Tycoons gain in Listing Committee shake-up
8th June 2009

Readers will be well aware of the backlash from tycoons over extending the insider dealing blackout periods to start from the year-end until they get their results out. There were cries that the Listing Committee was "stupid", an "independent kingdom", "a small circle dominated by foreign investors", "out of control" and so on. Perish the thought that international investors should have any say at all over how an international market is run, and erase from your mind the fact that the Listing Committee (LC) cannot change any rule without the SFC's approval.

The SFC (which had in November formally approved the rule) and the Government exerted huge political and regulatory pressure, implicitly threatening to (ab)use the SFC's "nuclear option" of amending the Listing Rule using section 23(5) of the Securities and Futures Ordinance, which it had never used before. Eventually, the Listing Committee caved in, referring to the SFC's "authoritative advice" (a euphemism if ever there was), and the tycoons got what they wanted - no change except for an extra month of blackout before the annual results announcement. The interim results blackout stays at 1 month.

Anyway, given all the noise of the tycoons, and understanding HK's political structure, it comes as no surprise to us that the Listing Nominating Committee (LNC), which comprises 3 directors from HKEx and 3 from the SFC, has taken the opportunity of the annual review of the membership of the SEHK Listing Committee to appoint loyal people who are directly or indirectly on the tycoon payroll and can be trusted to do the right (or wrong) thing.

On the HKEx side, the LNC includes two members of Hong Kong's cabinet, the Executive Council, namely HKEx Chairman Ronald Arculli and Laura Cha Shih May Lun. On the SFC side, it includes non-executive Chairman Eddy Fong, who vocally urged the Listing Committee to overturn its decision and disclaimed that the blackout rule was originally an SFC proposal, despite a "smoking gun" letter from SFC Executive Director Brian Ho Yin Tung back on 10-Jul-07, which refers to the SFC "championing" the proposal and says they had "no qualms in being associated with the proposal".

So here are the changes to the LC...

Straight in as Deputy Chairman goes Carmelo Lee Ka Sze, a partner since 1989 of Woo, Kwan Lee & Lo (WKLL), leapfrogging any LC member who was delusional enough to think they had a shot at a higher seat. WKLL is the firm co-founded by Charles Lee Yeh Kwong, first Chairman of Hong Kong Exchanges and Clearing Ltd (0388). The second and current Chairman of HKEx, Ronald Arculli, was Managing Partner of WKLL until Jun-2000. WKLL is legal adviser to numerous tycoons' firms, including Li Ka Shing's flagship Cheung Kong (Holdings) Ltd, (0001), Lee Shau Kee's Henderson Land Development Co Ltd (0012), Cheng Yu Tung's, New World Development Co Ltd (0017), the Kwok brothers' Sun Hung Kai Properties Ltd (0016) and many more besides.

Just to be extra safe though, the new LC members include Edith Shih, the Company Secretary of Li Ka Shing's Hutchison Whampoa Ltd (0013). She also sits on the Executive Committee of Helping Hand, the charity chaired by Mr Aculli's wife Johanna, and vice-chaired by Michael Lee Tze Hau, whom the Government recently appointed as a director of HKEx.

Teresa Ko Yuk Yin, partner of law firm Freshfields, moves up to the Chairman of the LC, where she will probably remain until her term expires in 2012. The top 3 seats are now occupied by partners of big corporate law firms, the other Deputy Chairman being John Douglas Moore of Herbert Smith, who joined the committee only last year. So the Chairmanship will likely go to one of these three until 2015.

This is a major year for changes as the six-year term limits of seven of the 27 appointed members have expired. One additional member is stepping down early - Ernst & Young (E&Y) partner Paul Go Kai Lung. But, with great imagination, the LNC has replaced him with another E&Y partner, Anthony Leung Siu Tung. Similarly, they have replaced departing PricewaterhouseCoopers (PWC) partner Ernest Ip Koon Wing with - no prizes for guessing - another PWC partner, Richard Sun Po Yuen. Finally, departing Deloitte Touche Tohmatsu (DTT) partner Roger Best is replaced with KPMG partner Jack Chow Siu Liu. So once again three of the big four accounting firms have partners on the committee - and none of the firms outside the big four do, even though they would face fewer conflicts, having fewer clients. According to the Webb-site.com database, PWC, E&Y and KMPG currently act for 525 out of the 1267 primary-listed companies on SEHK, and DTT is top dog with 280.

Although there are conflict of interest rules which prevent an LC member sitting on a case in which his firm is advising, it is impossible to eliminate concerns of reciprocity by the other members - if a questionable IPO accountants' report is on the table, it could be your firm next time - so give them the benefit of the doubt. And if you think that the Big 4 are some guarantee of audit quality, think again. E&Y is currently being sued by the liquidators of Akai Holdings Ltd, one of the biggest corporate collapses in HK history (due to trial in Sep-09). The liquidators of Moulin Global Eyecare Holdings Ltd have commenced discovery against its latest auditor E&Y, and are suing E&Y's predecessor, KPMG. The self-regulatory HKICPA, in our view one of HK's weakest regulators, recently settled proceedings against DTT and didn't even have the balls to name the listed companies involved, but they were obviously Guangnan (Holdings) Ltd and GKC Holdings Ltd.

The final three new appointees to the LC include two investment bankers: Jiang Guorong of China International Capital Corp Ltd and Daniel Ng Meng Hua of BOCI Asia Ltd; and Mary Ma Xuezheng, Vice Chairman and former CFO of Lenovo Group Ltd (0992) (no, not the fictional, mouth-frothing Mary Ma of the HK Standard tabloid). The LNC might argue that she is an investor representative, as she now works for private equity buyout firm TPG, but that really puts her on the sell side since they normally only come into contact with the market when they are exiting in an IPO or privatising in a buy-out.

Next year, only one member's term expires, and that is Stephen Hunt, who runs an investment company, so the best that investors can hope for is that someone on the buy-side will replace him. In 2011, there is one expiring term, of Roy Chen Yang Chung, another investor and son of a co-founder of Hang Lung Group. In 2012, the terms of most of the remaining buy-side representatives expire, if they last that long. It is disappointing, but hardly surprising, that the LNC didn't take the opportunity to create more balance between the buy-side (investors) and the sell-side (issuers and their paid advisers) and instead tilted it further the other way. Investors remain heavily outnumbered, and the prospects for quarterly financial reporting (first proposed in Jan-2002) and other important reforms (allowing independent shareholders to elect the so-called independent directors would be a start) now look very bleak indeed.

Now, for a few more words on the blackout and a study commissioned by an opponent of the blackout extension, from the brother of the Government Secretary whose department lobbied the LC to overturn it, see our side piece.

Copyright Webb-site.com, 2009