South China's Dead Dividends
30th January 2002 (update 31-Jan-02)

HK-listed South China Holdings Ltd (SCH) has discovered a new wheeze. The board has begun declaring special dividends consisting of shares in their unlisted subsidiaries.

The first such deal was announced on 21-Jan-02 and consists of shares in Jinchang Pharmaceutical Holdings Ltd (Jinchang), an unlisted company incorporated in the Cayman Islands and wholly owned by SCH. For every eight shares you own in SCH, you get one share in Jinchang. 

So SCH shareholders are getting a proportionate share in something they already own, but the difference is, they get unlisted shares, with no marketplace in which to trade them, and hence no way of selling their investment. Not only that, but Jinchang will no longer be subject to the listing rules on such things as connected transactions with its directors or controlling shareholders, as it will no longer be part of a listed group. This opens the door the potential for further abuse of minority shareholders.

Take this to extremes, and investors could end up with shares in a shrunken listed shell (SCH), together with a motley collection of untradeable investments (Jinchang and others) that have been distributed as dividends. In other words, SCH would be conducting a creeping delisting without ever seeking minority shareholders' approval.

Let's make this crystal clear. Dividends of unlisted assets should be prohibited by the Listing Rules. If you want to delist, make a privatisation offer, but don't turn the company into a collection of useless confetti.

The pathetic "benefits to shareholders" that the board of SCH offers in its announcement, is this:

"The Distribution will enable the Shareholders to hold a direct investment in the Jinchang Group, thereby allowing them to participate in the future development of the Jinchang Group."

That's nonsense - investors are already "participating" in Jinchang through their investment in SCH. 1% in SCH gives you 1% in Jinchang, simple as that. So distributing it confers no benefit. Quite the opposite - it disintegrates shareholder value.

The announcement of the dividend was followed by another with slightly more detailed financial information on Jinchang, and then a third one bringing forward the entitlement date for the distribution by two weeks for no stated reason.

It gets worse. On 29-Jan-02, SCH announced that they would hold another board meeting on 8-Feb-02 to consider the declaration of another special dividend which "may be non cash item".

You have to wonder why the two independent non-executive directors are going along with this behaviour. We'd love to hear them justify it. They are David John Blackett, a former Managing Director of financial advisers N.M. Rothschild & Sons (Hong Kong) Limited and a former member of the Takeovers Panel; and David Michael Norman, who is also a partner of major law firm Richards Butler, who are listed as solicitors to SCH in their annual report and presumably get fee income from SCH on occasions.

Come on guys, do the decent thing and put a stop to it, right now. Cancel the Jinchang dividend and don't try any more.

Update, 31-Jan-02

Several readers have pointed out that SCH has done this before - with Jessica Publications Limited, which was distributed by way of a dividend declared on 24-Aug-01. Again, investors received unlisted stock, and it was not until 8-Jan-02 that the company was listed on GEM after a successful application. Like Jinchang, at the time of the dividend, there was no guarantee that a listing would be applied for, and nor was there any certainty that if a listing was applied for, it would be granted by the Stock Exchange.

If Jinchang is planning a listing, then there is a set procedure for spin-offs under Practice Note 15 of the Listing Rules for this. We believe any distribution of unlisted stock should be made conditional on a successful application for listing. No listing, no distribution.

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