3SBio | NASDAQ | Meeting Date: 2013/04/24
The announcement of a management buyout often fills public shareholders with a sense of worry and skepticism, with good reason. When a company’s own senior executives decide to buy the company, unaffiliated shareholders need assurance that they haven’t been short-changed by a group of buyers with more and better information about the company.

Also, shareholders want to know if management’s buyout offer received any favorable treatment, perhaps giving it an upper hand over any competing offers from third parties. Given the inherent conflicts of interest and the potential disregard of shareholder interests, management buyouts rightly deserve a higher level of scrutiny.

When we review the merit of buyouts involving members of management, we generally look for a few common safeguards. They include an independent board committee to direct the negotiation process and review the buyout on behalf of unaffiliated shareholders, a “majority-of-the-minority” voting requirement that ensures independent shareholders have their say and a thorough solicitation process seeking alternative offers to ensure the buyout price is fair and the best available.

Chinese biotech firm 3SBio Inc., which trades primarily on the Nasdaq using American Depositary Shares, or ADSs, announced last September that it received a buyout offer from its chairman and CEO. The deal involves a total of 15 members of the company’s executive management team. Even though the board created an independent committee and conducted a solicitation for other offers, the process appeared to be rigged in a manner that all but guaranteed management’s offer would be the last one standing.

3SBio received a bid from another company that was 17% to 30% higher than management’s offer. Though the board perused the higher offer, 3SBio’s management discouraged the competing bidder from moving forward with its offer. In fact, 3SBio’s CFO on two occasions told the other buyer that management preferred a deal involving the company’s CEO, who was already committed to his own deal.

In effect, the commitment of the CEO and 14 other members of management made for a strong front that forced other would-be buyers to contemplate how they might operate 3SBio if a majority of its senior management left the company following a transaction — a strong deterrent indeed. As a result, management’s bond nearly guaranteed that any buyout would involve executives and exclude unaffiliated parties.

Were it not for the CFO’s and management’s stiff-arming of the other buyer, it’s fairly likely that 3SBio could have fetched a higher price than what’s presently offered to shareholders. The company’s prospects remain bright, with projected double-digit revenue growth and healthy profit margins. In addition, there were other indications that the buyout price might be on the low side. Against this backdrop, management’s buyout offer appears insufficient.

In this case, even though the board took steps to protect unaffiliated shareholder interests, management’s conduct and undue influence over the solicitation process was too great to be reined in by typical safeguards. As such, shareholders may have good reason to remain concerned and skeptical about management’s buyout offer.

At least one major shareholder has come out against the deal. OrbiMed Advisors, which owns 9.4% of the outstanding shares, believes management’s offer undervalues the company. It points to the higher offer from the third party and also to favorable developments for the company since the buyout announcement. As a result, OrbiMed plans to vote against the management buyout.

All shareholders will have the opportunity to voice their opinions on April 25, 2013, at 3SBio’s shareholder meeting to vote on the buyout.


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