CITIC Pacific/ CLP AGM Roundup
6 May 2003

The Annual General Meeting of CITIC Pacific Ltd (CITIC Pacific, 0267) was the 6th AGM in Project Poll, which has so far been successful in either demanding, or persuading the Chairman to demand, a poll at each meeting, so that unlike previous years, all proxy votes will be counted, 1 vote per share. While voting turnouts are still far too low, we are beginning to see results, as you will see below.

With Chairman Larry Yung Chi Kin (Mr Yung) on medical leave, it fell to managing director Henry Fan Hung-ling (Mr Fan) to kick off the meeting and he was duly proposed to chair it. Would shareholders, he asked, be demanding a poll on that? "Not at all", we replied, as the election of a chair  was entirely a matter of procedure, and not something that was included in the proxy form, so we had no objection to a show of hands.

So on we went, with Mr Fan duly enthroned, and he took the initiative of calling for a poll on each proposal, which saved Webb-site.com's 5 shareholders from demanding one, as we had to do at yesterday's CLP Holdings Ltd (CLP, 0002) meeting.

Speaking of CLP...

Despite all its corporate governance awards, CLP does not yet extend transparency to the ballot box unless shareholders at the meeting demand a poll, and its executive directors are not subject to retirement by rotation, so owners never get to vote on them anyway. "But rest assured, we do feel accountable" shareholders were told - it's a bit like the Chief Executive of Hong Kong - accountable to his controlling shareholders, but not to the public at large through the ballot box. But CLP did agree to look at that point, so we look forward to that, hopefully sooner than we get to vote for a Chief Executive of Hong Kong, which won't happen until 2007 at the earliest.

We also encouraged the Kadoorie family to extend their corporate governance framework at CLP to The Hongkong & Shanghai Hotels, Limited (0045), which they also control.

A stunning revelation on Boto

Now back to the CITIC Pacific AGM. As readers will know from our voting recommendations, we opposed today's re-election of Alexander Reid Hamilton (Mr Hamilton) because we found him unwilling to listen or respond to the views of independent shareholders in the controversial Boto (0585) transaction last year, when the company sold all of its core businesses to a Carlyle-backed buyout vehicle. To recap, the first announcement of the original transaction stated:

"The Directors, including the independent non-executive directors, consider that the Consideration is fair and reasonable to [Boto]"

This raised a few eyebrows at the time because the directors had not yet received any independent financial advice. The transaction was later restructured and the consideration was modestly increased. At today's meeting, in his defence, Mr Hamilton said that after receiving the independent financial advice, he did not regard the transaction as fair and reasonable. This was a revelation so stunning that we didn't think to ask the obvious question: why didn't he say so earlier? For 9 months Mr Hamilton has remained publicly silent on this issue, and now reveals that he agrees with the opinion of Independent Financial Adviser Anglo Chinese Ltd, who recommended shareholders to vote against the transaction.

The "Letter from the Board" in the shareholders circular (p.33) stated:

"The Board is of the opinion that the proposed Revised Transactions are fair and reasonable and are in the best interest of the Company and the Shareholders."

and the Chairman continued, in the first person:

"Therefore, I, for myself and on behalf of the management team, urge you to support the opinion of the Board and vote in favour..."

Take a close look at those two quotes. It was a careful choice of words. The truth, but not the whole truth. True: a majority of the directors (including executive directors) would be enough to pass a "Board" resolution expressing an "opinion of the Board" in favour of the deal. The use of the term "Board" implies only a majority, not unanimity in the boardroom. But the circular did not state Mr Hamilton's dissenting view. And the term "management team" was not defined, but does not implicitly include Mr Hamilton, since he was non-executive. As for the other independent director, Mr Oh Kok Chi (Mr Oh), he failed to express any opinion to shareholders even when his presence was revealed at the Boto shareholders meeting. After today's revelation, we now think Boto's circular was misleading by omission of Mr Hamilton's dissenting view and Mr Oh's views, if he had any.

In Mr Hamilton's defence, Mr Fan reminded the audience that Mr Hamilton won an award from the Institute of Directors as "listed company non-executive director of the year" in 2001. That was before the Boto transaction, and with such a shining reputation, if Mr Hamilton had made his views known at the time, they would have been given great credence, and the outcome of the Boto vote, which was approved by a narrow 53% majority vote, might well have been different.

In our book, non-executive directors do not win awards by telling us 9 months after a transaction has been voted through that they were in fact opposed to it. To this day, Mr Hamilton remains an "independent non-executive director" of Boto, now renamed IMI Global Holdings Ltd, and so does Mr Oh. There's nothing we can do about that, because in Hong Kong, controlling (management) shareholders get to vote on the re-election of independent directors, making a mockery of the term "independent".

Vampire bites

Moving on to the results of the CITIC Pacific poll, remember that we have urged shareholders in all listed companies to "Vote Against the Mandate for Placings, Issues by Rights Excepted" (Project Vampire) unless the issue mandate meets the criteria in that project, of a maximum placing size of 5% of issued shares, and a maximum discount of 5% to market.

It is always an easy sell to offer new shares to a short-term trader at a big enough discount to market, as such traders will flip the shares on for a profit, but that profit represents a transfer of value from the existing owners of the company - it is a zero-sum game.

The object of Project Vampire, combined with the voting records of Project Poll, is to prove public investor opposition to the issue mandate, and hence pressure the Stock Exchange to amend its rules in this area. To estimate the level of public support or opposition, we deduct the insiders votes from the total.

The two largest shareholders in CITIC Pacific are state-owned China International Trust & Investment Corp (CITIC) which owns 632.1m shares, or 28.88%, and Mr Yung, who owns 400.4m shares, or 18.30%. Mr Yung's father used to chair CITIC. We are assuming that they voted in favour, and also that Mr Fan, who defended the general mandate at the meeting, voted his 43m shares, or 1.96%, in favour. That makes a total of 1,075,447,285 shares, which we deduct from the vote in favour of the mandate on the official results of the poll.

There is one other large insider, a non-executive director, Mr Andre Desmarais, with 100.3m shares, who is based in Canada. If our assumption on CITIC, Mr Yung and Mr Fan is right, then the total implies that Mr Desmarais did not vote. All the other directors together hold 5.9m shares between them. We make no assumption about whether the other directors voted.

So although the official result shows a 95.04% vote in favour, if you remove the assumed votes of CITIC, Mr Yung and Mr Fan, you get :

What this appears to show is that a 55% majority of the public votes were opposed to the issue mandate. Vampire has begun to bite.

The alternative but unlikely explanation is that one of the 3 insiders failed to vote some or all of their shares in favour, in which case our figures are wrong, and the board have not backed their own proposal in favour of the mandate.

However, we note that the total public vote appears to be only 106.5m shares, or about 10.6% of the public float, lower even than the 17.8% public turnout at Hang Seng Bank. We still need much higher voting turnouts to prove the case beyond all doubt. We were somewhat late putting out our voting recommendations, and we will try to accelerate this. The turnout is also hampered by the inadequacies of Hong Kong's voting system, where many banks and brokers do not seek AGM voting instructions from retail investors.

One puzzle in the poll on the other resolutions is that the votes in favour of Mr Fan's re-election were only 949.6m, which is less than the total of shares held by CITIC and Mr Yung, and some 225m votes fewer than voted in favour of the other directors. So at least some of CITIC or Mr Yung's shares were not voted in favour of Mr Fan. We wonder why.

© Webb-site.com, 2003

Organisations in this story

• CITIC Limited (HK)
• CLP HOLDINGS LIMITED
• Imagi International Holdings Limited

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