Jardine's Back Door
16 May 2001
During the mid-1980s, Jardines, one of Hong Kong's oldest groups, developed a shareholding structure which allowed the Keswick family (distant relatives of the co-founder, William Jardine) to control the group while owning only a small percentage of the stock of Jardine Matheson Holdings Limited (JMH). The full story of how that was established is a case study in bad governance, but we won't waste time now on the historic transaction details. Chairman Henry Keswick and his brother Simon, also a director, are believed to be great-great-grandchildren of Margaret Johnstone, a niece of William Jardine, who died childless.
Over the last few years, the cross-shareholding between JMH and its subsidiary, Jardine Strategic Holdings Limited (JSH), has been intensified to the stage where JMH now owns 74% of JSH which in turn (including subsidiaries) owns 51% of JMH. Together Henry Keswick, Simon Keswick, and the Managing Director (quaintly known as the taipan) Percy Weatherall (another relative) including their related trusts and non-beneficial holdings, own just 7% of JMH, but their position on the board, together with the cross-shareholding, makes it almost bid-proof.
Take a look at the table below:
The 1947 Trust was established (surprise) in 1947, many years before JMH went public, and the trust's income may be distributed to senior executives and employees of JMH. The trustees are not known but we will assume that they would be allied with management when it comes to a vote. Clare Investment & Trustee Ltd (CLIT) is a wholly-owned subsidiary of JMH which holds shares in its parent and issues share options over those shares to employees. Although these shares are effectively unissued, there is probably nothing in Bermuda law to stop CLIT voting the stock in its parent, so again we assume it is allied. That takes the total voting weight to 14.7%, which is less than the combined 15.9% of Brandes Investment Partners L.P. (Brandes) and Cheung Kong/Hutchison Whampoa Ltd, which are controlled by Li Ka-shing. So as you can see, the 51% stake owned by JSH is essential to the outcome of any vote.
Brandes, a US-based institutional investor, is fighting a noble battle to realise value and unwind the cross-holding by getting JMH to privatise JSH, buying in the 26% it doesn't already own. That would expose JMH to a market discipline it has not seen, and open the group to potential takeover, particularly if they do not perform. JSH controls Hongkong Land, which owns much of the central business district, hotel chain Mandarin Oriental, and supermarket group Dairy Farm, as well as a 26% stake in Cycle & Carriage.
Last year, Brandes proposed a number of resolutions to improve corporate governance of the group in annual general meetings of both JMH and JSH. They also sought to remove the cross-shareholding by privatising JSH. The resolution that they proposed at the 1-Jun-00 AGM of JMH reads as follows:
"That the Members do hereby instruct and require the Directors to consider whether it would be in the interests of all Members to acquire all shares of [JSH] not presently owned by the Company. In such deliberations, the Directors are not to take into account whether or not such action, if consummated, would or would not make it easier for a potential bidder to obtain control of the company."
That resolution was proposed as an ordinary resolution, requiring a 50% majority, and was defeated. This year, the resolution proposed by Brandes for the AGM on 17-May-01 is more direct:
"That, pursuant to Bye-law 105 of the Company's bye-laws, the following regulation be and is hereby made:
That the Company shall, as soon as reasonably practicable after the passing of this resolution but not later than September 30 2001, make a proposal to privatise [JSH] pursuant to a cash offer, scheme of arrangement, amalgamation or otherwise..."
This time, the resolution is proposed as a special resolution to create a regulation under the bye-laws. A special resolution requires a 75% majority of those shares voted. Unlike an ordinary resolution which is normally only used to approve a course of action proposed by a board of directors, a special resolution is normally binding on the board, since it is the same majority that is needed to amend the bye-laws, which are binding. Hence Brandes' tougher strategy this year, putting forward a firm proposal to privatise the company, is one with which, if passed, the board would be bound to comply.
Now you might think, if Brandes failed to win a 50% majority (due to the cross-holding being voted against it) then why on earth would they try for the 75% majority needed for a special resolution?
The Flaw in Jardine's Armour
When the Jardine group delisted itself from Hong Kong in 1993/4, it established a separate takeover code in Bermuda (one for each company in the group). The codes were almost identical to each other, and adopted most of the provisions of the UK Takeover Code at the time. Each code takes the form of an Act of Law together with a set of Regulations made pursuant to that law. The "General Principles" of the UK Takeover Code (the fundamental principles) are reflected in the corresponding law in Bermuda.
Section 12 of the Jardine Strategic Holdings Limited Amendment Act 1993 (which tracks General Principle 7 of the UK Code) reads:
"FRUSTRATION OF OFFERS
Save as may be provided in the Regulations, once an intention to make a bona fide offer has been announced or communicated to the Board or the Board has reason to believe that a bona fide offer might be imminent, no action may be taken by the board in relation to the affairs of the Company... without the approval of shareholders in general meeting, if such action would be likely to result in such offer being frustrated or in shareholders being denied the opportunity to decide whether or not to accept such offer on its merits." (emphasis added)
The Act defines an offer as:
"a general offer, partial offer or tender offer and includes a proposed or possible offer" (emphasis added)
Now let's think about this. Sitting on the table is a JMH resolution proposed by Brandes, on which JSH (as a shareholder of JMH) is being asked to vote. But the resolution is to make an offer for JSH. If the resolution is passed, then there will be an offer for JSH. No ifs, no buts, the offer will happen. The only pre-condition to that offer is the resolution. So there is clearly a "possible offer" on the table. So it seems clear that "a bona fide offer might be imminent".
Secondly, if the board of JSH causes JSH (or its subsidiaries) to vote against the resolution, then since they own more than 25% of JMH, their vote would be certain (not just "likely") to result in the resolution failing and the offer being frustrated, and JSH shareholders would be denied the opportunity to decide whether or not to accept such offer on its merits - the offer simply would not proceed. That would seem to be "Frustrating Action" and a breach of the law. It would then follow that JSH should be restrained from breaching the law by voting its stake in JMH on the resolution.
So that, we conclude, is the flaw in Jardine's armour. Rather like the impenetrable Death Star in Star Wars, Brandes is looking for the thermal exhaust portal down which to drop the proton torpedo, and we think that portal is the Frustrating Action strategy.
If we are right, and Brandes pursues this strategy, then the next stage would be for Brandes to seek a ruling from the Bermuda Monetary Authority (BMA) (which is given the role of regulator of the takeover code) that the votes of JSH in JMH on the privatisation resolution should be disregarded, on the grounds that the conduct of the JSH board amounts to Frustrating Action in breach of the law. Whether or not the ruling was granted, the loser would probably seek a judicial review, sending the matter to the courts of Bermuda, to the Caribbean appeal court and ultimately to the Privy Council in London, which is the court of final appeal in the Bermuda legal system. It would be a long fight.
If Brandes succeeds in preventing JSH from voting, then the privatisation of JSH comes down to a straight fight between the Keswicks (with 7.0%) and their allied interests (with 7.7%), Brandes (11.1%) Cheung Kong/Hutchison (with 4.8%) and the public (18.1%). That all adds up to the 48.7% which JSH does not own.
Now the problem is that to win the special resolution, Brandes would have to get at least 3 times as many votes in favour as are voted against. But the Allies hold 14.7%, more than a quarter of the votes not held by JSH. So the attack is only possible if the Allies are split, since otherwise their vote against the resolution would be insurmountable. In essence, Brandes needs to persuade the trustees of the 1947 Trust (having regard to their fiduciary duties, about which they may be reminded) to vote in favour of the resolution or at least abstain, reducing the "no" vote to 9.0%. Brandes would then need 27% out of the remaining 34%.
Brandes might also argue that since CLIT is a wholly-owned subsidiary of JMH, the BMA should bar it from voting in meetings of JMH, because on a consolidated basis, the shares it holds are unissued. That would reduce the "no" vote to 7.0%, so Brandes would need 21% out of the remaining 34%.
A few years ago, when JSH held only around 35% of JMH, Brandes would have had a better chance of passing this resolution (assuming our Frustrating Action strategy worked), but now it may be too late; the outstanding votes are heavily stacked against it. Nevertheless, we wish them luck.
© Webb-site.com, 2001