, no. 2 (2007): 59.
In many instances, takeovers and mergers have resulted in better use of resources and greater efficiency. Although a range of benefits may be sought through acquisitions, in general, acquisitions are completed primarily to maximise a company’s value.3 Various factors decide whether the specific takeover or merger turns out as a success or a failure, and the advisory services are one of these factors. The independent adviser, either individual or institutional, to the target or acquirer is a vital player to add value to the outcome of takeover and merger transactions.4
Due to the rather complex nature of takeovers and mergers, a fundamental requirement of involving external experts to assist with these transactions is both, perceived and needed by the management of the companies involved in takeovers and mergers. The generic term ‘adviser’ covers all professional advisers including lawyers, accountants, engineers, financial institutions and banks. The term adviser is broad enough to include individual as well as institutional advisers. However, in this research, the discussion is focused on investment banks5 and their role as an independent adviser in takeover and merger transactions.
Independent adviser prepares a report, known as independent adviser’s report or the independent advice circular to help directors and shareholders of the companies involved in takeover or merger to deliberate about the desirability of the prospective deal. The adviser’s report is critical, as it contributes significantly to enable the directors and shareholders to make an informed decision on essential elements of the deal. The adviser’s report is discussed in this research, albeit it is not focused on the report per se,
3 Malcolm S. Salter and Wolf A. Weinhold, Diversification Through Acquisition: Strategies for creating economic value (New York: Free Press, 1987), 166.
4 Raymond da Silva Rosa, Philip Lee, Michael Skott and Terry Walter, “Competition in the Market for Takeover Advisers”, Australian Journal of Management, vol. 29, no. 1 (2004): 69.
5 To the extent of this research, the terms ‘bank’ and ‘investment bank’ are used interchangeably, which refer to the scheduled investment bank, and the investment banking departments of the conventional and Islamic banks.
but on the role of advisers in preparing the report for shareholders of the companies involved in the takeover or merger transaction.
Takeovers and mergers have been responsible for many significant structural changes in different corporate sectors, which have substantially changed the environment in which the organisations operate. During the last decade, takeovers and mergers have hit almost every sector of life, and this phenomenon is particularly real for well-developed western countries and to some extent, Malaysia and Singapore.6 However, the corporate takeover and merger activity are rather minimal in Pakistan as compared to other developed countries of the world, despite the great potential in the market.7 Takeovers and mergers can be a significant source of economic activity in Pakistan, provided that the several challenges which stand in the way are diligently navigated and ultimately surpassed.
Although Pakistan is a developing country, with a fertile market, the laws and the regulatory framework related to the capital market and corporate governance are not compatible to meet the needs of the time. In particular, the area of corporate laws on takeovers and mergers and protection of investor’s interests therein are not given due attention. The lack of corporate governance is very challenging for foreign investors to handle, especially when they initiate a takeover or merger to acquire the control of existing businesses in Pakistan.8
Lack of takeover and merger activity in Pakistan is primarily due to the reason that most of the companies in the country are still run by owner-entrepreneurs, who
6 Ruhani Ali and G. S. Gupta, “Motivation and Outcome of Malaysian Takeovers: An International Perspective,” Vikalpa, vol. 24, no. 3 (1999): 44.
7 Zahoor Rahman, Arshad Ali and Khalil Jebran, “The Effects of Mergers and Acquisitions on Stock Price Behaviour in Banking Sector of Pakistan,” The Journal of Finance and Data Science, vol. 4, no.
1 (2018): 49.
8 Mohsin Hassan Ahmad, Shaista Alam, Mohammad Sabihuddin Butt and Y. Haroon, “Foreign Direct Investment, Exports, and Domestic Output in Pakistan,” The Pakistan Development Review, vol. 42, no. 4 (2003): 718.
generally own controlling shares of the company. Although it is not an unhealthy thing in itself, there is always a likelihood of the oppression of minority shareholders. The complex and tedious process to undertake a takeover or merger, and lack of corporate governance in Pakistan discourages the investors to consider external growth by using the strategy of takeover or merger. In Pakistan, the companies can initiate takeover and merger through a standard agreement between the target and the acquirer. However, a simple agreement would not provide legal cover to the parties to the transaction unless it carries the sanction of the court of proper jurisdiction.
Primary statutes that govern takeover and merger activity in Pakistan are the Companies Act 2017, Securities Act 2015, Competition Act 2010, Stock Exchange (Corporation, Demutualization, and Integration) Act 2012, Competition Act 2015, and the Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Ordinance 2002. The regulations that regulate takeover and merger transactions are the Listed Companies (Substantial Acquisitions of Voting Shares and Takeovers) Regulations 2017, and the Competition (Merger Control) regulations 2016. There is no pending or draft legislation related to the governance of takeover and merger activity.
None of the corporate laws of Pakistan defines the term independent adviser in general or in the specific context of takeovers and mergers.9 Moreover, the companies engaged in takeover and merger are not obliged by law to appoint an adviser to provide expert advice to decide about a takeover or merger proposal. Malaysia, on the other hand, has comprehensive laws related to takeovers and mergers as compared to
9 The researcher reviewed all corporate laws of Pakistan that govern takeover and merger activity are reviewed, including: (i) Pakistan’s Takeover Ordinance 2017, (ii) Competition (Merger Control) Regulations 2016, (iii), Banking Companies Ordinance 1962, (iv), Contract Act 1872, (v) Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Ordinance 2002, (vi) Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations 2008 and 2017, (vii) Securities Act 2015, (viii) Stock Exchange (Corporations, Demutualization and Integration) Pakistan Act 2012, (ix) Stock Exchange Rules Book 2018, (x) State Bank of Pakistan Act 1965, (xi) Securities and Exchange Commission of Pakistan Act 1997.
Pakistan. Malaysia’s Companies Act 2016, Capital Market and Services Act 2007, Code on Takeovers and Mergers 2016 and Rules on Takeovers, Mergers and Compulsory Acquisitions 2016 deal with transactions related to change of control in companies.
Malaysia’s takeover and merger laws provide very stringent and comprehensive principles to ensure the independent advisers play their role effectively to safeguard the interest of shareholders, as well as to close the takeover and merger transactions successfully.10 Malaysia’s takeover and merger laws oblige the board of directors of the companies involved in takeover or merger, to appoint an independent adviser who shall provide independent advice, so that the shareholders can make an assessment on the merits and demerits of the offer.11
Malaysia’s takeover and merger laws emphasis on the role of independent advisers and specify the duty of the board of directors to appoint an independent adviser.
Malaysia’s takeover and merger laws have defined independent advisers12 and laid down criteria of their independence, scope of their role and responsibilities in clear terms. Malaysia’s laws offer comprehensive guidelines to determine the independence of advisers.13 In Malaysia, the board of director is required to seek independent advice from independent advisers when there is a takeover offer for the company, under
10 Principal Adviser Guidelines (Malaysia), issued: May 8, 2009, Updated/Effective: 3 August 2009.
11 Code on Takeovers and Mergers 2016 (Malaysia), General Principle: 4 (An offeree which receives an offer or is approached with a view to a take-over offer or is approached with a view to a take-over offer being made shall, in the interests of its shareholders, appoint a competent independent adviser to provide comments, opinions, information and recommendation on the take-over offer).
12 Rules on Takeovers, Mergers and Compulsory Acquisitions 2016 (Malaysia), Rule 3.6 (the board of directors of the offeree shall appoint an independent adviser to provide comments, opinions, information and recommendation on a take-over offer in an independent advice circular).
13 Rules on Takeovers, Mergers and Compulsory Acquisitions 2016 (Malaysia), Rule 3 (The Securities Commission would not regard a person as appropriate to give competent independent advice if the person: (a) is in the same group as the financial or professional adviser (including a stockbroker) to the offeror or the offeree; or (b) has a substantial interest in or financial connection with, either the offeror or the offeree company of such a kind as to create a conflict of interest for that person).
Malaysia’s Code on Takeovers and Mergers in principally for corporate transactions involving listed on the Malaysia Stock Exchange (Bursa Malaysia).14
Malaysia’s corporate laws provide adequate protection to the independent advisers against claims from shareholders or the companies involved in a takeover or merger transactions, in particular setting out the provisions of defences that are available to the advisers against litigation, in cases where the advisers have discharged their duties according to the required standards. The law further guides the soundness of the advice such as ‘reasonableness’ and ‘fairness’ of the offer.15 Malaysia’s takeover laws require the parties involved in takeovers and mergers to make full and prompt disclosure of all relevant information.16
In Malaysia’s takeover and merger laws, the shareholders and the board of directors of an offeree and the market for the shares that are the subject of a takeover offer shall be provided with relevant and sufficient information, including the identity of the acquirer or offeror, to enable them to reach an informed decision on the takeover offer, and reasonable time to consider the takeover offer.17 This is instrumental in providing adequate information to market players who shall be meaningful and useful to help shareholders of the companies in making an informed decision as to the merits of takeover or merger offer.
14 Rules on Takeovers, Mergers and Compulsory Acquisitions 2016 (Malaysia), Rule 3.
15 Rules on Takeovers, Mergers and Compulsory Acquisitions 2016 (Malaysia), Rule 11.3 (4) (The Circular shall include, but not limited to such comments, opinions and information on, among others, (e) the fairness and reasonableness of the take-over offer).
16 Code on Takeovers and Mergers 2016 (Malaysia), General Principle: 5 (All parties involved in a take- over or merger transaction shall make full and prompt disclosure of all relevant information).
17 Code on Takeovers and Mergers 2016 (Malaysia), General Principle: 6 (The shareholders and the board of directors of an offeree and the market for the shares that are the subject of a take-over offer shall be provided with: (a) relevant and sufficient information, including the identity of the acquirer or offeror, to enable them to reach an informed decision on the take-over offer; and reasonable time to consider the take-over offer).
Pakistan, on the other hand, lacks such corporate laws. In Pakistan, the companies involved in takeover and merger transactions are not required by law to appoint an adviser to give independent expert advice to its shareholders. Generally, and as a matter of practice, in case of large and complex transactions, the companies involved in takeover or merger engage legal and accounting firms in Pakistan to assist in transactions and conduct due diligence. However, it is now imperative to reform Pakistan’s corporate laws relating to corporate restructuring to introduce and formalise the role of the adviser in takeover and merger transactions, specifying criteria of their independence and confirming their responsibilities and obligations. The ultimate aim of these reforms shall be to offer expert advice and necessary guidance to the shareholders to make an informed corporate decision.
In this research, Malaysia’s corporate laws, specifically the laws governing takeover and merger activity are selected as a benchmark to compare with the corporate laws of Pakistan because both countries share many similarities including market structure and shareholding pattern which reflects ownership concentration.18 Just like Pakistan, Malaysia’s companies are characterised by high levels of ownership concentration and significant participation of owners in management.19
18 Arshad Hasan., “Impact of Ownership Structure and Corporate Governance on Capital Structure of Pakistan Listed Companies,” International Journal of Business and Management, vol. 4, no. 2 (2009):
53; Qaiser Rafique Yasser, Harry Entebang and Shazali Abu Mansor, “Corporate Governance and Firm Performance in Pakistan: The Case of Karachi Stock Exchange (KSE)-30,” Journal of Economics and International Finance, vol. 3, no. 8 (2011): 489; Ali Cheema, Faisal Bari and Osama Siddique,
“Corporate Governance in Pakistan: Ownership, Control and the Law,” Lahore University of Management Science, vol. 5 (2003): 171; Attiya Y. Javid and Robina Iqbal, “Ownership Concentration, Corporate Governance and Firm Performance: Evidence from Pakistan,” The Pakistan Development Review, vol. 48, no 4 (2009): 649; Hudson Joher Ali Ahmed, “Managerial Ownership Concentration and Agency Conflict Using Logistic Regression Approach: Evidence from Bursa Malaysia,” Journal of Management Research, vol. 1, no. 1 (2009): 4; Rahayu Izwani Borhanuddin, Pok Wee Ching, “Cash Holders, Leverage, Ownership Concentration and Board Independence: Evidence from Malaysia,”
Malaysian Accounting Review, vol. 10, no. 1 (2011): 66.
19 Stijn Claessens, Joseph P.H. Fan, “Corporate Governance in Asia: A Survey,” International Review of Finance, vol. 3, no. 2 (2002): 86; Stijn Claessens, Simeon Djankov, Larry HP. Lang, “The Separation of Ownership and Control in East Asian Corporations,” Journal of Financial Economics, vol. 58, no.
1-2 (2000): 96.
Malaysia’s takeover and merger laws offer provisions to endorse the role of investment banks as independent advisers in corporate restructuring, including takeovers and mergers.20 Whereas, in Pakistan, the corporate laws are silent as to the role of advisers as well as the investment banks as an independent adviser in the takeover and merger transactions, neither restricting nor encouraging their participation.
It is globally accepted that the banks are credible and reputable institutions, primarily because the banking industry has, since the last global recession of 2008, been heavily regulated and monitored. Therefore, to enhance investors’ confidence especially foreign investors, it is about time that Pakistan’s corporate law shall support the investment banks’ role as an independent adviser in takeovers and mergers, with a reasonable expectation based on global trends that such a move will eventually increase takeover and merger activity in the country.
There is a need to understand that the strategic intent of businesses, actually drives the takeovers and mergers, not the mere legal or accounting logic. Therefore, the exercise to introduce the independent adviser should not be governed by accounting principles or the legal formalities being the sole consideration. Instead, the major crux of the due diligence exercise is to estimate the proposed synergy between the merging companies based on realistic assumptions.
The banks potentially have comparative advantages in advising as an independent adviser to the companies involved in takeovers and mergers. In Pakistan’s corporate sector, banks receive the most confidence and trust. Therefore, their role in any such transaction will enhance the credibility and transparency of the deal, leading to the investor’s confidence.21 The State Bank of Pakistan (SBP) and Securities and
20 Capital Market and Services Act 2007 (Malaysia), Schedule 4 (Part I).
21 Jayant R. Kale, Omesh Kini and Harley E. Ryan, Jr., “Financial Advisers and Shareholders Wealth Gain in Corporate Takeovers,” Journal of Financial and Quantitative Analysis, vol. 38, no. 3 (2003),