Stand taken by SBI Offshore sponsor highly disappointing

Published September 14, 2016

First published in Business Times on September 4, 2016

By Mak Yuen Teen

THIS Friday’s EGM at SBI Offshore (SBIO), requisitioned by three substantial shareholders, will consider the following resolutions: the proposed removal of current CEO Chan Lai Thong as a director, and the proposed appointment of Hui Choon Ho, Lau Yoke Mun, Ong Nai Pew and Geoffrey Yeoh Seng Huat as directors.

The three substantial shareholders – Mr Hui, Dr Ong and Tan Woo Thian – together own about 31 per cent of the issued shares. At the time of SBIO’s Catalist listing in November 2009, Mr Hui was the executive chairman and CEO, Mr Tan was an executive director, and Mr Chan was an independent director. Prime Partners Corporate Finance (PPCF) was the manager, sponsor and sub-placement agent, and is its current continuing sponsor.

Mr Lau was an employee of the group from 2014 to 2015, who was later contracted as a service provider to manage finance and corporate matters for the group’s renewable energy business in South Africa.

Mr Hui and Mr Lau have made various allegations against Mr Chan to support his removal. In turn, the board has raised questions about the conduct and performance of Mr Lau, the conduct of Mr Hui, and the involvement of Mr Hui and Mr Tan in transactions relating to Jiangyin Neptune Marine Appliance Co Ltd (NPT), a PRC company.

All these are detailed in the 40-page letter to shareholders dated Sept 1, and a supplemental letter dated Sept 10, together with an executive summary report by PricewaterhouseCoopers (PwC) on their findings to date on the NPT transactions.

The board explained in detail the allegations against Mr Chan and concluded that, after investigations with the assistance of PwC, there were no adverse findings against Mr Chan – except that there was an amendment of the spouse travel policy allowing Mr Chan’s spouse to travel with him on a business trip that was not submitted to the board for approval, and that one-month variable bonuses paid to Mr Chan and other staff were not submitted to the remuneration committee for approval.

While acknowledging that there were corporate governance lapses, the board is of the view that the lapses do not warrant the removal of Mr Chan as a director. Based on the information and explanations in the two letters, the board’s position is reasonable in my opinion.

To the board’s credit, it took a measured approach to the proposed appointment of the directors. It is receptive to increasing its current board size from five directors to six or seven directors and is particularly open to directors with project expertise, especially in the solar business which it is diversifying into. It interviewed the proposed directors and provided fair and balanced profiles of the current and proposed directors.

In its letter of Sept 1, the board proposed that shareholders vote for the appointment of two of the four proposed directors, Dr Ong and Mr Yeoh, and said that it considers them to be independent.

In contrast, the board recommended that shareholders vote against the appointment of Mr Hui and Mr Lau. For Mr Hui, the board questioned his conduct, alleging that he was communicating and giving instructions to various employees of the group even though he is only a shareholder, and not a director or management.

Clearly, shareholders are not supposed to bypass the board and management and give instructions to employees and cause disruption to the company’s operations. In the case of Mr Lau, the board alleged that he had failed to comply with the instructions of the board and management, perform his duties, properly account for and handle company property, and was untruthful.

The sponsor’s position was that the allegations in the board’s first letter to shareholders would not prevent the appointment of Mr Hui and Mr Lau. In the case of Mr Lau, it merely recommended that he attends a relevant directors’ training course within three months of his appointment given his lack of experience as a listed company director.

In the supplemental letter dated Sept 10, the board disclosed the discovery of contradictory sales and purchase agreements for NPT. A PwC review of the NPT transactions found that the acquisition of a 35 per cent equity interest in NPT for US$1.75 million, as disclosed in the company’s 2009 IPO prospectus, was based on an undated agreement signed by Mr Hui on behalf of the company. However, there was another dated agreement in 2008 for the acquisition of the same equity interest for US$350,000 that was signed by Mr Hui and Mr Tan on behalf of the company.

In August 2015, the company announced that it had sold its equity interest for US$3.5 million. Again, it was found that there was another agreement in December 2015 for the disposal of the same equity interest for US$1.75 million that was signed by Mr Tan on behalf of the company.

According to PwC, the withholding tax amount filed with the PRC tax authority for the profit from the disposal is consistent with an acquisition cost of US$350,000 in the dated acquisition agreement and the disposal consideration of US$1.75 million in the second disposal agreement.

The second acquisition agreement and the second disposal agreement were dated and signed by Mr Hui and/or Mr Tan and all the other relevant parties, with the applicable company seals affixed to the agreements.

As the supplemental letter explains, the implications of having two sets of acquisition and disposal agreements are serious. Depending on which acquisition and disposal agreements are the correct ones, there could be breaches in the Securities and Futures Act (SFA), Catalist Rules, or PRC tax laws.

And what was the sponsor’s response to the second letter and the PwC report? In the case of Mr Hui, it now said that it would await the outcome of legal advice obtained by the board before forming its views on his suitability as a director. It added that it “would be concerned with the suitability of Mr Hui Choon Ho to act as a proposed director if, inter alia, it is subsequently confirmed that Mr Hui Choon Ho as the CEO of the company then was involved in any fraud, misrepresentation or misconduct in relation to the transaction(s) relating to the acquisition of the 35 per cent equity interest in NPT”.

In the case of Mr Lau, it advised the board to engage “an independent and suitably qualified third-party professional firm” to review the board’s allegations and that it would make its recommendation based on the findings of the review. Further, it “would be concerned with the conduct of Mr Lau Yoke Mun should the independent review confirm the existence of any serious wrongdoing or misconduct by Mr Lau Yoke Mun”.

I find it remarkable that PPCF is not prepared to at least express doubt about the suitability of Mr Hui and Mr Lau to act as directors given the detailed concerns expressed by the board, and the findings of PwC in the case of Mr Hui. With the EGM just days away, what PPCF has done (or not done) is almost as good as endorsing the appointment of Mr Hui and Mr Lau.

While the ability to appoint and remove directors is an important shareholder right, and a sponsor should not be seen to be helping to entrench incumbent directors, I find its handling of the proposed appointment of Mr Hui and Mr Lau to be highly disappointing. If PPCF is not prepared to at least express concerns about directors proposed for appointment where there are documented allegations about their conduct and even where allegations are supported by an independent review, I would be concerned about the quality of directors of Catalist companies for which it is a full or continuing sponsor.


Following the sponsor’s “advice”, the board has been forced to backtrack somewhat on its recommendation in its first letter to vote against Mr Lau. However, it affirmed its recommendation to shareholders to vote against the appointment of Mr Hui.

What was of even more concern is the sponsor’s statement that so far as it is aware, the undated acquisition agreement is the valid one. Does this mean that, as a sponsor, PPCF would accept undated agreements for the purpose of disclosure in prospectuses, circulars and announcements? Has it fully considered all the facts before arriving at its conclusion? What about the fact that this does not square with the withholding tax declaration in PRC?

Unfortunately, the odds are stacked against the board on Friday. The requisitionists collectively own at least 31 per cent of the shares. On the other side, non-executive chairman Mirzan Mahathir owns 11.6 per cent, while Mr Chan owns 8.3 per cent. The other substantial shareholder, Pheim Asset Management, owns 6.7 per cent, and it is unclear where it stands.

Regardless of the outcome of the EGM, it is important for regulators to review the contents of the two letters to shareholders and the PwC report to determine if there have been breaches of the SFA and Catalist Rules. I would also urge the Singapore Exchange to review the role of the sponsor in this episode and whether it has adequately discharged its responsibilities. It may also wish to extend this review to other Catalist companies and sponsors.

  • The writer is an associate professor at the NUS Business School, where he teaches corporate governance and ethics

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