The Civic Party Policy Proposals to the Securities and Futures Commission in relation to the various issues arising from the PCCW Privatisation Scheme of Arrangement under s. 166 of the Companies Ordinance (Cap. 32)
1. Earlier this week, the Civic Party issued a public statement urging the SFC to expedite its investigation in relation to all allegations of ‘shares-splitting’ and any misconduct, and if necessary, to apply to the Court to seek an adjournment of the forth coming hearing to ensure that the Court is fully apprised of all relevant information relating to PCCW’s application for privatization.
2. Subject to the results of its investigation, should any misconduct be found, the SFC should not hesitate to invoke its powers under the Securities and Futures Ordinance, including section 214, to petition the Court to redress the damages caused by any unfair prejudicial conduct affecting the rights and interests of the shareholders of PCCW.
3. Apart from these immediate measures, the Civic Party believes that this incident highlights the need for reform in our current regime.
Review of the “Head-Count Test”
4. The Civic Party believes that the requirement under s. 166 of the Companies Ordinance for a members’ scheme of arrangement to be approved by a majority in number of the members, or members in the relevant class, present and voting (either in person or by proxy) (i.e. the Head-Count Test) calls for review; especially in relation to publicly listed corporations.
5. The Head-Count Test is inconsistent with the fundamental principle of “one share: one vote” – which runs throughout our existing legal framework.
– The Head-Count Test has a misplaced concern with registered holdings of shares rather than underlying ownership. Many unrelated beneficial owners of shares may hold their shares through a single nominee (and count as one “member” for the purposes of the test). Conversely, one beneficial owner may hold shares through a variety of different nominees (and count as many members for the purposes of the test). Both of these outcomes are unsound and illogical.
– Because a very large proportion of shares in listed companies are now held by nominees, the satisfaction of the headcount test has little or no relationship to the decisions of the true owner of those shares.
– The Head-Count Test has a very real potential to distort the efficient operation of the scheme provisions.
– The most egregious problem is that share splitting may be undertaken in a deliberate attempt to manipulate the outcome of the vote required by the Head-Count Test (such as the present controversies concerning the PCCW privatisation scheme).
– Even in the absence of any share splitting, the Head-Count Test effectively operates to disenfranchise shareholders who invest in Hong Kong companies using depositary mechanisms (where the underlying shares are all held by a single depositary/custodian).
– The Head Count Test may also allow a large number of people, who are unconcerned with the interests of the shareholders and the company, to defeat or support a scheme for unrelated reason.
– Other comparable jurisdictions (such as Canada, United States (Delaware) and many European countries) have never had an equivalent of the Head-Count Test. Also: see the recent review of the legal position by the discussion paper published by the Australian Government Corporations and Markets Advisory Committee in June 2008.
The Civic Party urge the SFC to immediately look into this issue so as to facilitate the necessary legislative amendment in the current Companies law reform.
Other proposals to strengthen protection for minority/individual shareholders
6. Some shareholders may not understand all of the issues involved in a scheme. The SFC should consider increasing the level of information that should be provided to shareholders in relation to schemes of arrangement.
7. The degree of transparency required from the board, and the level of shareholders approval needed (i.e. whether 75% or above) should also be reconsidered so as to maximise shareholders protection. This should be reflected by way of amendments to the Companies Ordinance (and forms part of the present reform).
8. If the legislature were to approve the above amendments, the Courts would have a clear direction as to the legislature’s intention that protection for minority shareholders is the overriding principle in any application for approvals for schemes of arrangements.
9. The SFC should consider measures to better enable individual shareholders to take affirmative action and make their views known to the Courts during application for approval. The Courts should be required to take into account a wider range of views when considering whether to exercise its discretion to approve a particular scheme. This would enhance shareholders protection.
10. What the SFC and the HK Stock Exchange should consider is to regulate/monitor publicly-listed companies particularly privatisations. One legislative option which can be considered is to ensure that the offeror pays all the costs including sending out offers to buy, the meetings to obtain approval, all the costs of any court hearing irrespective of whether the offer gets shareholders’ approval and of whether the court sanctions the scheme. The costs should never be borne, whether directly or indirectly, out of the companies’ funds.
11. In order to eliminate last minute ‘opportunists’, the SFC should also consider freezing the register or requiring a longer period of holding shares of the company before a member will be qualified to vote in a meeting to consider any privatization proposal. More time should also be allowed to members who hold their shares through intermediaries to be able to participate in the voting.
12. Last but not least, the SFC should take a more proactive regulatory approach in monitoring these privatisation schemes and it should not hesitate to intervene in the process when there is a risk that the interests of small investors might be compromised.
Corporate Responsibility in the wider social context
13. The present controversies surrounding the PCCW privatisation have also generated much debate in the community regarding the corporate responsibility of listed companies in Hong Kong to the community in general. This is a much wider ethical issue that falls outside the ambit of this policy paper.
14. Nevertheless, the Civic Party believes that this is an important issue which requires us to rethink and challenge some of our entrenched values regarding the role of public and large corporations in our society, and what social responsibilities they must bear towards the long term sustainable development of Hong Kong’s economy.
15. We believe the present international financial crisis presents us all with an opportunity to look into our social conscience, the existing measures to ensure good corporate governance, and to rediscover the role and functions of large businesses and public corporations in the 21st Century. The Civic Party invites the SFC and the Hong Kong Government to actively participate in this dialogue.