End to Affin-BSN merger dispute?

An out-of-court settlement is on the cards in the legal dispute arising out of the 2001 merger between BSN Commercial (M) Bhd and the former Perwira Affin Bank Bhd, which resulted in the creation of Affin Bank Bhd.

This is the latest development in a lawsuit filed in 2007 by BSNC Corporation Bhd (formerly BSN Commercial Bank) against Affin Bank Bhd and its owner Affin Holdings Bhd.

BSNC Corp had taken legal action against Affin, alleging a breach of contract, after several years of negotiations over who should rightfully own some 106 debtor accounts that were said to be non-performing.

Court documents seen by The Edge Financial Daily showed that the court was informed on Sept 8 that BSNC had received a letter of offer from Affin to settle the dispute.

Court notes also quoted lawyers as saying “it is a serious offer”, before adding that BSNC’s board was on leave for the recent Hari Raya holidays.

The Kuala Lumpur High Court then fixed Oct 8 for case management, vacating several dates in September which had initially been fixed for hearing of the lawsuit. The matter is being heard before Judicial Commissioner Harminder Singh Dhaliwal.

When contacted, a source confirmed that there had been an attempt by Affin to settle the matter out of court but the offer was made “without prejudice”.
The ball now rests in the court of BSNC’s board of directors, the source said.

“If they (BSNC) don’t accept the offer, Affin has to either increase the offer price or decide if it wants to go for full hearing,” the source added, without revealing details of the offer.

The dispute arose from several revisions to the terms of merger of the two entities as part of Bank Negara Malaysia’s mandatory banking consolidation exercise undertaken after the 1997-98 Asian financial crisis.

Back then, BSNC had agreed to sell and transfer its banking business to Affin Bank in an agreement dated Aug 30, 2000 for a total consideration of RM338.56 million. The purchase price was later revised to RM338.98 million.

BSNC was incorporated in July 1975 as Bank Buruh before it was subsequently launched as BSN Commercial Bank in 1995. After selling off its banking business to Affin, BSNC now operates as an investment trading company and financing provider.

Under the original acquisition agreement, Affin Holdings was to pay BSNC RM67.71 million cash (equivalent to 20% of the total consideration) as part settlement of the purchase price.

The remainder would be settled via the issuance of 96,731,429 new shares in Affin Holdings at an issue price of RM2.80 apiece.

In an Aug 30, 2000 announcement to Bursa Malaysia, Perwira Affin said the purchase price of RM338.56 million represented a price-to-book multiple of 1.57 times the adjusted net tangible assets (NTA) of BSNC as at June 30, 2000 of RM216.03 million.

According to court documents, Affin Holdings had paid BSNC RM67.8 million cash on Jan 8, 2001.

But three months later, on April 6, 2001, Affin Holdings wrote to BSNC to raise issues including those involving the debtor accounts, which Affin said were “not recoverable in the ordinary course of business”.

Excerpts of Affin Holdings’ letter, quoted in court documents, stated: “We regret to inform however that based on draft audited accounts, there are amounts due from debtors (which have not been reflected as bad or doubtful debts in the audited accounts of BSNC as at June 30, 2000) that are not recoverable in the ordinary course of business.

“We anticipate that the amount will be well above 30% cap on the warranty provided by BSN ...”

Affin Holdings’ letter also proposed the following:

- that Bank Simpanan Nasional and BSNC acknowledge and confirm that, under Clause 2.1.5 of Schedule 1 of the Acquisition Agreement, BSNC is liable to Affin Bank and Affin Holdings for the sum of RM101.69 million, which is equivalent to 30% of the purchase price of settlement sum

- Affin Holdings shall issue to BSNC, pursuant to the agreement, 60,532,143 ordinary shares of RM1 each instead of 96,851,428 ordinary shares of RM1 each in settlement of the balance purchase price less the settlement sum

In a letter dated April 14, 2001, BSNC accepted Affin Holdings’ proposal and requested the transfer of 60,532,143 shares in Affin Holdings to BSNC at the value of RM2.80 per share, which would amount to RM169.49 million.

However, in another letter dated July 16, 2001, Affin Holdings told BSNC that “it cannot be said that all outstanding issues have been resolved”.

Affin Holdings alleged, among other things, that there was a “material deterioration of the net tangible assets (NTA) of BSNC as the quality of BSNC’s loans are suspect”.

Various letters between the parties followed until a settlement letter dated Jan 18, 2002 was issued with a view of settling the alleged “material deterioration” of BSNC’s NTA.

The settlement, court documents stated, provided for an effective reduction of the remaining balance of the purchase price from RM169.49 million (to be satisfied by 60,532,143 shares of Affin Holdings at an issue price of RM2.80) to a sum of RM80,507,750 (to be satisfied by 60,532,143 shares of Affin Holdings at an issue price of RM1.33).

This resulted in a further reduction of RM88.98 million in the balance purchase price.

BSNC is suing for the return of the amount in all the debtors’ accounts that were not recovered.

“The identity of these debtors accounts is a question of fact that is within the peculiar knowledge and records of the second defendant (Affin Bank),” BSNC said, adding that the 106 debtors’ accounts total RM988.07 million.

In the event the dispute goes to full hearing, Affin would have to disclose the amounts it had recovered from the 106 accounts, if any.

BSNC was also claiming damages for breach of contract and restitutio in integrum (restoration to original condition) for the sum of RM101.69 million, which was deemed paid by BSNC when the purchase price was reduced by that amount.

Affin Holdings and Affin Bank, in their statement of defence, however, have asked the court to dismiss BSNC’s suit.

Affin noted that they were entitled, under the agreement, to return any non-performing loan account to BSNC and claim repayment up to a maximum of 30% of the purchase price paid for the merger if it was discovered that some of the alleged performing loans were in fact non-performing.

Affin claimed that it was “completely reliant on the warranties in entering into the acquisition agreement” as BSNC’s accounts for 2000 had not been audited as at the date of acquisition agreement and as at the completion date.

PricewaterhouseCoopers and Bank Negara Malaysia (BNM) had completed audits on BSNC after the completion date of the merger, Affin added.

According to Affin, BNM had in its interim audit results determined that BSNC had made “insufficient provision” for some non-performing loans and instructed Affin Bank to make additional specific provisions of RM156.42 million.

When the audits were finalised in June 2001, BNM determined that Affin Bank had to make further specific provisions of RM104.15 million for the non-performing loans acquired from BSNC, Affin said.

“As a result of the audits, it became clear that the plaintiff (BSNC) had overstated the value of its banking business by RM260,580,259.

“Given this, the plaintiff’s NTA had changed from approximately RM104.5 million as at Dec 31, 1999 to negative RM117.6 million as at Dec 31, 2000 with the accumulated losses increasing from approximately RM353.6 million in 1999 to RM575.7 million in 2000,” Affin said in its defence.

According to Affin, at negotiations between the parties, including a meeting held on Oct 31, 2001 at BNM, it was agreed that a full and final settlement of all claims arising out of the acquisition agreement would involve:

- Affin Holdings issuing 60,532,143 shares to BSNC with the transaction price of each share being reduced from RM2.80 as agreed in the acquisition agreement to RM1.33 per share;

- As a gesture of goodwill, Affin Bank would assign debts (not specified) not exceeding RM101.694 million to BSNC on the condition that the latter would obtain prior written approval from the Minister of Finance pursuant to Section 49 of the Banking and Financial Institutions Act 1989 (Bafia).

However, Affin contended that the Minister of Finance in an order published in the Government Gazette only exempted Affin Bank (the second defendant) from the provisions of S49 of Bafia in respect of the proposed re-transfer of loans to the plaintiff.

“No corresponding exemption under Section 118 of Bafia or approval under Section 49 of Bafia was ever given to the plaintiff to receive and operate these loan accounts.

“The debts to be assigned to the plaintiff are in fact loan accounts which form part of the plaintiff’s (BSNC) banking business before the surrender of its banking licence and subsequently formed part of the second defendant’s (Affin Bank) banking business,” Affin said.


Written by Chua Sue-Ann
This article appeared in The Edge Financial Daily, September 21, 2010.