Soon after Cemex announced its intention to make a takeover bid for TCL on December 5, 2016, I wrote letters in the print media strongly advising the TCL Board to engage the services of a reputable International Investment Banker to do an Independent Valuation of TCL, which would be communicated to shareholders who had been offered $4.50 per share by Cemex.
Having gone through the process in 2002, I learned first-hand the pressures that would be brought to bear on directors after making their recommendation either to accept or reject the Cemex offer. Such a recommendation is one of the most staggeringly important pronouncements to be made by directors, as thousands of shareholders are depending on the Board's advice as to whether to sell at $4.50 or hold on in the expectation of a better price in the future.
TCL has over 6,000 individual shareholders including many credit unions and pension funds as well as important institutions such as the Unit Trust Corporation and the National Insurance Board.
In such circumstances the Board has a responsibility to mobilise the best available resources from anywhere in the world to bolster its recommendation and have it endorsed by a World Class Banker with specialised expertise in the building materials sector.
However, I was roundly chastised by TCL's chairman who implied that "his Board" watches its pennies and would not waste money hiring an international investment banker to do an independent valuation.
He went on to say that his Board–a Gold Standard in Corporate Governance–would comply with the minimum requirement under the law (do you see the contradiction?) and commission only a "Fairness Opinion" about Cemex's $4.50 per share offer rather than do a full valuation of TCL shares. The outcome of this Fairness Opinion was communicated via a Directors' Circular on Friday, December 23, 2016, in which the TCL Directors stated that Cemex's offer was unfair because it did not reflect "the full commercial value" of TCL but the directors refused to provide shareholders with the value from the Fairness Opinion which rendered Cemex's Offer unfair.
Obviously this has resulted in an uproar among minority shareholders who are understandably peeved that the TCL Board refuses to share the current value of TCL's shares as determined in Ernst & Young's fairness assessment. So TCL's directors are now caught with their proverbial pants down because while a "Fairness Opinion" will suffice if it had supported Cemex's $4.50 offer, it is inadequate for a Board that recommends rejection of the offer. A sensible shareholder would want to know where Cemex's Offer price is positioned relative to the Board's valuation. For example if the Board believes that the "fair commercial value" of TCL is $5 per share, then a shareholder may be prepared to take a $0.50 loss and cash out by accepting Cemex's Offer. However, if the fair value of TCL's share is assessed at $10, then they would be reluctant to sell.
Section 99(1) of the Companies Act requires that Directors act: "honestly and in good faith with a view to the best interest of the company." Directors are also required to "exercise care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances."
In 2002, the TCL Board–comprising a group of prudent persons in comparable circumstances–exercised care, diligence, and skill by engaging the services of an International Investment Banker to value TCL shares so that shareholders could made a direct comparison between the value of their asset ($10 per share) and Cemex's Offer Price ($7.15 per share).
The basis for the Board's recommendation to reject Cemex's Offer in 2002 was absolutely clear and shareholders could made their own decision about whether they would wait around for the realisation of the $10 value or sell to Cemex at $7.15.
Failing to equip shareholders with the best possible financial advice–which in this case was a credible World Class Valuation–during a major takeover, exposes TCL's directors to allegations that they are in breach of their duty of faithfulness to the company, and by extension its shareholders. TCL's directors know what TCL's shares are worth; Cemex knows what TCL's shares are worth but over 6,000 shareholders are left to guess, as they are about to make possibly one of the most important investment decisions in recent times.
However now that the Fairness Opinion has come out against Cemex's Offer, the Board doesn't have a thorough World Class Share Valuation, which can be shared with the public as the Bhajan- led Board had in 2002. With mere days to go before the Cemex Offer closes, it will be interesting to see how the Espinet led Board gets out of this pickle.
ROLLIN BERTRAND PHD,
TCL SHAREHOLDER