A month ago we launched
Project Vampire, urging investors to vote against the general issue mandate
which allows directors to dilute shareholders' interests without a rights
issue. We promised a fanfare for the first HK company to comply with our
recommendations on restricting the mandate to international standards. And
the prize goes to: Arts Optical. We hope that others will follow their
example. |
Arts Optical adopts Vampire
22nd
April 2003
One of the many ways in which management of listed companies can damage
shareholder interests is to dilute them through non-pre-emptive share issues,
meaning shares which are not offered to existing shareholders first. This can be
particularly damaging when the shares are issued at a substantial discount to
market, and the ability of management to choose shareowners in this way subverts
the governance mechanism. Shareholders should govern management, not the other
way around.
In Project Vampire, launched on
16-Mar-03, we urged all minority shareholders to vote against the general issue
mandate proposed at all Annual General Meetings, unless the proposed mandate
meets the following requirements:
-
The mandate to issue shares for cash, other than
by a rights issue, shall be in respect of not more than 5% of the issued
shares a the time of the mandate
-
The discount for shares issued other than by a
rights issue shall not exceed 5%.
-
The mandate to issue shares for other purposes,
including acquisitions, shall be for not more than 20% of the issued shares
We promised a fanfare for the first company to comply with this proposal,
which reflects the international best practice seen in the UK, where issuers and
institutional investors agreed similar standards in 1987.
We didn't have to wait too long to find a winner. On 9-Apr-03,
Arts
Optical International Holdings Ltd (Arts Optical, 1120)
announced its 2002 annual results, including its notice of Annual General
Meeting. Resolution 7 is the general issue mandate, and it complies with the
above requirements and provides an example that other companies would do well to
adopt. Project Vampire has scored its first conversion, so give the boys in
spectacles a round of applause for their far-sightedness.
Based on public disclosures, the company is held as to about 40.55% by
Chairman Michael Ng Hoi Ying, 9.80% by his wife, 4.98% by his brother,
7.67% by Templeton Asset Management Ltd and 5.25% by Webb-site.com editor
David Webb.
This is also the stock which we made our
2002 Christmas Pick, and so far
(although it is still early in the year) they haven't let us down. The results
came in with basic EPS of $0.284 ($0.279 fully diluted), beating our expectation
of $0.26 per share. We tipped the stock at $1.87 and today it closed at $2.00,
up 7.0%. In the same time, the Hang Seng Index has fallen 16.2% from 10,227 to
8,572 (excluding dividends).
It is worth noting that Arts Optical's EPS would have been even higher if it
had not used part of an earlier year's general mandate to
issue new shares to Templeton for cash in Jan-02, enlarging the share
capital by 5.23%. Arts Optical appears to have learnt from that lesson by
limiting this year's mandate, and you can't blame Templeton for taking candy
when it was offered to them.
However, the subscription inflated the cash pile by $31.2m, and at 31-Dec-02,
the company was sitting on net cash of $214.1m or about $0.57 per share, or
about 2 years' profits. The board proposes a final dividend of $0.08 per share,
making a total of $0.16 for the year, or a yield of 8%.
We have urged the board to consider a special dividend in the next
results, to allow each shareholder to invest the surplus money as they choose.
When a listed company retains excessive amounts of cash, there is always the
risk of bad investments being made.
The company has also recently set up a remuneration committee for the board
comprising the two independent non-executive directors, and Finance Director
Desmond Lee Wai-chung tells Webb-site.com that all the annual meeting
votes will be conducted on a poll, 1-share-1-vote, in compliance with best
practice and in line with Project
Poll.
Obviously we benefit if Arts Optical continues to perform well, but so do all
shareholders, and the same thing works in reverse. With a substantial investment
in a listed company, we will take all necessary steps to encourage good
governance, and failing that, to hold management to account.
Listing Rules
OK, so one company has met the recommended best practice for the general
mandate, and we hope others will follow. Does that mean that the Listing Rules
can remain relaxed in this respect? Certainly not. Any company that rises above
the low standards set by the Listing Rules can still fall back in future, and
minority shareholders are powerless to stop it. So we still need tighter
Listing Rules, and will keep pressing for that by encouraging shareholders to
vote against the general mandate unless it meets our recommended best practice.
Copyright Webb-site.com, 2003
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