Bursa Malaysia reprimands KNM and its 8 directors

"Ze Moola" has been spot on following the on goings in KNM Group Berhad, his blogs can be found here:

http://whereiszemoola.blogspot.com/search/label/KNM

In particular the details of the aborted MGO by a group of investors in the first quarter of 2010 are worrisome to say the least.


Yesterday Bursa Malaysia reprimanded KNM and reprimanded and fined its eight directors. The fine was a paltry RM 25K per director. In my opinion, this is not a meaningful amount compared to what happened in this case. The only punishment is then "name them and shame them", that at least has happened.

Due to the announcement of the MGO the volume and shareprice of KNM spiked (by 800% respectively 9%), who were the sellers?


Bursa Malaysia Securities Berhad (“Bursa Securities”) has publicly reprimanded KNM Group Berhad (“KNM” or “the Company”) for breach of the Main Market Listing Requirements (“Main LR”), and publicly reprimanded and fined its directors a total of RM200,000.

Bursa Securities publicly reprimanded KNM for breach of paragraphs 9.16(1)(a) and (c)(i) of the Main LR in respect of KNM’s announcement, dated 4 February 2010, of an offer to buy the business and undertakings of the Company. The announcement was not factual, unclear, inaccurate and lacked sufficient information and material facts to enable investors to make informed investment decisions.

The following directors of KNM were found to be in breach of paragraph 16.13(b) of the Main LR for permitting, knowingly or where they had reasonable means of obtaining such knowledge, KNM to commit the breach and the penalties imposed are as follows:-
1 Lee Swee Eng, Managing Director, Public Reprimand & Fine of RM25,000
2 Gan Siew Liat, Executive Director, Public Reprimand & Fine of RM25,000
3 Chew Fook Sin, Executive Director, Public Reprimand & Fine of RM25,000
4 Dato’ Mohamad Idris bin Mansor, Independent Non-Executive Chairman, (Resigned on 28 April 2010) Public Reprimand & Fine of RM25,000
5 Ng Boon Su, Executive Director, Public Reprimand & Fine of RM25,000
6 Lee Hui Leong, Executive Director, (Retired on 8 April 2010) Public Reprimand & Fine of RM25,000
7 Dato' Ab. Halim Bin Mohyiddin, Independent Non-Executive Director, Public Reprimand & Fine of RM25,000
8 Lim Yu Tey, Independent Non-Executive Director, Public Reprimand & Fine of RM25,000
Bursa Securities views the above contravention seriously as it is the fundamental obligation of listed companies to ensure that all announcements made are factual, unambiguous, accurate, succinct, and contain material and sufficient information to allow investors to make informed investment decisions.

BACKGROUND

(I) PUBLIC REPRIMAND ON KNM GROUP BERHAD
KNM had on 4 February 2010 announced that the Company had on even date received from BlueFire Capital Group Ltd (“Bidco”), an entity controlled by Ir. Lee Swee Eng, the Group Managing Director and major shareholder of KNM, a proposal to acquire the entire business and undertakings of KNM (“the Proposal”). The proposed price was equivalent to RM0.90 per issued ordinary share of KNM.

However, the announcement dated 4 February 2010 failed to disclose the following material terms, which were clearly stated in the Letter of Offer from Bidco:-

1. The proposed acquisition will be fully settled by the issuance of redeemable convertible preference shares (“RCPS”) in a new entity and the RCPS can be converted into non-voting ordinary shares in Bidco or redeemed for cash; and
2. Bidco intended to include as one of the conditions precedent of the proposed acquisition that as of the day prior to or the day of KNM’s extraordinary general meeting to consider and approve the proposed acquisition, there has not been:
   1. any new shareholder holding 5% or more in KNM or existing shareholder increasing their shares by 5% or more; or
   2. more than 10 new shareholders holding 1% or more in KNM shares, compared to at the day of announcement of the transaction by KNM,

[collectively referred to as “the Conditions”].

The Conditions which formed an integral part of the Proposal were clearly of interest and material to shareholders and investors to enable them to make an informed decision regarding the Proposal. In particular, the Conditions were material as to, amongst others, the reasonableness of the offer and certainty of the acceptance by KNM of the Proposal. The announcement of the Proposal without stating the Conditions (particularly the new shareholder condition as stated in sub-paragraph (b) above which had or may have the effect of minimising the positivity / certainty of the Proposal) had resulted in a one-sided / unbalanced announcement.

It was also noted that KNM’s share price and volume traded had increased following the announcement of the Proposal. KNM’s share price had increased from RM0.75 to RM0.815 on 5 February 2010 and the volume traded on 5 February 2010 was 142 million (representing 3.5% of KNM’s share capital) versus the past 5-day average of 15.9 million shares traded.

The Proposal subsequently lapsed on 14 April 2010.

(II) PUBLIC REPRIMAND AND A TOTAL FINE OF RM200,000 IMPOSED ON EIGHT DIRECTORS

All the directors were in possession of and were aware of the Letter of Offer from Bidco dated 4 February 2010 and its contents. As such, they were or should have been aware of the Conditions.

However, Dato’ Mohamad Idris bin Mansor, Dato' Ab. Halim Bin Mohyiddin, Lim Yu Tey, Ng Boon Su and Lee Hui Leong had proceeded to approve the announcement on the Proposal on 4 February 2010 without ensuring / requiring full disclosure of the terms and in particular, the Conditions.

Lee Swee Eng, Gan Siew Liat and Chew Fook Sin who were interested parties in the Proposal had also failed to discharge their duties to ensure disclosure of the Conditions by the Company. Notwithstanding that they abstained from deliberating and voting on the Proposal, they were in possession of, and hence, were aware of or were in a position to ascertain the terms of the Letter of Offer / Proposal. In addition, they were given a copy of the Company’s announcement dated 4 February 2010 on the Proposal subsequently on 5 February 2010. As such, through their silence / inaction, they had consented / acquiesced to the announcement and hence, permitted the breach of paragraphs 9.16(1)(a) and (c)(i) of the Main LR by KNM.

The explanations that the Conditions were preliminary, in a state of flux, uncertain, subject to negotiations / due diligence and unresolved do not absolve the Company and the directors from their obligation to disclose comprehensively all the material terms set out in the Letter of Offer, including the Conditions, when KNM announced the Letter of Offer / Proposal on 4 February 2010.

The finding of breach and the imposition of the above penalties on KNM and the directors were made pursuant to paragraph 16.19 of the Main LR upon completion of due process and after taking into consideration all facts and circumstances of the matter, including the materiality and impact of the breach and in relation to the directors, their awareness, knowledge and respective roles and responsibilities in the Company.

AirAsia & MAS: conflict of interest?

A long and interesting article from the Wikipedia website about the Board of Directors, their powers, duties and responsibilities, etc.

http://en.wikipedia.org/wiki/Board_of_directors

One paragraph in particular looks interesting:

"Competing with the company
Directors cannot compete directly with the company without a conflict of interest arising. Similarly, they should not act as directors of competing companies, as their duties to each company would then conflict with each other."

On August 11, 2011 Tony Fernandes, Group CEO of AirAsia, was appointed director of Malaysia Airline System, the direct competitor of AirAsia. Is there no conflict of interest there?

Whenever angel investors invest in a company they will put in special conditions for the founders: founders are not allowed to work for another company, they are not allowed to invest in another company in the same industry and after quitting the curent company they are not allowed to work in the same industry for a few years. All will be written down in the shareholders agreement and the employment contract with the founders. To balance things out, angels often promise not to invest in other companies in the same industry without prior permission.

To me these rules are completely normal and generally accepted, I never had any problem dealing with founders regarding the above, I never met a founder who had problems with these restrictions.

But when companies are a thousand times larger (like AirAsia and MAS) these restrictions don't apply anymore?

Lodge complaints!

Malaysians are a cynical lot. When I lodged complaints in a few serious corporate governance cases they were all shaking their head in disbelief: "don't waste your time and effort, this is Malaysia". I still proceeded, and did receive a lot of help from Malaysians, from the same people who told me not to lodge a complaint, Malaysians are also very helpful.

Although I can not say I am impressed about the speed with which my complaints have been dealt with in the past, things have improved and the Securities Commission (SC) has promised that better systems are in place now. For instance a complaint will be immediately acknowledged and the complainant will receive the name and telephone number of the manager in charge handling the case. Any uncertainty about the status, just pick up the phone and dial the manager.

Within 15 days one will receive an answer on the complaint, otherwise a file will be opened for the ones that need more study and work.

The year reports of the SC can be found here:

http://www.sc.com.my/paper.asp?pageid=381&year=2010

On the left the years 2010, 2009 and 2008, on the right the more old ones. This is a table of the complaints and enquiries received in the year 2010:

The more serious cases are the ones where files are opened, 274 or about one per working day. Not a bad number but with the high number of corporate exercises and (unfortunately) quite a few of them being controversial (to say the least), the number should really have been much higher.

Why is it important to lodge complaints? Because without a complaint the Securities Commission might not take action, they might not know about the issue (there are more than 1,000 listed companies) and even if they know about the issue they might not be able to pursue each one. But when a serious complaint is lodged, they have to look into it, open a file and start a serious investigation. There are good people inside the Securities Commission, and although I have been (very) critical in the past, I do also see clear improvements. A few perpetrators have been sentenced to long jail sentences and the number of fines has increased dramatically (Bursa Malaysia also has increased its fines). There have been a few good cases recently like Bandaraya's RPT being abandoned and EPIC being forced to offer a MGO and cash settlement, my guess is that the SC might have put pressure on the companies behind the scenes.

I have again lodged a few complaints not too long time ago. Although I will not fight tooth and nail in these cases, I still found it important enough for the SC to look into, since all Minority Investors deserve a decent deal.

More information on how to lodge a complaint:

http://www.sc.com.my/main.asp?pageid=245&menuid=243&newsid=&linkid=&type=

"What should be in the complaint?

Efficient and effective processing can only be done if information received is accurate and complete. Even though a complainant is not required to furnish any more information than he/she wishes, critical information required to enable proper evaluation of the complaint includes:

• Name of the complainant, mail and email addresses, and telephone numbers.
• The name, mail and email addresses, telephone numbers, and any website address of party(ies) mentioned in the complaint
• Specific details of how, why and when the matter complained about arose."

E-mail: aduan@seccom.com.my

You can consider sending a copy to the Minority Shareholder Watchdog Group:

Email: watchdog@mswg.org.my

More M&As in PNB’s stable?

I am very much in favor of the private sector doing business, they simply know best how to do it. However, I have no problem with the way PNB tries to buy more shares of SP Setia, the share price came down, PNB offered to buy shares at a premium to that low price (RM 3.90), management immediately responded that the price was too low (it had often traded above RM 4.00 before, but during better market conditions), PNB does not threaten with delisting, and an independent adviser will be called in to give his opinion.

In the article below other potential candidates on PNB's target list are named.


This article appeared in The Edge Financial Daily, October 3, 2011.

Written by Isabelle Francis.   

After its takeover bid for S P Setia Bhd, speculation is rife that Permodalan Nasional Bhd (PNB) may be eyeing its other holdings, particularly against the backdrop of a softening equity market.
PNB said the move for S P Setia is to turn it into a strategic shareholding, as this would allow it to further strengthen its portfolio.

It is also part of its responsibility to continuously seek long-term value for its unit holders, it said in a statement to defend the proposed deal.

It is worth noting that PNB is sitting on assets of over RM120 billion (based on 2010 numbers). Its investments have yielded at least 8.5% returns to unitholders for the past five years.

In comparison, the Employees Provident Fund provided returns to unit holders of less than 6%, Lembaga Tabung Haji 4.5% to 7% and Lembaga Angkatan Tentera between 15% and 16% over the same period.
Among the bigger companies PNB has invested in are Sime Darby Bhd, which has generated lower returns, especially after it was hit by cost overruns at its energy and utilities division over the past two years.
However, Sime has now turned around and with the palm oil prices staying high at around RM2,900 per tonne, the company may be worth looking at, especially since PNB is just short of making Sime a subsidiary with its current stake in the giant planter of just over 48%.

An observer conjured that in the event PNB increases its stake by another 2%, it can equity account Sime’s earnings. However, unlike S P Setia which is an entrepreneur-run company, Sime is viewed as a government-linked company and any increase in the stake by PNB would not alter the company’s management and culture.

Rumours are rife that PNB may be looking to bag Bonia.

Interestingly, Sime has also unveiled interest to grow its property division, having recently acquired a 30% stake in Eastern & Oriental Bhd (E&O) at a huge premium.

With such aspirations, PNB may put in more efforts to consolidate its property division. Apart from S P Setia, Sime Darby’s property arm and E&O, it also earlier privatisated companies like Island & Peninsular Bhd and Pelangi Bhd.

“With the expertise and branding at hand, PNB can create the strongest property group in the country,” opined an analyst.

PNB owns 48.14% of Sime, which is valued at some RM2.43 billion, based on its latest share price.
The counter has lost some 5% year-to-date (YTD), and fell sharply in recent weeks due to the stock market slump as well as concerns over whether it will be required to undertake a general offer for E&O.
Meanwhile, Bonia Corp Bhd stands out as one of the smaller companies where PNB has a large stake, outpacing that of its controlling shareholder.

Bonia is speculated to be on PNB’s radar given that the fund already holds a 32.99% stake in the apparel company. This is just short of the 33% level that will trigger a general offer. Besides, the counter is trading cheap versus other fashion stocks, particularly those listed in Hong Kong, at 8.3 times trailing price-to-earnings (PE) ratio.

Like S P Setia, Bonia is also an entrepreneurial-driven entity with the Chiang family owning some 26.9% stake, less than PNB’s shareholding.  The company, which specialises in making quality leather goods, has offered PNB a dividend yield of some 3.1%. Its stock price, however, lost over 9% YTD against the backdrop of weak market conditions, which dragged the key benchmark index to 9% YTD.
Over the past four years, Bonia’s revenue grew at an average annual compounded rate of 13% from RM221.37 million in 2006 to RM360.1 million in 2010. 

Net profit growth was even stronger from RM13.83 million to RM33.55 million, reflecting a 24.8% compounded annual growth rate over the same period.

Given the numbers — and the Chiang family’s successful entrepreneurial track record — it makes sense for PNB to continue banking on Bonia’s growth. Another possible target for PNB, observers say, is Asia File Corp Bhd, in which PNB and its funds collectively own 26.4%.

This is especially after PNB made a rare move at Asia File’s AGM last week when it expressed its unhappiness over the company’s directors’ fees and choice of several directors. However, it will be difficult for PNB to take over the company as its controlling shareholder, Prestige Elegance (M) Sdn Bhd, which belongs to chairman Lim Soon Huat, holds a 45.3% stake. Its share price has lost over 22% YTD.
At the AGM, PNB forced a vote by poll following dissatisfaction on the reappointment of three independent non-executive directors and the amount of directors’ fees paid.

This was despite the company’s officials defending the directorship fees, saying that it was much lower than most companies.

The executive directors were paid fees, salaries, bonuses and benefits totalling RM1.04 million while the non-executive directors were paid RM90,000 fees in total.

It is worth noting that Asia File recently bought DS Smith Paper located in the UK for RM22.4 million (£4.6 million), with the hope that the mill would boost income, particularly on the back of declining profits.  For the financial year ended March 31, Asia File, which sells stationery items, reported a 12.7% decline in net profit to RM50.39 million, on the back of a 7.6% dip in revenue to RM247.11 million.

However, with the decreasing income, it is uncertain whether Asia File can continue to be one of the highest dividend contributors to PNB — it has a dividend yield of 7.5%.

One of PNB’s largest and highest dividend yielding investment is Malayan Banking Bhd (Maybank). The fund, via Skim Amanah Saham Bumiputera and PNB directly, owns about 51.4% of the country’s biggest bank. Maybank offers a dividend yield of 7.5% while the counter has lost 5.8% YTD.

PNB also owns 46.42% in UMW Holdings Bhd, which in turn controls Perusahaan Otomobil Kedua Sdn Bhd (Perodua). A merger between Proton Holdings Bhd, owned by Khazanah Nasional Bhd, and Perodua has been heavily speculated of late. PNB also invests in little known companies such as Formosa Prosonic Industries Bhd, which makes high quality speakers.

Formosa, in which PNB owns 22.4%, offers a return of 9% to the fund."