Don't Stack the Boto Vote
9 May 2002
In the latest announcement by Boto International Holdings Ltd (Boto) released today, the despatch of a shareholders' circular regarding the Buy-out proposal was again delayed until "on or before" 10-Jun-02. This follows an earlier announcement dated 23-Apr-02 which delayed the circular up to today.
No mention was made in the earlier announcement that the Management had appealed to the external Listing Committee against a key decision of the Listing Division (the full-time staff in the Stock Exchange of Hong Kong Ltd, SEHK) , but it now turns out that they did. The committee normally meets each Thursday afternoon, and according to today's announcement:
"The Listing Committee of the Stock Exchange decided at the meeting on 18th April, 2002 that, inter alia, the existing and proposed executive Directors and certain Shareholders should abstain from voting on the [Buy-out]"
The "inter alia" is legalese for "among other things" - and since the decisions of the Listing Committee are not published, we don't know what else they decided or who the "certain Shareholders" are. As we explained in detail in our previous article, the executive directors and senior management, amongst others, have several material conflicts of interest and should not be allowed to vote. We won't repeat all the arguments and share figures here - see our last article.
Now we have today's announcement saying that the Management is appealing again, to the Listing (Review) Committee (LRC), which is the highest level for a case of this type. Under Listing Rule 2B.11, the LRC comprises at least 5 members of the Listing Committee, none of whom were present at the first hearing.
What does this appeal tell you?
What the repeated appeal clearly shows is that Management knows there is no public support for the Buy-out, which independent shareholders recognise dramatically undervalues the two core businesses. The only way that Mr Kao and Carlyle can have any hope of winning is by forcing it through with management votes, which is why they have been appealing to the SEHK, Listing Committee and LRC to allow these votes in.
If Management had any confidence in the supposed merits of the deal, then they would drop the appeals and allow the truly independent public shareholders to determine the outcome of the vote.
Back-door privatisation avoids Takeover Code
All along, this deal has been in essence a back-door privatisation of the business of Boto, by buying almost all the assets, which generated 100% of last year's revenue, rather than going through the front door and making an offer to buy the company itself. So let's look at the principles that the LRC should be following, if they want to discourage this sort of manoeuvring.
Concert parties cannot vote
If Mr Kao and Carlyle had gone through the front door, with a privatisation proposal in compliance with the Code on Takeovers and Mergers (Code), then under Rule 2.10 of the Code, it would have required 75% approval in general meeting and could have been blocked by opposition from 10% of the "disinterested" minority shares, not the 50% needed to block the Buy-out. Of course, independent investors would not have approved a privatisation at a discount to market price, which is what the Buy-out price is.
In addition, under Note 6 to Rule 2 of the Code, "disinterested shares" means shares other than those which are owned by the offeror or persons "acting in concert" with it, and under the Code definitions, all directors are presumed to be acting in concert with each other. That means that the directors of Boto would be presumed to be acting in concert with Mr Kao and would be prohibited from voting, along with their close relatives, related trusts, and companies they control.
In summary, by using the back door, the hurdle for minorities to stop the privatisation of Boto has been raised from 10% to as much as 50% of minority shares, and now the Management are trying to stack the vote further by allowing parties with clear conflicts of interest to vote. To allow this would make a mockery of minority shareholder protection.
1 vote per share
The Code also requires in Rule 2.9 that votes be taken on a 1-vote-per-share poll rather than a 1-vote-per-person show of hands, and that the voting figures and results be announced. The Listing Rules impose no such requirement, but we have taken the necessary steps to ensure that a poll will be demanded if Boto calls a meeting, and we hope the Stock Exchange will meet the same standards as the Code and ensure that:
- the poll is conducted fairly by requiring an independent scrutineer such as the auditor or registrar to tally and certify the results;
- those persons who are required to abstain but hold their shares through nominees (including through HKSCC Nominees) appoint a proxy who will hold their votes to prove that those shares were not secretly voted; and
- the results are announced, including the total numbers of shares present and voted in favour, against and abstaining. Even though Bye-law 68 of Boto specifically does not require this, there is nothing to stop the SEHK requiring it.
Controller pays costs of failed privatisation
Each appeal to the Listing Committee and LRC involves a fee to the SEHK (under Rule 2B.14) of HK$60,000 - so the two appeals have already cost $120,000 plus any legal and adviser's fees. These appeals are not being made in the interests of the company but in the interests of management who want to push the deal through.
In addition to the costs of the appeals, there will be fees for the adviser to Boto, the independent financial adviser, lawyers, accountants and printers, which could run into millions.
Rule 2.3 of the Code requires that when a privatisation scheme is not approved, the costs should be borne by the person seeking to privatise the company and not by the company itself. The reason for this is that independent shareholders should not have to pay, through their company, for a proposal from a controlling shareholder. So if the Buy-out is voted down, we call on Mr Kao to meet the costs.
The World Watches
This deal has put the spotlight on minority shareholder protection in Hong Kong. From La Tribune in Paris, to the Financial Times in London, media and investors are watching. The first green shoots of shareholder activism are sprouting, and regulators can either water them or cut them down by their treatment.
The Deal Lapses on 31st May
Today's announcement made clear that the shareholder circular will not be despatched until after the LRC has made its ruling, which cannot be earlier than the hearing on 23-May-02. Since it requires 14 clear days' notice to convene a Special General Meeting, there is now no way that the meeting can be convened before 31-May-02, when the agreement between Boto and the Carlyle-Kao Buy-out vehicle will automatically lapse.
The only way for the Buy-out to be completed after that is if both parties enter into a supplemental agreement for an extension of the deadline beyond 31-May-02. As the announcement did not mention any such extension, we presume there is none.
Carlyle and Mr Kao would be wise to accept the original ruling of the Listing Committee, to realise that the Buy-out has no hope of being approved by independent shareholders, and to either seriously increase their offer or let it lapse.
As we've said before, this is a great business, with 7 years of uninterrupted growth in sales and profits and a leisure furniture line just entering its rapid growth phase. Management should turn its thoughts to making a success out of the Hong Kong listing, as several of their industrial peers have recently shown is entirely possible. In all the darkness of Hong Kong's market, the stars shine brightly. With a supportive base of value-investors who are opposed to privatisation, there is every hope of achieving this. As they say about pets, a listing is not just for Christmas.
© Webb-site.com, 2002
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