| 
Billionaire Richard Li’s blocked $2.1 billion buyout of PCCW Ltd. may discourage investors with the deepest pockets from using “share splitting” to outvote minority shareholders in Hong Kong.
The son of Hong Kong’s richest man abandoned his five-month effort to privatize the city’s biggest phone company after the Court of Appeal yesterday overturned a lower court’s approval of the deal. Li is “disappointed” by the verdict, which deprived minority shareholders the chance to sell their stock above the market price, the PCCW chairman said in a statement today.
PCCW tumbled the most in nine years in Hong Kong trading after the HK$4.50-a-share ($0.58) bid collapsed. The ruling is a victory for the local markets regulator, which opposed the deal on claims that that PCCW stock was improperly given to hundreds of investors to boost support for the bid.
“It’s a good ruling for minority shareholders,” said Ronnie Tong, a member of Hong Kong’s Legislative Council. “Additional safeguards should be enshrined in legislation through changes in corporate law.”
Li and co-bidder China United Network Communications Group Corp. on Feb. 4 received the support of more than 1,400 PCCW stockholders, compared with about 850 against, allowing the bidders to clinch the required majority of participating investors’ votes. The “headcount rule,” designed to help minority shareholders, must be met in addition to 75 percent of shares represented for acquisitions to be approved in Hong Kong.
David Webb
The Securities and Futures Commission began its probe on the buyout after receiving a complaint from shareholder activist David Webb. More than 800 people became registered as PCCW shareholders shortly before the ballot after some investors divided their holdings and distributed them to hundreds of agents at Fortis Insurance (Asia) Co., a company previously owned by Li, according to the regulator.
Judges Anthony Rogers, Johnson Lam and Aarif Barma at the Court of Appeal unanimously ruled yesterday in favor of the commission and said they’ll explain later. The decision overturned an April 6 ruling by Court of First Instance Judge Susan Kwan, who cleared the deal on grounds that “share splitting” was legal in Hong Kong.
‘Malpractice and Manipulation’
The decision “vindicates the SFC’s intervention in the court’s hearing to sanction the scheme and our ongoing investigation into allegations of malpractice and manipulation of voting at the shareholders’ meeting,” Martin Wheatley, chief executive officer of the commission, said after the ruling.
PCCW, which had been suspended from trading since the appeals court hearing started on April 16, tumbled 13 percent to HK$3.57 at 10:50 a.m. in Hong Kong, the biggest percentage drop since September 2000.
The stock has plunged from a split-adjusted peak of HK$131.75 in 2000. That year, Li’s Internet startup, Pacific Century Cyberworks Ltd., took over Hong Kong’s former telephone monopoly, creating a company valued at about $41 billion. The shares traded at HK$2.90 before Li and his co-bidder made their initial offer of HK$4.20 a share.
“I genuinely wanted to, through the privatization proposal, give minority shareholders an opportunity to exit for cash at a substantial premium to the market price,” Li said in a statement. “I feel sorry that minority shareholders have lost this chance.”
Lack of Rationale
Judge Lam said this week the appeal court would consider the lack of rationale in documents supplied to PCCW investors to justify the buyout. Judge Rogers said investor circulars about the transaction were “wishy-washy” and PCCW’s plan to pay a HK$18.78 billion special dividend to Li and China Network was “outrageous.”
The buyout offer gave PCCW shareholders concerned about the company’s “short-term prospects” an opportunity to exit their investments, Denis Chang, a lawyer for Li’s Pacific Century Regional Developments Ltd., told the court this week.
PCCW reported on April 21 a 15 percent decline in annual profit that missed analysts’ estimates as Hong Kong’s recession reduced demand for phone services. The shares traded as low as HK$2.51 on Oct. 13 before the buyout plan was announced.
Li, son of Cheung Kong (Holdings) Ltd. Chairman Li Ka-shing, made his buyout bid after the company failed to sell a stake in its main phone assets to private equity investors in October as global markets slumped.
Legislative Changes
Webb, who lodged the complaint to the commission, welcomed the court’s ruling.
“The government needs to move quickly to remove the head- count requirement from the legislation because it’s open to manipulation,” said Webb, formerly an independent director at Hong Kong’s stock exchange. “People who try that would be more subtle about it in the future.”
In January, Fortis Insurance Executive Regional Director Lam Hau-Wah bought 500,000 PCCW shares and distributed them to 494 subordinates and their relatives after phone calls with Francis Yuen, a business associate of Li’s, the commission said. Lam’s secretary obtained 500 proxy forms for the PCCW ballot from Yuen’s secretary in January, according to the commission.
The regulator’s legal challenge was its first attempt to block a takeover through the courts.
“It’s the court’s role to ensure not only the letter of the law is observed, but also the spirit of the law,” said Fred Kinmonth, a partner at Minter Ellison Lawyers in Hong Kong. The ruling “shows it’s not only enough to tick all the boxes.”
|
Comments