Webb-site.com launches Project Vampire
16 March 2003
In our previous article, we told you about Project Poll. After jumping through numerous hoops, we have arranged 5 registered shareholders in each member of the Hang Seng Index, plus Hong Kong Exchanges and Clearing Limited (HKEx), the company which runs the market. These 5 will require a poll at each AGM, and your votes will be counted.
Now it would be pretty boring if we got the votes counted and there were no objections to anything! That brings us to Project Vampire - we need your votes against the general mandate, a power which gives the directors the ability to choose the owners of their company by placing new shares without offering them to existing owners.
Project Vampire stands for "Vote Against Mandate for Placings, Issues by Rights Excepted". We call on all shareholders to vote AGAINST the general placing mandate in each AGM of the 33 Hang Seng Index companies and HKEx itself, and indeed for any other HK-listed companies in which you hold stock.
A pre-emptive share issue is one in which existing shareholders are given a right of first refusal, to maintain their economic and voting rights by subscribing for their share of a new issue, or alternatively to sell their rights in the market. It protects both their voting stake and their economic interests. Anything else is a non-pre-emptive issue.
Any non-pre-emptive discounted issue of shares represents a transfer of value from existing shareholders to the subscribers, or placees. Their gain is your loss.
As we explained in our article Stop Displacement (23-Jan-02), the "general mandate" rule in Hong Kong allows an issuer to obtain approval from shareholders (including the controlling shareholder) to make non-pre-emptive issues of shares for cash (or for anything else) at any time in the next year, up to a number equal to 20% of the existing issued shares. So for example, a company with 100m shares in issue can issue 20m more. The mandate can be "refreshed" an unlimited number of times each year.
In its Jan-03 conclusion paper on a consultation on the Listing Rules, HKEx said it plans to limit the discount on such placings to 20%, except where the issuer is in a serious financial position and the only way they can be saved is by an urgent rescue operation. HKEx also plans to require that any refresh of the general mandate during the year (other than the one granted at the AGM) would require minority shareholders' approval, although that has already met with opposition from some listed companies and the HKEx's plans may yet change.
UK issues for cash
Hong Kong has inherited its legal system and listing rules from the UK. The difference is that while the UK has modernised in the last few decades, in many areas HK has barely moved, and HK often diluted UK rules when adopting them, leading to a divergence of standards. In the UK Companies Act, there is a statutory right of pre-emption, so that any issues of shares for cash must be done by rights issue unless shareholders disapply those rights by passing a special resolution, requiring a 75% majority of those who vote.
By contrast, in HK, Bermuda and the Cayman Islands, there are no statutory pre-emption rights, and it takes only a 50% majority of votes cast to grant powers to the board to allot shares however they choose. This fundamentally undermines the paramount governance mechanism of the shareholders' meeting, because it allows management to pick and choose the shareholders by allotment of shares. Management should not choose shareholders, shareholders should.
As we first explained as long ago as 17-May-99 in our article The Placing Game, in the UK, pre-emption rights are only waived in respect of issues for cash which are:
a maximum of 5% of the company in any one year
a maximum of 7.5% in a rolling 3-year period
a maximum discount of 5% to the market price
The UK guidelines on this and other investment matters are driven by the Association of British Insurers and the National Association of Pension Funds. Both having proxy advisory services; the ABI runs the Institutional Voting Information Service and NAPF runs a Voting Issues Service. Between them, the members of the two organisations own over half of all UK equities, so issuers almost always comply. The two organisations tend to jointly agree the Guidelines, and their members would normally veto any issuer who dares to go outside the guidelines. That's the key difference to Hong Kong - in the UK, investors can make policy rather than suffer it.
Issue of shares other than for cash
In the case of issues of shares other than for cash, such as shares issued for an acquisition, the UK Guidelines allow for a 5-year mandate to be granted at the AGM for allotment of new shares up to one third of the existing shares, so that the maximum number of new shares amounts to 25% of the enlarged company. This is customarily renewed at each AGM. However, if shares issued for an acquisition are immediately sold in a placing, known as a "vendor placing", then the guideline specifies that the shares must first be offered to existing shareholders in a "clawback" unless the issue is smaller than 10% of the existing shares and the discount is 5% or less.
A message to listed companies
You can earn considerable kudos from corporate governance watchers, and probably a re-rating in your share price, if you adopt international best practice and seek a general mandate at your AGM on the following basis:
The mandate to issue shares for cash, other than by a rights issue, shall be in respect of not more than 5% of the issued shares a the time of the mandate
The discount for shares issued other than by a rights issue shall not exceed 5%.
The mandate to issue shares for other purposes, including acquisitions, shall be for not more than 20% of the issued shares
The first one to do this gets a free plug on Webb-site.com.
All institutions should vote
While it may be difficult for retail investors to vote via brokers and banks, institutions have no such excuse, because they are professionals and have custodians who are geared up for it. We suspect that many institutions have not bothered to send votes to AGMs in the past, thinking that it would be a waste of time since proxy votes are never disclosed or counted on a show of hands, and they were right. Another reason would be that many companies have a majority shareholder who determines the outcome anyway.
The head of one major institution we spoke to last week drew a sharp intake of breath when we asked him to pull his pen out and vote. So don't be surprised if the initial voting turn-outs are pretty low.
However, a warning to all institutions: if you don't vote, and we find out, you will be named and shamed. You have a fiduciary duty to your beneficiaries to exercise your voting rights - these are not just rights but also responsibilities. How would we find out? Well, from 1st April, all holdings of 5% or more will be disclosed (the threshold reduces from 10%) so there will be a lot of institutional disclosures. If turnout figures don't at least include those disclosed holdings (plus disclosed directors' holdings) then we will know that someone was asleep at the wheel.
According to an HKEx survey, the UK represents the largest source of overseas orders in the HK market at 33% in 2000/01. So in particular, we hope that UK institutions, many of whom are members of the ABI and NAPF, will apply the same principles abroad as they do at home, and support project Vampire by voting against the general mandate, until such time as HK companies meet the UK standards.
We do not expect that Project Vampire will actually overturn the general mandate, because most companies have a controlling shareholder who will push it through. That is not the point. Coupled with Project Poll, we will consider it a success if we register substantial opposition to the mandate, excluding votes cast by the controlling shareholders. By pressure of investor votes, in the long run, we hope that HK regulators will tighten the Listing Rules which currently permit such mandates.
© Webb-site.com, 2003