HKEx adopts VAMPIRE mandate
29 March 2011
Long-time readers will recall the launch in 2003 of our ongoing campaign to cut the general issue mandate, in the form of Project VAMPIRE - Vote Against Mandate for Placings, Issues by Rights Excepted. This is the battle for pre-emptive rights in HK - if a company needs to issue shares for cash, then it should offer the discounted shares to all shareholders in a rights issue, rather than transferring the value of that discount to chosen investors, diluting existing owners in terms of both value and voting rights, without their consent.
VAMPIRE calls for investors to vote against general mandates unless:
- the mandate to issue shares for cash, other than by a rights issue, is for not more than 5% of the outstanding shares at the time of the mandate; and
- the discount for shares issued other than by a rights issue does not exceed 5%; and
- the total mandate, including non-cash issues, such as shares issued to a vendor in an acquisition, can remain up to 20%.
Also in 2003, our Project Poll forced the blue chips to start counting their votes properly (one vote per share, rather than on a show of hands), and we were then able to show how investors have been voting on the mandate. Poll voting finally became mandatory for all HK-listed companies on 1-Jan-2009. On average, investors vote more than 2 to 1 against the mandate. The mandate only gets approved because of the votes of a controlling shareholder who elects the entire board which proposes the mandate in the first place.
In 2004, Hong Kong Exchanges and Clearing Limited (HKEx, 0388) went ahead with its usual request for a full 20% placing mandate and almost lost the vote, by 53:47. Your editor was an elected independent non-executive director of HKEx at the time, and opposed the mandate. Until now, that was the last time they asked for a mandate. HKEx is an unusual animal in that although the Government only owns about 5.8% of it, shareholders can only elect 6/13 of the board, with the rest appointed and approved by Government. So the Government controls the board, but shareholders call the shots on the general mandate.
This year, for the first time in 7 years, HKEx is seeking a general mandate. Click here for the circular. Webb-site is pleased to note that the proposal complies with the requirements of Project VAMPIRE - HKEx is seeking approval to issue up to 5% new shares for cash, up to 10% new shares in total (including non-cash issues) and a discount limit of 5%. Investors should vote in favour of this proposal, Resolution 6.
Now reform the mandate Listing Rules
A 100% subsidiary of HKEx, The Stock Exchange of Hong Kong Ltd (SEHK), makes the Listing Rules, including the rules on the maximum allowed placing mandate - currently 20%, with a discount limit of 20% except in "exceptional circumstances". In early 2008, SEHK consulted the market on tightening the general mandate, but dropped the proposal in Oct-2009, citing "current facts and circumstances".
Now that its parent, HKEx, has set an example by adopting a VAMPIRE-compliant general mandate, SEHK should look again at reforming the Listing Rules and cutting the general mandate for all listed companies. The standards for pre-emptive rights were set in the UK in 1987. Almost a quarter of a century later, it is about time that HK caught up and stopped allowing directors of HK-listed companies to pick and choose shareholders, diluting existing shareholders against their will.
Proposed changes to Articles
Webb-site is also pleased to note that there is no repeat of last year's outrageous proposal to allow the passing of written board resolutions with the signature of a majority of directors, i.e. a paper board meeting without debate. Investors (excluding the Government) voted that down by 70:30. We also note that HKEx has this year divided proposed changes to its Articles of Association into 3 separate resolutions on separate issues rather than bundling them all together as it did last year, which was in breach of Code Provision E.1.1. Shareholders should vote in favour of the proposals, Resolutions 8, 9 and 10. We note that in paragraph 257 of SEHK's recent consultation paper on corporate governance aspects of the Listing Rules, it said:
"If resolutions are "bundled" there is a possibility that the significance of a resolution may be hidden from shareholders by less controversial resolutions in the same bundle. For example a resolution on a controversial matter on a change to an issuer's articles of association may be bundled with several uncontroversial administrative amendments on the same subject."
Lesson learned!
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