Updated Preliminary Response to Datapulse Technology’s General Update on 30 January, 2018

Published January 31, 2018

Note: This is an updated and extended version of my preliminary response  to the company’s announcement on January 30, 2018. A more detailed response may be provided after I have gone through all the company’s recent announcements.

By Mak Yuen Teen

Datapulse Technology’s latest general update on January 30, 2018 states: “Although the share purchase agreement for the Acquisition was signed one day after the Board’s appointment, in actual fact, Board members were already introduced to the vendor of Wayco Manufacturing (“Vendor”) and furnished with information relating to, amongst others, the past financial performance of Wayco Manufacturing and the list of trademarks held by Wayco Manufacturing about two weeks prior to their appointment to the Board, so they did have sufficient opportunity to review and consider before deciding to undertake the transaction.” It also says: “… although the Vendor and its shareholder was introduced to the Board by Ms Ng and Ms Ng was of the view that Wayco Manufacturing was a suitable target for investment by the Company, the Board did not form its decision to make the Acquisition (or the terms on which it was made) purely based on the direction of the controlling shareholder, but took into consideration the interests of the Company and Shareholders.”

The company’s December 14 response to my December 13 Business Times article said:  “Mr Low (the Chairman) was introduced to Ms Ng by a third party as a possible candidate for independent Director and Chairman of the Board, and prior to his appointment to the Board, was not acquainted with Ms Ng nor with the other New Independent Directors.” Mr Low was appointed to the Board on December 11.

So, Ms Ng introduced the vendor to the then proposed directors (they are not the Board then) some two weeks before the proposed directors were appointed, the proposed directors were furnished information then, had the opportunity to review and consider the acquisition, but Mr Low was not acquainted with Ms Ng and the other proposed directors until he was appointed to the Board on December 11? So, the then proposed directors did all that without Mr Low (who is the Chairman) having been acquainted with Ms Ng or the other proposed directors before December 11?  Was Mr Low as proposed Chairman discussing the possible Wayco acquisition introduced by someone he did not know, in cyberspace with proposed directors he did not know? And then the day after he was appointed, he was ready for the company to spend $3.5 million on the acquisition when he only finally “got acquainted” with Ms Ng and the other board members for the first time the day before. Or would the company now want to clarify when Mr Low actually first got acquainted with Ms Ng and other board members?

In the company’s response to SGX’s queries on December 28, it said: “The Company did not conduct extensive due diligence on the Target Company prior to the completion of the Acquisition, inter alia, as the CEO was a former employee of the Vendor and is familiar with the business and operations of the Target Company.” It also cited the “buyback agreement” for not doing “extensive due diligence”.  In its update on January 30, it says “it is inaccurate that the Board decided to acquire Wayco Manufacturing without having done due diligence on the asset.”

Relying totally on information provided by the vendor, including financial statements, does not constitute proper due diligence for an acquisition. The fact that the new CEO was a former employee of the vendor makes it even more important that the Board does it homework properly before making the acquisition. In my commentary that appeared in Business Times on January 31 (“Datapulse Technology saga presents a challenge to SGX rules”), I also mentioned that the acquisition amount does not necessarily reflect the total risk exposure of Datapulse and its shareholders. I also said that the buyback agreement may actually be harmful to shareholders as Datapulse may have invested additional amounts in Wayco before selling back at the original purchase price.

It is also interesting that the proposed directors were reviewing the acquisition about two weeks before they were appointed to the Board. They were not directors then and had no powers to make any decision about the acquisition. At that time, there was an existing Board in place and from the company’s earlier disclosures, it was clear that the then Board had no idea about Ms Ng’s plans. Why did Ms Ng not bring her proposal to the then Board and get the then Board to consider her proposal? Why was she so adamant in having these proposed directors consider it instead? Was she worried that the then Board would not support her proposal?

The Board now says that it made the hasty acquisition to avoid Datapulse becoming a cash company under SGX Rule 1018.  I had in my Business Times commentary on December 8 (“Datapulse Technology’s disclosures about its operations throw up more questions than answers”) highlighted this risk if the company ceased its then manufacturing activities and was unable to secure other business and investment opportunities timely. However, if the Board had read Rule 1018 carefully, the company can avoid a suspension from SGX if it takes certain steps after it has ceased its then manufacturing activities and sold its Tai Seng property. Subject to compliance with these steps, SGX may allow continued trading of the company’s securities on a case-by-case basis. Thereafter, the company would have 12 months to find a new business to avoid a delisting. Therefore, the risk of the company becoming a cash company is no excuse for the hasty acquisition.

In the same December 14 response, the company also said: “In relation to the comment made by Ms Ng in her letter of 29 November 2017 to the then board of directors which was disclosed in the Company’s announcement of 8 December 2017, the Board is not in the position to speculate as to what may have been the information in the possession of, or assumptions made by Ms Ng which led her to state in her letter, inter alia , “… the Company will be ceasing its manufacturing business soon……” . Now the company has said that the Board  already knew about the proposed Wayco’s acquisition some two weeks before they were appointed – that is, before November 29. So  in the December 14 response, why did the Board say that it was not in a position to speculate about what Ms Ng knew or assumed, rather than disclose then what it is saying now?

This reminds me of the company’s earlier response to my questions about the appointment of the current Board. Initially, it was “the then Board” that made the appointment of the new directors, and then it later said that it was actually only the three executive directors who did it. Is this the kind of disclosures that shareholders and regulators should accept from the company and the Board?

Regulators need to look into all the company’s disclosures. Further, now that it has been revealed that information about the proposed Wayco acquisition was already known to some directors and the new controlling shareholder some time before the new Board was appointed and before the acquisition was first announced on December 12, regulators should certainly look even more closely at whether certain individuals traded in the company’s shares while in possession of material non-public information.

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