Listing Rules Review Part 3: Count the Votes
11 March 2002
In our third instalment on the consultation paper on the Listing Rules of The Stock Exchange of Hong Kong Ltd (SEHK), we look at shareholder voting and general meetings. It is often a surprise to investors we speak with, particularly overseas institutions, that the votes they thought they had cast through their custodians are not normally counted.
Globally, perhaps the most famous battle going on at present is the HP-Compaq merger, and whichever way the HP vote goes, everyone presumes without question that their votes will be counted on the basis of one vote per share, and that the results will be fully disclosed. However, if that vote had been taking place in Hong Kong, then they would presume too much.
In a typical Hong Kong listed company general meeting, all votes are normally held on a show of hands. It's a system inherited from English company law enacted in the 19th century. Back then, companies were often held by a small number of local shareholders, and most could either attend a meeting or send others as their appointed proxies. Nobody had computers, let alone electronic calculators, so tallying of votes on a poll, where each share is counts for one vote, was a tedious manual process. In those circumstances, it was normal and practical for the Chairman of a meeting to dispense with the need for a poll if the meeting was clearly either in favour or against a proposal on a show of hands.
Ever since Britannia ruled the waves, the laws of the UK, Hong Kong, and British territories like the Cayman Islands and Bermuda (where over 75% of Hong Kong listed companies are domiciled) have allowed such voting procedures.
It doesn't matter how many shares you've got, you only have one hand. If you feel strongly about this, then you can show up at the meeting and try to get a poll. However, normally only the following people can demand a poll:
- The Chairman; or
- Five shareholders present in person or by proxy (3 for Bermudan companies); or
- Shareholder(s) who together own 10% of the Company, present in person or by proxy.
Often only 25% of the company (sometimes as low as 10% for large companies) is in public hands, so it's unlikely that 10% will be present in the meeting. The difficulty in demanding a poll is compounded by the fact that the vast majority of the public shares are held through the Central Clearing and Automated Settlement System (CCASS), often via your bank, broker or custodian, because that is how they received the shares when they bought them, and they have to be in the system to settle a sale.
CCASS is run by Hong Kong Securities Clearing Company Ltd (HKSCC), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Ltd (HKEx), which also owns SEHK. HKSCC is the monopoly clearing company and registers all the shares it holds in the name of HKSCC Nominees Limited.
As a consequence, any public votes through CCASS normally boil down to a single HKSCC employee, who shows up at the meeting and raises a hand in accordance with the majority of votes on which CCASS has been instructed, either in favour or against. Only if there is a poll will the shares count.
CCASS will not normally demand a poll, even if it has received votes in respect of shares totalling more than 10% of the company. You would have to make a special arrangement to get CCASS to demand a poll, in respect of your shares alone, which would have to be at least 10% unless at least 4 other shareholders (or 2 for Bermudan companies) at the meeting also demand a poll. Often there are no genuine public registered shareholders who have the time to attend in person.
How it goes
Hong Kong shareholder meetings are almost always held behind closed doors, out of sight of most public shareholders. No press, no cameras, no web streaming of proceedings.
In practice, the votes of the public (on one hand) are nearly always overwhelmed by the several hands of the company's employee shareholders (non-directors) who each have a script and instructions on how to vote. As each resolution is proposed, a young employee will stand up and say something like "Mr. Chairman, I have pleasure in seconding the resolution". Normally each such employee shareholder holds only a small number of shares, but that doesn't matter on a show of hands; there will be more of them than there are of you, and they will win.
As SEHK itself wrote in 1999:
"Listed issuers may ensure that employee shareholders are present and cast their votes accordingly, thus tending to result in the... transaction being approved."
So next time you consider instructing your broker, custodian or bank to vote at a meeting, remember - it probably won't count.
SEHK is well aware of this problem. After all, they are a fellow subsidiary of HKSCC which goes through this voting charade almost every day. We raised it several years ago, and after that the Consultation on the 1998/1999 Listing Rules Review contained a proposal for a poll on connected transactions (but not on other resolutions). The results of that consultation vanished without trace and the proposal was never implemented. The requirement did make it into the first GEM Listing Rules in 1999.
No further progress has been made, and all that the SEHK now proposes for the main board is:
"to require voting by way of a poll for connected transactions and all resolutions requiring independent shareholders' approval (i.e. where controlling shareholders are required to abstain from voting)."
This is almost the same as the proposal as 1999. The SEHK writes that:
"We recognise that voting by poll would serve as an effective means to ensure protection of shareholders' rights, particularly when dealing with matters which involve conflicts of interests or connected parties or have significant impact on companies and shareholders. However, taking into account the cost and time that may be incurred, such method of voting may not benefit the issuer and shareholders in the same way, if required for less important matters". (emphasis added)
Wait a minute. Shareholders get consulted little enough as it is. They own the company. If a resolution is important enough to require shareholders' approval, then it is important enough to require the votes to be properly counted, 1 vote per share. The "less important matters" to which the SEHK refers would include:
- Major acquisitions and disposals of more than 50% of net assets
- Adoption of share option schemes
- Election of directors
- Appointment of auditors
- Amendments to the articles of association
- Approval of annual accounts and dividends
To suggest that such matters should be passed on a rigged show of hands, where the public is reduced to a single hand, is an outrageous system beyond the imagination even of Robert Mugabe. There is no practical difficulty in conducting a poll. CCASS already knows how most of the public has voted, and all that remains is to add up the votes of those few shareholders who attend the meeting, and announce the total. Any minor expense and time incurred is minimal in the context of effective shareholder governance.
A controlling shareholder with between 30% and 50% of the voting rights is by no means certain of carrying all these proposals on a poll. Even if they have more than 50%, the proposal may be a "special resolution" which requires a 75% majority. And even if they have the requisite majority, it is in the public interest that investors should know the extent of any opposition to management proposals, and that the votes should be properly recorded and announced.
The solution is simple. The Listing Rules should require that all votes in meetings of shareholders should be held on a poll. The poll should be scrutinised by the appointed auditor, who should certify the results. As a consequence, controlling shareholders would think harder before trying to rip off minority shareholders.
The OECD has set out very basic principles which should be followed to protect shareholders' rights. Principle I.C3 states:
"Shareholders should be able to vote in person or in absentia, and equal effect should be given to votes whether cast in person or in absentia"
Principle II.A.3. states:
"Processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders."
Clearly, that is not something that SEHK, Hong Kong's for-profit regulator, subscribes to.
World Class City?
On the subject of procedures, most of what we have described in general meetings normally happens in either Cantonese or (in the case of mainland or Taiwan-managed companies) Mandarin, in either case without formal translation.
In the interests of making Hong Kong attractive to international investors, who in most cases cannot read Chinese, SEHK goes to great length to require bilingual (English and Chinese) announcements, financial reports and shareholder documents, but when it ultimately comes to the shareholders' meeting, foreign investors face blatant discrimination. When your editor attends such meetings, he usually gets a sympathetic staffer from the company to sit next to him and poke him in the ribs when it is time to vote (hopefully) in the right direction. For all we know, he could be voting the wrong way.
Hong Kong cannot have it both ways - if you suck in foreign investors by giving them information in a common language (English) as well as the domestic language(s), then you must conduct shareholder meetings with simultaneous and complete translation. If you want to limit the market to Chinese-literate Chinese-speaking shareholders, and then require them all to attend shareholders meetings if they want their votes to be properly counted, then fine, go ahead, but don't aspire to be a world-class open financial centre.
Fix it or we will
We have a plan. If the SEHK persists with allowing the show-of-hands system in its Listing Rules, then we will implement a fallback system which targets 32 of the 33 companies in the Hang Seng Index (with the exception of HSBC, which as a UK company holds its annual meetings in London), comprising the bulk of Hong Kong's market capitalisation. We will establish 4 BVI companies and each of them and your editor will hold at least one registered share in each company. All 5 of us will attend the general meeting of each company and demand a poll on each resolution. So get those calculators ready. One way or the other, you are going to have to get your acts together and count the votes.
© Webb-site.com, 2002