Legend voting advice
4 July 2003

Note to journalists:
We have up to 4 proxy seats available inside this AGM. Please contact us if you want one.

Reasons AGAINST

Item 3.2

Professor Woo Chia Wei (Prof Woo), a physicist, is former President of Hong Kong University of Science and Technology. He is proposed for re-election as an independent non-executive director (INED) of Legend. He is also an INED of Shanghai Industrial Holdings Ltd (SIHL, 0363) and First Shanghai Investments Ltd (0227), an NED of IDT International Ltd (0167) and a senior adviser to the Shui On Group controlled by Vincent Lo Hong Sui (Vincent Lo). SIHL is controlled by the Shanghai Government. Shui On Group has extensive property development interests in Shanghai.

Prof Woo's past directorships include being an NED of Codebank Ltd (8162) until 15-May-02, an INED of MAE Holdings Ltd (0851) until 7-Mar-01 and an INED of Midas International Holdings Ltd (1172) until 7-Mar-00.

SIHL recently proposed a connected transaction in which it acquired for RMB866m in cash from its parent and other vendors a 56.63% controlling stake in Shanghai Industrial United Holdings Co Ltd, a Shanghai-listed company which in turn owns 23.3% of HK-listed Lianhua Supermarket Holdings Co Ltd (0980) and a herbal medicine retail and distribution business. Prof Woo was one of 3 INEDs who advised shareholders to vote in favour, but none of the INEDs attended the shareholders meeting and the chairman of the meeting did not give any specific reason for their non-appearance. So minority shareholders had no opportunity in that meeting to question the INEDs about the deal.

According to SIHL, the INEDs chose as their independent financial adviser BOCI Asia Ltd (BOCIA), a subsidiary of Bank of China, which through its HK subsidiary is one of the principal bankers listed in SIHL's annual report. As such, we do not regard BOCIA as sufficiently independent of SIHL.

BOCIA, who presumably discussed their advice with the INEDs they were advising, did not anywhere in their letter point out that the effective P/E of the acquisition was 16.25x, nor did they at any point analyse the pro forma effect of the proposal on the earnings or NAV of SIHL. No such analysis appeared anywhere else in the shareholder circular.

BOCIA instead focussed on the NAV of the target, which In our view, is not the most appropriate way to value an earnings-driven business. In an effort to justify this approach, BOCIA said "we consider it appropriate to take into account accustomed pricing considerations generally adopted in the PRC" - as if financial analysis is somehow different in the PRC to anywhere else. Perhaps the PRC has its own laws of physics too.

BOCIA, in a leap of flawed logic, said that "...taking into account of the fact that relevant PRC government regulations prohibit selling state-owned assets below net asset value, we are of the view that the Consideration of the Acquisitions are fair and reasonable". How does a third party setting a reserve price make that price fair and reasonable, regardless of its earning potential?

Apparently, the INEDs were satisfied with this quality of advice and adopted the advice in their recommendation. The other INEDs of SIHL are Lo Ka Shui (Deputy MD of Great Eagle Holdings Ltd, brother of Vincent Lo and a Government-appointed director of Hong Kong Exchanges and Clearing Ltd) and Francis Leung Pak To, who used to run the ill-fated Peregrine Investments Holdings Ltd when it sponsored the IPO of SIHL. A fourth INED, 84 year-old Lee Quo Wei, did not participate "due to health reasons".

In our view, Prof Woo and his fellow INEDs non-appearance at a meeting of SIHL shareholders they were supposed to be advising, together with the lack of analysis in their adviser's report, means that it would be inappropriate for us to recommend his re-election at Legend.

Items 5.1 and 5.3

Webb-site.com urges all investors to vote against the general issue mandate for all listed companies, for the reasons explained in Project Vampire, unless they comply with the recommendations set out in that article. The non-pre-emptive issue mandate allows management to choose the shareowners by allotment of shares. This corrupts the governance mechanism. Shareowners should govern management, not the other way around. If a company wishes to raise cash by issuing shares, then it should do so by rights issue.

If your company offers new shares to other investors at a discount, but not to you, then your company is transferring value from you to the new investors. Their gain is your loss. That's why we believe an issue for cash should be done by rights issue, failing which it should be limited to 5% of existing issued shares and a maximum discount of 5%.

Recently, a majority of independent investors in 9 Hang Seng Index companies: Cathay Pacific, Cheung Kong Infrastructure, China Unicom, CITIC Pacific, MTRC, PCCW, Shanghai Industrial, Television Broadcasts and Swire Pacific have all voted against the issue mandate. Their fellow index members would do well to take note of this. After all, we don't mandate boards to buy back shares from chosen shareholders at a premium to market price, so why should they be allowed to issue shares to chosen shareholders at a discount?

© Webb-site.com, 2003

Organisations in this story

• LENOVO GROUP LIMITED

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