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    China Business
     Apr 28, 2009
Shocked, shocked!!
By Olivia Chung

HONG KONG - The scene is Rick's Cafe, in war-time Casablanca. The town's head of police, Captain Renault, has ordered the joint closed.
Rick: "How can you close me up? On what grounds?"
Captain Renault: "I'm shocked, shocked to find that gambling is going on in here!"

Hong Kong appeal court judge Justice Anthony Rogers may be less a man of the world than Casablanca's fictional police chief. Yet his reaction last week to "outrageous" terms offered to shareholders by Richard Li Tzar-kai's Hong Kong-listed PCCW was no less amusing, given the Asian city's recent public


displays of corporate contempt for minority shareholders.

Justice Rogers was commenting during the latest culmination of attempts by Li to privatize PCCW, Hong Kong's biggest fixed-line telephone operator, in which he had bought a controlling stake in 2000. The company also runs mobile phone and Internet operations.

Li had secured the go-ahead for his privatization scheme on February 4 this year, when 1,404 shareholders voted for the scheme and 859 voted against, for a majority margin of 545 votes on a headcount basis.

This met the requirements of local rules under which a privatization scheme must secure the support of 75% of independent shareholders by share value but also the approval of 50% of the shareholders physically present at the relevant shareholders' meeting - a criteria dubbed the "headcount rule". The rationale behind this is to ensure the interests of minority shareholders are looked after.

Hong Kong's securities market regulator, the Securities and Futures Commission (SFC), then alleged that up to 726 of the votes in favor of the deal might have been the result of "share splitting", or the practice of dividing shares to boost the headcount in support of such a proposals.

A high court ruling on the issue, on April 6, cleared the takeover - because splitting blocks of shares is not illegal in Hong Kong. At the heart of that case, the SFC alleged that the regional director of Fortis Insurance Co (Asia), Lam Hau-wah, on January 5 bought 500,000 PCCW shares to hand out as bonuses to Fortis agents and others. Of the recipients, 494, who were newly registered shareholders, voted in favor of the buyout offer.

The SFC brought to light messages and phone calls between Lam and Francis Yuen Tin-fan, the deputy chairman of Singapore-listed Pacific Century Regional Developments (PCRD), which is Li's Singapore-listed flagship and one of the two controlling shareholders of PCCW. The other is mainland-based China Netcom (which the government in Beijing last year instructed should be taken over by China Unicom as part of a shake-up of the Chinese telecommunications sector).

The SFC also revealed that Lam's secretary acquired 500 to 600 proxy voting forms from Yuen’s secretary.

The SFC appealed against the high court ruling, although it was in accord with the fact that share-splitting was not actually against Hong Kong stock-exchange rules. It asked the appeal court to exercise its "discretion" and issue a ruling on whether the practice was "fair and just".

Justice Rogers, one of the three appeal court judges, clearly thought it was not. He described as "outrageous" the scheme by Li and partner China Netcom to acquire for HK$15.9 billion (US$2.1 billion) the 52.4% of PCCW that they do not own, then have PCCW pay a $18.78 billion special dividend to Li and China Netcom.

The $4.50 per share offer price, Rodgers said, was too low. Li is seeking the buyback after seeing the share value collapse from $131.75 in 2000. The stock was trading at $2.51 before he made his offer last October.

The appeal court will release later the full reasoning behind its judgment to halt Li's privatization plan.

Justice Rogers told the court "there’s just an amazing series of coincidences in this case", after hearing the evidence of the link between PCRD deputy chairman Yuen and Lam.

The ruling followed a number of other high-profile snubs to Hong Kong's investors and the apparent impotence or unwillingness on the part of the city's exchange regulators to act.

An estimated 48,000 people in Hong Kong saw their savings disappear last year after they had placed HK$20 billion into bond-like products linked to or issued by Lehman Brothers. After the collapse of the US-based bank last September, the investors claimed the products were mis-sold as low-risk.

Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong this month admitted in a Legislative Council public hearing on the "minibond" saga that minibonds were complicated and the name misled people into thinking that the products were bonds.

Responding to charges that HKMA's benchmark was too lenient when eight mortgage-linked products could be rated as low-risk and medium-risk, Yam said that the SFC had failed to require lenders to re-evaluate risks entailed in their products once the market changed.

A lawsuit on behalf of SAR minibond buyers has been filed in New York against units of HSBC, Lehman and the Bank of New York Mellon for alleged failure to protect investors.

Earlier this month, it was revealed that CNOOC, the Hong Kong-listed unit of China’s biggest offshore oil producer, China National Offshore Oil Corp, had for years falsely stated the earnings of its senior executives. This was purportedly to give the impression to Western investors when CNOOC dual-listed in Hong Kong and New York eight years ago that the company had adopted some international procedures such as management incentive schemes to bring it in line with its global counterparts.

CNOOC's annual report for 2008 showed that chairman Fu Chengyu earned 12.047 million yuan (US$1.77 million) last year, almost as much as the total amount paid to the board of rival oil company Sinopec.

A China National Offshore Oil Corp spokesman said on April 13 that the incentive scheme for the CNOOC's senior management was only a show. The stated remuneration bore little relation to the executives' actual take-home pay, which is determined by the State-owned Assets Supervision and Administration Commission of the State Council, based on individual merit.

So far, the SFC appears to have taken no action against CNOOC.
Fu himself admitted on April 19 on the sidelines of the Boao Forum for Asia annual conference in China's Hainan province that the company's official pay is designed to convince investors that management has generous Western-style incentive schemes to ensure they are well motivated.

In a slightly less bizarre case, though involving a vastly larger amount of money, police this month raided the offices of Citic Pacific, the Hong Kong arm of a Chinese government investment company, which had earlier admitted large losses on foreign exchange contracts. Founding chairman Larry Yung Chi-kin and managing director Henry Fan Hung-ling quit after the raids, and directors were asked to assist investigations into allegations of false statements and conspiracy to defraud.

The SFC started investigating Citic Pacific last October after it reported losses of $14.63 billion related to a number of forex contracts.

The company is accused of being aware as early as September 7 last year of the degree of exposure it faced arising from the contracts, yet it released a circular on September 16 indicating that there was no adverse information that it should declare to the market. It was not until six weeks later that the scale of possible losses was made public, sending its share price tumbling.

Legislator Chim Pui-chung, who represents the financial services sector in the city's Legislative Council, said the recent corporate scandals showed the existing regulatory system no longer worked well.

"The city has not had a clear regulatory system, which has led to a lack of supervision over listed companies and even the whole financial industry, which has damaged Hong Kong's image as an international financial market." It is confusing that the SFC acts as a market overseer while Hong Kong Exchanges and Clearing serves as front-line regulator, he said.

"It is a defective system allowing the authorities to shirk responsibility. There should be an overhaul of financial market regulation in the city," he said.

Corporate governance activist David Webb, the first to alert the SFC to the Fortis share-splitting for the PCCW vote, welcomed the appeal court ruling in the case as "a good day for corporate governance in Hong Kong". But his hope for more like it might be a while in become reality.

Secretary for Financial Services and the Treasury Chan Ka-keung said the government will consult with the market and study rules of other jurisdictions before deciding whether the city's Companies Ordinance needs to be revised.

The part of the law containing the "headcount rule" in the PCCW case also affects negotiations between a company's creditors, so the administration will need to study the situation thoroughly before making any changes, Chan said after the court ruling.

SFC chief executive Martin Wheatley vowed to probe other alleged malpractices in a bid to protect small shareholders. "The investigation of any alleged market misconduct in the deal will continue to ensure the interests of minority investors are protected," Wheatley said.

How that may be done may become more difficult, given that the global financial turmoil has cast doubts on many regulatory changes over the past decade or so.

Democratic Party legislator Kam Nai-wai called for expanded powers for a centralized market watchdog to replace the fragmented regulatory bodies formed by the SFC and the Hong Kong Monetary Authority and the Hong Kong stock exchange.

"We should set up a powerful single regulator like Britain's Financial Services Authority [FSA] to oversee all banks, brokers, fund managers and listing affairs," he said.

British Prime Minister Gordon Brown, now facing the threat of obliteration of his party at the next general election, established the FSA when he was chancellor of the exchequer, or finance minister. He, and the country's voters, are now paying heavily for the failure of the FSA to forecast and forestall the collapse of mortgage lender Northern Rock in 2007 and the subsequent financial crisis. Other role models might be preferable for Hong Kong.

Olivia Chung is a senior Asia Times Online reporter.

(Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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