ROLE OF BANKS AS INDEPENDENT ADVISER IN TAKEOVERS …
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ROLE OF BANKS AS INDEPENDENT ADVISER IN TAKEOVERS AND MERGERS IN PAKISTAN BY FAKHARA RIZWAN 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 September 2019
Transcript of ROLE OF BANKS AS INDEPENDENT ADVISER IN TAKEOVERS …
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ROLE OF BANKS AS INDEPENDENT ADVISER IN
TAKEOVERS AND MERGERS IN PAKISTAN
BY
FAKHARA RIZWAN
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
September 2019
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ABSTRACT
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.
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ملخص البحث
، ولا تعد عمليات الاستيلاء والاندماج إستراتيجيات ترمي إلى تغيير الهيكل التنافسي للسوق تغييرا جذريا العمليات في باكستان في مرحلته البدائية بسبب القيود التنظيمية والقيود على المعاملاتيزال نشاط هذه
التجارية؛ إذ تحتاج باكستان إلى إدخال تعديلات شاملة على قوانين الشركات، ولا سيما القوانين التي كم عمليات الاستيلاء والاندماج؛ لجعلها في كفاءة القوانين في البلدان المتقدمة ليه؛ يقدم هذا البحث ، وعتحح
استعراضا مقارن للموضوع، ويشير إلى أن القوانين الماليزية توفر مرجعا كافيا لباكستان في هذا الصدد، تعلق ؛ لتمكينهم من التوصل إلى قرار واضح فيما يم في قوانين الشركات الباكستانيةويقترح إدراج أحكا
هذا البحث أيضا مكانة المستشارين المستقلين للشركات الضالعة في بعرض الاستيلاء أو الاندماج، ويحللعمليات الاستيلاء والاندماج لتزويد حملة الأسهم بالمشورة في مزاي العرض، ويناقش البحث مكانة المصارف
ها مستشارا مستقلاا؛ ذلك أن مكانة المستشار المستقل في باكستان مهملة تماما؛ لاف بخالاستثمارية بعد البلدان المتقدمة، ولا تخضع الشركات الضالعة في عمليات الاستيلاء والاندماج لأي واجب تنظيمي بتعيين
ت ورغم ذلك؛ لا بد من إصلاح قوانين الشركا، لمشورة إلى مساهميها، وعملياامستشار مستقل لتقديم االباكستانية المتعلقة بإعادة هيكلة الشركات؛ لإضفاء الطابع الرسمي على مكانة المستشار في صفقات الاستيلاء والاندماج، وتحديد معايير استقلاليتها، وتأكيد مسؤولياتها والتزاماتها، والهدف النهائي أن يقدم
ت قوانين اختير ن هؤلاء المشورة والإرشادات اللازمة للمساهمين، وفي هذه الدراسة المستشارون المستقلو ة لبيئتيهما معيارا للمقارنة مع قوانين الشركات الباكستانية؛ بسبب حالات التشابه الكثير الشركات الماليزية
ه مستشارا مستقلاا ار موتوفر قوانين الشركات الماليزية أحكاما لتأييد مكانة المصرف الاستث القضائيتين، ي بعد قوانين الشركات الباكستانية تلتزم الصمت إزاء تلك المكانة للمصارف أنو عمليات الاستيلاء والاندماج، في
حث إلى أنه يمكن ، ويشير البج، فلا تقيد مشاركتها أو تشجعهاالاستثمارية في صفقات الاستيلاء والاندما لكافية أن تؤدي وظيفة المستشار المستقل في عمليات الاستيلاء للمصارف الإسلامية ذات الخبرات ا
والاندماج؛ لضمان أن الصفقة متوافقة مع الشريعة الإسلامية، وأن تعمل على تعزيز مصادرها، اختير المنهج يتضمن البحث أيضا "دراسة حالة" كان الباحثكما ، و ا البحث؛ إذ يستند إلى المقابلاتالنوعي في هذ
ويزود ،مباشرا فيها، وتسهم النتائج في فهم الآلية الحالية لعمليات الاستيلاء والاندماج في باكستانمشاركا البحث القارئ بمراجعة للدراسات السابقة القليلة المتاحة المتعلقة بعمليات الاستيلاء والاندماج في
عمليات مكانة المستشار المستقل فيباكستان، كما يعد هذا البحث الدراسة الأولى من نوعها التي تناقش الاستيلاء والاندماج في باكستان.
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APPROVAL PAGE
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
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DECLARATION
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.
Fakhara Rizwan
Signature ……………………… Date: August 26, 2019
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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
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I dedicate this research to my parents
& Rubab – the blessings
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ACKNOWLEDGEMENTS
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.
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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
2.4.1.1 Horizontal Takeovers and Mergers ....................................... 46
2.4.1.2 Vertical Takeovers and Mergers ........................................... 47
2.4.1.3 Conglomerate Takeovers and Mergers ................................. 47
2.4.1.4 Consolidation Takeovers and Mergers .................................. 48
2.4.2 Financial Perspective ....................................................................... 49
2.4.2.1 Takeovers and Mergers for Cash Consideration.................... 49
2.4.2.2 Stock-swap Buyouts ............................................................. 59
2.4.2.3 The Leveraged Buyouts........................................................ 50
2.4.2.4 Managerial Buyouts ............................................................. 51
2.4.3 Legal Perspective ............................................................................. 51
2.4.3.1 Friendly Takeovers and Mergers .......................................... 51
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2.4.3.2 Hostile Takeovers and Mergers ............................................ 52
2.4.3.3 Reverse Takeovers and Mergers ........................................... 52
2.4.3.4 Backflip Takeovers and Mergers .......................................... 53
2.5 Rationales for Takeovers and Mergers ....................................................... 54
2.5.1 Strategic Reasons for Takeovers and Mergers .................................. 54
2.5.1.1 Growth and Performance ...................................................... 54
2.5.1.2 The Scale of Operations ....................................................... 55
2.5.1.3 The Transformation .............................................................. 55
2.5.1.4 Competition ......................................................................... 56
2.5.1.5 Thriving Market Share ......................................................... 57
2.5.1.6 Strategic Alignment ............................................................. 57
2.5.1.7 To Acquire the Right Size .................................................... 58
2.5.1.8 To Control Supply Chain ..................................................... 59
2.5.1.9 To Control Production and Distribution ................................ 59
2.5.1.10 Synergy Rationale .............................................................. 60
2.5.1.11 Core Competence ............................................................... 60
2.5.1.12 Diversification ................................................................... 61
2.5.1.13 Removal of Excess Capacity from Industry ........................ 61
2.5.1.14 To Enter New Markets ....................................................... 62
2.5.2 Political Reasons .............................................................................. 62
2.5.3 Financial Reasons ............................................................................ 63
2.5.3.1 Investment of Surplus Funds ................................................ 63
2.5.3.2 Revenue Growth .................................................................. 64
2.5.3.3 Tax Benefits ......................................................................... 64
2.5.3.4 Increase in Cash Flow .......................................................... 65
2.5.3.5 Increase in Share Value ........................................................ 65
2.5.3.6 Bootstrapping Earnings ........................................................ 66
2.5.4 Organisational Reasons .................................................................... 67
2.5.4.1 Management Driven Takeovers and Mergers ....................... 67
2.5.4.2 Removal of Inefficient Management .................................... 68
2.5.4.3 Emergence as a Conglomerate .............................................. 68
2.5.4.4 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
2.7.1.1 Overestimation of Target’s Value ......................................... 77
2.7.1.2 Non-comprehensive Planning ............................................... 79
2.7.2 The Post-Transaction Errors ........................................................... 80
2.7.2.1 Non-comprehensive Integration Plan .................................... 80
2.7.2.2 Inappropriate Relative Size of the Target.............................. 81
2.7.2.3 Lack of Synergies ................................................................ 82
2.7.2.4 Managerial Issues ................................................................. 82
2.7.2.5 Technological Nonconformity .............................................. 83
2.7.2.6 Failure to Consider External Constraints .............................. 84
2.7.2.7 Cultural Diversifications ...................................................... 84
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2.7.2.8 Inability to Implement Change ............................................. 85
2.7.2.9 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
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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
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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
7.5.7.1 Commodity Murabaha........................................................ 244
7.5.7.2 Musharaka ......................................................................... 245
7.5.7.3 Modaraba ........................................................................... 246
7.5.7.4 Bai Salam........................................................................... 246
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7.5.7.5 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
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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)
xvi
ABBREVIATIONS
AAOIFI Accounting and Auditing Organization for Islamic
Financial Institutions
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
Amortization
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
1
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.
2
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.
3
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.
4
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.
5
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).
6
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).
7
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.
8
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),
