4DS - Anything but Charting, page-15249

Another end game hypothesis for recreational purpose .............................



There is the off maket takeover solution.
There is the merger or scheme of arrangement solution.

And there the selective capital reduction.


What is a selective capital reduction ?

Its a form of takeover where the company buy back the shares of all shareolders except one.
This shareholder will own 100% of the shares at the end of the process.

This shareholder will also grant the target company a loan that will pay for considerations given to exiting shareholders (payment in shares are also possible).
The reduction decision must reach 75% of the expressed votes


https://s3.amazonaws.com/documents.lexology.com/af75c7fa-6074-41db-a118-7b8951197b5f.pdf?AWSAccessKeyId=AKIAVYILUYJ754JTDY6T&Expires=1623662890&Signature=vi6HmyxUmPBYW6mf1gmvQhK%2Futk%3D

The technique involves the major shareholder persuading a company and its shareholders to approve a cancellation of all shares in the company other than those held by the major shareholder.

For the technique to be workable, the major shareholder generally needs to have a significant existing stake in the company.

As a general guide, successful proposals have involved an existing holding of at least 50% to 60% in the target (but a higher stake may be preferable depending on the circumstances).

Exiting shareholders receive a payment from the company (usually in cash) as consideration for the cancellation of their shares [could be shares as in a scrip for scrip takeover].
The amount may be wholly or partially funded by the major shareholder.

The major shareholder is then left with 100% control.


What are the advantages of a selective reduction of capital ?

- No competing bid on market. Once the vote for a selecting reduction of capital is announced, shareholders at the time of the annoncement, are called to vote
- The majority shareholder (the one that will keep its shares) is the only shareholder allowed to vote FOR the resolution . Other shareholders can only vote AGAINST or abstain.
=> It's a way to eliminate all trouble if you want to reach 100%
- In fact, with only 50% of the voting rights, the major shareholder can reach 100% if less than 16,5% of other shareholders vote against the proposal.
- In a normal takeover the bidder need to reach 90% to go to 100% with mandatory selling.
- In a scheme of arrangement, the bidder can reach 100% with only 75% of the vote, but the bidder is not allowed to vote and it might not be so easy as between the time that the price is known and the moment shareholders are called to vote for the merger, the share is still trading and it can go much higher on market. This scenario did happen several times in the last ten years.
- As the selective reduction of capital is a share buy back, only shareholders
at a certain date are allowed to vote. So it's more difficult to pump the price on market.
- Coupled to pre bid acquisition and stealth accumulation this is a very innexpensive way to buy a company, the price offered will only be the price for the minority shares. The major shareholder will have accumulated at a much lesser price before the capital reduction.


What are the conditions of a successful selective reduction of capital ?

- The major shareholder must have 50% or more shares to have a reasonnable chance.
Actual expressed votes must be 75% FOR . The minority shareholders can only vote AGAINST (expressed vote FOR and AGAINST represent 100% of the votes used to define the threshold of 75%.
That means that if the majority shareholder has 50% of the votes. A vte AGAINST by minority sharholders must not reach 16,5% of the voting rights or the capital reduction will be defeated.
(no vote against = 100% of the vote cast for the bidder/majority shareholder)
(16% of votes AGAINST => 50%+16% represent 100% => 75% of 66% = 49,5% => with 50% of the votes, the selective reduction of capital is a success, but with 16,5% of the vote against it doesn't work.

https://s3.amazonaws.com/documents.lexology.com/af75c7fa-6074-41db-a118-7b8951197b5f.pdf?AWSAccessKeyId=AKIAVYILUYJ754JTDY6T&Expires=1623662890&Signature=vi6HmyxUmPBYW6mf1gmvQhK%2Futk%3D


But if the bidder must own around 50% of the shares for the selective reduction to work, this is not for 4DS...

Not so sure !


How to make a stealth acquisition of 50% of 4DS shares


1 - Pre bid acquisitions are allowed

https://www.mondaq.com/pdf/clients/665726.pdf

(p 21 - See also section 1043H ,1043J of the Corporations Act)

3.25 Knowledge of own intentions or financial products transactions
Pursuant to the 'own intentions' exemptions under sections 1043H to 1043J, the Dealing Prohibition does not apply where the relevant information is the insider's awareness of their own intentions.

For example, under section 1043I of the Corporations Act, a body corporate will not contravene the Dealing Prohibition by entering into a transaction or agreement in relation to financial products issued by another person merely because the body corporate is aware that it proposed to enter into, or have previously entered into or proposed to enter into, one or more transactions or agreements in relation to financial products issued by the other person or a third person.

Accordingly, a potential bidder is not precluded from dealing in target securities merely because it is aware of its own intention to make a bid.

38 CAMAC, above n 12, 6 [1.6 and Recommendation 6]. Sparke Helmore Lawyers GPS\GPS\62159151\2 Page 22

However, this defence would not be available where the inside information relates to the intentions of others (such as other members of a bid consortium).
In this regard, CAMAC has recommended that sections 1043H-J should be amended to make it clear that members of a prospective takeover bid consortium can acquire Division 3 financial products on behalf of that consortium, but not through the intended bid vehicle (eg the offeror/bidder), prior to the market becoming aware of the bid.

39 Under the CAMAC recommendation, allowing bid consortium members to acquire on behalf of the consortium before the market becomes aware of the bid is consistent with the policy of the current exemption, namely to promote takeover bids which may benefit shareholders. However, CAMAC states that bid consortium members who trade on their own behalf before the market is aware of the takeover bid are not furthering the bid, and therefore should not have any comparable exemption, even where they have the consent of the other bid consortium members

I didn't find any time limitation for declaring the take over. It means that the bidder can start buying 6 month or one year before the bid is announced to the market.


2 - Pre bid acquisitions can be stealth acquisitions

- A potential bidder could start buying on market without anybody noticing, using equity swap or other derivatives as to not appear int the share register. This form of stealth acquisition is more and more frequently used.

- ASIC will not object as long as all holdings in the target company are disclosed to ASIC at the time of the take over and the shares bought doesn't give any individual bidder more than 20% of the voting rights.

- In the case of 4DS we could have a takeover bid or a selective reduction of capital by a consortium of 3 companies (WDC, Kioxia, Micron) each individual member of the consortium buying 16,6% of 4DS through customised swap agreements.



https://clsbluesky.law.columbia.edu/2020/04/01/stealth-takeovers-how-hidden-shareholders-are-buying-companies/

- If the bidder consortium make a bid, the members of the consortium need not to disclose to market the shares they bought on market through swap agreements. There would be an offer and this offer would reach 75% anonymously. So the all process could remain unknown to retail shareholders (but not to ASIC).
(Not completely sure about that last point. So happy to be corrected).


3 - But how such a large block of shares could remain unoticed even if it is split between heundreds nominee accounts ?

- As a new poster asked a few weeks ago : who are the silent shareholders ?
We have the Top 20, we have HC long term shareholders and we have short terme traders and day traders.
But the volumes are so thin that we have to agree that - except at certain times - a large number of shareholders have no market activity.

- From the last annual report we know that we have 3.800 shareholders holding less than 100,000 shares, and around 1500 shareholders owning more than 100,000 shares.
The distribution inside that group of 1500 shareholders is unknown.

. The top 20 own 301 millions shares (22% of dilluted shares)
. The board and top employees + JD own 146 millions shares & options (10,5% of dilluted shares)
- Long term retail shareholders could own 50 millions shares (HC long termers less the two that are counted in the top 20)
- Short term holders could own 151 millions shares
- Day traders and Small parcells holders could own 118 millions shares

=> If we think that distribution of shareholders looks reallistic, then there is arround 680 millions shares (51,5%) that doesn't seem to belong to any group ( 1401 millions - 641 millions). Just the right number for a selective reduction of capital.


I agree, all this looks like a very complicated way to look at a simple thing.

But one must remember that 4DS has a very unusual business model : Sell the company with a large profit.

The final selling is a huge part of the story.

It is not unreasonnable to think that the way the company will be sold has been carefuly thought of from the beginning of the project, so as to guarantee the best outcome for the 4DS team and shareholders.

And, imo, it is not unreasonnable to think that the exit strategy could have been specialy designed to fit the very special nature of 4DS.


No financial advice




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