A Hong Kong appeals court yesterday backed a Securities and Futures Commission appeal that the $2.2 billion proposal to privatise Richard Li's telecommunications firm PCCW be rejected.
The proposal has been in limbo since February 24. Shareholders approved the delisting on February 4 but the SFC, spurred into action by evidence submitted by Hong Kong's corporate governance champion, David Webb, editor of webb-site.com, alleged that the vote was rigged. PCCW won a case in the High Court to proceed with the delisting on April 6 but, yesterday, Hong Kong's Court of Appeal sided with the SFC and ruled that the privatisation proposal should be scrapped.
This is the first time the SFC has exercised its power to intervene in such proceedings and the securities watchdog said it had analysed more than 6,000 voting records, interviewed 91 witnesses and reviewed 2,000 other documents related to the deal to substantiate its case.
The SFC contended that Francis Yuen, an associate of Richard Li's who used to run Li's insurance business, had distributed shares to insurance agents with the intention of rigging the vote. The said agents then attended the February 4 meeting and voted in favour of the delisting to enable the vote to achieve a requirement that 51% of shareholders present at the meeting vote in favour of the proposal.
"The headcount requirement should be scrapped," says Webb. "We would still have the other voting requirements: 75% of the shares which vote are voted in favour and not more than 10% of all independent shares are voted against."
The Court of Appeal hearing which began Thursday was characterised by emotional outbursts from shareholders and equally impassioned statements by the judges. One of the judges is reported to have said that the offer price of HK$4.50 ($0.58) was pathetic for a share which had been purchased by shareholders for HK$100.
Indeed, it is precisely statements like these which have caused disquiet among some specialists. While it is indisputable that some of the circumstances surrounding the PCCW privatisation may have warranted further scrutiny, it is unusual that judges are commenting on the financial rationale underlying the pricing of the delisting or leading shareholders to believe they have the right to recoup losses they may have suffered on stockmarket investments. Caveat emptor has long been the mantra of stockmarket investing and those who don't heed this are well-advised to invest in bonds or keep their money in bank deposits.
"[The Scheme] represented an opportunity under the current economic climate for minority shareholders to exit from the stock through an all-cash offer," PCCW said in a written statement issued yesterday after the ruling was announced. And, in saying this, the telecoms firm is correct. If the current deal does not proceed, there is no guarantee that minority shareholders will get a better exit price. PCCW did not clarify its next steps, saying only it would await the detailed judgement and then advise.
"No doubt PCRD [Pacific Century Regional Developments -- the Singapore-listed holding company through which Li owns his stake in PCCW] will look for grounds for final appeal in the written judgment and they have the right to apply for leave to appeal," reckons Webb. "However, I struggle to imagine what those grounds would be."
Today Li announced that he would not appeal and the deal would lapse. He also announced PCCW would pay shareholders a special dividend of HK$1.30 per share, in lieu of a final dividend.
For Li, the ruling marks another closed chapter in his saga of unsuccessful delistings. He first tried to delist PCRD, in concert with private equity firm TPG-Newbridge, in January 2006. His first offer did not find favour with PCRD shareholders and, while an improved offer was on the table, Macquarie submitted an offer for the underlying telecom assets of PCCW. In the ensuing melee, the deal was scuttled altogether. Then, in February 2008, Li tried to delist PCCW's property subsidiary Pacific Century Premium Developments for an outlay of HK$2.6 billion. Shareholders did not find the price attractive enough to play ball and the delisting attempt failed.
Continuing with another trend, the advisers to the current deal -- HSBC for PCRD, UBS for PCCW and the Royal Bank of Scotland for China Netcom -- will not book a success fee on the deal. China Netcom owns 19.8% of PCCW and was acting together with Li with regard to the privatisation.
Some specialists believe that Li's track record of trying to extract value out of his investments over the past three years may have formed an unfavourable backdrop for yesterday's ruling.
On Monday PCCW announced calendar 2008 results, which showed an increase in revenues by 7% and Ebitda by 3%. However net profit fell by 15%, mostly on account of one-off items (deficit on revaluation and restructuring costs accounting for the majority). Standard & Poor's subsequently revised the outlook on Hong Kong Telecommunications, the core operating subsidiary of PCCW, to negative from stable.
PCCW shares last traded at HK$4.12 before they were suspended on April 15. Arbitrageurs have not been active in the stock given the overhang that the proposal could be rejected and seem to have made the right call. Minority shareholders can probably expect the shares to start falling when they resume trading.
But it is not all gloom and doom. "This is a good day for corporate governance in Hong Kong," says Webb, going on to suggest that Hong Kong legislators should now amend the laws to remove the headcount requirement. "Although the court has condemned vote-rigging, people will still be tempted to try more subtle ways to split their votes, including pre-emptive splitting before privatisations are proposed, for example, by handing out registered shares to employees, so long as the law is there," he adds.
