Republished with permission from Governance for Stakeholders.
Mak Yuen Teen is Associate Professor of Accounting and former Vice Dean (Finance and Administration) at the NUS Business School, National University of Singapore. He is also former Director of the Corporate Governance and Financial Reporting Centre at the NUS Business School, which he founded in January 2003.


 

ProfMakYuenTeen LinkedInA/Prof Mak Yuen Teen of the NUS Business School.

On April 20, Datapulse shareholders will get to vote on the proposed removal of the current board of directors, the proposed appointment of new directors, the proposed diversification plan and the proposed 1-cent special dividend.

It is critical that shareholders vote to remove the board. Here’s why.

Under the Companies Act, the directors have all the powers for managing, directing or supervising the affairs of the company, except those powers that the Act or the constitution require to be exercised by shareholders at the general meeting.

For a listed company like Datapulse, the listing requirements contain additional rules requiring certain decisions to be approved by shareholders or a particular group of shareholders, such as an acquisition whose relative figures exceed the 20 percent threshold set out in Chapter 10, interested person transactions or adoption of share-based incentive schemes.

If Datapulse shareholders keep the current board but reject the proposed diversification plan, there are still many ways that the board can destroy shareholder value without shareholders having any say. These include spending on capital or operating expenditures in existing businesses (such as Wayco), undertaking “creeping diversification”, engaging in interested person transactions, paying excessive remuneration to management and staff, or diluting existing shareholders.

Capital and operating expenditures in existing businesses

As shareholders know, many of Wayco’s property, plant and equipment are already significantly depreciated. I have also pointed out that many of its trademarks are not in use, expiring or may not actually be owned by Wayco (or by the other Way companies if acquired). The company may have to incur significant capital and operating expenditures to support Wayco.

Small acquisitions

The board may also make small acquisitions that do not constitute a “major consumer business acquisition” or “major investment business acquisition”. Let me explain further. In the circular, the company has said that it will seek shareholder approval when it makes “major” acquisitions in the consumer and investment businesses. “Major” refers to acquisitions where the relative figure as computed based on the purchase consideration set out in Rule 1006 exceeds 20%.

There are various scenarios. One is that the board makes a major acquisition in both the consumer and investment businesses that crosses 20% and obtains shareholder approval. Thereafter, any further acquisitions would not need further shareholder approval even if the relative figure exceeds 20% as long as it does not change the risk profile of the company – because they are considered to be in the “ordinary course of business”. Whether an acquisition changes the risk profile is rather subjective. A few years ago, when Keppel Corp privatised Keppel Land, Keppel Corp shareholders did not get to vote even though the relative figure was very large, because it was argued to be in the ordinary course of business and does not change the risk profile. I wrote a letter then to the Business Times disagreeing that the transaction did not change the risk profile, but to no avail.

The second scenario is that the board does not make any “major” acquisition but makes a number of small  ones in the consumer or investment business that fall below 20%. In this case, the company has said that it will seek shareholder approval if the cumulative amount within a 12-month period is above 20%. The way to get around shareholder approval in this case is to cross the 20% threshold within a period exceeding 12 months – maybe 12 months and 1 day.

I have also seen companies first make a small acquisition in a new business, and then make a large one that crosses the thresholds in chapter 10 without triggering the chapter 10 requirements. For example, when SingPost bought TradeGlobal, an e-commerce company, the relative figures based on my calculations exceeded 5%. If the relative figures exceed 5% but are below 20%, shareholder approval is not required but there is requirement for an immediate announcement and chapter 10 requires certain detailed information about the acquisition to be disclosed. I noticed that the chapter 10 requirements were not fully complied with for the TradeGlobal acquisition. It appears that the company need not comply because it had earlier bought a small company in the same business and therefore the TradeGlobal acquisition was in the ordinary course of business. So it is possible for a board to make a small acquisition in another business – say buy a ski operator which is what one company did even though its existing business had nothing to do with that – without requiring shareholder approval. It may then proceed to buy bigger ones in the new business without shareholder approval.

There is one company recently that diversified into the property business overseas but claimed that it had not, even though the amount involved was very large. It argued that because the property had an F&B business, which was its existing business, it was not a diversification. How creative!

The reality is that the chapter 10 rules are rather porous – as are the chapter 9 rules on interested person transactions. If  a board is determined to follow the letter only and get round them, it can (and I am sure there are advisers readily available to recommend how).

Interested person transactions

SGX has proposed strengthening the chapter 9 rules on interested person transactions that will remove the de minimis threshold of $100,000 and prevent splitting of interested person transactions to get around the rules, which some companies have done. I think those are good changes. However, we do not know if they will be adopted. Further, there are no proposed changes in the bases used to compute the “relative figures’ (it will still be based on net tangible assets) or the definition of an interested person. As I have pointed out in a previous article, even though the Wayco acquisition was in substance an interested person transaction, it did not meet the definition of an “interested person transaction” under chapter 9.

Ng Siew Hong bought 29 percent of the shares which is below the 30 percent threshold that triggers a mandatory takeover. It is possible that there are undisclosed parties acting in concert who hold additional shares who support her. Interested person transactions involving such parties is a possibility.

Interested person transactions carried out without shareholder approval either because they do not cross the thresholds or because they are not technically interested person transactions under SGX rules is a risk.

Excessive remuneration

It is also possible that management and staff are paid excessive remuneration. Under our rules, only the total amount paid to non-executive directors need shareholder approval and many companies only put the cash fees paid to non-executive directors, but not say shares or share options awarded, up for shareholder approval. Executive and director remuneration is not considered an interested person transaction, so is not covered by interested person transaction rules.

When it comes to executive remuneration, that is a matter for the board in Singapore. With minor exceptions, regardless of the amounts paid, shareholders do not get to have a say in Singapore. The appointment of management and staff also does not require shareholder approval.

It is therefore possible that the company will hire management and staff who are family members or business associates of the directors and controlling shareholder and pay them excessive remuneration. The company can even hire the controlling shareholder as management.

Dilution

Finally, shareholders may be diluted through (non-pro rata) private placements  that are made at a discount from the market price. Recall that in 2015, the then board made a private placement to Lian Beng at a 10% discount from the market price. Or they can be diluted through shares issued to management and staff through share-based incentive plans.

I hope I have explained sufficiently to minority shareholders why it is so important to have the right board in place – because many of the decisions of the company would not require shareholder approval but would be made by the board. In fact, if minority shareholders do not trust the board, they should not invest in the company.

However, the odds are against the requisitioning shareholders succeeding in removing the board. If it is 29 percent versus 16 percent, it is already difficult enough to muster enough support for the requisitioning shareholders holding 16 percent. However, it is likely to be more than 29 percent as there will be some shareholders who support the controlling shareholder, including those who have not sold their shares in order to avoid crossing the 30 percent threshold. Therefore, it will be very difficult.

As I have mentioned, it is important that minority shareholders and regulators continue to scrutinise the company transactions and the actions of the board if it is not replaced. Minority shareholders can also consider coming together and exploring legal avenues available to protect their interest. Regardless of the outcome at the EGM, I hope this episode has brought together a significant number of minority shareholders who will continue to scrutinise the board and its actions.

Given the questionable quality of many boards, especially in smaller companies, and the many ways that I have described above about how controlling shareholders, the board and management can take money out from companies and destroy shareholder value, I often wonder why minority shareholders would invest in such companies at all because there is little redress for them when that happens. It is probably because they do not realise the risks they face.

 
On 16 April, Datapulse issued a rejoinder on the SGX website to Prof Mak's articles. Click here.


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