Published August 19, 2009

Don't shortchange minority shareholders

By JAMIE LEE
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IN ONE of the most heart-wrenching passages in English literature, young Oliver Twist - who was 'desperate with hunger, and reckless with misery' - finished his serving of gruel and made the famous request: 'Please sir, may I have some more?'

That, as the narration continued, invited a blow on his head with a ladle and a great deal of yelling from the masters of the workhouse, as though starving Oliver's plea for more food was a heinous crime.

Like Oliver Twist, minority investors have been left hungry by recent privatisation offers and are asking for more.

From Man Wah Holdings and Kingboard Copper Foil to Elec & Eltek International Company to CK Tang, shareholders of these companies that made privatisation plans have been bitterly upset at the exit offers.

Kingboard Copper Foil - which failed in its de-listing attempt - offered 21 cents a share or 0.374 shares of its own Hong Kong-listed shares, or a combination of the two, to take the company private. Small-time investors were disgruntled, arguing that the low valuation was unfair.

The successful attempt by the Tang brothers to take CK Tang private was also tainted with fierce and hostile opposition from minority investors.

These small-time investors - many of whom have held the shares for more than 10 years - argued that the price was just too low and did not price in the value of its flagship store along Orchard Road that could be unlocked with redevelopment.

Should minority investors be given a bigger serving of gruel?

Majority investors have used the recession as a reason - and a convenient one at that - to argue otherwise. Some of these offers were priced at discounts to net asset values, which these companies say are likely to suffer given the limbo in economic recovery. In other words, it's not our fault, blame the economy.

It is difficult to tsk-tsk these companies for taking advantage of this opportunity. Like it or not, it's a shrewd move to derive more bang for their buck. And minorities are, as the label tellingly indicates, last in the pecking order. Majority investors - who put in more resources than the minority investors - are the top chickens, minorities cluck at the bottom.

However, it's one thing to grab an opportunity, it's another to be opportunistic. The majority shareholders are in a powerful position to impose their will on these investors, who have parted with their money in implicit expectation of a fair return in the end. Protection of minority investors is also thin at this point. Perhaps the proposed minority buy-out rights regime - under which companies here may be required to buy out minority investors who disagree with a fundamental change to the business - will address this.

There is no doubt that there will be numerous debates over what is the fair value at which investors should be bought out, but that is the crux of the issue.

Avoiding these long-drawn arguments with investors may prompt some companies to offer a more attractive exit price in the first place, rather than risk having investors come after them with alternative valuations, since the process will certainly be lengthy and tense.

But before that fear even comes into play, companies mulling privatisation should on their own consider the legacy they leave behind. If companies factor 'goodwill' into their offers - not in the accounting sense but in the general sense of showing appreciation for the loyalty and support of minority shareholders - more investors will go away pleased.

This isn't as critical for companies that haven't been on the market for years, but for retailer CK Tang, for example, its shine as a listed retailer for 34 years has been taken off by the bitter fight over privatisation. One angry shareholder, for example, has threatened to boycott the store (and there is little doubt that she will) to protest the exit offer.

Gaining such 'goodwill' beats any glossed-up marketing ploy and helps to preserve the heritage of a company that was once shared by the public.

No doubt, it'll cost the offerers more money. But it certainly beats being remembered as the sour man who hit a skinny orphan boy over a portion of gruel.