Published November 10, 2008

Must minorities just take it or leave it?

By CHEW XIANG
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IN A disclosure-based regulatory regime, a question at the back of the minds of many minority shareholders is often 'What next?'. So long as nothing untoward happens that should catch the attention of the authorities, there is not much that unhappy minority shareholders can do except to sell out, even if there is evidence of poor management or weak corporate governance, or if board decisions go against their perceived interests.

Take the example of Catalist-listed E3 Holdings, which is in real estate in China. On Tuesday, it held its annual general meeting, a rambunctious six-hour affair during which an angry bloc of shareholders tried desperately to oust the company's chief executive officer, Jonathan Ow, and chairman, Peter Ngo, and to keep their candidate director Liau Beng Chye on the board.

Among the facts revealed at the meeting were:

# that $22.2 million - more than the company's entire market capitalisation - had been sent to two bank accounts in China controlled by Ken Ngo, brother of Mr Ngo, but that no bank statements were ever shown to the auditors (statements were only obtained the day before the AGM);

# Mr Ken Ngo had received travel advances of $167,000, which the auditors could not document to their satisfaction (he is apparently undertaking to repay the sum);

# That he had also, while a general manager of the company's subsidiary, paid $334,600 to a company whose services were terminated after just a few months, and which was said to be controlled by his associate (the fees were stipulated in the contract and approved by another director);

# And, that the company had embarked on numerous 'promising' ventures in the past three years without any result, while losing over $6 million in its last fiscal year (doing business in China is just plain tough).

To their credit, CEO Mr Ow and chairman Mr Ngo kept their cool despite considerable provocation and frequent heckling. Their testimonies to shareholders were frank and full and there is no evidence that any laws or relevant regulations were broken.

But at the very least, the company's actions show that its internal controls were seriously lacking. As more than one professed 'neutral' shareholder at the meeting said: 'I can't believe this sort of thing is happening in a Singapore public listed company.'

Yet, in the end, both Mr Ow and Mr Ngo kept their seats on the board by a comfortable margin of the votes polled, while Mr Liau was booted out, even though he had the support of Armorcoat International, the single largest shareholder of the company with some 7.4 per cent of the shares.

His party angrily left when they realised their revolt had failed. What else could they do? As one shareholder, supportive of the company's management, said: 'If they don't like it, they can just sell their shares.'

Another example: Addvalue Technology, in the satellite communications business, on Monday announced a deal to raise up to $94.6 million in cash, placing out up to 51.56 per cent of the company by issuing 860 million new shares to a Cypriot investment firm. The deal values the company at a generous 90 times historical earnings (it made about $2.2 million last fiscal year, on revenue of $10.7 million).

So the deal is likely to be great for the company, which will, once necessary approvals are obtained, get at least $38 million in the first phase of investment to fund its capital expenditures.

But this may not be a good deal for minority shareholders. If it goes through, they won't get a cent in terms of an offer, since Addvalue is seeking a whitewash resolution so that no takeover offer needs to be tabled. Worse, their holdings will see a 50 per cent dilution, with no indication at present that the company's performance will improve dramatically. Again, their only option is to sell out.

In theory, the fortunes of shareholders should always be tied to that of their company. But in practice, it's possible for majority shareholders with control of management to take the company down a road that diverges from the interests of minority shareholders. The only solace they have is to chalk it down to tough luck.