SIAS to take legal action (2)

Interesting follow up article in the Business Times (Singapore) by Michelle Quah:

"Are class actions good for investors and Singapore markets?"

My answer on that question is simply "Yes!".

The share markets (both in Singapore and Malaysia) are too much in favour of the majority shareholders, class actions will help to bring more balance to the equation.

In my home country (The Netherlands) the VEB ("Association of share holders", a not-for-profit organisation) has won many class action suits on behalf of the minority shareholders against large (mostly) Dutch companies, some of them in the top 500 of the world.

Here are some of the current actions (in Dutch):

• Volkswagen
• Fortis
• Ahold
• BP

And here of the past, succesful examples:

• KPNQWest
• Shell
• Unilever
• Fokker
• Philips

Some of the reasons for the suits:

• Misrepresentation
• Unfair treatment of a certain class of shares versus another class
• Unfair valuation at a merger or acquisition
• Sensitive information was given too late or was leaked
• Mismanagement and/or fraud

To participate one only needs to become member of the VEB, which costs 60 Euro per year and one will receive (beside the possibility to participate in class action suits) a few more benefits, like a monthly magazine, expert advice, etc. It is therefore no surprise that the VEB has 45.000 members (on a population of about 17 million).

SIAS to take legal action

Article in the Business Times (Singapore): "SIAS says it will take errant companies to court if need be".

Some snippets:


SIAS president and chief executive David Gerald told The Business Times: "We will take legal action if the company doesn't want to come to the table, refuses to see reason and continues to do wrong."


.... the SIAS chief said he felt it was important to let SIAS members and retail investors know that they have the option of joining the association in a representative action - similar in vein to class-action suits filed in other jurisdictions - as not many investors are aware that such actions can be pursued here. "Investors must know they are protected," he said. "And I have been advised by our lawyers that SIAS can represent aggrieved shareholders. We can even set up a litigation fund, which minorities contribute to, even if they may not be involved in the legal action, to support the principle."


Mr Gerald took pains to stress, however, that while a representative action is an option for minorities, it should be their last one. "I sincerely hope we do not see the day when we launch a class-action suit against a company. I believe in resolving things in the boardroom, not the courtroom, in the interest of all parties."


Although I don't always agree with the actions of the SIAS, I fully support the above reasoning. It is very hard for minority shareholders to group together, while taking action individually doesn't make sense at all because of the costs involved (unless it involves a relatively large minority shareholder, like a fund).

SIAS and MSWG are ideal platforms to organize legal action for minority investors that have been disadvantaged.

Silverlake Axis down 24%, suspended, after damning report (2)

Silverlake Axis announced yesterday is quarterly earnings, like nothing has happened. Some more information can be found in this article in the Straits Times.

A bit unreal, since the company has not replied to the very serious allegations by "razor99". But may be the results were ready and planned, and it was considered to release the results anyhow, even though the anonymous report was not even mentioned once in the results.

In the Value Investors Club there is a member named "razor99" who has written a report before about possible fraud at Longtop Financial, allegations that proved to be right. In the introduction of the report on Silverlake Axis there is a reference made to this report. If this is indeed the same writer, then that would add to the credibility of the current report.

For those that have not found the time to read the whole report (it is rather heavy on accounting), a shorter version can be found here.

I have read the report several times, and have not been able to find errors in it. I have to admit, that I am not an expert on Silverlake Axis, I only started to follow the company more closely over the last few months after a tip of a friendly party.

Given that, some comments by me:

• The corporate structure is indeed horrific, and unexplainable so. Why does the group need so many subsidiaries, audited by so many different auditors, and even some in (notoriously non-transparent) BVI?
• The amount of RPTs (both revenue transactions and acquisitions) is very high (although recently less so).
• Transparency (in relation to the above) does seem to be a problem.

This is also determined by the Governance and Transparency Index of the NUS Business School, which put Silverlake Axis on the 507th place out of 639:

Why does a multi-billion company with a credible board of independent directors have such poor corporate governance standards, why did the board not insist on improvements? This is indeed a puzzle.

Another question is: why did SGX allow such a company to be listed in the first place? The company should have been forced to restructure pre-IPO, bringing under one umbrella all companies in the group with high RPTs.

On the other hand, the above considerations are red flags, but not really beyond the law.

In Section 5 undisclosed off-balance sheet debt is mentioned, with appendices 12-14 as proof. This allegation looks serious (at least to me), the company definitely needs to come with a good, concrete explanation here.

The report further suggests that because of this there might be more hidden loans. Silverlake Axis might want to give full transparency (beyond what is required) to show this is not the case, even in BVI registered related parties.

Section 6 gives an overview of the chairman cashing out (more than RM 1 Billion), and the minorities coughing up money (RM 555 Million). In itself there is nothing illegal about this.

This is however a very refreshing way to look at things, I hope analysts will follow this example, I suspect there are many other companies where the same has happened in the past. I hope to have time in the future to give some Bursa listed examples.

Section 7 gives a peer analysis. This is indeed quite disturbing for me, if the peers (as selected by Razor99) are typically for the industry, then this section does need some serious discussion by the company. The average salary for an employee is RM 111K, while the revenue per employee is RM 625K. With most revenue coming from project work and maintenance, these numbers do seem puzzling. A lot of the technology of Silverlake Axis even appears to be acquired, while spending little on R&D, not what one would expect from a top-notch technology company.

Section 8 about possible bribery is very disturbing, especially in the Malaysian context. But no conclusive evidence is given (which would anyhow have been impossible to do), although rumours have been going around for some time (I am aware of some of them, something I hardly ever hear).


SIAS announced a press release regarding the matter. It made a stunning comment:

"It is unfortunate that such an anonymous report can have an impact on the stock as it lacks credibility".

I honestly have no idea how anyone can be so sure. Also, why did the author make such a comment without going in any detail whatsoever?

"If the person or persons responsible for the report are found to be mischievous then the company must take prompt legal action and, if the facts indeed are found to be mischievous and misleading, SIAS calls also on the authorities to take police action."

Not one word what action should be taken if it turns out that (some of) the allegations turn out to be true.

"It is the small investors who always suffer the consequences."

Sorry, that is simply playing the gallery.

But what if the allegations are (substantially true)? Would this anonymous report not limit the damage, prevent more money from minority investors to be poured into the company while preventing the chairman of cashing out more money, and enabling the authorities to take action?

Also, it does give the independent directors a chance to improve things on corporate governance issues. Something that anyhow seems to be overdue.

"SIAS calls on all listed companies to be as transparent as possible to their shareholders to prevent such attacks from members of the online community who indulge in such attacks for personal gain. Companies must be prompt in responding to such attacks to ally the fears on the part of the investors and consequently avoid losses."

Finally something I agree with. But given that the company has been the target before, and its long listing history, has Silverlake Axis really been "as transparent as possible"? I strongly doubt it and NUS Business School seems to agree with that, placing the company in the last quartile of its CG list.

How this episode will play out, of course I don't know. It is a very high profile case, with lots of vested interest. The company has been recommended by many astute investors and its numbers did indeed appear very good. Will it turn out that the numbers were simply too good to be true? Time will tell.

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).

Glaucus vs Minzhong, some observations

The attention for the “Singapore Squeeze” (Financial Times) Glaucus vs Minzhong seems to wane. Probably good, since a lot more is happening in the world these days. Still some observations:


A good article can be found here, comparing the Glaucus vs China Minzhong case with the Muddy Waters vs Olam case.

Some more background of the situation in China can be found here.

"SIAS calls on regulators to punish short sellers", article in The Business Times.

"The heavy weight of the law must be felt by these mischievous perpetrators,” said SIAS President and Chief Executive David Gerald"

(SIAS is more or less the MSWG of Singapore)

Strong words, but the reader probably already know that I completely disagree with this argument. If people buy shares, convince others about their investment case (using subjective or even wrong arguments) and subsequently sell their shares for a tidy profit, that is exactly the same. And if those people would be prosecuted, countries better build a few more jails, since this is happening every day of the year in every country of the world.

In addition to that, Glaucus was very transparent about their interest, and their arguments were backed by a lot of data and arguments. One might not agree with some, but that is something else.

"The SIAS said yesterday that it has had meetings with China Minzhong and is satisfied the company has “vindicated itself”."

I find that a bold and rather naïve statement, I think to give such a definite answer much more work has to be done to give such a definite answer. Somebody on the Valuebuddies forum mentioned:

"China Aviation Oil, ACCS, HongXing and Jurong Technologies had been awarded Transparency award by SIAS and many investors had been hurt by investing into these companies. How many more of such useless awards does the Singapore market need to see before such awards are stopped?"


In my previous posting "And Glaucus responds ...." I wrote several times that it looked like Minzhong admitted that certain things were not in order.

Associate professor Mak Yuen Teen from the NUS Business School puts it more specific in a letter to The Business Times (emphasis mine):

"Is China Minzhong saying it keeps 2 sets of books?"

"China Minzhong has provided a succession of rebuttals to the allegations of US-based short seller Glaucus Research Group, including highly detailed ones on Sept 1 and 3, complete with extracts of source documents. Although its efforts in rebutting the allegations are commendable, they are unlikely to completely dispel the concerns raised by Glaucus. The source documents provided by the company can understandably provide only a partial picture of the true situation.

While the company has cited the fact that it has consistently received clean opinions from its external auditors and that the auditors have not withdrawn their opinions, the auditors themselves have been silent. Given the well-known challenges faced by auditors in China and the fact that all of China Minzhong's business is conducted through subsidiaries there, the auditors may be reluctant to bet their partners' bonuses that the allegations of Glaucus are totally without basis. It is likely that only a comprehensive special audit will be able to dispel all the concerns raised by Glaucus, but we cannot realistically expect a company to commission a special audit each time allegations are made about its financials.

Unfortunately, China Minzhong's latest announcement on Sept 3 contains statements that may not help its cause in dispelling concerns. It stated that "Glaucus's assertion that documents that are publicly available are more reliable than those not in the public domain is flawed. The public information was not obtained independently by the regulators but based on our filings. Where there is inconsistency in information, it is only logical to look to the source documents to verify the truth . . . for SAIC (State Administration for Industry & Commerce) filings, given the purpose and intention of such filings, the key consideration is to ensure that the company operates within its permitted business scope and duly informs SAIC of changes to its registered particulars". It stated that it places great emphasis on the accuracy of accounts which affect its tax liability but appears to admit that its SAIC filings may be inaccurate.

Is this a public admission that it is keeping two sets of books? Rather disconcertingly, it does not seem to see anything wrong with filing inaccurate information in order to comply with regulatory requirements.

Given that the company's filings to SAIC in China may be inaccurate, how can investors be sure that its financial statements and announcements to the Singapore Exchange here are really true and fair, especially when it is clear that regulatory enforcement is easier for Chinese authorities than for Singapore authorities?

China Minzhong's statement also confirms the challenges of doing proper due diligence for Chinese companies using publicly available information, even those filed with regulatory authorities in China, and once again highlights the risks of investing in Chinese companies."