Good Honest Dollar $$

For far too long, it seems that a few tycoons and wealthy families in Hong Kong have run companies under their control as they please, with scant regard for issues relating to corporate governance.

For far too long, it seems that Hong Kong authorities have been ever unable or unwilling to stand up for the rights of minority shareholders.

But things can change, and hopefully, a court ruling last month (refer article) represents a promising sign that authorities are becoming less tolerant of corporate governance abuses.

 
The case and the judgment
The case in question concerned a proposal for the privatization of PCCW, the telecommunications firm which commands a dominant position within the Hong Kong market.

The proposal would have seen Richard Li, son of renowned tycoon Li Ka-Shing, along with China Telecom, PCCW’s second largest shareholder, acquire the 52.4% of the firm which they do not already own.

One problem – Hong Kong law requires the approval of the majority of non-buying shareholders before these types of buyouts can proceed, and given that many small shareholders had expressed venomous opposition to the deal, it was not likely that this requirement would have been met.

Mr. Li’s solution – Gift a whole load of his own shares, in small parcels of worth about $1,000 each, to agents at an insurance brokerage firm that he once controlled.

The recipients would then have become stockholders and would thus have been entitled to vote on the proposal – votes which would then have had a significant influence on the outcome. Presumably, given their past relationship with Mr. Li, along with the nature of the gift, they would feel bound by a sense of obligation to vote in favor of the proposal.

As a result, the prospect of a scenario occurring whereby the privatization went ahead even where it was not widely supported amongst non-purchasing shareholders would certainly not have been out of the question. Had this have occurred, then the objective of a law designed to protect the interests of ordinary shareholders would have effectively been circumvented by virtue of actions which essentially represented a form of manipulation of the voting process.

On April 06, a judge ruled that Mr. Li was within his rights to split up his shareholding in the manner described above, even if this was solely for the purpose of pushing through a deal.

Fortunately, however, common sense prevailed and a later decision in the appeals court reversed the earlier decision. As a result, the transaction has now been abandoned.

 
A fair and just decision ..
The decision reflected a simple dose of basic common sense.

Laws which provide for minority shareholders to have their say on critical matters exist for a reason, and to allow controlling or influential shareholders to manipulate the voting process simply by donating shares to their buddies would represent a clear violation of the basic fundamental principles of fairness and corporate democracy.

Not only that, but if these types of practices are allowed, it would not be difficult to imagine scenarios occurring whereby large shareholders are able to manipulate processes relating to corporate governance and push through arrangements which are not in the interests of minority shareholders – such as transfers of company assets to parties related to large shareholders at prices which do not represent fair market value.

Indeed this may well have been the case with the PCCW proposal – apparently, many long term shareholders demonstrated venomous opposition to the deal, and one of the judges labeled Mr. Li’s offer “pathetic” and “outrageous.”

 
.. and a victory for corporate governance?
More broadly, the decision just might be a sign that Hong Kong authorities are getting serious about corporate governance and the protection of minority shareholder rights.

If this is indeed the case, then it represents a change which is both more than welcome and long overdue.

For far too long it seems that Hong Kong has been a place where wealthy tycoons rode roughshod over the rights of small shareholders, and indeed, many commentators had apparently expected this trial to be a mere formality which would be over in a single day.

Fortunately, they were mistaken, as may be any tycoons who still believe that abuses of minority shareholder rights will be tolerated by the courts.