Almost No Mandate
5 April 2004
On 31-Mar-04, we had the first AGMs of the year in Project Vampire (Vote Against Mandate for Placings, Issues by Rights Excepted), for Hong Kong Exchanges and Clearing Limited (HKEx, 0388) and The Bank of East Asia, Limited (BEA, 0023).
The board of HKEx, against the advice of your editor David Webb, who is one of its elected directors, proposed that shareholders grant it a 20% general mandate to issue new shares for cash without offering them to existing shareholders first.
By proposing this, the board almost ended up with no mandate at all. As the poll voting figures show, the relevant resolution 6(I) was passed by a margin of just 52.7% in favour to 47.3% against:
If this waiver of pre-emptive rights had taken place in a UK-incorporated company, then a special resolution would have been required, and the required 75% majority would not have been achieved. As it is, the ordinary resolution at HKEx was probably only passed as a result of support from stockbroker-shareholders who stand to lose the quick and lucrative fees of placings if listed companies start doing rights issues.
Reflecting the ongoing difficulties with voting access in Hong Kong, the turnout was only 29.0% of the issued shares, similar to last year's. However, the 47.3% vote against the mandate was much higher than last year's 17.3%, which indicates that investors are becoming more aware and less tolerant of this problem. As a reminder, the recommendations of Project Vampire are:
- The mandate to issue shares for cash, other than by a rights issue, should be for not more than 5% of the outstanding shares a the time of the mandate
- The discount for shares issued other than by a rights issue may not exceed 5%.
- The mandate to issue shares for non-cash purposes, including acquisitions, should be for not more than 20% of the outstanding shares
We hope that next year, the board of HKEx will take heed of these voting figures and propose a mandate which is more acceptable to shareholders. As shown above, the general mandate relates not only to issues for cash, but also for non-cash issues such as acquisitions, where we have no objection to the 20% mandate. But by asking for the ability to issue 20% for cash, the board almost ended up with no mandate at all. They were lucky to get away with it this year.
Other listed companies should take note, particularly if they have not yet sent out their 2004 AGM notice, and should consider amending the mandate. Of course, most have controlling shareholders who can ram the approval through, but is that the kind of message they want to send to investors? The voting figures will show how investors voted, after deducting the insider votes.
Whose rules are these?
From a regulatory perspective, we should remember that HKEx owns the Stock Exchange of Hong Kong Limited, which as part of its Listing Rules allows a maximum 20% cash issue mandate in the first place. The outcome of its own shareholder vote should increase the pressure on the for-profit regulator to tighten the rules, if it is to be seen to fulfil its duty to the investing public, who clearly are not happy with the present situation.
Earlier that same day at BEA, shareholders were also presented with a request for a 20% mandate. Based on known shareholdings of directors and their associates, including the late Alan Li Fook-sum, the bulk of whose interest was held via a family company of which he owned one third (so we presume it still voted), the insiders own 154,836,002 shares or 10.54% of the company. This almost certainly understates the holdings of the wider concert party which would include other relatives of the extended Li family. But we will ignore that and tell you that by deducting the figure for insiders from the poll voting figures, assuming the board was in favour of its own mandate, the vote on the general mandate was:
That's hardly a ringing endorsement of the policy either, and very similar to the outcome at HKEx. The voting turnout was about 21.1% of the free float (shares not held by insiders). As for the actual vote (including insiders) it was 69.1% in favour to 30.9% against, so if this had been a special resolution, as is the case for UK-incorporated companies, it would not have passed.
The tide is turning in Hong Kong's battle for pre-emptive rights.
© Webb-site.com, 2004