In a city where free-wheeling deals are often at the expense of small investors, have the Court of Appeal judges drawn a line in the sand?
Ruling that the vote splitting involved in the PCCW buyout deal was unfair to minority shareholders, the judges - Mr. Justice Anthony Rogers, Mr. Justice Aarif Barma and Mr. Justice Johnson Lam Man-hon - highlighted the need for reform of Hong Kong’s corporate laws to enhance protection of small investors.
The judges’ concerns are valid. Minority shareholders in the city have been victims of a range of corporate scandals over the past six months, revealing serious defects in the regulatory regime.
The list is long - the PCCW privatisation vote-rigging saga, the Citic Pacific foreign-exchange losses, the alleged manipulation of the Hong Kong closing auction system and the Lehman Brothers minibond fiasco. Each has revealed chinks in Hong Kong’s regulatory armour and loopholes that need to be plugged.
In the PCCW case, the focus has been on Section 166 of the Companies Ordinance - the so-called “headcount rule” that requires more than half of investors attending a shareholders’ meeting on a buyout to vote in favour of the deal. That rule allegedly allowed manipulation of the vote in the PCCW deal.
Mr. Justice Barma in a written judgment yesterday noted the law might need to be changed “to enable the court to look into the true headcount position both for and against the proposal”.
His comments highlight a serious anomaly in the shareholding system. Unlike in the past, when people registered shares in their own names, a majority of shares are now held on behalf of investors by banks or brokers in the Central Clearing and Settlement System (CCASS) - the local clearing system introduced in 1992.
That means a broker holding shares on behalf of 100 clients only gets one vote under the headcount rule as opposed to multiple votes that could be lodged if the shareholders were voting in their own name.
Mr. Justice Rogers said the CCASS nominee system meant the court could not know how many individuals voted for or against the deal.
Mr. Justice Barma said although not all shareholders wanted to vote, this did not mean “the court should turn a blind eye to situations in which the voting, in headcount terms, is distorted by the effect of nominee or other arrangements designed to inflate the number of shareholders apparently voting in favour of the proposed scheme of arrangement”.
He said: “The legislation has not kept up with changes in shareholder mechanisms of listed shares ... this is a matter that can, and properly should, be addressed by making appropriate amendments to the terms of legislation.”
The government would consult the market on the headcount rule in the fourth quarter, a spokesman for the Financial Services and the Treasury Bureau said. The government had noted concerns Section 166 might have given rise to some form of “share splitting” that diluted protections for small shareholders.
“While the ‘majority in number’ requirement was originally intended to protect the interests of minority shareholders and small creditors and exists in the company law of comparable jurisdictions, such as Britain, Australia and Singapore, we agree that there is a case to review such a requirement,” the spokesman said.
Paul Chan Mo-po, the legislator for the accountancy sector, said the PCCW case showed the headcount rule was outdated and easily manipulated.
“The headcount rule and the other regulations related to privatisation must have an overall review to prevent vote rigging occurring again,” Mr. Chan said.
Sun Hung Kai Financial executive director Joseph Tong Tang suggested abolishing the headcount rule but keeping other provisions in place to protect small investors.
“The headcount requirement can be easily manipulated to affect the poll result,” he said.
“Another point to consider is that for all other shareholders’ resolutions of listed companies in Hong Kong, the board can choose to use the percentage of the value of shares to determine the poll result without taking into account the number of shareholders.”
Hong Kong Stockbrokers Association chairman Kenny Lee Yiu-sun, however, pointed out that Britain had maintained the headcount rule even after a comprehensive review: “We should note that the purpose of keeping the headcount rule is to protect the minority shareholders’ interests, as it allows the investor who holds a few shares to speak out.
“The PCCW case showed this rule has been abused, but I do not think we should abolish it. We should seek ways to enhance it and to prevent further abuse. For example, the Securities and Futures Commission can issue guidelines on vote splitting.”
SFC chief executive Martin Wheatley said the judgment made it clear that “share splitting in this context is a form of vote manipulation, and the results of shareholder meetings achieved by manipulative devices may be struck down by the court”.
Mr. Chan said that besides amendments to the Companies Ordinance, the government should push ahead with another law change proposal to give statutory backing to listing regulations. If that happens, Citic Pacific’s delay in disclosing its heavy foreign-exchange trading losses in October last year might have been prevented.
“The statutory backing of listing rules on disclosure of information will mean those who mislead the market may face jail terms. This will be much tougher than now, when the exchange can only reprimand those who break the listing rules,” he said.
While the government has vowed to push ahead with such legal reforms, analysts are not so optimistic, given the government’s track record of caving in to the “big end” of town.
A typical example was the back down in February over the extension of the blackout period for directors trading shares. After stiff opposition from key businessmen and the wider business sector, officials watered down the proposal.
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Justices stress need for reform of corporate laws
Enoch Yiu
12 May 2009
In a city where free-wheeling deals are often at the expense of small investors, have the Court of Appeal judges drawn a line in the sand?
Ruling that the vote splitting involved in the PCCW buyout deal was unfair to minority shareholders, the judges - Mr. Justice Anthony Rogers, Mr. Justice Aarif Barma and Mr. Justice Johnson Lam Man-hon - highlighted the need for reform of Hong Kong’s corporate laws to enhance protection of small investors.
The judges’ concerns are valid. Minority shareholders in the city have been victims of a range of corporate scandals over the past six months, revealing serious defects in the regulatory regime.
The list is long - the PCCW privatisation vote-rigging saga, the Citic Pacific foreign-exchange losses, the alleged manipulation of the Hong Kong closing auction system and the Lehman Brothers minibond fiasco. Each has revealed chinks in Hong Kong’s regulatory armour and loopholes that need to be plugged.
In the PCCW case, the focus has been on Section 166 of the Companies Ordinance - the so-called “headcount rule” that requires more than half of investors attending a shareholders’ meeting on a buyout to vote in favour of the deal. That rule allegedly allowed manipulation of the vote in the PCCW deal.
Mr. Justice Barma in a written judgment yesterday noted the law might need to be changed “to enable the court to look into the true headcount position both for and against the proposal”.
His comments highlight a serious anomaly in the shareholding system. Unlike in the past, when people registered shares in their own names, a majority of shares are now held on behalf of investors by banks or brokers in the Central Clearing and Settlement System (CCASS) - the local clearing system introduced in 1992.
That means a broker holding shares on behalf of 100 clients only gets one vote under the headcount rule as opposed to multiple votes that could be lodged if the shareholders were voting in their own name.
Mr. Justice Rogers said the CCASS nominee system meant the court could not know how many individuals voted for or against the deal.
Mr. Justice Barma said although not all shareholders wanted to vote, this did not mean “the court should turn a blind eye to situations in which the voting, in headcount terms, is distorted by the effect of nominee or other arrangements designed to inflate the number of shareholders apparently voting in favour of the proposed scheme of arrangement”.
He said: “The legislation has not kept up with changes in shareholder mechanisms of listed shares ... this is a matter that can, and properly should, be addressed by making appropriate amendments to the terms of legislation.”
The government would consult the market on the headcount rule in the fourth quarter, a spokesman for the Financial Services and the Treasury Bureau said. The government had noted concerns Section 166 might have given rise to some form of “share splitting” that diluted protections for small shareholders.
“While the ‘majority in number’ requirement was originally intended to protect the interests of minority shareholders and small creditors and exists in the company law of comparable jurisdictions, such as Britain, Australia and Singapore, we agree that there is a case to review such a requirement,” the spokesman said.
Paul Chan Mo-po, the legislator for the accountancy sector, said the PCCW case showed the headcount rule was outdated and easily manipulated.
“The headcount rule and the other regulations related to privatisation must have an overall review to prevent vote rigging occurring again,” Mr. Chan said.
Sun Hung Kai Financial executive director Joseph Tong Tang suggested abolishing the headcount rule but keeping other provisions in place to protect small investors.
“The headcount requirement can be easily manipulated to affect the poll result,” he said.
“Another point to consider is that for all other shareholders’ resolutions of listed companies in Hong Kong, the board can choose to use the percentage of the value of shares to determine the poll result without taking into account the number of shareholders.”
Hong Kong Stockbrokers Association chairman Kenny Lee Yiu-sun, however, pointed out that Britain had maintained the headcount rule even after a comprehensive review: “We should note that the purpose of keeping the headcount rule is to protect the minority shareholders’ interests, as it allows the investor who holds a few shares to speak out.
“The PCCW case showed this rule has been abused, but I do not think we should abolish it. We should seek ways to enhance it and to prevent further abuse. For example, the Securities and Futures Commission can issue guidelines on vote splitting.”
SFC chief executive Martin Wheatley said the judgment made it clear that “share splitting in this context is a form of vote manipulation, and the results of shareholder meetings achieved by manipulative devices may be struck down by the court”.
Mr. Chan said that besides amendments to the Companies Ordinance, the government should push ahead with another law change proposal to give statutory backing to listing regulations. If that happens, Citic Pacific’s delay in disclosing its heavy foreign-exchange trading losses in October last year might have been prevented.
“The statutory backing of listing rules on disclosure of information will mean those who mislead the market may face jail terms. This will be much tougher than now, when the exchange can only reprimand those who break the listing rules,” he said.
While the government has vowed to push ahead with such legal reforms, analysts are not so optimistic, given the government’s track record of caving in to the “big end” of town.
A typical example was the back down in February over the extension of the blackout period for directors trading shares. After stiff opposition from key businessmen and the wider business sector, officials watered down the proposal.
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