Tuesday 23 July 2013

Institutional investors have to fight

David Webb wrote on his website:

"Webb-site urges independent shareholders to vote against the transactions if and when shareholder meetings are convened. We consider the transactions to be blatantly unfair and unreasonable. The transactions once again illustrate a glaring hole in the Listing Rules by which companies can pay out cash to connected persons in the form of "deposits" for acquisitions which have not yet been approved by minority shareholders."

Webb also provided a link to a public statement issued by Somercourt Investments Ltd:

"Reference is made to the announcements by Sino Prosper in relation to: (i) the proposed acquisition of the entire issued share capital of Success State Development Limited from Mr. Leung Ngai Man, the chairman and an executive director of Sino Prosper (the "Chairman") dated 30 December 2011 (the "Qing Jiao Transaction"); (ii) the proposed acquisition of the entire issued share capital of Treasure Join Limited from the Chairman dated 21 December 2012 (the "Micro Finance Transaction"); (iii) the voluntary update by Sino Prosper on 19 April 2013; and (iv) the 2013 annual report of Sino Prosper (together the "Announcements", and the Qing Jiao Transaction and Micro Finance Transaction together, the "Transactions"). Terms not defined in this announcement have the meaning given to them in the relevant Announcements.

Somercourt has followed with extreme concern the Announcements, conduct and intentions of Sino Prosper in relation to the Transactions.

Somercourt believes that the Transactions are not in the interests of Sino Prosper or the shareholders as a whole and announces that it intends to vote against the proposed Transactions as and when the shareholder meetings are held to consider the Transactions. 

Despite the Qing Jiao Transaction and the Micro Finance Transaction being announced on 30 December 2011 and 21 December 2012 (more than 18 months and 6 months ago respectively), shareholders have still not received details of the Transactions other than as contained in the Announcements.

Somercourt considers that the continuing delay in dispatching detailed circulars to shareholders, and convening shareholder meetings to consider the Transactions is materially prejudicial to the interests of shareholders.

Deposits of RMB120m and HK$200m paid to the Chairman in relation to the Transactions
Under the terms of each of the Qing Jiao Transaction and Micro Finance Transaction, significant cash deposits were paid by the Sino Prosper group to the Chairman. These cash deposits:

1. represent the entire upfront cash consideration payable on completion of each Transaction;

2. were paid on an interest free and unsecured basis; and

3. represent respectively (i) more than 21% (Note 1) and 70% of the market capitalisation of Sino Prosper for the five business days immediately preceding the date of the Transactions; (ii) more than 102% (Note 2) and 135% of the market capitalisation of Sino Prosper for the five business days immediately preceding the date of this announcement; and (iii) approximately 79% (Note 3) and 107% of Sino Prosper's cash balance as at 31 March 2013.

Despite the deposits being returnable to the Sino Prosper group should the Transactions not proceed, Somercourt considers that in view of their excessive size and interest free and unsecured nature, and in the light of the intended timetable for the Transactions, the deposits do not represent normal commercial terms and arm's length negotiations and are not fair and reasonable and in the interests of Sino Prosper and shareholders as a whole. Somercourt considers that the deposits are, in substance, financial assistance and/or interest free loans to the Chairman as a connected person that should only have been made after the approval of independent shareholders had been obtained.

Purchase price under the Transactions
Somercourt believes that the consideration to be paid by the Sino Prosper group to the Chairman (as vendor in each of the Transactions) is excessive and unjustified in each case, and that the overall terms of the Transactions as detailed in the Announcements do not reflect normal commercial terms and arm's length negotiations and are not fair and reasonable or in the interests of Sino Prosper and shareholders as a whole: ....."

Etcetera, the whole article can be read on the above link.

The above episode is interesting, for several reasons:

  1. It seems that in Hong Kong there are also enough cases with serious Corporate Governance concerns, even though its standards in general are higher than in Malaysia;
  2. Somercourt, an institutional investor, is actively fighting for its rights, the above article is copied in several places (for instance here); in Malaysia this would be extremely rare;
  3. Sine Prosper paid a large amount of cash without asking permission from the minority shareholders; the same seems to be true in Malaysia, for instance in the case of Protasco the company paid out significant cash deposits of RM 50 million as upfront payment, more than 13% of the shareholders funds as of December 31, 2011. There are other glaring similarities, for instance the Protasco funds are also not interest baring, the lack of essential information, the long time that the deal takes, etc.
The Malaysian authorities should look into the hole in the Listing Rules, and also in the specific case of Protasco.

Regarding the second issue, MSWG stated on its website the following:

"..... I wish to inform that MSWG has been entrusted by the SC, the owner of the CG Blueprint, to spearhead the formulation of a new code for institutional investors (Institutional Investors Code). A Steering Committee comprising key senior representatives from the institutional investor fraternity has been formed to develop the Code for Malaysia and the 1st Steering Committee meeting was held on 12 July 2013. I was very encouraged by the support given by the heads from the various institutional funds who had also played their stewardship roles and shown their commitment for the project. I look forward to a series of engaging and insightful deliberations to deliver the Institutional Investors Code targeted to roll out by the 1st quarter of 2014."

That sounds good, and is long overdue, institutional investors in Malaysia have been much to quiet, they are hardly ever seen fighting for the people whose money they manage. They have in the past voted many times in "mysterious" ways, approving deals proposed by the majority shareholders, deals that looked outright bad to the minority shareholders.

But, to be honest, I don't understand why this all has to take so long time, institutional investors just have to start acting for the people whose money they manage, nothing more and nothing less. I have no problem that they first (behind the scenes) try to overturn a deal that looks bad. But if they don't succeed, they have to get vocal, issue a public statement (which most likely will be reported by the local media) what is wrong with the deal and why they are going to vote against it. They should also voice their concern on AGMs and EGMs.


  1. Hi CG - just want to raise awareness of another episode of corporate governance issue. This time it have to do with Land and General.

    Despite having a cash horde of RM 159 million plus (and strong operational cashflow) - they as a developer have decided to issue 1% ICULS to raise RM77.8M to purchase an office building in Putrajaya from the majority shareholder itself.

    The rights issue have a potential dilutive effect to existing shareholder by up to 50%. To add salt to the wound, the current majority shareholder (holding approximately 18%) have undertaken to take up all excess rights not subscribed.

    The company have a market cap of approximately RM245M and can expect a profit of approximately RM120M for its Elements project alone.

    I've written about it on my blog a few weeks back.

    But with the impending EGM - I hope to gain more publicity to this matter.

  2. Thanks Market Watcher, will look at it in the weekend, I did read something about L&G recently, hope I can find it.