Karce chairman extracted hidden fee
21 January 2011
On 12-Sep-2008, Karce International Holdings Ltd (Karce, 1159) agreed to sell its printed circuit board business to KFE Hong Kong Co., Ltd (KFE), which was owned by KFE Japan Co., Ltd of Japan (KFE Japan), which is listed on the Nagoya Stock Exchange. The price was US$3m in cash, of which Karce agreed to reinvest US$1m in new shares of KFE Japan.
The sale was effected by Karce selling Jet Master Ltd (Jet Master) to KFE. Jet Master in turn owned Dongguan Tai Shan Electronics Co., Ltd. It was treated as a discloseable transaction under the Listing Rules. The deal was covered in a circular dated 17-Oct-2008. Karce was advised by Nuada Ltd - click here to see their other clients, several of which have featured in Webb-site horror stories before.
We thought nothing more about that until today, when the case of KFE v Extract Group Ltd (Extract) was published. It turns out that, undisclosed to Karce shareholders, there was a side deal between KFE and Extract, for a further US$1m, taking the total price on the disposal to US$4m. As the judgment put it:
"A deal was struck between Karce and [KFE] whereby the total consideration payable by the plaintiff for acquiring the disposal target was US$4 million. The total consideration was divided into 2 parts:
(i) acquisition of the disposal target for a consideration of US$3 million by way of a sale and purchase agreement; and
(ii) consultancy service for procurement of an upgraded sewage license for output of up to 800 tons per day ("the License") to be granted to the PRC company for a fee of US$1 million. Karce nominated [Extract] as consultant who eventually entered into the consultancy agreement in question ("the Consultancy Agreement") with [KFE]."
And guess who owned Extract? The judgment doesn't say, but we can tell you. According to a circular dated 30-Sep-2008, Extract was owned by the Founder and Chairman of Karce, Tong Shek Lun (Mr Tong). That circular covered the disposal by Karce to Extract of the calculator and electronic organiser business for HK$250m.
The "consultancy" side deal has now been revealed because KFE is suing Extract, saying that Extract failed to procure the sewage license by 30-Sep-2009, and so KFE wants its money back.
Mr Tong remained Chairman of Karce until 2-Mar-2009. If, as the judgment says, the acquisition was a two-part deal for US$4m, then the circular was seriously misleading, and Mr Tong had a secret interest in the disposal, in terms of the US$1m "consultancy fee" payable to his wholly-owned company. The whole disposal should have been treated as a connected transaction and subject to independent shareholders' approval, because there is the obvious question of whether an excessive part of the US$4m consideration was allocated to Mr Tong's company, and the question of why the "consultancy work" was not done by Karce itself.
The Directors' Report (p42) for the year to 31-Dec-2008 also failed to disclose Mr Tong's interest in the sale of Jet Master by way of the side deal between Extract and KFE.
We call on the SFC to investigate whether the circular dated 17-Oct-2008 and the subsequent annual report was false and misleading, and the Stock Exchange to investigate whether Karce breached the Listing Rules on connected transactions. The SFC should also investigate whether its licensee Nuada Ltd, the adviser to Karce on the sale, knew about the side deal.
© Webb-site.com, 2011
Organisations in this story
- KFE HONG KONG CO., LIMITED
- KFE Japan Co., Limited
- Nuada Limited
- Starlight Culture Entertainment Group Limited