Published March 23, 2009

Concerns raised over pledged-share disclosure

Some call it invasion of privacy, but others say it would improve corporate governance

By SIOW LI SEN

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BUSINESSMEN are said to be concerned about the idea they may have to reveal shares they have pledged amid calls for greater disclosure, arguing that it's an invasion of privacy over their personal financial arrangements.

Clearer picture? A supporter of the proposal says disclosure would 'let investors see the risk profile of those in charge of their companies - it'll let people see that he (the businessman) is not the substance he is said to be'

But they may not be able to drown out the growing clamour as more pledged- share scandals emerge, as is typical in recessions.

Some CEOs are indifferent to revealing pledged shares.

'Speaking for myself, since I don't pledge my shares for any banking facilities, I am ambivalent whether it should or should not be disclosed,' said Timothy Chia, chief executive of Hup Soon Global.

Mr Chia, who is also UBS Investment Bank vice- chairman, acknowledged, however, that it is a delicate issue. 'This can be a sensitive issue, depending on whether you pledge or do not pledge your shares,' he said.

'For people who own the shares, it's a nightmare,' said Yap Wai Ming, Stamford Law director and a corporate law specialist. But disclosure would be good from a corporate governance viewpoint, he added, pointing out that it would 'let investors see the risk profile of those in charge of their companies'.

'It'll let people see that he is not the substance he is said to be,' said Mr Yap, who added that some rich businessmen have entered into very complicated structures with regard to the stakes they own.

Since the UK's Financial Services Authority (FSA) made it a sanctionable requirement, more than 80 companies in the UK have announced that one or more of their directors had used their shares as collateral for personal loans, said the Financial Times in a January report.

A common practice - and widely encouraged by bankers - pledging of shares by entrepreneur chief executives and executive directors in order to get loans to finance all manner of purchases including expensive cars and homes, is not untypical.

'According to my knowledge, it is not that uncommon for them to pledge their shares,' said Kenny Yap, managing director of Qian Hu Corp. He added that he has no objection if disclosure is made mandatory.

Those against disclosure say it constitutes an invasion of privacy and they point to current safeguards for minority investors such as the 12-month lock-up period for newly minted listed companies.

Said Stefanie Yuen Thio, head of corporate at TSMP Law Corp: 'The law recognises that shareholders should be allowed to deal with their shares as they think best for themselves. It's a fundamental ownership right.

'I think business people and entrepreneurs would strenuously object if they had to start disclosing when they have pledged their shares. It's a matter of maintaining privacy in relation to their personal financial arrangements.'

Moreover, requiring majority shareholders to disclose when they have pledged their shares may actually be misleading to the market, Ms Thio added.

'It may create an unnecessarily alarming impression, for example, where the amount borrowed is small compared to the value of the shares pledged, especially where the shareholder is financially able to meet his repayment obligations. The share pledge may never be enforced.'

According to Ms Thio, the law already protects minority shareholders in other ways. For example, if a majority shareholder has his shares force-sold because he is unable to pay his debts, and if an investor purchases more than 30 per cent in the company, the Takeover Code requires the incoming shareholder to make a takeover offer to all the other shareholders.

However, it may be too late by then. Last year's botched takeover of Jade Technologies - where a forced sale of pledged shares sabotaged a take- over attempt - left minorities hung out to dry.

'As a fund manager, I'm happy to know the position of a big investor,' said Teng Ngiek Lian, Target Asset Management chief executive.

But Mr Teng said the market should distinguish between the cash flow problems of major shareholders and the companies they run.

'A few individuals get into cash flow problems but it doesn't signify the company is in trouble,' he said.