What the UK should learn from Jardines
27 March 2014
Along with its results on 6-Mar-2014, the Jardine group of 5 companies announced proposed downgrades to their UK listing status, which will reduce minority shareholder rights and governance standards. And guess what? The controlling shareholders can vote to approve this, so minorities have very little say in the matter, except in one case.
It is a popular misconception, because the majority of trading in the Jardine stocks takes place in Singapore, that they have a primary listing there. They don't. The Singapore listings are secondary listings, so Singapore plays no material regulatory role over the companies. What matters is the primary listing in London.
The group comprises Jardine Matheson Holdings Ltd (JMH), which owns 82.5% of Jardine Strategic Holdings Ltd (JSH), which owns 77.6% of Dairy Farm International Holdings Ltd (DFI), 73.5% of Mandarin Oriental International Ltd (MOI), and 50.01% of Hongkong Land Holdings Ltd (HKL). All are incorporated in Bermuda. Crucially, JSH also owns 55.5% of JMH, making them subsidiaries of each other.
Under Bermudan law, subsidiaries can vote shares in their parents. If JMH and JSH were HK companies, they would be prohibited by section 113 of the Companies Ordinance from acquiring or voting shares in each other. The Bermudan cross-shareholding allows the boards of both companies to lock themselves in by voting the cross-shareholdings to re-elect the directors at any AGM. The cross-shareholding was established in late 1986 at lower levels, and since then, the Jardine group has been gradually swallowing its own tail, each of JSM and JSH increasing its stake in the other, partly by accepting scrip dividends, and JSH increasing its stake in DFI, MOI and HKL.
Done deal, except for HKL
All of the Special General Meetings to approve the listing downgrade will be held on 8-Apr-2014 in Bermuda. The JM circular is here, the JSH circular is here, the DFI circular is here, the MOI circular is here and the HKL circular is here. Each proposal is a Special Resolution which requires 75% of votes cast. But before you put on your shorts and jump on the plane, keep in mind that under current UK Listing Rules, the controlling shareholder is allowed to vote (but not for long - see below). That basically means that it is a done deal for JSH, DFI and MOI. It is also practically impossible to stop JMH, because by our reckoning, the Keswick family on the board have 9.21%, a "1947 Trust" which incentivises staff has 5.36%, and other directors have 0.43%. Add that to the cross-holding and you have 70.53%:
But for HKL, the story is slightly better, as JSH has only 50.01%, and its directors have only modest holdings totaling 0.16%, although there are probably other minor family holdings. Taking the figure of 50.17% control, if nobody else is in favour then it would take about 16.8% of the company, or about one-third of the independent shares, to stop the downgrade. Webb-site urges independent shareholders of HKL to vote against the listing downgrade. Independent shareholders in the other companies should also vote against, but they won't win.
The circulars are full of disingenuous arguments about how "Asian conditions" are different, how the companies benefit from each other, and how good the total shareholder returns have been over the last decade (nothing to do with the property bubbles, of course) - but that really isn't the point. "Trust us" is not an acceptable alternative to the checks, balances and discipline that a Premium Listing brings. Trust, but verify. The current generation of management may turn out well, but they need proper oversight. It was only a generation ago that this group almost blew itself up in the bid for the land now under Exchange Square and then an abortive investment in Bear Stearns before the 1987 crash.
All five companies were once listed in HK and were members of the Hang Seng Index, but they transferred their primary listing to London and then delisted in 1994 after the regulators refused to allow them to downgrade their listing to a proposed "trading only" status ahead of the Handover of sovereignty. The 1991 consultation paper on that is available on Webb-site. The delisting from HK has not changed the business presence in HK, where the group remains the biggest landlord in Central and one of the largest employers through various retail and service businesses.
Co-founder William Jardine, it should be remembered, persuaded the British Government to go to war with China in 1840 to protect the opium trade. The result of this First Opium War was the Treaty of Nanking on 29-Aug-1842 (full text here) which ceded Hong Kong Island to Britain in perpetuity, without which we would not be writing this today, so thanks, Bill. Some 150 years later, there was really no reason to think that the change of sovereignty would result in regulatory retribution against the Jardine group, but perhaps this was a driving force in the group's decision to escape HK regulation.
A decade earlier, in 1984 during the Sino-British negotiations over HK's future, Jardines had led the way to shift their holding company from HK to Bermuda, perhaps fearing the imposition of global taxation on HK holding companies, rather than just taxing their HK profits as remains the case today. The shift of parent domicile to a tax haven remains a rational move, one which many HK companies have emulated. Today there are just 209 HK-listed companies incorporated in HK, or about 13% of the total, with 75% incorporated in the Cayman Islands or Bermuda, both of which are British colonies. A breakdown of listings by domicile is in Webb-site Who's Who.
Worldwide, it makes sense for companies to escape the tendency of their governments to seek to tax income from outside their jurisdiction. This problem is exemplified by the fact that many US-domiciled companies have cash stranded in their offshore subsidiaries because the US Government taxes dividend remittances.
William Jardine died unmarried. His sister Jean married one David Johnston, and their daughter Margaret Johnstone married Thomas Keswick (born Kissock). The couple spent some years breeding in New Brunswick, Canada before returning to the nest in Dumfriesshire, Scotland. They produced the line of male Keswicks that still runs the group. The current "Taipan", Benjamin William Keswick, has (we presume) the Y chromosome of his great-great-great grandfather Thomas Keswick, and Ben's 5 x great-grandfather Andrew Jardine was William's dad. Incidentally, the last will and testament of Will Jardine was an interesting exercise in early 1840s estate planning, and we'll get to that in a future article.
The Listing downgrade
Until now, the group has had a "Premium" listing in the UK. This used to be called "Primary", with the alternative being "Secondary". London has gradually morphed its rules over the years. It used to require that a company with a secondary listing must have a primary listing in another place, but that requirement was dropped in 2005. On 6-Apr-2010, Primary was renamed "Premium", and "Secondary" was renamed "Standard" although a better term would be "Bog Standard". Under a Standard Listing, a company only has to comply with the lowest common denominator set by the European Union through "EU Directives" - you know, the kind of governance that makes Spain and Greece so successful. Jardine group now wishes to downgrade from Premium to Standard.
The UK Premium listing rules are broadly similar to the HK Main Board Listing rules. There are requirements for minority shareholder approval of related party transactions above a certain minimum size, for pre-emptive rights, and to "comply or explain" against a Code on Corporate Governance. Soon, there may even be requirements on the UK Premium board for independent directors to be approved by non-controlling shareholders. Yes, we know this seems obvious, but it is something we have called for in HK forever. These are not requirements of the UK Standard Listing. A comparison of Premium and Standard Listing requirements is here.
The UK has also, with effect from 6-Oct-2009, allowed UK companies to obtain a Standard Listing rather than a Premium Listing. Previously, the secondary listing status was only allowed for foreign companies. Inclusion in the FTSE UK indices still requires a Premium Listing, but this paves the way for the UK to attract a whole new category of crappy companies to the Bog Standard who can claim that they are "London Listed", glossing over the fact that this offers little protection.
Getting out while they still can
On 5-Nov-2013, the UK Financial Conduct Authority (FCA) launched a further consultation, CP13/15, on proposed changes to the Listing Rules to "significantly enhance the protections for minority shareholders in premium listed companies". The cover of this document features a happy dude in a scarf, so it must be alright then.
The current requirement for a delisting from the Premium segment, introduced in Jul-2005, is significantly weaker than HK's. UK Listing Rule 5.2.5 normally requires approval of 75% of votes cast for a delisting from the Premium segment, but all shareholders can vote. That means, for example, that JMH could vote to delist JSH, and with 82.5%, it would succeed. The FCA writes:
"We are aware that stakeholders may feel that, in line with our other proposals, it is necessary to enhance shareholder protections where a controlling shareholder is present".
You bet it is. In HK, the SFC dealt with this in 2002 after our 2001 article Hobson's Choice on Privatisations, in which we pointed out that shareholders were often forced to choose between a low-ball buyout offer and being left with unlisted shares without any Listing Rule protections at all. So on 1-Feb-2002, the Takeovers Code was amended to require in Rule 2.2 that a stock could only be delisted in a privatisation if the offeror had exercised compulsory purchase powers to acquire 100% of the company. Similarly, HK Listing Rule 6.12 mirrors the requirements for privatisations, requiring 75% of voted shares in favour, requiring controlling shareholders to abstain, and requiring that if more than 10% of all the independent shares vote against, then the stock will not be delisted.
Twelve years later, London is attempting to address the same problem. And guess who runs the FCA? Martin Wheatley, former CEO of the SFC. So he should understand the problem. The FCA proposes adding a requirement that a simple majority of votes cast by independent shareholders must also be in favour for a delisting from the Premium segment. It's a half-measure, since you could still end up stranded in a delisted company or forced to accept a low-ball offer.
The FCA also noted that there is no requirement for shareholder approval on delisting from the Standard Listing (yes, really). So they said:
"We recognise the potential for circumventing cancellation provisions by transferring to the standard segment...So, we have proposed amending LR 5.4A4R to ensure that the voting thresholds for transfers out of the premium segment are aligned to the cancellation provisions."
In other words, if the rules are changed as proposed, then Jardines would need majority approval of independent shares voted in order to downgrade from Premium to Standard. Webb-site regards it as highly unlikely that outside shareholders would want to give up the protections of a Premium Listing. By doing it now, Jardines avoids the need for independent shareholders' approval. They are downgrading while they still can.
And once they are down to Standard Listing, the entire group could subsequently delist without any shareholder vote. This would certainly make it easier to squeeze out the remaining minority shareholders with a Hobson's Choice; take a low cash bid or keep delisted shares.
Call to London
It may be too late to stop most of Jardine group (except HKL) dropping to Standard Listing status, but Martin Wheatley and his FCA should get a grip on this problem, and change the rules to prevent companies delisting from the UK (Premium or Standard) unless they have been fully taken private (or have an equivalent listing elsewhere), following HK's example from 2002. The UK, Cayman Islands and Bermuda company laws, and many other commonwealth laws, provide methods to ensure that a successful offeror can get to 100% with either a compulsory purchase of the remaining minority (after 90% of the offer shares have been acquired) or with an all-or-nothing Scheme of Arrangement. So there is no need to force shareholders into a Hobson's Choice.
Disclosure: your editor David Webb is a Deputy Chairman of the Hong Kong SFC's Takeovers and Mergers Panel.
© Webb-site.com, 2014
© Webb-site.com, 2014
Organisations in this story
- DAIRY FARM INTERNATIONAL HOLDINGS LIMITED
- HONGKONG LAND HOLDINGS LIMITED
- JARDINE MATHESON HOLDINGS LIMITED
- JARDINE STRATEGIC HOLDINGS LIMITED
- MANDARIN ORIENTAL INTERNATIONAL LIMITED