Citibank vote-stuffing in HK AGMs
18 June 2014
Do you remember the brief flurry of enthusiasm in 2008-2011 for creating Taiwan Depositary Receipts (TDRs) for shares in HK-listed companies? The TDRs are then traded in Taiwan. Webb-site can exclusively report that Citibank, which acts as custodian for most if not all of the TDR stocks, is tilting the outcome of shareholder meetings in HK by giving blank proxies to management-nominated voters on behalf of TDRs for which it has no voting instructions.
Imagine that in the next general election (if you have one) in your country, the ruling party could give a proxy to a person of its choice, who would vote at her discretion on behalf of all those citizens who did not vote. It would be a travesty, because of course the party would choose someone whom they expected to vote for their candidate. But that is exactly what Citibank has been facilitating in HK.
We discovered this by accident when we attended last week's AGM of Yorkey Optical International (Cayman) Ltd (Yorkey, 2788), and were surprised by the large voting turnout in favour of the resolutions, relative to the known shares held by insiders. Our inspection of the attendance list revealed that one of the directors, who has no disclosed shareholding of his own, was appointed as proxy to vote exactly 68,136,000 shares, or about 8.23% of Yorkey. (Disclosure: your editor holds over 5% of Yorkey).
According to a disclosure on the Taiwan Stock Exchange website, this number of shares exactly matches the number of 68,136,000 shares in Yorkey's TDR program on 11-Jun-2014, the cut-off point for the AGM. Citibank is the custodian of that TDR program. We checked with the director after the meeting, who confirmed by e-mail that "Citibank issued the proxy to me without any restriction". Presumably the only persons who could have asked Citibank to appoint that proxy (via the HK depository, HKSCC Nominees Ltd) are Yorkey and its management.
The prospectus for Yorkey's TDR issue (in Chinese) is here. The parties to the issue (page 2) include Citibank as custodian, and ChinaTrust Commercial Bank (now CTBC Bank) as depositary. So CTBC would be responsible for collecting voting instructions from TDR holders (or their broker intermediaries) and passing them on to Citibank.
To be clear, it doesn't matter to us whether the proxy is an executive director, an "independent" director, or a monkey with a pen. The point is that TDR custodians should not be giving proxies without instructions from TDR holders, otherwise they are corrupting the corporate governance system. If TDR holders choose not to vote (or more likely, if they are not asked for voting instructions by their broker intermediaries) then those shares should not be voted.
Citibank actually has an online brochure titled Depositary Receipt Services - Guide to Proxy Services, aimed at potential issuers for ADRs in the USA, in which it promotes its "Discretionary proxy" as a service to issuers. It says:
""Discretionary proxy" is a voting mechanism that may be included in a DR Deposit Agreement... In a typical discretionary proxy clause found in DR Deposit Agreements, the depositary bank is authorized and directed (subject to certain contractual limitations specified in the DR deposit agreement) to provide a proxy to a person designated by the DR issuer to vote, at his or her discretion, all the shares for which the DR holders have not given specific voting instructions to the depositary bank. The authority of the depositary bank to issue a discretionary proxy derives from "standing instructions" a DR holder is deemed to have given to the depositary bank upon the purchase of a DR. A discretionary proxy is typically reserved for "routine" items to be voted on at shareholders' meetings. Many DR issuers avoid the use of a discretionary proxy for items involving mergers and acquisitions, for issues subject to shareholder opposition and for decisions that may adversely affect the rights of shareholders." (our bold)
But you can see that they do this with some concern about legality, because the brochure continues:
"A legal opinion and/or representation letter are typically provided whenever the issuer requests that the depositary issue a discretionary proxy. The form representation letter is typically prepared by the DR issuer. The instruction requests that the depositary bank give a discretionary proxy for shares represented by DRs for which no voting instructions have been received, and identifies an individual to whom the discretionary proxy is to be given. The letter also confirms that the DR issuer is not aware of the existence of any circumstances that would preclude the issuance of the discretionary proxy, i.e., opposition to the matters to be voted on, and that none of the issues to be voted on at the meeting will have a material adverse effect on the rights of the holders of DRs. The legal opinion is issued by the DR issuer's counsel in its home jurisdiction and confirms that the granting of the discretionary proxy does not violate the issuer's country law or the company's Articles of Association." (our bold)
Vote-stuffing is an outrageous practice, and Citibank should cease and desist immediately. HK has enough problems with corporate governance, without allowing companies to stuff their ballot boxes with votes from shares in the TDR programs for which the TDR holders have not given voting instructions. It is obvious that all proposals in HK-listed companies' shareholder meetings can face "opposition to the matters to be voted on" as Citibank puts it. That opposition is simply an "against" vote rather than a "for" vote, and all proposals, including director elections, are binary, allowing votes either "For" or "Against" the proposal.
We call on Citibank to stop the vote-stuffing practice, and we call on the HKMA and SFC, as regulators of the Citibank business in HK (which presumably acts as sub-custodian to the TDR programs) to ensure that they stop.
Vote-stuffing has real implications in the event of a connected transaction where only independent shareholders can vote, or in director elections where shareholders are unhappy with the performance of a director, or where competing slates of directors are up for election, or in a proposal for a "general mandate" to issue new shares. But even in what might be regarded as "routine" business, such as approving a dividend or approving accounts, there is no excuse for stuffing the vote with uninstructed shares. If something is deemed important enough to require a vote and be on the agenda, then Citibank and anyone else should not interfere with the vote.
The use of discretionary proxies appointed by the depository under instruction of a company's management also raises possible implications under the Takeovers Code, where the management shareholders could be deemed to be acting in concert with their chosen proxy.
Potentially affected companies
As far as we can tell, the following 16 HK-listed companies have surviving TDR programs:
There are also at least 7 Singapore-listed companies with TDRs, and at least 1 from Malaysia. TDRs never really took off, because liquidity tends to drain back to the source market, and because Taiwanese investors already have access to the HK market, so there have been no more TDR listings since 2011.
© Webb-site.com, 2014
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