Related Party Transactions, "a national sport in Asia"

I have often warned about Related Party Transactions (and its closely related cousin "Conflict of Interest"). Basically, these should be avoided by companies, and if they are unavoidable due to the nature of the business, they should be done in a very transparent and upfront manner.

In Malaysia, RPTs (and Conflict of Interest situations) are of course almost a way of life, many of the Corporate Governance abuse cases described in this blog handled about them.

GMT did recently some research regarding Hong Kong and Singapore companies.


Over 90% of all companies were engaged in some form of related party transactions in 2014. It makes us wonder if the remaining 7-8% simply forgot to declare them! These transactions averaged 7% of combined sales and expenses which is highly material to profit. A whopping 13% (46 companies) had related party transactions in excess of 20% of combined sales and expenses. However, of these, 31 were state owned enterprises (SOE) which clearly do a lot of business with other SOEs. Who knows whether they conduct business at market prices or in line with government policy? What we’re really interested in are those private companies with a large amount of related party transactions because that’s where minority shareholders are at greatest risk. That leaves us with just 15 companies which we list in alphabetic order below:

Some of GMTs findings (unfortunately the names of the companies are left out, I guess one has to subscribe to their services for that):

• Company 1: The largest related party balances of any company GLOBALLY, at US$6.2bn. It is paid interest income on amounts owed to it but doesn’t pay interest on amounts it owes. This boosted 2014 pre-tax profit by 20%.
• Company 2: Two CEOs have been sent to jail in the last decade.
• Company 3: Around 45% of expenses routed through two companies owned by the founder. One of these paid the founder an estimated US$22m in dividends over the past two financial years.
• Company 4: Building the world’s 5th tallest building in China, financed with a US dollar loan from a related party.
• Company 5: Over 35 pages of connected party transactions.

As a safeguard, RPTs have to be evaluated by the independent directors (INEDs), if the deals are properly done at arms length.

However, as David Webb put it: 

Once appointed by the board, the INEDs are re-elected by shareholders at the next annual general meeting, and thereafter by rotation (typically standing every three years, if they survive that long). Unfortunately, the controlling shareholders are allowed to vote in these elections, so they nearly always determine the outcome. Yes, the sheepdog is appointed by the flock, not by the shepherd. It is a clear absurdity that the controlling shareholders effectively appoint the people who are supposed to prevent them from abusing the company. This is shareholder democracy Hong Kong-style.

In fact, INEDs are often so closely allied to the executive directors that, if the company is taken over, the INEDs resign at the same time as the executive directors, and the new controlling shareholders will appoint new "independent" directors of their choice.

GMT concludes with "Now we’re working on the rest of Asia". I certainly hope they don't skip Malaysia, there will be lots of juicy material to be found.

Non-independent directors suddenly becoming "independent"

Great article by Mak Yuen Teen in the Business Times (Singapore). Very relevant to the situation in Malaysia also where the same practices happen.


Some snippets:




.... "the lack of independence of independent directors here is such an intractable issue that there's little hope of any improvement".


Recently, there was a company that redesignated a non-independent director to an independent director. This director had served on the board for 11 years as a non-independent director, including three years as a non-independent chairman. Unlike the more typical situation of directors being redesignated from independent to non-independent after nine years, this director was re-designated from non-independent to independent after 11 years. This is like someone who was not a virgin and then became one.


.... I have developed a form that asks directors to declare all payments and services and to provide details of these payments and services. I also include a question that asks directors to declare "any other relationships or arrangements" with the company, its related corporations, its key officers and major shareholders. This puts the onus on an independent director to declare, for example, that he has been the regular golfing partner of the CEO over the last 20 years.


Until we allow non-controlling shareholders more say in the nomination and election of directors or the determination of their independence, this search will continue to prove to be elusive.

iCapital: questions regarding adjourned AGM and expenses (2)

I wrote before about these issues regarding iCapital.

According to The Sun Daily website:


City of London Investment Management Co Ltd has written a letter to fund manager Tan Teng Boo to explain why it and Laxey Partners Ltd, the single largest shareholder of icapital.biz with 11.39%, plan to vote against the reappointment of Tunku Abdul Aziz Tunku Ibrahim as a director was due to the length of time he has been retired.

"Directors should not start a new term in office if they have retired from active employment for more than five years. City of London believes that the skills and contributions of a director outside this criterion may be too far removed from current business practices or thinking to truly add value to the board over the long term," City of London's portfolio manager Oliver Marchner said in a copy of the letter sent to SunBiz.

It also pointed out that Tunku Aziz as a board member has no "requisite experience and knowledge of a listed closed-end funds (CEFs) and has retired from active employment for more than five years.

In relation to the composition of the board, City of London's portfolio manager Oliver Marchner made reference to Section IV paragraph 2a of its Statement on Corporate Governance and Voting Policy for Closed-End Funds (9th Edition).

The Statement on Corporate Governance and Voting Policy for Closed-End Funds can be found here.

I hope that the letter is public, and that iCapital will publish the letter in an official announcement at Bursa's website. Since the last AGM was adjourned because of the question why City of London decided to vote against the director, other shareholders should be informed about their answer.

Independent directors: use different approach

I have highlighted several times the issue of independent directors, not speaking up for the minority investors (for instance in the case of related party transactions), not trying to unlock value in a company (for instance in the case of privatisation), not voting down (relatively) high wages for the management, etc.

Mak Yuen Teen wrote a letter to The Business Times (Singapore) "Independent directors: use different approach", which is also relevant in the Malaysian context. Some snippets:


.... The question I posed was in response to a discussion about the "nine-year" guideline on independent directors in the 2012 Code of Corporate Governance, under which the independence of directors should be subjected to a "particularly rigorous review" after nine years. In addition to the lack of clear guidance on how a "particularly rigorous review" is to be conducted, I was concerned about relying solely on the nominating committee or the board to determine if a director who has served beyond nine years should continue to be considered to be independent. This is because of the inherent conflict faced by the nominating committee and the board in this.

In fact, the nominating committee and the board are also conflicted in the initial and ongoing assessment of independence of directors, and in other issues such as recommending board appointments and re- election/retirement of directors. In the case of the latter issues, a check-and-balance is having shareholders vote on the election or re-election of directors.

In countries such as Malaysia and Hong Kong, the code of corporate governance recommends that the independence of directors should be subject to a separate shareholders' vote after nine years. If shareholders vote against the independence of the directors in this separate vote, then the company can still choose to retain the director as a non-executive director, but should not label him as an independent director. Alternatively, the board can just redesignate the director as a non-independent, non-executive director, without seeking a shareholders' vote.

At the forum, I had expressed doubt about whether such a shareholders' vote would be effective, if all shareholders get to vote on the continuing independence of the directors after nine years. After all, those who are familiar with our corporate landscape would know that there are many independent directors who have an inter-dependent relationship with controlling shareholders. If the vote is to be meaningful, then controlling shareholders should not vote.

David Webb said about this subject:


Another key issue in Asia is the lack of truly independent directors. "You have tycoons appointing their cronies and golf buddies as ‘independent directors'," notes Webb.

"There are very few really independent directors in Asia who are not tied to management or owners and who are willing to ask difficult questions," he says. "It is important that independent directors be elected by minority shareholders, with controlling shareholders forced to abstain from voting."

He adds that independent directors should be answerable to minority shareholders; so, if they fail to do a decent job, they can be quickly replaced.

Minorities' right to expect full value (3)

Michael Dee (former regional CEO of Morgan Stanley and senior managing director of Temasek Holdings) wrote another excellent article in The Business Times (Singapore):

"Offer for CMA is still undervalued"

"Minorities need to speak up for their rights"

The first few paragraphs can be found here, I will give some snippets regarding the whole article.


"Capitaland (CL) has revised upward its offer for CapitaMalls Asia (CMA) to S$2.35 in the hope that this will allow CL to acquire 90 per cent and delist CMA. Game over, right? Well not quite yet. CMA minority investors were smart enough to see through the fact that the original price was too low, leaving CL in an untenable situation of having only 2.6 per cent acceptances. But the revised offer is also questionable.

It is my hope this misguided situation and others ongoing will serve as a wake-up call for regulators (Monetary Authority of Singapore, Singapore Exchange, Securities Industry Council) and third-party groups (Securities Investors Association (Singapore), Singapore Institute of Directors) over governance lapses and loopholes which disadvantage minority investors, thus leading to significant reforms in the protection of minority investors. In the meantime, investors are taking matters into their own hands."


"Second is the broader issue of the independence of independent directors, which is essential to the protection of minority shareholders. MAS "guidelines" (not proper rules) do not consider directors on the CMA board to be independent if they also sit on the CL board. However, these are just guidelines and a company can explain its deviation if not in compliance, and CMA is not in compliance. The guidelines further stipulate that if the chairman of CMA is not independent then at least 50 per cent of the board should be independent. As the chairman of CL is also the chairman of CMA, he is correctly not listed as independent. Yet two of the six independent directors of CMA also sit on the board of the CL board and yet are still classified independent. In my opinion this is not right.

Minority shareholders should never be put in a situation where there are such obvious conflicts of interest in particular when even the perception of conflicts is so easily avoided. None of this is to say that anyone has acted improperly but rather point out that in situations of majority/minority shareholding, there should be firm regulations and rules that expressly prohibit such conflicts, and guidelines which have no meaningful enforcement or oversight should be eliminated.

Given the relatively disadvantageous position of minority shareholders, they have the right to expect that independent directors have no conflicts whatsoever. In particular, in the event of an offer from the majority shareholder, the Independent Board Committee (IBC) simply should have no issues that may be perceived as impairing its ability to act as an advocate for minority shareholders. That SIAS (of which I am a member) has vigorously defended these interlocking relationships and conflicts, without discussing its own conflict of having CL as a major corporate sponsor, is also unfortunate."


"I conclude by saying to minority investors that the decision to sell or hold CMA or any of the other minority offers is yours and yours alone. You have rights and you must speak up for them or they will be eroded or abdicated. CMA is a great company with a bright future and as China moves to stimulate domestic demand, quality malls in good locations in China will command a good premium. Online retailing is unlikely to displace quality shopping locations and experiences. I would not be surprised if a third-party investor would pay more for the CMA portfolio than the offer currently on the table. Remember, the very reason CapitaLand wants your CapitalMalls Asia shares is the very reason you should also."


For those who are interested in shareholders activism, there is a great series of lectures to be found here, from the Rock Centre for Corporate Governance, Stanford University. Interesting is the historic perspective and lots of specific cases (all in US).

Minorities' right to expect full value

In Malaysia low privatisation offers by the large majority shareholder are quite common. The problems are:

[1] no competing offers;
[2] independent directors should maximize returns for all shareholders;
[3] minority shareholders should stand up and fight.

It seems that in Singapore there is a very similar situation.

The first relevant article is by Michael Dee, former regional CEO for Morgan Stanley and senior managing director for Temasek Holdings, it can be found in the Valuebuddies forum.


CMA shareholders should stand their ground against 'fair offer'

CMA is a cash cow and is worth much more than that

THE CapitaLand (CL) offer for the 35 per cent of the CapitaMalls Asia (CMA) shares they do not own is yet another example of the lack of respect for minority shareholders. The post-IPO performance of CMA shares and the paltry premium over the IPO price and book value multiple should concern all CMA shareholders.

At the November 2009 CMA IPO, all of the proceeds went to CapitaLand and none were invested into CMA. Thus the IPO and current offer are just asset trades for CL with no strategic benefit for CMA shareholders. Prior to the IPO, CL shares peaked at $8.60 and during the financial crisis fell almost 80 per cent. A few months later, CMA's IPO was priced at $2.12, closed the first day at $2.30 and the multiple of book value offered was 1.55x. The current offer of $2.22 is valued at a thin 1.2x book value.

Yet, now more than four years later, CL wants to pay only a 4.7 per cent premium to the IPO price, a 3.4 per cent discount to the day one closing price and a 23 per cent discount to the IPO book value multiple. Has CMA really deteriorated that much over the last four years?

At the time of the IPO, CMA had 59 completed projects and today there are 85, a 44 per cent increase. In 2013 vs 2012, revenue, profit and the asset value per share were all up about 10 per cent and operating income increased a whopping 40 per cent. Looking back to the IPO, in 2009, profit was $388 million and for 2013 it was $600 million, an increase of 55 per cent. Total equity in 2009 was $5.5 billion and at year-end 2013, it is $7.2 billion, more than a 30 per cent increase. So operating performance since the IPO has been quite strong and hardly justifies a discounted multiple to book value and a discount to the closing price after the IPO.

CL will stress the offer price is at a premium to recent closing prices. Yet this is illusory as CMA is worth more than its market values and worth much more to CL than the offer price. CMA shares hit a high of $2.66 within days of the IPO on Dec 7, 2009. Two years after the IPO, the shares had fallen 60 per cent to a low of $1.13, while during the same period, the STI was unchanged. Within a few months of the IPO and aside from a few weeks in 2013, the shares traded below the IPO price about 90 per cent of the time. Even today, after the offer, the STI has still outperformed CMA's share price by 35 per cent since the day one close. Most of the dividends have gone to grow the business and reinvest in new projects, yet current investors are not being compensated enough for those investments and the projects currently being developed.

CMA is 65 per cent owned by CL and at least one of the independent directors also sits on CapitaLand's board. Additionally the chairman of CapitaLand and CapitaMalls Asia are the same person. Thus the majority of the Board should not be considered independent in the transaction as five of 10 board members have direct ties to CL. CL has had direct control strategically and operationally of CMA as a public company. This includes a healthy conflict of interest as noted among the 26 pages of Risk Factors of the IPO prospectus; "We cannot assure you (potential CMA investors) that the interests of our (CL) existing Reits or private real estate funds will not conflict or be subordinated to our (CL) interests in such circumstances. Furthermore, we cannot assure you (CMA Shareholders) that conflicts of interest will not arise in future . . ."

As a minority shareholder, the odds are stacked against you. When a 65 per cent shareholder has to decide whether to put minority or their own shareholders first, it is clear that CL comes first. You were warned at the IPO.

CL investors, including Temasek, should wonder why CL is not buying their own shares that are trading at only about 0.8x book value. Is it really the case that the CMA offer is so cheap that it is a better investment than buying CL shares at a 20 per cent discount to book value instead of CMA's 20 per cent premium?

Clearly the market sees the unique value in CMA, value that is not being provided to CMA shareholders. Just look at the CL share price since the CMA offer. Investors and analysts in CL have bid up the CL share price almost 10 per cent, to a level not seen for almost six months.

CL wants to attain 90 per cent so as to delist CMA. This means buying at least 25 per cent of the outstanding shares. No doubt an IFA (independent financial adviser) can be found to give a "fairness" opinion. However there is a big difference between a minimally acceptable fair offer and receiving the full value of the company. CMA investors should expect the independent directors to maximise the value they receive and not just accept a price deemed "fair". But who is negotiating on behalf of CMA shareholders to get the best price?

CL wants to buy CMA as cheaply as possible because it is a great asset. In short, CMA is a cash cow and is worth much more than they are offering now. Shareholders should be prepared to stand their ground in order to attain the full value for giving up their share of the company. CMA is very profitable and has strong dividends so even if CL walks away, the minorities are left with a good yielding asset. The China assets are increasingly valuable now that the government is focused on increasing consumption and domestic demand. CMA shareholders should be happy to hold onto their shares.

One hopes the independent directors will represent only the minority investors to the full extent of maximising the economic potential for shareholders. Since CL has now shown they are negotiating solely on their own behalf, it is up to the minority shareholders to make their decisions about whether they are getting full, fair or inadequate value. As a general matter, if minority investors won't stand up for their rights then they can expect even more poor performance from the majority managers of their assets.

The second letter is at Business Times, partly behind a paywall:

I refer to "Privatisation unhappiness: market is to blame" (BT, April 23), which says in effect that markets fluctuate so you have to take the good with the bad when it comes to takeover offer valuations. I could not disagree more stridently.

What the column fails to take into consideration is that the current rash of takeover complaints deals with a unique class of takeovers - those where a controlling or majority shareholder or consortium who is in control of the corporate entity, makes an offer for the minority shares they do not own. It is a whole different game when a shareholder or group of shareholders are in control of the value of the offer.

Consider this: Temasek used to own 15 per cent of F&N. If it made a bid for the outstanding shares it did not own, would a bidding war have erupted with the velocity we saw last year? Will we see a bidding war for CapitaMalls and Olam, etc? Most certainly not. However, Temasek sold its shares in July 2010 and thus a bidding process was able to unfold whereby all F&N shareholders received the full market value possible, but only because there was competition for the asset.

Now contrast that with today's deals. What bidder is going to emerge for the minority shares with the controlling shareholder(s)? The Temasek consortium controls 52 per cent of Olam and CapitaLand controls 65 per cent of CapitaMalls Asia (CMA). No other bidder is going to step up to drive an undervalued company to its maximum shareholder value. As the article points out, there is no chance the controlling shareholders are going to make a bid at full value - why should they?

The third article is the response from the SIAS on this matter.

David Webb in The Business Times

Two large articles (one of which on the front-page) in The Business Times (Singapore) about David Webb, the shareholder activist from Hong Kong. The first article can be read here.


Let's not pretend any more that independent directors (IDs) are independent, says Hong Kong shareholder activist David Webb.

He suggests abolishing the requirement for IDs and letting them be called independent only after being elected by minority shareholders.

IDs need to make up at least one-third of boards in Singapore and Hong Kong to provide an objective voice to ensure management acts in shareholders' interests.

But Mr Webb, repeating a common criticism, says IDs are often picked because of their close relationship with controlling shareholders or board chairmen.

Shareholders are given "a sense of false comfort" as a result, says Mr Webb, 47, a retired investment banker who made his name in the past 14 years giving scathing, sharp and sometimes prescient commentary on the Hong Kong stock market through his website, "webb-site.com".

"Good companies will still put good people on boards, bad companies will always find three people who are willing to endorse anything," he says.

Mr Webb spoke to BT early this month when he was in town for this year's Corporate Governance Week organised by investor lobby group Sias, or the Securities Investors Association (Singapore).

Having IDs only electable by minority shareholders could improve corporate governance in both Singapore and Hong Kong, he says.

"The reality is that if candidates are voted upon by controlling shareholders, the candidates will only be those who are acceptable to the controlling shareholder. Then the whole system breaks down...

"It'll be more honest to say he's the old school friend of the chairman, family doctor, whatever, he's only there because the chairman likes him."

Under Mr Webb's system, controlling shareholders are not precluded from putting forward candidates they deem suitable, he notes - just that they have to abstain during voting.

This gives IDs a mandate to ask difficult questions without "being quietly asked to stand down", he says.


David Webb made the same point on his website before, see the third box "note to regulators". That article is about the excessive pay of the family of the "Managing Chairman" and majority shareholder of Hong Kong listed company Xpress Group Ltd, (currency in HKD):


Taking the 15 years together, the Chan family has taken pay of $492.8m, and the total profit attributable to shareholders was...well, there wasn't any. It was a total loss of $247.5m.


The second article about David Webb in The Business Times today can be found here (the whole story only for subscribers). Some parts:


He built up a formidable database on his website - which he started developing in 1998 after he retired from his investment banking job and found that the Internet had made it easy for him to publish his own views. "I've always been a bit of an activist," he says.

On his site, one can browse a list of directors and sort them by number of directorships, age, sex, and even the average returns o fall the past and present companies they have been directors of.

One can find out, for example, which company has the oldest average age of directors (Melbourne Enterprises), how many companies go beyond the minimum required number of three independent directors (less than one quarter), or who holds the largest number of independent directorships (Abraham Razack, 16 seats).

Investors can also track the number of companies incorporated each year, with the history going back to 1865. Company name changes are also recorded, and total returns for each company can be calculated and compared against each other.


The above database would be very helpful for investors in Malaysian (and Singaporean) companies. Either Bursa Malaysia or MSWG would be suitable for this task?