HKEx AGM Shake-up
16 April 2003
It was a fun-packed evening at the annual general meeting of Hong Kong Exchanges and Clearing Ltd (HKEx) yesterday, held on the trading floor of the Stock Exchange which it owns. We've always wondered what a "seat on the Stock Exchange" would be like, and now we can tell you - they are made of hard, red plastic and rather uncomfortable.
The evening began with your editor David Webb asking why, as a public listed company, the meeting was not open to media observers, and what kind of example this set for transparency to other listed companies, which HKEx currently regulates. We also pointed out that HKEx was perhaps the only listed company with its own viewing gallery overlooking the proceedings. After some debate, and our citation of Bank of East Asia and HSBC for allowing media observers, Chairman Charles Lee reluctantly agreed, and the doors of the Exchange (or at least, the windows of the viewing gallery) were flung open to the media. Score one for the public interest!
Next, the Chairman asked the meeting if we could skip straight to the election of directors, item 3 on the agenda, as this was going to involve a poll (a tally of shares voted) and would take some time. Your editor then suggested that it would be better to handle items 1, 2, 4 and 5, which were relatively non-controversial, before moving to item 3, as we would then be seeking an adjournment, and in any case, we would require a poll on all resolutions anyway, in accordance with our Project Poll, which is aimed at abolishing the Victorian show-of-hands system in listed companies, a system which ignores proxy votes. The Chairman quickly claimed that this polling was what they were planning to do anyway, but decided that the meeting would still handle item 3 first.
Moving for adjournment
At that point, we reminded the Chairman of his fiduciary duty to all shareholders and explained that it would not be fair to all shareholders to hold this election without allowing sufficient time for them to vote on the complete list of candidates. We pointed out that the clearing system was only open for voting for 3 days after the last three candidates had been named (one, David Parker, dropped out after a day), and this would surely not be enough time for everyone to vote. For details of this complaint, see our previous article, HKEx should Adjourn the AGM.
Stanley Chow, for Allen and Overy, legal advisers to the board, then opined that it was "theoretically possible" for institutional shareholders to have voted in the 3-day window. And most improbable, we thought. From the floor, Walter Reisch, the Vice President of Clearing at HKEx, which processes incoming votes from custodians, banks, brokers and investors, then said that "about 200 million" shares had been voted on the 2 new candidates, but then declined to tell us how many shares had been voted on the first 8 candidates, which figures, as we will show below, would have made our point. By giving only half the picture, he was in fact arguing against the interests of many of the ultimate clients of his clearing company around the world, who would have favoured an adjournment so that they had time to vote.
The Chairman declined to exercise his right under Article 69(2)of the Articles of Association to adjourn the meeting. We were then left with no option but to seek to defend the voting rights of absent shareholders. So we played our trump card. As a shareholder, we proposed a motion under Article 69(1) that the meeting "direct" the Chairman to adjourn the meeting for 14 days until 4.30pm on 29th April. We demanded a poll on the adjournment motion. Under article 71(2), such a poll must be taken "immediately and without adjournment".
Much head-scratching ensued on the flummoxed board as the realisation gradually dawned on them that they would have to comply. Someone asked if we could do the other business of the meeting first, and then adjourn. "No", we said, the articles were quite clear, and besides, we had previously invited the Chairman to process the other items first, and he had declined.
So a pause followed while the scrutineers PriceWaterhouseCoopers headed off to fiddle with a word processor and came up with a voting form for the proposed adjournment, which the meeting then filled in. We didn't expect to win, but the outcome would demonstrate that only a small percentage of the company was represented at the meeting, and had pushed the election forward. Of course, the very shareowners who were disadvantaged by the lack of an adjournment were also unable to vote on the adjournment. The result of the poll on the adjournment were:
So we made the point that only 11% of the company was represented at the meeting and had decided to proceed.
Next, the meeting proceeded with the long process of reading out the resolutions for the election the directors. The board planned to adjourn for a poll on that, until we suggested that the meeting discuss all the other resolutions and then put them on the same poll, or else we would be there all night. The Chairman gladly agreed. Sometimes, one just has to point out the obvious.
The unknown budget variable
So on we went. On the dividend, we asked the board whether they had considered distributing surplus capital as a special dividend. Many observers have suggested that they may be sitting on too much cash, did the board agree? The Chairman replied that they have to take into account a number of factors, including risk management on the securities clearing business, and "projected strategic investment opportunities", when deciding on the cash requirements. In essence, the board did not think they had surplus capital. We asked then, how much money did they "project" they would need for these investment opportunities, and did they have any such "opportunities" in mind? They replied that there was no specific figure in the projections, and no specific opportunities - which raises the obvious question - how can you include an unknown figure in a budget, and then know that you have no spare cash? It is mathematically impossible.
On the reappointment of auditors, you will be happy to learn that the only non-audit work performed by PriceWaterhouseCoopers was tax compliance work, for a fee of $564,000. We always ask this question at every listed company whose AGM we attend, because there is increasing concern about conflicts of interest. We were satisfied that in this case, there were none.
Project Vampire begins to bite
As regular readers know, we have been campaigning to amend the Listing Rules which allow directors to choose who owns the company by granting them a mandate to issue new shares up to 20% of existing shares, to whomever they choose at any discount they choose. Unnoticed by the market, one small listed company has already complied with our recommendations to reduce the mandate as made in Project Vampire, and we will give them a fanfare in a day or two, as promised. We hope others will follow their lead.
Meanwhile, HKEx has continued to seek the maximum authority to issue new shares under its own listing rules. So we opposed that, and as the results show, there is increasing opposition to this management proposal by listed companies. As the year moves on, we expect more investors to wake up to the damage that the general mandate can do to their ownership rights, and vote against the mandate in annual general meetings of other listed companies.
Here are the results of the board's proposals:
It is notable that two of the above proposals (the dividend and paying fees to the directors) received about 50m more votes in total than the other resolutions, which makes us wonder whether those investors really understood the other proposals, which are more technical in nature, or simply chose to abstain on them.
Now we come to the sweetest part. There was a contest by 10 candidates for 6 seats on the board. 8 of the candidates were included in the original shareholder circular published on 21-Mar-03, included 7 recommended by the board, and David Webb, who wasn't recommended, but was proposed by a shareholder. The 7 candidates recommended by the board included all 6 incumbent broker directors, plus Oscar Wong, CEO of BOC-Prudential Asset Management Ltd. The final two candidates, each proposed by a shareholder, were included in a second shareholder circular published last Tuesday, 8-Apr-03.
The board decided that the winners would be determined by net votes, being votes in favour minus votes against each candidate. Only those with a net positive vote would be elected, and if there were more than 6 with a net positive vote, then the top 6 would be elected. Here's the result:
This is remarkable on several counts:
- 3 of the 6 incumbent broker-directors recommended by the board were rejected by shareholders
- 5 of the 8 broker candidates were rejected by shareholders
- The only investor recommended by the board, Oscar Wong, scored the highest net votes. Even if you deduct the 40m shares he says employer Prudential owns and voted for him, he still polled well.
- The other investor, David Webb, who stood without recommendation of the board and owns just 10 shares, was elected by shareholders. This is the first time we can recall a minority shareholder proposal being passed in a general meeting of a Hong Kong listed company.
It goes against the grain for institutional investors to oppose management, and they only do so if they feel very strongly, so this sends a clear message that shareholders have had enough of the way HKEx has been run by vested interests, including the brokers who have held all the elected seats since the company was listed, at which time they owned 100% of it. Many have since sold their shares, and yesterday's election marks at least the beginning of the end of broker dominance which has impeded market development.
Readers will also note that the last two candidates proposed last week, Henry Chan and Kenneth Lam, scored bottom, but also that the total votes cast on their resolutions was 197 and 168m, far fewer than the other 8 candidates, who had total votes of 287-364m. Clearly then, our point that many investors were excluded from voting by the short timetable was well made, although with hindsight their defeat would probably have been even greater if everyone had enough time to vote.
Judging by the total votes cast, it's a fair bet that Prudential voted their 40m shares in favour of only their own candidate Oscar Wong, against Yue Wai Keung and John Seto, and abstained on the others in the original batch of 8.
Only 5 candidates were elected, so the Board will fill the remaining vacancy by appointment, probably at its first meeting this afternoon. David Webb will propose candidates who we believe will act independently of vested interests and in the public interest, and hopefully we will then have at least 3 out of 13 directors who have some influence in pushing reform forward.
Late last night, the Government belatedly announced its six appointees to the board, 3 of whom have been given only 1 year terms and the rest, two year terms. It is to be hoped that this will pave the way for the transition of HKEx as it is relieved of the regulatory role by implementation of the Expert Group recommendations, and can focus on its commercial activities of building a better exchange, and the number of government appointees can then be reduced in favour of a board elected by shareholders.
© Webb-site.com, 2003