Schemes & Votes
29 May 2000

On 26-May-00 Pacific Century Cyberworks Ltd (PCCW) and Cable & Wireless HKT Ltd (HKT) published a document for a Scheme of Arrangement (SoA) in which HKT is proposed to be a wholly-owned subsidiary of PCCW.

You may have read in the press that all that matters is the UK shareholders meeting of Cable & Wireless plc, and that after that the vote in HKT will be a done deal. Not so fast. In this article we'll explain how the SoA, while offering a fast track to the balance sheet of the target, carries a risk of intervention by minority shareholders.

In Hong Kong, there are basically two ways of taking over a listed company. One is by "General Offer" and the other is the SoA. To see why PCCW has chosen the SoA route, we'll have to explain the General Offer route first. So bear with us, this will be worth the read.

General Offer

In a General Offer, the same offer is made to each shareholder of the target, who may choose whether to accept the offer in respect of their shares. In the case of companies incorporated in Hong Kong (including HKT), where an offeror has acquired 90% of the shares under offer (i.e. other than those that he already owned) then he may compulsorily acquire the rest. The relevant law is in Schedule 9 of the Companies Ordinance. Similar laws apply in Bermuda and the Cayman Islands, the two jurisdictions in which most HK-listed companies are incorporated. HKT is incorporated in HK.

The drawback of the General Offer route is that it may take some time to reach the 90% threshold (the law allows up to 4 months), and then it takes at least 2 months to acquire the minority interests, or longer if a minority shareholder submits an objection to the Court within that time. As long as there remain minority shareholders in a company, it is difficult or impossible for the new parent to extract the cash or other assets from its balance sheet, or use them as loan security, particularly if the minority shareholders are still subject to the protections of the listing rules as shareholders of a listed company.

For PCCW, this is an important distinction, since on 29-Feb-00 they arranged a US$12bn loan facility to finance the US$11.3bn cash element of the takeover. Most of that must be repaid by 28-Feb-01 with not more than 30% extendable for a further 2 years.

At 31-Mar-00 HKT had some US$2.75bn of cash in its balance sheet, of which US$702m will be absorbed by the final dividend of HK$0.45 per share. That leaves around US$2.05bn of cash which PCCW wants to help meet repayments on its facility, subject to any changes since 31-Mar-00. Indeed, the "Facilities Agreement" between PCCW and its bankers refers to the "Target Cash" being the cash reserves of HKT, and that this must be used in repayments within 90 days of the takeover.

PCCW has therefore chosen the second route of takeover known as a "Scheme of Arrangement".

Scheme of Arrangement

By contrast to a General Offer, a Scheme of Arrangement, once approved, is binding on all shareholders, not just those who accept the offer. No subsequent period is needed to compulsorily acquire minority interests, since there are none. If the Scheme is not approved, then the deal does not happen. It's an "all or nothing" situation. That allows the offeror to have (upon completion) instant access to the balance sheet of the target. But there is a risk in the voting requirements.

The principal condition of the HKT takeover is a "Court Meeting" of  HKT on 3-Jul-00 in which shareholders' approval will be sought. Under Section 166(2) of the Companies Ordinance, the required approval is:

"a majority in number representing three-fourths in value of the... members..., present and voting either in person or by proxy at the meeting".

Note that there are two parts to that test. A "majority in number" and "three-fourths in value". The second part, 75% of the shares voted, largely depends on how the shareholders of Cable & Wireless plc (C&W) vote in their general meeting on 13-Jun-00.

C&W owns 54% of HKT but, under London Listing Rules, it cannot vote its stake without the approval of its own shareholders (because this is a mighty big transaction). That is why PCCW is spending the next two weeks on a roadshow to try to convince the C&W shareholders of the value of their concept stock (such as it may be). If the C&W shareholders approve the sale, then with their 54% combined with the 13% held by China Telecom (the unlisted mainland Telecom company) and the estimated 8% held by the HK Government since their market intervention, there would be a total of 75% and it would be impossible for the second part of the test to fail.

Here's the Risk

The first part of the test requires a "majority in number...of the members". If you own shares in HKT (or any HK-listed company), you may well think you are a member. Think again. Is your name on the share certificate? Do you even have one? A member is only someone whose name is on the register of members, otherwise known as the shareholders' register. You probably hold those shares through a bank or broker, or if you are a fund manager, through a custodian.

In Hong Kong, stocks can only be traded and settled if they are deposited in the monopoly clearing system run by Hong Kong Securities Clearing Company (HKSCC), part of the new Hong Kong Exchanges and Clearing. As a consequence, at the end of Feb-00, 53.67% of all shares of the stocks admitted to HKSCC (by number) were in the system. The vast majority of the rest represent normally un-traded shares held by controlling shareholders such as C&W who do not wish to pay custody fees on their own stock.

Practically all brokers (497 at Feb-00) and custodians (63) are "participants" in the clearing system. If you are a private investor, you may open your own "investor participant" account with HKSCC to avoid the risk of broker default.

HKSCC runs a "book entry" system in which it records the interest of participants such as custodians and brokers. They in turn run their own internal systems which record who they hold the stock for, and so on up the ownership tree, often including multiple layers of custody. None of these interests are recognised in law as shareholdings, and the only "member" is the person on the share register. In this case, that is HKSCC Nominees Ltd, which holds the stock as nominee of HKSCC.

When you want to vote your stock, you normally give instruction to your bank, custodian or broker, and the instructions may be aggregated by each participant and eventually wind up at HKSCC. These instructions are then aggregated and HKSCC fills in a proxy form or appoints one or more corporate representatives to vote shares in favour or against. If the vote takes place on a show of hands (normally the case), then the numbers of shares don't even count. HKSCC can only raise one hand each way, even if it represents a thousand ultimate owners. The vote is determined by the number of hands in the air. This is why connected transactions are so seldom voted down - your votes simply don't register.

For most companies (including HKT) their articles of association do now allow for HKSCC to appoint you as its corporate representative so that you can attend and vote in your own right, but few people bother.

By contrast to the show of hands in most meetings, Schemes of Arrangement take place on a "poll" where each share has one vote and the votes are tallied. However, each member can only count once as a member, even if they hold the shares on behalf of thousands of ultimate owners (as does HKSCC Nominees). And there's the catch - look at the current membership of HKT (we inspected the register today):

As you see, 3 members hold 97% of the shares. There are several thousand members who hold the other 3% - we counted over 200 whose names begin with "A" and then gave up - think how many Chans, Chens, Chengs and Chows are on the list. Some members are dormant or untraceable and may not vote. Others just prefer to keep the stock under the mattress, or hold for the very long term and prefer not to pay custody fees.

Since a majority in number (of members who vote) is required, it is these several thousand who will determine whether the takeover is approved, not the 3 members who own the 97%. In modern times this may be considered as unfair, but that is the way the law works and was originally designed to prevent large shareholders bullying the small ones. Offerors have the alternative of making a General Offer and thereby avoiding this hurdle, but more patience is required to get their hands on the cash of the target. 

The Risk of Intervention

If an outsider wanted to stop this Scheme, the best chance that person would have is to buy some shares (a few hundred or thousand would do), withdraw them from CCASS and then split them into small holdings (as little as one share each) held by separate individuals or BVI shelf companies. Each new member would need to get onto the register before it closes on Friday 23-Jun-00. Companies would then need to appoint proxies or corporate representatives to vote at the meeting. One person could represent more than one corporate member in the poll or act as proxy for multiple individuals and sign for each of them.

Without meeting the legal requirement for a majority in number of members voting in favour, the Scheme would fail.

If PCCW/ HKT or their advisers saw such a move coming, then that may provoke a counter-move in which a friendly shareholder would flood the register with greater numbers of supporting members using the same technique. For either side, it involves some expense to buy a lot of shelf companies, and hundreds of people are not easy to find (except, perhaps, at the trade unions of HKT, still smarting from their effective pay cut last year).

Of course, we are not advocating this strategy, but we are simply pointing out the risk of it to anyone who thinks the HKT vote is a foregone conclusion.

Your Vote CAN Count!

If you are a public shareholder of HKT, whichever way you want to vote, up to now you may have thought that your vote didn't matter when the 3 major shareholders have 75% between them.

Now we have shown you that this is not the case - there are 3 of them and thousands of you, and a majority in number is required. To make your vote really count, you need to become a member (if you don't already hold share certificates in your own name). The only other way is to become a corporate representative of HKSCC and attend the meeting yourself.

So withdraw 1 share or 1 board lot from your broker, bank or custodian and make sure you get it registered in your name (at the registrar, Central Registration Ltd) by 23-Jun-00. Then pick up a proxy form from the registrar, cast your vote, mail it in, and make your vote count!

If you are in any doubt about how to do this, consult your broker or other professional adviser.

© Webb-site.com, 2000

Organisations in this story

• CABLE & WIRELESS LIMITED
• PCCW LIMITED
• PCCW-HKT Limited

Topics in this story

• Headcount test

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