A truly extraordinary meeting that raises many issues


Published March 29, 2016

By Mak Yuen Teen and Chew Yi Hong

First published in Business Times on March 30, 2016

IN THE course of writing the forthcoming second report on shareholder meetings in Singapore which covers 906 such meetings conducted in 2015, we came across what we consider the most questionable shareholder meeting, in terms of how the resolutions were presented and voted on. That was the extraordinary general meeting (EGM) held by Catalist-listed Brooke Asia on July 20, 2015 to approve the acquisition of all the shares of China Star Food Holdings (CSFH) in a reverse takeover (RTO). PrimePartners Corporate Finance (PPCF) was the financial adviser and sponsor, and Colin Ng & Partners was the legal adviser on Singapore law for Brooke Asia on the transaction.

Under the RTO, Brooke Asia was to acquire all the shares of CSFH for S$168 million, with the former issuing 840 million shares as consideration to the vendors.

In the EGM notice dated June 26, 2015, a total of 13 resolutions were put up for approval by Brooke Asia’s shareholders. The subjects of the 13 resolutions are reproduced below:

  • Ordinary Resolution 1: Proposed Acquisition of the entire issued and paid-up share capital of China Star Food Holdings Pte Ltd for the Purchase Consideration of S$168,000,000
  • Ordinary Resolution 2: Proposed allotment and issue of (i) 840,000,000 Consideration Shares to the Vendors in satisfaction of the Purchase Consideration for the Proposed Acquisition, (ii) 3,500,000 PPCF Shares to PPCF in partial settlement of their fees and (iii) 27,500,000 Arranger Shares to the Arranger in satisfaction of the arranger fees, at the Issue Price of S$0.20 for each Share
  • Ordinary Resolution 3: Proposed Whitewash Resolution for the waiver by Independent Shareholders of their right to receive a mandatory general offer from the Vendors and their concert parties for all the issued and paid-up Shares of the Company following the Completion of the Proposed Acquisition
  • Ordinary Resolution 4: Appointment of the Proposed Directors
  • Ordinary Resolution 5: Proposed allotment and issue of up to 101,000,000 Placement Shares pursuant to the Proposed Compliance Placement
  • Special Resolution 6: Proposed Change of Company’s Name to “China Star Food Group Limited”
  • Special Resolution 7: Proposed Amendments to the Articles
  • Special Resolution 8: Proposed Capital Reduction and Proposed Cash Distribution
  • Ordinary Resolution 9: Proposed Change of Auditors
  • Ordinary Resolution 10: Proposed adoption of the China Star Employee Share Option Scheme
  • Ordinary Resolution 11: Grant of Options at a discount pursuant to the China Star Employee Share Option Scheme
  • Ordinary Resolution 12: Proposed adoption of the China Star Performance Share Plan
  • Ordinary Resolution 13: Proposed variation of the General Share Issue Mandate upon the Completion of the Proposed Acquisition

Inter-conditionality of resolutions

The EGM notice also states: Shareholders should note that the passing of resolutions 1, 2, 3, 4, 5, 6, 7, 8 and 9 contained within this Circular are inter-conditional (“Inter Conditional Resolutions”), and the passing of resolutions 10, 11, 12 and 13 are conditional on the passing of the Inter-Conditional Resolutions. This means that if any one of the Inter-Conditional Resolutions is not approved, the other resolutions will not be passed.

Although Brooke Asia’s circular dated June 26, 2015 provides more information on the resolutions and re-states the fact that the first nine resolutions are inter-conditional while the last four resolutions are conditional on the passing of the inter-conditional resolutions, it does not explain why all the nine resolutions have to be inter-conditional. Apparently, the company did not think that the rationale for making the nine resolutions inter-conditional is important enough to be included in its circular that is nearly 500 pages long.

Some degree of inter-conditionality of resolutions is understandable in RTO situations. However, the extent of inter-conditionality in Brooke Asia’s case is far more than what we have observed in other RTO situations and, in our view, unjustified and may set a bad precedent.

Guideline 16.2 of the Singapore Code of Corporate Governance recommends “separate resolutions on each substantially separate issue and that companies should avoid bundling resolutions except where resolutions are interdependent and linked to form one significant proposal”.

In our view, the three most fundamental resolutions in order to execute the proposed acquisition are arguably resolutions 1, 2(i) and 3. Other resolutions would be irrelevant if these three resolutions were not passed.

Is it not sufficient that the other resolutions are made conditional on the approval of these three resolutions relating to the proposed acquisition of shares of CSFH, the issue of consideration shares to the vendors and the proposed whitewash resolution? Why should each of the nine resolutions be made inter-conditional with the other eight resolutions?

By making the nine inter-conditional resolutions as “must-have” resolutions, the company had effectively created an “all or nothing” situation for shareholders voting at the EGM. It might just as well have bundled all nine resolutions together as one mega-resolution and asked shareholders to vote on this resolution.

Let’s consider resolution 9 on the proposed change of external auditors. The incumbent auditor of Brooke Asia was Ernst & Young (EY) and it was proposed to replace them with RSM Chio Lim (RSMCL). RSMCL was the incumbent auditor of CSFH.

Page 229 of the circular purports to explain the rationale for the proposed change of auditors but raises some questions.

It states: RSM Chio Lim is the current external auditors of the CSFH Group and Reporting Accountants to the Enlarged Group. In conjunction with the Proposed Acquisition, it is proposed that RSM Chio Lim be appointed as Auditors of the Company in place of EY at and with effect from the next AGM. In this regard, EY has informed the Company by way of letter dated June 15, 2015 that it will not be seeking reappointment as Auditors at the next AGM.

RSM Chio Lim has given its consent to act as Auditors by way of a letter dated June 26, 2015.

Subject to Shareholders’ approval of the Proposed Transactions, RSM Chio Lim will be appointed as the Auditors of the Company, in place of EY. Upon their appointment as Auditors, RSM Chio Lim will hold office until the conclusion of the next AGM of the Company following their appointment as Auditors.

The first paragraph above states that the appointment of RSMCL will take effect only from the next AGM. If the auditor change will only be effected at the next AGM, why is there need to put it to shareholders for approval at this EGM? There is no reason to pass this resolution at the EGM, let alone make the other resolutions conditional on the passing of this resolution.

Bundling of resolutions

In addition to the inter-conditionality of nine of the resolutions, two of these inter-conditional resolutions were also bundled. Resolution 2 bundled the proposed allotment and issue of consideration shares to the vendors with the proposed allotment and issue of shares to the financial adviser and sponsor as partial payment of their fees and also the fees to the “arranger”.

As it is, paying sponsors in the form of shares rather than cash is controversial and has been the subject of media debate in the past. In this case, there are other controversies. Should this particular resolution be bundled at all? Should the passing of the other eight resolutions be conditional on the financial adviser/sponsor receiving their partial payment in shares? Are there not perception issues when the sponsor is supposed to review the contents of the notice and circular, and the resolution on payment of fees to itself is bundled and made inter-conditional with other resolutions?

However, the controversy gets deeper. The most contentious issue, in our view, is the bundling of the resolutions relating to the proposed appointment of six directors, including three independent directors.

Resolution 4 reads as follows:

“That contingent upon the passing of resolutions 1, 2, 3, 5, 6, 7, 8 and 9: (a) the appointment of (i) Liang Chengwang as an Executive Director, (ii) Chen Huajing as an Executive Director, (iii) Huang Lu as a Non-Executive Director, (iv) Koh Eng Kheng Victor as an Independent Director, (v) Lim Teck Chai, Danny as an Independent Director, and (vi) Loh Wei Ping as an Independent Director with effect from the Completion of the Proposed Acquisition be and is hereby approved . . .”

Brooke Asia is a Singapore-incorporated company subject to the Singapore Companies Act. Section 150(1) of the Act states that, for a public company, “a motion for the appointment of 2 or more persons as directors by a single resolution shall not be made unless a resolution that it shall be so made has first been agreed to by the meeting without any vote being given against it”. Section 150(2) states that “(A) resolution passed in pursuance of a motion made in contravention of this section shall be void, whether or not its being so moved was objected to at the time”. The intent of this section is to ensure that shareholders are not forced to vote for a slate of directors on a single resolution without their full consent.

The EGM notice did not indicate any motion for the meeting to agree to the appointment of the six directors under a single resolution, and there is no disclosure in the meeting results announcement of any resolution being unanimously agreed at the meeting that the appointment of the six directors can be voted as a single resolution. The results announcement also clearly shows that this was voted as a single resolution.

Section 150(5)(b) states that “Nothing in this section shall prevent the election of 2 or more directors by ballot or poll”. We have discussed this with a number of people, including lawyers and company secretaries. Some take the view that Section 150(5)(b) may arguably allow for the election of 2 or more directors to be elected on a single resolution if the resolution is voted by ballot or poll.

Others disagree, as do we. Surely, the intent of Section 150(5)(b) is not to undo the provision in Section 150(1) as long as the voting is by ballot or poll. If it is true that Section 150(5)(b) allows the election of 2 or more directors on a single resolution as long as it is done by ballot or poll, then it would mean that with mandatory poll voting for all SGX-listed companies, the election of multiple directors of all SGX-listed companies can be undertaken through a single bundled resolution without all shareholders agreeing to it.

Section 201E of the Corporations Act 2001 in Australia contains a similar provision for public company directors and then states that it “does not affect a ballot or poll to elect 2 or more directors if the ballot or poll does not require members voting for 1 candidate to vote for another candidate” (emphasis added).

In other words, it is unequivocal that voting for one director cannot be linked to voting for another. Section 160 of the UK Companies Act 2006 on this matter does not include the equivalent of Section 150(5)(b). We believe that Section 150(5)(b) should be removed or clarified.

Did Brooke Asia comply with Section 150 and were the director appointments valid? If the appointments were void, does it invalidate the other resolutions given that they were conditional on this resolution?

Regardless of whether the bundling of the resolutions to elect directors complied with the Companies Act, we believe the bundling and inter-conditionality of resolutions in Brooke Asia’s case sets a bad precedent and is contrary to good corporate governance because it significantly diminishes the rights of shareholders to vote on each resolution based on its merits.

On Sept 23, 2015, the day the transaction was completed, the company changed its name to China Star Food Group Ltd. It has been suspended since then because the compliance placement in Resolution 5 – which is required to satisfy the minimum distribution and shareholding spread requirements in the Catalist Rulebook – has not been effected.

  • Mak Yuen Teen is an associate professor at the NUS Business School, where he teaches corporate governance and ethics. Chew Yi Hong is an active investor and has also participated in a number of corporate governance research projects in Singapore and the region

 

 

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