Academic Case Study HOSTILE TAKEOVER OF ADAMJEE INSURANCE COMPANY LIMITED (AICL) Submitted to; Dr. Irum Saba Submitted by; Naveed Aslam (15187) Muhammad Daniyal (18195) Hafiz Syed Muhmmad Ubaid (15188) Aiman Shaikh (18197) INSTITUTE OF BUSINESS ADMINISTRATION, KARACHI Ethics and Corporate Governance –Case Study CASE SYNOPSIS This case presents a chronological review of the first and the largest hostile Takeover in Pakistan. Mian Muhammad Mansha of Nishat group was able to accumulate significant shareholding in a company with a weak stock performance but with a strong future potential. This case highlights how Mian Masha worked around the regulations and legal framework to get hold of the largest general insurance company of Pakistan. At that time, Adamjee Insurance Company Limited (AICL) was marred by poor operating performance due to weak management of the company. The Adamjee family was not able to keep the company on track which had a high free float. Mian Mansha gained a huge stake in the companies with the help of his bank, MCB Bank and the MCB Employees funds in addition to his other companies and allegedly manipulated the share price. By the time the Adamjee family became aware that they have lost their control, it was too late… PROFILE OF MIAN MUHAMMAD MANSHA Mian Muhammad Mansha is a business tycoon. He is the founder Nishat Group. Mansha is the highest tax payer in Pakistan. Nishat Textiles Mills was begun in 1951 by his dad and uncles. He joined his family company in 1969. The family split and the companies held by Mansha were named as Nishat Group. He was worth US$2.5 billion till 2013. Aside from making enormous acquisitions, he was all the while growing his Nishat Textiles section. Nishat Textiles Mills is Pakistan's biggest texture producing plants. Mansha mainly benefitted from the privatization of the 1990s. Through this period, he made various acquisitions. Nishat Mills was able to purchase DG Khan Cement Plants situated in Dera Ghazi Khan District, Punjab, which was originally claimed by the Saigol family. Similarly, Mansha had gained a controlling stake in AICL. Allegedly, benefitting from is political connections, he acquired MCB Bank Limited with a consortium. Later, he paid out his consortium member to gain the control which eventually turned out to be most profitable bank of Pakistan. MCB Bank, in 2008, was partly acquired by Maybank of Malaysia which now owns a 20% share in MCB Bank. Forbes Magazine declared him a one of 500 richest people of the world. ADAMJEE GROUP Adamjee Group was a conglomerate of companies hailing out of Karachi. The group was founded by Sir Adamjee Haji Dawood. There have been ups and downs for the group over the past 50 years. They were able to spread their interests in sectors such as tea, sugar, textiles, paper, engineering, chemicals and insurance. Following is the list of companies in both groups. 2 | P a g e Ethics and Corporate Governance –Case Study Nishat Group Adamjee Group Adamjee Insurance Limited Ad power DG Khan Cement Company Limited Panther Trading (Pvt.) Ltd Lalpir Power Limited Commodities Trading (Pvt.) Ltd MCB Bank Matual Trading Co. (Pvt) Ltd Nishat Chunian Limited Adamjee Pharmaceuticals Ltd Nishat Power Limited Coastal Enterprises (Pvt.) Ltd Adamjee Life Assurance Limited Adamjee Diesel Engineering (Pakistan) Nishat Papers Products Company Limited Ltd Nishat Hospitality (Private) Limited Pacific Multi Products (Pvt) Ltd Security General Insurance Pakistan Adamjee Engineering (Pvt) Ltd Nishat Automobile (Private) Ltd Chempro Pakistan Ltd Nishat Agriculture Farming (Private) Enesel Industries (Pvt) Ltd Limited Sahara Buying Services Nishat Linene Trading LLC Adamjee Automotive Ltd Adamjee Polymers Company (Pvt) Ltd AICL; A FAVORABLE TARGET ON RADAR Since the sell-out of AICL shares by foreign investors (in the post-nuclear scenario 1999), few other sponsors also sold their stakes in late 90s, Adamjee Insurance has been under various attempts of take-over. The free float of the company was greater than 60% and the availability of shares in the stock market was far higher than the holding in the hands of once-strong Adamjee family, have many attempted to take over the company but failed in the absence of any effective law. Mian Mansha already decided and kept his eyes on Adamjee Insurance, which is one of the biggest insurance company of Pakistan grasping nearly 40 per cent share in the total non-life insurance business of the nation. The company held Rs. 7 billion in total assets and Rs. 1.5 billion in equity. MODE OF ACQUISITION Low price and poor performance of AICL shares. Slow acquisition by Mian Mansha Group. Mansha Group acquired 38 percent official holding in Adamjee and around 5-10 percent unofficial. They were in a position where the take-over option is there. SHARE POSITIONING Mansha Group can easily put a majority (may be 5 out of 9) directors on Adamjee's Board either through more purchase of shares from the market or through proxies. It is estimated that the Adamjee Group has holding of less than 40 percent. 3 | P a g e Ethics and Corporate Governance –Case Study In 2002, the MCB Bank pension and provident funds along with its shareholding in the insurance company crossed 36 percent of the total shares. The share position of Nishat Group in AICL is given below: Mansha Group Concern Percentage Shares Held MCB 36.38% Nishat Mills Ltd 0.03% Security General Insurance Co. Ltd 3.35% DG Khan Cement Ltd 2.86% Pakistan Molasses Co. Pvt. Ltd 0.03% Other Proxies 10.00% Total 52.64% LEGAL SUITS 2002 – 2005; IN ACTION A law suit was filed by the Adamjee family in the High Court of Sindh that was alleging that a plan was being carried out by MCB to take control over the company with depositors’ funds which is violation of Banking Companies Ordinance 1962 that does not permit a bank to take control of more than 30% shares in another company. The High Court of Sindh stopped the AGM of the AICL after the case was filed. After this situation Mian Mansha group took this point in the court that they had no intention of taking control of AICL, the court decided to vacate the stay order. The AICL family approached the Supreme Court of Pakistan to plea against the SHC’s verdict, but the Supreme Court of Pakistan relied on the statement of Mian Mansha group that they had no thought to take control of AICL. So, they upheld the SHC’s decision and ordered holding of the AGM. The AGM of shareholders of AICL was held after a 16-month-old stay against the holding of the meeting was set aside by the Supreme Court of Pakistan on March 15. The Mian Mansha group easily got control of AICL and marking the first successful 'hostile takeover' in the corporate history of Pakistan. TAKEOVER ORDINANCE 2002 Mostly pertained to disclosure of investment in a company upon acquiring 10% and 25%. The same was not applicable in this transaction due to section 3 which is reproduced below: (3) Nothing in this section apply to a person who has already acquired fifty-one percent or more of the voting share or control in consequence of making a public announcement 4 | P a g e Ethics and Corporate Governance –Case Study AGM 2004; GAME CHANGER On the AGM date, when the race just started, the Mian Mansha group was easily and officially got possession of 38.5% shares in AICL comprising 29.5% stake by the group-owned MCB and 9% owned indirectly in which 4% was through MCB Employees PF (Provident Fund) and 5% by Muslim Commercial Bank Employees Pension Fund. The Mian Mansha group had accumulated another 8% of the 20,000,000 floating shares from the stock market. With about 46% shares were already in their basket, they had only to gat 5% 'proxies' from the 30% shares held by individuals. 6 seats on the 9-member BOD were possessed by the Mian Mansha group at the end of 4-hour long AGM and after that counting of votes. The AICL could secure only three seats. A large audience of some One Hundred Seventy other shareholders came to attend the AGM, but the main majority were noticed to have retired and enjoyed the tea tables even well before the results were declared. ANOTHER LEGAL SUIT 2005; LAST HOPE The Adamjee family again knocked at the door of the High Court of Sindh in 2005 against the hostile takeover. After listening the case, a divisional bench of reputed judges summoned the judgment. In 2009, the Sindh High Court decided the matter to be listened for re-hearing. Nadeem Ahmed of Ahmed & Qazi, the counsel for AICL family, said that their customers had unconditionally withdrawn their case without any commercial or financial benefit or settlement. WHAT NEXT; PRICE BOOST!!! After the acquisition, the share was trading at around Rupees Ninety-Three. The share price in AICL has multiplied as high as five times in value since the lows of Rupees Twenty in 2002. "Now that the two-year-old drama and suspense is over, the share would settle to its true worth, which could be lower or higher than its current price," observed an equity trader. 5 | P a g e Ethics and Corporate Governance –Case Study GRAPHICAL REPRESENTATION OF FINANCIAL PERFORMANCE OF AICL BEFORE & AFTER THE TAKEOVER it is clear from the graph that the operational performance improved significantly after the takeover. Trend before and after Takeover 500000 400000 300000 200000 100000 Retained Earning / Accumulated 0 Loss -100000 2003 2004 Profit Befor Taxation Amount PKR in -200000 -300000 -400000 -500000 YEAR TIMELINE OF THE HOSTILE TAKEOVER • Controversy arose between 2002 • Adamjee family filed a suit in the Sindh High Court • AGM after 16 months stay of court 2004 • MCB group acquired control of the Adamjee Insurance • The Adamjee family again approached the Sindh High Court in 2005 against the 2005 hostile takeover • Adamjee family withdrawn their claim without any commercial or financial 2010 settlement COVERAGE BY MEDIA This takeover was widely discussed in the print media and business circles as highlighted below: 6 | P a g e Ethics and Corporate Governance –Case Study 7 | P a g e Ethics and Corporate Governance –Case Study LESSONS LEARNT Companies Act may be reviewed with reference to disclosure and takeover intent.