Published September 25, 2008

Australand could have handled rights better

By TEH HOOI LING
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GOOD corporate governance is about treating and working for all shareholders as equally as possible, not the box-ticking way that corporate governance can oftentimes degenerate to, says veteran investor Hugh Young of Aberdeen Asset Management.

As with all good corporate governance manuals, the spirit and intention should outweigh the letter of the law.

It is hence disappointing to see what Australand, a majority-owned subsidiary of CapitaLand - the region's biggest property group and a Temasek-linked company which had won numerous good corporate governance awards - did recently.

In late July, Australand, a property group in Australia which is listed both in Singapore and Australia, announced a one-for-one rights issue. The application price for the rights was A$0.60. That's a significant 38.5 per cent discount to the stock's closing price of A$0.975 just prior to the rights issue announcement.

The rights offer to institutional investors was to close in end-July and for retail investors early this month.

In the offer document, Lui Chong Chee, Australand's chairman, began his letter to security holders as follows: 'On behalf of the Board of Australand, I am pleased to provide you with the details of an opportunity to increase your holding of Australand Stapled Securities by participating in a 1-for-1 (rights) issue.'

He added that the issue would raise A$557 million (S$666 million), with CapitaLand undertaking to subscribe to its full entitlement of about A$302 million. The proceeds would be used to recapitalise and strengthen Austra- land's balance sheet in these uncertain market and assist to fund its development pipeline including the measured expansion into Asia with its joint venture partner CapitaLand.

Mr Lui concluded by saying: 'The directors of Australand are unanimous in commending this entitlement offer to you.'

But the catch was: retail investors outside Australia and New Zealand were not entitled to the entitlement!

Rights issue at a deeply discounted price is of course dilutive to the existing shareholders. Take the example of a shareholder who owns 10 shares or 10 per cent of a $100 company. His stake is worth $10, with each share having a market value of $1. If the company were to offer a 1-for-1 rights issue at 60 cents each, and the above shareholder did not take up that offer, his stake in the company will be diluted to just over 5 per cent, and his 10 shares will have a market value of just $8.10. It is worse if his rights entitlement was allotted to others.

So denying any shareholders his right to subscribe to additional shares in a company at below market price is grossly unfair, and a blatant disregard of basic shareholder right. And to put it simply, bad corporate governance. There is even less excuse given the company has a legal listing status here in Singapore.

The reason for not offering the rights issue to Singapore and other overseas retail investors is far from satisfactory. In response to an email from an aggrieved Singaporean shareholder, a representative of Australand said: 'Our general counsel has advised me that the law has changed in Singapore since our last capital raising and it is therefore more difficult, time consuming and expensive for Australand to meet these new requirements and make the offer available to Singaporean resident retail security holders. The same situation applies for retail security holders living elsewhere in the world, other than Australia and New Zealand.'

Yes, Australand sought shareholders' approval in an extraordinary general meeting prior to the exercise. They followed the rules. But as with the Australian Securities Exchange listing rules and all good corporate governance manuals, the spirit and intention should outweigh the letter of the law.

It is perhaps a little consolation that the share price of Australand has since fallen below A$0.60 each and retail shareholders who really wanted to maintain their stake at the pre-rights level can do so at an even lower cost than those who subscribed to the rights issue earlier.

Still it could just have been trading at a higher price and retail investors here would be done a disservice.

For a company of its pedegree, Australand definitely could have handled the exercise better.