In a result that was a foregone conclusion, Unilever Pakistan formally secured the approval of its shareholders to delist the stock at an extraordinary general meeting, and has appointed KASB Securities, an investment bank, to manage the share buyback.
The announcement came on the same day that the global consumer giant announced that it would be increasing its stake in its Indian subsidiary, Hindustan Unilever, from 52.5% to 75% at a price that would offer shareholders a premium to the market. Unlike its plans to delist its Pakistan subsidiary, it does not appear that Unilever will be delisting its Indian subsidiary.
The delisting of the Pakistani subsidiary, meanwhile, will go ahead despite stiff opposition from minority shareholders who wanted the company to remain listed on the Karachi Stock Exchange. Those shareholders, however, appear to have accepted the delisting as a fait accompli: no more than 5% of the total votes cast on Tuesday at the shareholders meeting in Karachi were against the delisting, according to sources familiar with the matter. By some accounts, most of the dissenting shareholders appear to have abstained from voting.
KASB Securities, an investment bank, has been appointed manager for the transaction valued at just over $500 million. Unilever will be paying its minority shareholders Rs15,000 per share, a 55% premium over its original offer of Rs9,700 per share.
The offering will remain valid from May 3 to July 1, inclusive, following which Unilever Pakistan will stand automatically delisted from all three stock exchanges in the country. Any shareholder who declines to sell will then become the shareholder in an unlisted company, a powerful motivator for virtually all minority shareholders to sell, including those opposed to the delisting.
The delisting of Unilever Pakistan has called into question the protections for minority shareholders in such situations: under the current rules, Unilever was not required to even directly negotiate a price with them. The minority stakeholders were essentially forced to accept whatever price the management of the Karachi Stock Exchange announced.
Some foreign investors – such as New York-based hedge fund Acacia Partners – have said that they may reduce their investments in Pakistan in the future should the current rules remain in place. Acacia has $4 billion in assets under management, about $75 million of which is invested in Pakistan.
The simultaneous announcement of the share buyback in India, meanwhile, has triggered renewed speculation among some investors on Karachi’s McLeod Road that the delisting is an attempt by Unilever to minimise its tax liabilities in Pakistan by charging royalty fees: the charge that it levies on all of its global subsidiaries in exchange for providing technical expertise from its global headquarters.
That charge transfers money back to the global parent, while showing up as an expense in subsidiary’s accounts, and hence not subject to taxation. The money transferred would then appear as revenues in the Netherlands-based global parent, where the corporate tax rate is 25%, lower than the 35% in Pakistan, allowing the company to save on its overall tax bill. Unilever faced an enormous shareholder backlash when it raised the royalty fee it charges its Indian and Indonesian subsidiaries. No such plans have been announced for Pakistan yet.
According to reports published in the Financial Times, the Indian government is set to announce that those increases in royalty fees will in the future require approval of at least three-quarters of all minority shareholders. Having fewer minority shareholders should help reduce any problems Unilever might have in imposing such changes in the future.
Indian law appears to make delisting a company very difficult, requiring a supermajority of the minority shareholders to agree to a delisting price. And no sponsor of a listed company is allowed to own more than a 75% stake in a company.
Published in The Express Tribune, May 1st, 2013.
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