Mergers & Acquisitions in Ghana - Case Study of the Guinness Ghana takeover of Ghana Breweries

Mergers and Acquisitions in Ghana– A Case Study of the Takeover of Ghana Breweries Ltd by Guinness Ghana Breweries Limited
Introduction:
Mergers and acquisitions are a developing phenomenon in Ghana. Historically, most of the major mergers and acquisitions activities have always happened through the Ghana Stock Exchange (GSE). It is important to point out that just as in all other jurisdictions, mergers and acquisitions in Ghana are ultimately regulated by the apex regulator, the Securities and Exchange Commission (SEC). Acquisitions involving listed companies on the GSE are essentially guided by the GSE’s own Rules on Takeovers and Mergers. The said Rules apply only to listed companies or companies who have notified the GSE of Intended acquisitions activity involving them and a listed entity such that the Rules would become applicable. However, the apex regulator, the SEC is currently working on Draft Regulations on Mergers and Takeovers which would be applicable to all public companies in Ghana engaged in mergers and acquisitions, pursuant to the Securities Industry Law, 1993 (PNDCL 333), as amended. The promulgation of the SEC’s Regulations on Takeovers and Mergers should automatically lead to the demise of the GSE Rules on Takeovers and Mergers.
The acquisition of Ghana Breweries Limited (GBL) by Guinness Ghana Limited (GGL) in 2004 (which changed its name to Guinness Ghana Breweries Limited, (GGBL) has thrown up very interesting legal questions that necessarily must be answered to guide the entire Ghanaian market in future mergers and acquisitions. In this article, I would attempt an assessment of the legal basis for the acquisition as expressed in the Offer Circular forwarded by the then GGL to GBL’s shareholders and postulate an opinion on the legalities underpinning the particular transaction. I have also been intrigued as I follow the Mittal Steel/Arcelor takeover battle being played out in European markets and compare it to the Guinness takeover of Ghana Breweries particularly regarding the interplay of securities rules applicable to the deal. In the past few weeks, for example, the respected news magazine, The Economist, has carried advertisements from first, Mittal Steel, aimed at the shareholders of Arcelor, extolling the virtues of the proposed takeover. Mittal’s pitch was aptly titled “Arcelor shareholders, you have a right to be properly informed.” I have also seen the advertorial by the management and board of Arcelor which followed later, essentially telling its shareholders not to sell their shares to Mittal Steel as the future held bright for Arcelor’s prospects. I was therefore rather intrigued by news filtering in that Arcelor and Mittal Steel may be reaching an agreement in what has become a long drawn out takeover battle. As I write this article, Mittal Steel has apparently won the battle for Arcelor. Joseph Kinsch, Chairman of Arcelor, called it “a marriage of reason”. After using every defence Arcelor could muster over a period of more than five months including a Russian steelmaker, Severstal as a white knight, to rebuff Mittal’s hostile bid that statement probably was made through gritted teeth.
As a securities lawyer, I would recommend that all Ghanaian corporate executives read about the Mittal Steel/Arcelor takeover battle. It has been long and drawn out but fundamentally played within the rules. Instructively, the shareholders of Arcelor have had access to relevant information that enables them to make informed decisions about what to do with their investment in Arcelor. How do we manage ours in Ghana?
Ghana’s stock market is a fast-growing emerging market and there are strong
indications that major mergers and acquisitions will happen on the market in the
near future. Recently, Total Outré Mer S.A. of France engaged in the process of a
takeover offer to shareholders of Mobil Oil Ghana Limited. It is noteworthy that
the Total acquisition was by way of a tender offer, having expressly disclosed in
the circular that it will only acquire shares up to a defined percentage. The
tender offer technique is a means of buying a substantial portion of the
outstanding shares or stocks of a company by making an offer to purchase all
shares, up to a specified number, tendered by shareholders within a specified
period at a fixed price, usually at a premium above the market price. A tender
offer is often the first step in acquiring a company, since the company making
the tender offer may follow the tender offer with a merger proposal. The Total’
Offer is a good example. That appears to have gone fairly smoothly. The only
thing left for the regulator to do is to hold Total to their commitment to proceed
to the merger as clearly defined in the circular to Mobil’s shareholders in respect
of the tender offer. That is where the SEC of Ghana has woefully failed in the
past situations of mergers and acquisitions it has supervised. Why has the
Guinness takeover of Ghana Breweries led to so much controversy leading to
actions in the High Court by a former shareholder of Ghana Breweries and an
application which is currently pending before the High Courts of Ghana seeking
an order of mandamus to compel the SEC to investigate the acquisition by
ThinkGhana. Why is the SEC not following through on seeing the so-called
merger of Guinness Ghana and Ghana Breweries through after more than two
years? Why are shareholders of Guinness being paid dividends when
shareholders of Ghana Breweries get no dividends? Will it ever be possible to
clearly distinguish between the assets of Ghana Breweries for the purposes of
valuations to enable the shareholders get a fair final dividend or is there a grand
scheme at fudging the assets such that it becomes impossible to have a clear
delink between undertakings pursuant to the takeover and any future merger of
the two companies? What are the tax implications for the state as these
processes unfold? Fundamental questions of corporate governance have arisen. This article seeks to tackle some of the critical issues arising with a view to helping the discourse on shaping an appropriate corporate governance regime for the country which will be in tandem with best practices the world over.
Takeovers Vrs. Mergers
Takeovers and mergers have been used interchangeably and rather liberally in the Ghanaian media. This has particularly been so regarding the acquisition by GGBL of GBL. The general population may still be unclear as to what has actually taken place and whether the transaction was a merger or a takeover. It will therefore be helpful to state the historical facts. The facts are that in June 2004, GGL launched its Offer Circular in which it detailed the terms of an offer to the ordinary shareholders of GBL to purchase all the outstanding ordinary shares of GBL. GGBL is owned by Diageo Plc of the United Kingdom whilst Heineken International was the majority shareholder of GBL at the time. The said takeover offer was launched further to Heineken’s Irrevocable Undertaking to offload its shares in GBL to Diageo Plc, the parent company of GGBL. Irrevocable Undertakings are essentially binding promises on the part of the holders of the relevant shares to offer them to the offeror provided certain agreed conditions are satisfied. It must be noted that both majority shareholders in the two entities are major multinational companies involved in the breweries industry worldwide. Ultimately GGBL was able to acquire 99.7% of GBL’s outstanding shares. Currently, there are about 1000 shareholders of GBL, which pursuant to undertakings in the Offer Circular has since been delisted from the GSE.

GBL, Dead or Alive?
It instructive to point out that delisting does not mean liquidation. Since the takeover, there has been a concerted effort in the media and through certain public activities that have given the impression that GBL had ceased to exist. Indeed, an article written by one Edward Quartey, appeared in the business column of the highly esteemed Daily Graphic newspaper on February 13, 2006 captioned “ThinkGhana and the Guinness Merger”,. That article stated categorically that there had been a merger between GGBL and GBL and therefore GBL did not exist. It further asserted that the transaction was a merger and not a takeover, as consistently stated by ThinkGhana. Fortunately, months after the said article, the non-existent GBL has been able to hold two Annual General Meetings. No steps were however taken by anyone in Ghana to disabuse the minds of the investing public on the issues, except a rejoinder by ThinkGhana which sought to state the correct position under Ghanaian securities laws. Neither the SEC nor the GSE nor GGBL nor GBL saw it fit to correct the obviously wrong impression created. At the present date therefore, it is uncontested that GBL has not been liquidated and still exists.

According to the Concise Oxford Dictionary (9th Edition), a merger is “the
combining of two commercial companies etc into one.” A takeover is
defined as the “assumption of control (especially of a business); the
buying out of one company by another. A merger is conventionally defined as a “transaction whereby assets of two companies become vested in or under the control of one company (which may or may not be one of the original two companies) which has as its shareholders all or substantially all the shareholders of the two companies”. A takeover is however a “transaction or series of transactions whereby any person acquires control over the voting rights or the assets of a target company”.

In the transaction under review therefore, the applicable rules at all times were
the GSE Rules on Takeovers and Mergers, with full regard to relevant applicable
provisions under any other Ghanaian securities legislation. This is because this
was the first time a listed company was being taken over by another listed
company. It will be necessary to set out in full, rule 1 of the GSE Rules on
Takeovers and Mergers as a guide.

Rule 1: Substantial Acquisition of Shares:
1. (1) Where any person acquires or agrees to acquire any
shares and the number of shares so acquired or agreed
to be acquired, together with the total number of
shares already held by such a person, exceeds or shall
exceed in the aggregate 15% of the voting
capital of the company, the company and the acquirer shall notify the Exchange within 2 days of such acquisition or such agreement for acquisition.

(2) Where any person holds shares which in the aggregate carry less than 25% of the voting rights in the Company, he shall not acquire any shares which, when aggregated with the shares already held by him, shall carry 25% or more of the voting rights unless he notifies the Exchange and fulfills the conditions specified in rule 2.

Provided that nothing in this sub-rule shall apply to a person who on an
application to the Council is specifically granted exemption.

(3) A listed company which has any information on the transactions mentioned above which has or is likely to have any effect on:

a. the company's assets and liabilities;

b. its financial position; or

c. the general course of its business

leading to substantial movements in the price of its
shares shall make this information known to the
Exchange within 7 days.

(4) The above requirements shall not be applicable to an acquisition by a person who has announced his firm intention to make an offer to a listed company and has also notified the Exchange.

Legal Basis/Conditions of the Offer

The Offer Document submitted by Guinness Ghana stated that the Offers were being made under Rule 1(4) of the GSE Takeovers Rules because Guinness Ghana was not a registered shareholder of GBL at the time of the Offers. This was also sanctioned by both the GSE and the SEC. At the time the announcement of the transaction was made through the GSE, a firm intention to make the offer had been made by GGBL and the GSE duly notified. However, could those three characteristics, namely status as non-shareholder of GBL, announcement of firm intention to make an offer to GBL, and GSE notification imply that the GSE Rules were not applicable? What rules would guide an acquisition in that regard? The Guinness Offer Circular stated clearly that “As Guinness Ghana is not currently the registered holder of any Ghana Breweries shares, the Offer is being made pursuant to regulation 1(4) of the Ghana Stock Exchange Rules on Takeovers and Mergers. In addition, the Transaction does not constitute an arrangement or amalgamation for the purposes of Part S of the Companies Code.”

Part S of the Companies Code concerns arrangements and amalgamations. Section 229 of the Code defines what the terms mean. Under s229(a), “the expression ‘arrangement’ means any change in the rights or liabilities of members, debenture holders or creditors of a company or any class thereof or in the Regulations of a company, other than a change effected under any of the foregoing sections of this Code or by the unanimous agreement of all the parties affected thereby. S229(b) defines “amalgamation” as “any merger of the undertakings or any part of the undertakings of two or more companies or of the undertakings or part of the undertakings of one or more companies and one or more bodies corporate”. Prof. Gower, the brain behind Ghana’s Companies Code of 1963, admitted in the Final Report of the Commission of Enquiry Into The Working and Administration of Present Company Law of Ghana (usually referred to as “Gower’s Report”) that an arrangement could include a compromise with creditors or members which is to bind all concerned in the corporate entity even though all may not have agreed. An amalgamation would necessarily involve the merger of undertakings.

The relevant rules for the purpose of this discussion are sub-rules (1) and (2) of rule 1 of the GSE Takeovers and Mergers Rules. Sub-rule 2 states that where any person holds shares which in the aggregate carry less than 25%, such a person cannot acquire more such that it will hold 25% or more unless the GSE is notified and also fulfils conditions under rule 2 which is the core conditions underpinning takeovers on the GSE. The caveat applies to persons who already hold shares. I therefore submit that the exemption under sub-rule 2 would apply to such persons.

Rule 1(4) states that the requirements in rules 1(1),(2), are not applicable to acquisitions by persons who have announced a firm intention to make an offer to a listed company and have also notified the GSE. It is instructive that rule 1(1) states “acquires or agrees to acquire” an aggregate of 15% of voting capital. This implies that under that sub-rule, a notification that a person intended to acquire up to 15% or more should suffice. I wish to submit that a close reading shows that an agreement to acquire 15% could trigger rule 1(1). Thus the first threshold for communicating to the GSE in respect of acquisitions is 15%. However, unless there is an agreement to acquire more shares such that the person’s aggregate holdings would exceed 25%, the “real’ takeover rules are not triggered. Thus one can acquire shares below 25% and not trigger the takeover rules of the GSE but would necessarily have to send a notice to the Exchange at the 15% threshold. Acquisitions can continue so far as they remain less than 25%.

Rule 1(2) does not present such ambiguities. It states that where any person holds shares less than 25%, he cannot acquire more such that the person holds 25% or more unless the GSE is notified and the person fulfils the conditions in Rule 2 (emphasis mine).

The essential characteristic under rule 1(2) to my mind is that one must already hold shares of the entity. “A person” in the exemption refers to persons clothed with a certain characteristic: “…holds shares which in the aggregate carry less than 25% of the voting rights….”

The interpretation of the position that the transaction was done pursuant to rule 1(4) would seem to necessarily imply that exemptions had to be granted by the GSE in respect of:
● precondition of being a shareholder in the first instance before rule 1 (2) is invoked and
● requirement of notification to GSE (admittedly a moot point in this case) and
● fulfilling conditions in rule 2.

The position on this matter is informed by the fact that in the GBL Acquisition, GGBL had secured irrevocable undertakings in respect of the Heineken holdings in GBL. Heineken could therefore not be able to resile from the undertaking to transfer its stake in GBL to GGL. From these irrevocable undertakings therefore, GGL had “agreed to acquire” approximately 76% of GBL. In the circumstances, all things being equal, I wish to submit therefore that the applicable rule to the transaction would be rule 2, unless the GSE had expressly granted an exemption from the said rule. However, a close study of the Offer Circular does not make any specific reference to any such exemption.

It is therefore my considered submission that it is only in respect of acquisitions between 15% and 24.99% which would not trigger rule 2. In the event that exemptions become necessary, it is important in the circumstances for such exemptions, if any, to be clearly stated in the Offer Document (emphasis mine). If the GSE and/or the SEC had granted an exemption, it should have been expressed and the reasons therefore clearly given in the Offer Document.

I respectfully wish to submit that rule 2 is invoked by virtue of the provisions of rule 2(1)(b) of the Takeover Rules. Rule 2(1)(b) states that where “any person secures the control or management of a company by acquiring or agreeing to acquire, irrespective of the voting capital, the securities of directors or other members who by virtue of their holdings of securities together with the holdings of their relatives or nominees control or manage the company”, the applicable rules under rule 2 are invoked. It seems to me that this particular provision best describes the antecedents to the transaction and therefore looks to be the most applicable trigger for the invocation of rule 2 of the GSE Takeovers Rules.

Rule 1(4) states that certain requirements shall not be applicable in case of a person who has announced a firm intention to make an offer to a listed company. The major question is which requirements are the exemptions applicable? Respectfully, rule 1(1) is not in contention as it is obviously not applicable. The relevant clause for interpretation is rule 1(2). Is it the requirement not to make the acquisition without prior notification to the GSE? A close reading of rule 1(2) and (3) seems to suggest that notification is not waived. Therefore is it in respect of fulfilling the conditions specified in rule 2? It may be necessary for these knotty legal issues to be clarified for the sake of clarity in respect of future acquisitions through the GSE.

A close reading of rule 1(2) seems to indicate that where the acquisition is more than 25%, the requirements of rule 2 which are the essential disclosure requirements in that regard has to be complied with. Conventionally, regulators would only grant such exemptions where it is in respect of corporate actions such as rights issues where mini-prospectuses may be required because the targeted persons are either already members of the company or are privy to the information. My humble submission is that in this case where GBL shareholders were being solicited to invest in GGBL, all relevant information necessary for informed decisions as defined under rule 2 are applicable. Any deviation therefrom must be clearly pursuant to exemptions expressly granted by the regulators and the Offer Circular must denote as such. I further submit that in the philosophy of regulation, it should not be possible for any regulator to grant an exemption from disclosure requirements obligated by law which shareholders need in order to make an informed investment decision (emphasis mine). In this particular instance therefore, the regulators seemed to be signalling that there were no rules that guided that transaction on the stock exchange. That, respectfully cannot be the position. If a transaction can be done under rule 1(4), which by the definition of the regulators technically ousts the invocation of rule 2 which contains all the necessary requirements on disclosure for the protection of investors and the Offer Document further states that the “Transaction does not constitute an arrangement or amalgamation for the purposes of Part S of the Companies Code”, the billion-cedi question is therefore under what rules or law was the takeover of GBL by Guinness Ghana premised?

Legal Effect

The major question that confronts all students of securities law in Ghana should be, what standards of disclosure are guaranteed in this regard. Does the Offeror then have power to cherry-pick what disclosures to make in the Offer Circular? Does the regulator strike a deal with the Offeror to keep material information, necessary and indeed warranted under law, out of the Offer Circular? What does the Securities Industry Law, 1993, as amended and the Securities and Exchange Commission Regulations of 2003 (LI 1728) say on disclosures? When a statute demands disclosure, can the GSE suo motu or even with the fiat of the SEC, sanction an abdication from fulfilling statutory disclosure obligations? (emphasis mine).

The situation becomes even more intriguing when available records on the Transaction indicate that when the original Offer was made by Guinness to the GBL Board, Guinness was in clear breach of its disclosure requirements to the GSE.

The provisions in Part VII of the GSE’s Listing Regulations bind the Offeror as a listed company. However the reporting regimes in the market have been fundamentally altered by the promulgation of the LI 1728. Regulation 55(1) of LI 1728 is instructive. Under the old GSE reporting regime, listed companies were obliged to disclose half-year results not later than 3 months after the end of the relevant period. Preliminary financial results were also to be published not later than 3 months after the end of the relevant financial year. A fully audited annual report was expected to be published not later than 6 months.

But the old order changeth! Under LI 1728, an annual report was to be published not later than 3 months from the end of the relevant financial year (regulation 54 of LI 1728). However, regulation 55 introduced a new quarterly reporting regime such that quarterly financial statements in defined form were to be filed with the regulators and published not later than one month from the end of the relevant quarter. What this means is that where a firm’s quarter ended in March, if the SEC did not receive the quarterly unaudited results by May 1, defined sanctions must necessarily be applied.

It is significant to note that LI 1728 does not mention half-year results as was the case in the GSE Listing Regulations. This is because the reporting format was such that the second quarter results would automatically reflect the position at half-year. The more important point to note however in respect of the new reporting regimes is in terms of content. It also differs fundamentally from the old regime. It is also important to note that where the GSE Listing Regulations conflict with LI 1728, it is my submission that LI 1728 would prevail. The reporting requirements under LI 1728 entail a much more detailed disclosure regime than under the requirements of the GSE Listing Regulations. Note reg. 52(1) entails all listed companies to comply with the Rules on Takeovers and Mergers of the GSE.

Guinness Ghana’s financial year ends on June 30. Thus ordinarily, its first quarter results for financial year 2004 should have been published latest by October 1, 2003. LI 1728 clearly states that after a month’s grace period has expired, a company would be in default and is liable to pay ¢2million for each day the default continues. Till date, Guinness Ghana’s first quarter results have never been disclosed yet the SEC and the GSE approved a major transaction involving a corporate entity that was essentially in breach of the disclosure rules on the market. Ultimately, Guinness Ghana’s half-year results for the period in question were published as GSE Press Release No. 021/2004. This obviously went some way to cure the lacunae in information that the market needed in order for informed investment decisions particularly during a period when a major takeover process was underway. But did the half-year results published through the GSE actually set out to provide badly needed information or was it a cosmetic attempt at financial disclosure?

A cursory look at the mode of disclosure by Guinness Ghana in respect of the half-year results also gives cause for concern. As outlined earlier, LI 1728 has broadened the depth of information to be provided under the GSE’s Continuing Obligations for listed companies. Reg.56 of LI 1728 on contents of quarterly financial statements provides as follows:

(1) “The quarterly financial statements shall comprise either a complete set of financial statements or a set of condensed financial statements but the statements shall include at least
a. A balance sheet
b. An income statement for the period on a year to date basis;
c. A statement where relevant showing either
i. Changes in equity
ii. A statement of recognized gains and losses, changes in equity,
except those arising from capital transactions with owners
and distribution to owners;
iii. selected explanatory notes as specified in this regulation; or
iv. a condensed cash flow statement.”

However it seems that Guinness Ghana used the old format under the GSE Listing Regulations in purported compliance with LI 1728. What this means is that essential details of financial information that would have been captured under the applicable regulation which is the LI 1728, were conveniently missing in the format adopted. Was it deliberate? Was it inadvertent? Were the regulators aware of this? Did the regulators grant an exemption to make disclosure as provided under LI 1728? These questions would be answered in the High Court when it has an opportunity to consider the application for mandamus filed against the SEC. It is as yet unclear whether Ghanaian case law has anything in respect of mergers and acquisitions, particularly regarding actions taken pursuant to prevailing securities laws in Ghana. The action taken in the High Court in Ghana was due to the fact that it seemed both the GSE and the SEC have allowed breaches of fundamental disclosure obligations to pass. This however may not absolve SEC and the GSE from potential lawsuits alleging complicity in the breach of the securities laws, which could possibly be interpreted as calculated to deny full disclosure in respect of a major transaction such as under review.

Conclusion

Having evaluated all these situations, I have been concerned about the continued insistence on rule 1(4) as the legal basis for the takeover of Ghana Breweries by Guinness Ghana. In the light of the foregoing, it is my humble submission that more disclosure, not less, was necessary. The irony in the particular situation was that the Guinness Ghana Offer Document fundamentally and in a very large measure, attempted to comply with rule 2 of the GSE Rules on Takeovers and Mergers. I therefore see no utility in tagging the transaction under rule 1(4) as it served no purpose but to heighten doubts about fundamental disclosures in respect of the deal.

In the light of the foregoing, I am not comforted by the fact that both the Offer letter and the Offer Document indicated that both the GSE and SEC were satisfied with the Transaction and the disclosures made pursuant thereto. I submit that takeovers on the Ghana Stock Exchange are legally done under rule 2. The non-applicable requirements should not be interpreted to imply total abdication from the provisions of rule 2. That may give too much room to Offerors to determine what disclosures to make, leading to potential breaches of Ghana’s securities laws, ironically sanctioned by the very ‘policemen’ who have been tasked with protecting the integrity of the market and investors. After all, the cardinal principle in disclosures is “material information necessary for informed investment decisions”. Thus, if the information is material and is necessary for informed investment decisions, any regulator who grants an exemption from disclosure would either have been acting to guarantee a potentially ‘fat’ listing fee or would have inadvertently sanctioned a clear breach of Ghana’s securities laws, for which all parties involved may be held accountable.

Does that account for the loud silence of the Total Offer Circular on what particular provisions were applicable to the transaction?

The securities market is young and growing. It is my expectation that over time, both from experience gained by the regulators and relevant case law that will necessarily be developed, The Ghanaian securities regulatory framework will be as relevant to modern securities regulation pursuant to IOSCO best practices just as any other jurisdiction in the world.

Together We Build!

Joe Aboagye Debrah Esq.

Partner, 1stLaw, Legal Practitioners/Consultants, Accra.
CEO, ThinkGhana, Accra.
Former Coy. Secretary/Legal Adviser, Ghana Breweries Limited, Accra
Former Legal Adviser, Ghana Stock Exchange, Accra.