Christmas is Cancelled
19 August 2002
Sorry folks - Boto International Holdings Ltd (Boto) won't be making any more Christmas trees this year. At the Special General Meeting this morning, the resolution to sell the core festive products and garden furniture business to a vehicle 75% owned by Carlyle group and 25% by Boto (with 15% management options) was approved, on the face of it, by the narrowest of margins.
The outcome was:
In fact, this is not as close as it seems. Most of the shares voted in favour were management-related in some fashion. They almost certainly include the 5.54% held by Liliana Tsen Yun Lei (Ms Tsen, aged 53), an executive director of Boto who retired from the board at Friday's Annual General Meeting, and the 4.08% held through HSBC as trustee of the Law Pun Leung Family Trust, established by a deceased co-founder of the company. These total 9.62%, which implies that the only other shares in favour were 5.13%. That's too small to be Shanghai Industrial Investment Co Ltd (SIIC) which owns 5.83% and sources confirm abstained.
Several senior managers (non-directors) were permitted to vote, including Philip Kao, nephew of Chairman Michael Kao (Mr Kao). The senior managers' total shareholdings have not been published, but we know from our previous inspection of the share register that they are hold at least 0.81% (by comparing the register with the names of senior managers in the annual report). The registered shares likely arose from the exercise of share options, as most investors who buy shares in the market leave them with their bank or broker who in turn holds them through HKSCC Nominees Ltd, the central clearing company's nominee. The senior management may well have other shares which were acquired and held in this manner - we have no way to tell.
It is reasonable to assume that all the senior management who were permitted to vote, voted in favour of the proposal of their boss. It can't be a bad career move. So combining Ms Tsen, HSBC and senior managers, that makes a total of at least 10.43% and leaves not more than 4.32% unaccounted for.
So the vast majority (13.22% versus not more than 4.32%), that is, at least 75% of the shares held and voted by the public were cast against the transaction.
Unfortunately , this was not enough. Readers may recall that the Listing (Review) Committee of the Stock Exchange, on an appeal from Boto, ruled that Ms Tsen could vote her 5.54%. It was also ruled by the Stock Exchange that Silverbay Group Ltd, the BVI company held by HSBC as trustee, could vote its 4.08%. This is having regard to the fact that the banking arm of HSBC was providing debt finance of US$104m, or about 80% of the purchase price in the transaction, and notwithstanding the fact that Silverbay's address on the share register was the same as Boto's head office.
It is obvious from today's outcome that if either of these shareholders had been prohibited from voting, the proposal would have been defeated by a large margin.
For the first time in the Hong Kong market in about 10 years, an Independent Financial Adviser (Anglo Chinese Corporate Finance Ltd) went against the management who appointed them and advised shareholders to vote against the deal, which the IFA said was not fair and reasonable. We think they must have had serious concerns about the deal for taking such an unusual step.
Shy INEDs
At this morning's SGM, only one of the two "independent" non-executive directors, Mr Oh Kok Chi (Mr Oh) was present - and he did not even sit on the podium and only identified himself in the audience near the end of the two-hour question-and-answer session when we asked where the INEDs were and what they thought.
We asked Mr Kao and Deputy Chairman Mr Philip Lam (Mr Lam) (several times, in several different ways) for the opinion of the independent directors, and they declined to say. When we asked directly, Mr Oh declined to disclose his opinion and simply said that he wasn't required by any rule or law to give an opinion, which is true, but not exactly illuminating. He and Mr Lam said that in the board meeting to consider the final deal, some directors were in favour and some abstained. When pressed, Mr Lam said that one independent director (Mr Alexander Reid Hamilton) had not even attended the board meeting, but there were abstentions at the board meeting, in the plural. This wall of silence suggests that neither Mr Oh nor the other non-executive director, Mr Zhou Fu Min (who until recently represented SIIC) voted in favour of the deal at the board meeting, because if they had, then the management would have been pleased to say so.
Once again, we say that independent directors should be elected by independent shareholders. Let's hope Boto's INEDs are both shy and retiring, without further delay.
The Bottom Line
After a five month Battle of Boto, here's the score. We have an IFA recommending shareholders to vote against the "inadequate" deal, something we have not seen since before the World Wide Web was invented. We have non-executive directors who decline to express an opinion, and certainly not a favourable one. Fewer than 4.3% of the company's shares were voted by the public in favour of the deal, and 13.22% against. And yet we still can't stop the deal.
In Hong Kong, the decks are firmly stacked against independent shareholders. We lost this vote because the Stock Exchange and the Listing Committees accepted appeals from management which allowed them to push the deal through. It wasn't surprising - a maximum of 4 fund managers are allowed out of 25 members of the Listing Committee. Until the Stock Exchange and its Listing Committees reflect investor interests and give the benefit of the doubt to independent public shareholders, Hong Kong will continue to be a minefield for investors. What was so wrong with the idea of restricting the vote to truly independent shareholders? If the deal was fair, we would have been in favour.
The miracle of all this is that despite these hurdles and the management-related votes stacked against us, we came so close to winning, just 1.53% of the company would have been enough. A couple of institutions whose shares would have swung the deal, chose to cut their holdings, perhaps in fear of what might happen if we won. One was a value investor who should have known better. Minority shareholders must stand and fight for their rights, and more importantly, campaign for a more level playing field without the landmines.
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