Our allegation of Apr-04 against CNOOC Ltd has been proven right. The Listing Committee of the Stock Exchange today issued a public censure of CNOOC for failing to seek shareholders' approval before lending money to its parent's finance company. We look back at the case, and call on the Exchange and SFC to increase transparency over their secret, closed-door disciplinary proceedings.

CNOOC Censured
6 October 2005

On 19-Apr-04, we published an article in which we alleged that CNOOC Ltd (CNOOC, HK:0883, NYSE:CEO) had broken the listing rules by failing to seek minority shareholders' approval before lending (or as they put it, "depositing money with") CNOOC Finance Corp Ltd (CNOOC Finance), a company controlled by CNOOC's parent, China National Offshore Oil Corporation (CNOOC Parent). Between Jun-02 and Mar-04, CNOOC lent as much as RMB6,600m to CNOOC Finance, representing 16.6% of the listed company's net tangible assets.

This was big news at the time of our report, as CNOOC was seeking shareholders' approval for future loans of the same type, and we urged investors to vote against. In response to our allegation, CNOOC's spinmeister CFO at the time, Mark Qiu, a former banker with Salomon Smith Barney, was repeatedly quoted in the media stating that CNOOC's management did not believe the firm had breached the listing rules. He has since left the company.

At the time, the Stock Exchange remained silent on the case other than a tepid newspaper quote from an anonymous spokesman who said "we have been following up on the case since the company's announcement."

Most shareholders and particularly ADR holders in the US then slept through the shareholder meeting which was held on 29-Apr-04 with the minimum possible notice. Only 21.9% of the shares eligible to vote turned out at the meeting, probably including some or all of the "friendly" strategic investors who came in ahead of the IPO, and the resolution to approve loans to CNOOC Finance for the next 3 years was passed with 92% in favour.

Later in 2004, CNOOC's listed sister company, China Oilfield Services Ltd (2883) sought to renew a pre-IPO waiver to lend money to CNOOC Finance, bundling the proposal with other, more necessary, connected transactions until we complained and they unbundled it. This time, shareholders were awake and shot down the proposal.

Finally, the Stock Exchange today issued an announcement containing the Listing Committee's Censure of CNOOC for breaching the Listing Rules on connected transactions. Also covered by the censure were two other breaches in relation to selective disclosures of price-sensitive information way back in 2002 and 2003.

Richard Williams, Head of Listing at the Stock Exchange, commented today:

"The Exchange views the failure to disclose and obtain prior independent shareholder approval of connected party transactions very seriously. The case is another example of the granting of financial assistance by a listed issuer to a connected party over a lengthy period of time without proper approval. Such conduct prejudices the interests of independent shareholders in that they are not being given information on a timely basis or invited to approve the transactions before they are implemented."

Regulatory note:
Speaking of receiving information on a timely basis, the Listing Committee moves in mysterious ways to perform its disciplinary hearings, always behind closed doors and never with any disclosure that hearings are even taking place. The Exchange and the SFC also do not normally disclose that a company is under investigation for suspected breaches of rules, codes or laws. The lack of transparency and these secret trials leave investors in the dark.

Webb-site.com again calls on SEHK and the SFC to increase their own transparency. The fact that a company or its directors are under-going disciplinary proceedings, whether with the Listing Committee or the Takeover Panel, should be regarded as price-sensitive to the shares, and investors should at least be told that proceedings are being brought, even if the actual proceedings are held in private. When someone is charged with a criminal offence in Hong Kong, that fact is disclosed, and the court proceedings are public. Such transparency is considered essential to maintaining public confidence in the rule of law. Why should regulatory proceedings against listed companies or their directors be any different?

Unfortunately, this public censure came too late to affect the voting at the CNOOC meeting. And although the disciplinary hearing was held almost 6 months ago, on 19-Apr-05, the result was only announced today. What went on since April is anyone's guess - the Exchange didn't say.

© Webb-site.com, 2005

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