The Honorable Islamabad High Court declined to lift its the stay on Greentree Holdings Limited and its advisor AKD Securities Limited from Greentree proceeding with its acquisition of a controlling interest in TRG Pakistan Limited.

The IHC had earlier granted its injunction on the basis that Greentree has no funds of its own but was instead illegally using TRG Pakistan’s own money to purchase TRG Pakistan’s shares. In 2021, TRG Pakistan had given approximately $200 million to its Bermuda-based affiliate TRG International, which is 69% owned by TRG Pakistan. TRG International then gave the money to its 100%-owned subsidiary Greentree, which used the funds to purchase TRG Pakistan’s own shares.

In 2022, the Securities & Exchange Commission of Pakistan ruled that this conduct by TRG Pakistan and Greentree was illegal under Section 86 of the 2017 Companies Act. The SECP issued a show cause notice to TRG Pakistan for this and other violations, but TRG Pakistan received a stay order from the Honorable Sindh High Court that stopped further investigation and enforcement.

Three years later, Greentree is repeating the same conduct, this time to take over the whole company. Experts say that this is an attempt by the management of TRG Pakistan to keep itself in place as the share price of TRG Pakistan has collapsed while the business has incurred huge losses of over Rs 30 billion and its principal subsidiary Afiniti Limited has declared bankruptcy.

TRG Pakistan has repeatedly refused to hold board elections which have now been overdue since January 14, when the term of the present board expired. Greentree filed a suit in the Honorable Sindh High Court seeking to delay elections until after it acquired a controlling interest, but the Sindh High Court refused to stop the elections.

The Islamabad High Court’s injunction has created an awkward position for parts of the brokerage community that had been advising clients to accumulate a position with the view of making a quick return. That is no longer possible given the Honorable Islamabad High Court’s orders. The market now seems to believe that the Greentree transaction will not happen, with the shares trading at a 20% discount to Greentree’s offer price of 75 Rupees per share.

TRG Pakistan and Greentree are taking the position that the Greentree acquisition will bring $50 million in investment to Pakistan. However, experts say that Greentree’s purchases were occurring through an SCRA account. This meant that no dollars were actually coming to Pakistan and that the funds would be repatriated back to Bermuda when Greentree ultimately sold its shares.

Further, Greentree’s acquisition did not lead to any voting or dividend rights cancellation which would be the case under a proper share buyback of shares by TRG Pakistan itself. Experts also stated that the proposed structure evaded approximately $30 million in Pakistani taxes, which would be due if TRG Pakistan properly took possession of its own funds and returned money to its shareholders.

This Greentree purchase is part of a battle for control over TRG Pakistan between the present management and its former CEO Zia Chishti. The present management has less than a 1% shareholding in TRG Pakistan, hence the purchase of shares through Greentree to counter Zia Chishti’s approximately 25% shareholding.

Recently both sides claimed victory in an arbitration decision in the United States, with TRG Pakistan’s management stating that Mr. Chishti had violated his contract with TRG Pakistan by pledging certain of his shares, while Mr. Chishti stated that the arbitration decision gave him the right to freely sell over 90% of his shares.

All eyes are now on the Securities and Exchange Commission of Pakistan and on the Competition Commission of Pakistan who are required to provide their responses to the Islamabad High Court, which has set a hearing for March 13th. Experts say that, in particular, the SECP’s analysis of the law will be a strong indicator as to the likelihood of success of Greentree’s tender offer. To the extent that the SECP maintains its earlier stance that Section 86(2) bars a public company from providing financing to purchase its own shares, that will make clear that Greentree’s tender offer is illegal.