Investors Win at COS
30 November 2004
It's not often we can give you good news, so here's something to warm the proxies of your heart. A month ago, we warned that H-share China Oilfield Services Ltd (COS, 2883) was proposing to renew and expand a mandate to lend money to CNOOC Finance Corporation Ltd (CNOOCF), a subsidiary of state-owned parent China National Offshore Oil Corporation (CNOOC). We urged investors to vote against the proposal, because it is bad governance for a listed company to lend money to its controlling shareholders. It's your money, not theirs.
The vote was originally scheduled for 5-Nov-04, leaving a very short timetable in which to vote, but thanks to PRC regulations, the meeting was adjourned on the grounds that only 32.41% of the shares eligible to vote at the meeting were represented, falling short of the initial quorum of 50% of the eligible shares. In an adjourned meeting, no such quorum applies.
In Apr-04, CNOOC's other listed subsidiary, CNOOC Ltd (CNOOCL, 0833), sought and obtained a 3-year mandate to do the same thing, in a rushed meeting timetable in which many investors, including some ADR holders, had no time to react and turnout was only 21.9%. CNOOCL is incorporated in Hong Kong and so does not have to follow the same quorum rules as PRC-incorporated COS.
PR battle
Prior to the original meeting, COS had engaged in some aggressive public relations in which it claimed to media that the risk of depositing money with CNOOC Finance is not greater than putting money in "any other bank". After we pointed out that CNOOC Finance was not a bank, on 1-Nov-04 they issued an announcement which corrected that but then said:
"With respect to the credibility of commercial banks in the PRC vis-a-vis that of CNOOC Finance, CNOOC Group was rated A2 by Moody's and BBB+ by The Standard and Poor's, which ratings, the Company believes, remain among the highest ratings assigned by these rating agencies to the PRC corporates, including commercial banks."
Students of finance will spot the error in that statement - credit ratings are given to individual companies, not to whole groups. A subsidiary of a company may be highly geared and not credit worthy, but the parent can still be triple-A rated. That is due to the legal concept of limited liability - the debts of a company are not the debts of its parent. We checked with the agencies and sure enough, CNOOCF has no credit rating. But if you read the announcement, it carries the clear and misleading implication that CNOOCF is rated BBB+.
So we complained again, and then on 4-Nov-04 we get another announcement which says:
"The Company would like to clarify that the credit ratings as mentioned in the Clarification Announcement were for CNOOC and CNOOC Limited. CNOOC Finance Corporation Limited was not assigned any credit rating by any rating agency"
The meeting was adjourned the following day. On 9-Nov-04, COS published a revised proxy form in which it unbundled the proposed connected transactions, as we had urged them to do. So now, instead of a single resolution covering all the connected transactions with CNOOC group, there were 6 different resolutions, the first 5 of which relate to necessary transactions for COS to carry out its ordinary business and the last one relating to the loans to CNOOCF, or as the company called it, "depositary services".
The meeting took place on 29-Nov-04, and as you can see from the official results, the proposal relating to the loans to the parent group was defeated by 62.92% to 37.08%. The turnout at the meeting was 34.74% of eligible shares.
The message
There are several points that come out of this:
- The vote at COS should deter other red-chips and H-shares from seeking authority to lend money to their parent groups in the future - because investors will not tolerate this and, provided they have sufficient notice, they will vote it down.
- CNOOCL got away with a mandate in Apr-04, but if the board, and more importantly, the controlling shareholder, really believe in good governance as they claim, then they will publicly commit not to lend money to the parent group. We call on them to make this commitment.
- COS's independent financial adviser, Quam Capital Ltd, gets our black mark for blessing the proposal in the first place, and the independent board committee consisting of Independent Non-executive Directors Gordon Kwong Che Keung, Andrew Y Yan and Simon Jiang Xiaoming earn our criticism for allowing this to go to shareholders with their recommendation. At the last count, Mr Kwong holds 18 directorships of HK-listed companies, 17 of which are as INED and one as NED. Perhaps he should cut his workload and focus on quality rather than quantity. Incidentally, one of his INED positions is at Quam Limited, parent of the IFA on this transaction. Mr Jiang is the son of Qiao Shi, the former Chairman of the National People's Congress. Mr Jiang was Chairman of loss-making property firm Vision Century Corporation Ltd (0535) until 16-Oct-03, where Mr Kwong is an INED.
- Investor activism can work, even in China.
© Webb-site.com, 2004
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