Regulators must look into the loopholes in related party transactions (RPTs), say shareholder activists, over concerns that minority shareholders might get the short end of the stick.
As much as transactions are above board, concerns abound over deals that follow the letter of the law rather than the spirit of it, they said.
“There is only a need to call a general meeting when the RPT is above a certain percentage for revenue or asset size. By setting a threshold in terms of percentage, the ruling allows larger companies to get away with quite a bit,” Devaneson Evanson, CEO of the Minority Shareholders Watchdog Group (MSWG), told FocusM.
However, by setting a value-based threshold, the reverse would come to pass, with smaller companies being able to get away with more questionable deals. Not every company is Genting Malaysia, he said.
Two examples of RPTs are The Baker’s Cottage Sdn Bhd (TBC) by Leong Hup International Bhd (LHIB), as well as the acquisition of Empire Resorts by Genting Malaysia Bhd (GenM).
The acquisition of Empire Resorts by GenM saw Tan Sri Lim Kok Thay selling the loss-making US-based gaming and entertainment company to GenM, with the acquisition utilising internal funds to the tune of RM538.8 mil in August 2019. Recently, in March, there were reports that GenM will be pumping in an additional RM175 mil as fresh capital to help the ailing US-based operation.
With LHIB, the acquisition of TBC, which should be completed in the third quarter of the year, saw the need for three RPTs, ultimately forming a price tag of RM20 mil. Concerns were raised over whether or not this formed a bailout, considering the largest chunk of the money, RM17.94 mil, will go to the major shareholders in TBC’s holding company Emerging Glory Sdn Bhd, which is owned by LHIB executive chairman Lau Chia Nguang, his brothers, and nephews, all of whom also sit on LHIB’s board of directors.
Lya Rahman, adviser to the Institutional Investors Council of Malaysia (IIC), agrees, and suggests that perhaps it is time that Bursa, as the regulators of the market, review the current threshold to a lower percentage, so that RPTs are subject to shareholders’ approval.
She noted that Bursa should also be proactive in monitoring RPTs, while facilitating a platform for shareholders to air their grievances on RPTs which are below the threshold of 5% and thus do not require shareholders’ approval.
“There is always concern when a transaction does not require shareholder approval as that can easily be subjected to abuse. This is where the independent executive directors have to step up, and make sure they are really independent, not only in form but also in spirit, and acting in the best interests of all of the shareholders, and the company as well, rather than being perceived and seen as beholden to the major shareholder,” said Lya to FocusM.
“The independent directors must play their role, and it is a key role, and not compromise their independence. They should not be beholden to the founder, or whoever is involved,” said Lya, adding that the appointment of such directors is very important to the wellbeing of a company.
This highlights the importance of the nature of the appointment of these independent directors, such as their tenure and how they were appointed to ensure that they remain independent in true spirit, she shared.
According to Chapter 10 of the Listing Requirements of Bursa Malaysia, the threshold sits at a percentage ratio of 5%, where the company would only have to notify Bursa Malaysia, but does not need to engage shareholders or hold a general meeting to get shareholder approval. Any transaction below the value of RM500,000 is exempt as well.
Evanson agrees that board members hold a key role in the decision-making of such transactions, considering transactions below the threshold do not require shareholder approval, and the interested party in the RPT (who tends to be a majority or founding shareholder) is not allowed to vote on the matter.
“However, more often than not, board members are more patronising to the interested party, who could also have a dominating personality. There is a risk that the independent directors on the board will be patronising to the interested party who, as a major shareholder, tends to sit on the board as well,” he said.
In RPTs that are above the threshold, which require shareholder approval and the engagement of an independent adviser, Lya believes that these advisers have a key role as well. She stated that they should ensure information on any deals is “sufficient but concise, and easy to understand.”
“Remove the legal and technical jargon, so shareholders can more easily understand the contents,” she said.
Lya also believes that such RPTs that pass the threshold should also be kept fair and reasonable for minority shareholders, though she also notes that shareholders, major or minority, have to play their roles as well.
“They (the shareholders) have to play their role. Go through the circular issued by the company, read and analyse to better understand the transaction, attend the general meeting and ask relevant questions or seek clarification by raising issues of concern, before exercising their right to vote accordingly,” she said. – June 15, 2020
