Webb-site.com has discovered compelling evidence of an attempt to rig the shareholder vote in the proposed privatisation of PCCW Ltd, involving hundreds of new holders of one board lot each, many of whose names match insurance agents of Fortis Asia, a former fellow subsidiary of PCCW.

Vote-rigging plan for PCCW meeting
1 February 2009

Late on 14-Jan-09, we received an anonymous tip-off, via the tip-off facility on Webb-site.com, alleging that there was a scheme in which hundreds of Fortis insurance sales agents would each receive one lot (of 1,000) PCCW Limited (PCCW, 0008) shares, and that in return, they would sign a proxy form (which would allow the holdings to count in favour of the deal). If the proposed privatisation succeeds, then of course they would each get HK$4,500 for the shares.

We normally treat anonymous tip-offs with great suspicion, because if someone isn't willing to disclose their identity to us (and we do protect the identity of our sources) then they may simply be airing a grudge. However, in this instance, we could not think of any reason why someone would make up such a specific story. So early on 15-Jan-09 we reported the allegation to the SFC and ICAC.

On Thursday 29-Jan-09, the first working day after Chinese new year, your editor visited Computershare, the registrar of PCCW, to investigate, and ran into two journalists from Hong Kong Economic Times who were looking at similar issues.

Due to the size of the 26,000-member register, we just took an alphabetic sample of names beginning with "Chan F" to "Chan P". In that sample alone, we found 30 transfers lodged on 21-Jan-09, each of 1,000 shares, so by extension there must be hundreds of such transfers lodged on the same day.

Of the 30 transferees in the sample, 2 gave their address as "Level 28, Office Tower, Langham Place" which is an office of Fortis Insurance Company (Asia) Limited (Fortis Asia, formerly known as "Pacific Century Insurance Company Ltd"), and a further 20 have names matching those of agents of Fortis Asia on the register of the Insurance Agents Registration Board run by the self-regulatory Hong Kong Federation of Insurers. So it looks like about two-thirds of the new transferees are Fortis Asia insurance agents. Outside of the sample space (but only looking at a fraction of the register), we found 10 more new shareholders who gave the Langham Place office address, each with 1,000 shares, all of whom became shareholders on 21-Jan-09 except for one, the name of a Regional Director, who became a shareholder on 22-Dec-08, ahead of the first shareholder meeting on the privatisation on 30-Dec-08, which was adjourned, presumably because it was clear from the proxies that the privatisation would be defeated. The offer was subsequently increased.

It is incredibly unlikely that several hundred people, most of whom happen to work for the same company, would separately, simultaneously and independently decide to transfer the same number of shares into their own name.

It is much more likely that a single person, or a very small number of people, took a larger holding and broke it into lots of 1,000 shares each. Webb-site.com believes someone, or some group, is orchestrating a plan to affect the outcome of the shareholder meeting. Under section 166(2) of the Hong Kong Companies Ordinance, the scheme requires two things from the "Court Meeting" of shareholders: 75% approval by number of shares, and 50% approval by number of shareholders (in person or by proxy). It is the second requirement that the plan is targeted at. You will not, of course, see hundreds of people turning up at the meeting with 1,000 shares each - it is enough for them to just sign a proxy and then the coordinator can mail the proxies in.

The question is, who is behind the scheme to corrupt the vote, and who is paying for it? Compared to the size of the privatisation, it wouldn't cost very much to run this plan - e.g. 500 shareholders with 1,000 shares each would only cost about $2m in total. This is a multi-billion dollar deal. Despite the historic association between Fortis Asia and PCCW, there is no evidence at this stage of any involvement by persons connected to PCCW.

We sent the SFC and ICAC a further update on 29-Jan-09 after inspecting the register.

Precedent from 1992

There is a precedent for SFC action in this case. In February 1992, in a convoluted transaction, Evergo International Holdings Co Ltd tried to privatise Chinese Estates Holdings Ltd (0127). According to an SFC statement at the time, after the shareholder meeting, the Chairman of the Takeover Committee of the SFC filed an affidavit at the hearing of the Bermuda Supreme Court on 31-Mar-92 to sanction the scheme, stating that the Committee was "of the view that there are strong prima facie grounds for concern about the fairness of the vote at the February 10 meeting". The SFC asked the court to either adjourn for 30 days or reject the scheme. Chinese Estates withdrew the proposal the same day and the scheme lapsed.

The SCMP wrote on 2-Apr-92:

"In its affidavit the SFC said the overwhelming majority of shareholders who voted in favour of the transaction held just one board lot of shares (4,000 shares). Of the 644 who voted in favour, 527 had precisely one board lot. Of the 527 in favour, 491 were not on the register at the end of August immediately before the announcement of the privatisation proposal.

"By comparison, only one shareholder holding exactly one board lot voted against the privatisation out of the 214 shareholders voting against" said the SFC.

"The voting pattern suggests, and our enquiries so far lend weight to the suggestion, that one person did orchestrate both a splitting of shares into single board lots and the purchase of shares in single board lots.""

What the SFC should do

The SFC and ICAC have statutory powers that we don't. They can obtain evidence from the registrars, including the identity of the person(s) who transferred the shares, the identity of the person(s) who lodged the share transfers and paid the transfer fees, as well as trace the share certificates lodged by those persons. Hong Kong Securities Clearing Co Ltd, the central depository owned by HKEx, can also provide any necessary evidence if the certificates originated from its vaults and were withdrawn by 1 or more persons.

Schemes of Arrangement don't just require shareholders' approval. They also require the sanction of the High Court. Webb-site.com urges the SFC to petition the court to exclude from the "majority of holders" any registered shareholders who first became registered shareholders after the possible privatisation offer was announced on 30-Oct-08, but include their shares in the "75% by value" test. This would allow the shares to count at their normal voting weight (1 vote per share) but would not corrupt the vote (1 vote per holder).

What the Government should do

Going forward, the Government should amend the Companies Ordinance to remove this archaic "majority of holders" requirement, because:

  1. it goes against the 1-share-1-vote principle
  2. it gives disproportionate voting weight to small shareholders
  3. it attracts attempts to corrupt the vote (for or against a scheme)
  4. the Listing Rules (since 1-Jan-09) require all meetings to be by poll (1-share-1-vote) rather than a show of hands. The majority-of-holders is like imposing a show of hands veto on a poll vote.

If the SFC takes no action, then in effect it would be declaring open season on voting manipulation. This can work both ways - a hedge fund that might short a stock which is the subject of a privatisation offer could arrange for hundreds of holders, with 1 board lot (or even 1 share) each, to vote against a future privatisation proposal of a company, if that is considered acceptable behaviour. Ironically, Webb-site.com pointed out the possibility of such a plan 9 years ago, in an article titled Schemes & Votes about the takeover by PCCW of Cable & Wireless HKT Ltd.

For disclosure purposes, as part of the successful Project Poll, since 2003 Webb-site.com has 5 registered shareholdings of 2 shares each in PCCW and other blue chips of the time. Consequently we also benefit from disproportionate voting weight on schemes of arrangement.

© Webb-site.com, 2009

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