By Mak Yuen Teen
In this year’s World Cup, Germany was knocked out at the group stages. This was one of the biggest shocks of all time, since Germany were the champions just four years earlier and one of the best teams in history.
In response to the shock, the German Football Federation decided to undertake a review of what went wrong. It decided to go back to the first World Cup held in 1930 and concluded that nothing much was wrong since Germany had won four World Cups.
This, of course, is not what Germany would do. However, this was essentially what Datapulse Technology decided to do when it was issued a Notice of Compliance (NOC) by SGX Regco on 23 February this year. The NOC was in response to numerous issues involving the company especially since November 2017, with some dating back to 2015. It directed the company “to engage an independent professional firm to conduct a review of the Company’s internal controls and corporate governance practices which would cover the following:
- Determine the facts and circumstances surrounding the new Board’s approval for the acquisition of Wayco (“Wayco acquisition”);
- Review the adequacy of the Company’s internal policies, processes and procedures relating to evaluation and approval of mergers and acquisitions, and conflicts of interest;
- Review the Company’s processes relating to board appointment and nomination by shareholders; and
- Make recommendations on improvements to internal controls and corporate governance practices.”
Lee and Lee were eventually appointed to undertake the review on 11 April 2018.
Datapulse decided to extend the review period for M&As and director appointments all the way back to 23 November 2000, the date when it was transferred from the then SESDAQ to the Mainboard.
On 18 September 2018, The Business Times ran a report following the release of the executive summary of the review with the headline “No systemic failure by Datapulse in M&A due process: review”. By expanding the scope of the review to 2000, the company has managed to change the narrative and divert attention from its recent appalling corporate governance. Extending the review back to 2000 is a waste of shareholders’ monies and has very limited usefulness – something which I had earlier pointed out and which Lee and Lee itself acknowledged when it said: “It should be borne in mind that we have looked at the Company’s transactions and directorships that span a period of more than 17 years and during this period of time, standards, practices, rules, regulations and market expectations in the areas of internal controls processes and processes may have over time changed and become more stringent”. The ability to obtain information from documents and personnel involved would also be limited for events and transactions that happened a long time ago.
The company adopted a liberal interpretation of the scope of the review specified in the NOC. Unfortunately, SGX Regco did not put its foot down firmly and bring the review back to its original intent and focus on the recent issues that are at the centre of the controversy –reinforcing the perceptions of many investors that it is a regulator that is friendly to issuers, even poorly-behaved ones.
To be fair, on 1 June 2018, SGX Regco did send further queries to Lee and Lee relating to the company’s investment in Goldprime Realty, a joint venture investment with Lian Beng Group, and a further review relating to the acquisition and disposal of the company’s interest in Goldprime is being undertaken by Lee and Lee.
Captive review
However, it is not only the scope of the review that undermines the whole exercise and renders it rather useless in my opinion.
The report makes clear who is calling the shots in the review and who it is for. It says it is intended for, and only for, the benefit of the Board, the AC and no other person. Not for SGX which ordered the review, or for shareholders who are paying for it.
It goes on to say that Lee and Lee “do not accept or assume responsibility for our work, and this Report thereof, to anyone except the AC”. In other words, Lee and Lee have no responsibility for its work to SGX Regco or shareholders.
The trouble is that the AC consists of the same directors whose actions are the subject of the review. Datapulse has taken “ownself check ownself” to a whole different level. It is a case of “ownself appoints a reviewer to review what ownself wants to be reviewed and then report to ownself”. Frankly, this is absurd. It is because of cases such as this that third party reviews, including for example the review commissioned by the Noble Group in response to questions about its accounting and disclosure practices, often lack credibility.
The reviewers did not verify or authenticate any information and relied extensively on information, including representations, provided by those whose actions are under review.
Lee and Lee only talked to the current directors and management, selected former management nominated by the current directors, and the company’s legal advisors. While the report said that “the management of the Company from time to time” were interviewed, it did not disclose who in “management” were interviewed and there are no indications that “the directors of the Company from time to time” were interviewed. Surely, the directors would have been involved in decisions relating to M&A, which was a key focus of the review.
Throughout the report, one is constantly wondering “Why didn’t they ask so and so?”. I guess it’s because “so and so” may not give the “right” answers.
I am left to ponder the wisdom of Lee and Lee in agreeing to such an engagement given the scope and the limitations.
The findings
I struggle to make sense of the findings in the report. It is strange to read a report supposedly based on a review by experts that is so shy about expressing any opinion about whether something is appropriate or not (there are some minor exceptions, but they are put across ever so gently). Lee and Lee said that they “referenced an ideal system of internal controls processes and procedures” and then largely avoided commenting on whether the practices met those standards.
It should of course be noted that my comments are based on the executive summary that has been made public. It is possible that the full report that presumably has been given to SGX may be quite different. However, one would expect that the summary report – which I assume would have been reviewed by SGX Regco before its release (even though the report was not prepared for SGX according to Lee and Lee) – is an accurate reflection of what is in the full report. Of course, it is possible that the summary report is like a PG version of Fifty Shades Darker.
Acquisition and disposal of interest in Goldprime
One of the issues I have raised in my articles is about events and disclosures surrounding the acquisition and disposal of the interest in Goldprime, the joint venture with Lian Beng Group.
Lee and Lee said: “We sighted Board approval for the provision of the corporate guarantee [to Goldprime] but we did not sight any Board approval for the…loan of approximately $2.82 million from the Group to Goldprime. We also did not sight any formal paper or discussions of the loan or the corporate guarantee. We note however that the Board approval for the Goldprime acquisition was given by the Board with knowledge of the immediate cash requirements and undertaking to provide a corporate guarantee in respect of the joint venture and the intention to purchase the Melbourne property for redevelopment. We also note that it was previously disclosed by the Company that the Company that the use of the placement proceeds raised from the issuance of shares to Lian Beng Group Ltd would be used by the Company for property related businesses.”
From the above paragraph, one gets the sense that the report was trying to salvage the situation for the Board. It avoided giving an opinion as to whether what was done was acceptable or not. What is shareholders to make of such statements? Oh yes, the report is not written for them!
The bottom line is that there is no evidence of any formal paper or Board discussions of the loan or the corporate guarantee. There is also no indication that the reviewers asked the directors who were on the Board at that time why this was the case and apparently no evidence that the Board formally approved the loan or corporate guarantee.
The report then said that the reviewers were informed in their interviews with management that during the period of the joint venture in Goldprime, both the company and Lian Beng Group provided loans and corporate guarantees proportionate to their respective shareholding interests in Goldprime. I had in my articles asked whether the loan that was provided to Goldprime by the company was proportionate to its shareholding interest.
While the report mentions that brief details were circulated to the Board prior to the Board’s approval of the investment in Goldprime, and these details covered a pro-rated cash contribution of $2.9 million, there was apparently no mention of any corporate guarantee. The views provided by management are just their assertions of what happened at that time. It is also unclear who in the then “management” were interviewed and no indications that the reviewers interviewed the then directors. Surely, the directors and not just management should be interviewed when we are talking about matters requiring board approval.
In response to SGX Regco’s further queries about Goldprime, Lee and Lee asked the company and the current management. For example, on the question of why Datapulse did not disclose that Goldprime’s A$24.35 million investment in a Melbourne property, Lee and Lee asked the current management. What good would that do, given that current management were not involved at that time? Not surprisingly, the current management replied that they do not have the requested information. It is surprising that for this question, Lee and Lee did not ask the board and management at that time. Again, it does not say whether the information ought to have been disclosed.
Disposal of Tai Seng property
On the disposal of the Tai Seng property, which used to house the company’s manufacturing activities, the report effectively cleared the board and company by saying that the necessary information was provided to the board, the directors had considered the rationale, and the appropriate announcement was made. These are not the central issues relating to the disposal of the property.
The report did not address the question as to why when the Tai Seng property was put to shareholders approval at the EGM on 28 September 2017, shareholders were kept in the dark that key conditions precedent for the purchase of the proposed replacement property in Toa Payoh were at a significant risk of being unmet – since the company had already received two rejection letters from the authorities for the alternative use of the proposed replacement property by that time. In my view, shareholders were not given the full information when they were asked to approve the disposal of the Tai Seng property. Why was the board and management at that time not asked about this? The reviewers did not express an opinion as to whether this information should have been disclosed. Well, presumably because it was not within the scope!
Appointment and nomination of directors
The report confirms what everyone already know by now – that the four directors (one executive and three independent) appointed on 11 December 2017 were appointed by the three executive directors who remained on the Board after the previous three independent directors resigned suddenly. It mentioned about not sighting certain documents or announcements. In the case of Form 45 (Consent to act as a director), this is statutorily required without which a director cannot be appointed. [Prior to 2007, the separate announcement of appointment or cessation of directors was not specifically required by SGX, so that may explain the absence of appointment announcements in earlier years. Or it could just be that current management could not find the documents or did not produce them for the review.]
What is telling is that the reviewers did not sight any resolutions of the remuneration committee/Board relating to the review/approval of the remuneration and service agreement for Kee Swee Ann (KSA), who was appointed as CEO and ED on 11 December 2017. In addition, it did not sight any declaration of his shareholding and interests under sections 156 and 165 of the Companies Act. However, by extending the review back to 2000, these findings are now buried among a number of findings that are not related to the recent issues that have put the company in the spotlight.
The report then gave the all clear for the announcements of resignation of the directors – even though the scope of the review refers to appointment. It said absolutely nothing about the disclosure lapse by Low Beng Tin (LBT), who as I had pointed out in earlier articles, failed to disclose prior regulatory action in a company where he was lead independent director and a petition for winding up in another company where he was a director. In other words, the report commented on something that is not directly of interest and for which there were no lapses, but did not look into something that is directly relevant to the appointment of directors for which they was clearly a lapse.
Other matters relating to the appointment of the directors that were not covered include:
- Why did NCC stand for re-election at the company’s AGM on 9 November 2017, only to sell all his shares the very next day and resign about 1.5 months later? An announcement on 23 November 2017 disclosed that NCC had entered into an agreement dated 10 November 2017 to sell his shares. Based on the AGM minutes, he gave no indication to shareholders that he was disposing his entire stake when they were asked to vote on his re-election. Did he agree to be re-elected so that he could be involved in the appointment of the new directors? Was it part of the agreement for the sale of his shares to NSH at a more than 50 percent premium that he stayed on as a director to help approve the appointment of the new directors?
- Why did the company announce that LBT was introduced to NSH as a potential director and Chairman by “a third party”, only to change its tune later to say that it was in fact NCC who did the introduction? Clearly, NCC is not a third party.
Wayco acquisition
For the Wayco acquisition, Lee and Lee relied on documents provided by the company and interviews with the former CEO, Wilson Teng (WT); the CFO, Michael Lee Kam Seng; Low Beng Tin (LBT), Thomas Ng (TN) and Rainer Teo (RT). Therefore, the review of this transaction is heavily based on what those whose actions are under review told the reviewers. Since WT only joined the company on 8 March 2018 – well after the Wayco acquisition – what information could he possibly offer to the reviewers, except what he has been told by others?
It said that prior to 27 November 2017, NCC introduced NSH and Ang Kong Meng (AKM) to the CFO and informed the latter that NSH and AKM were parties interested in acquiring NCC’s shares in the company. The report does not say when exactly prior to 27 November 2017 this meeting happened, but presumably it was sometime before 10 November when NCC entered into an agreement to sell his shares, which was later revealed to be to NSH.
This is the first time that there is a disclosure that AKM was one of the parties interested in buying the shares from NCC. So, was AKM eventually involved in any way in the purchase of shares by NSH? Does AKM have a beneficial interest in the shares bought by NSH? For all intents and purposes, the Wayco acquisition was an interested person transactions (IPTs) given the close business relationship between NSH and AKM – but for the rigid interpretation of SGX rules on IPT. Now we learn that AKM was in fact involved with NSH in discussing the purchase of shares from NCC. If this still does not make the Wayco acquisition an IPT, then we might as well tear up chapter 9.
The report said that on 27 November 2017, NSH arranged for a casual and informal lunch meeting, which was attended by NCC, AKM, LBT, TN and KSA. LBT, TN and RT were said to have confirmed that they were not told by NSH that the company should acquire Wayco. Again, this is an assertion by the directors that was not independently validated. Clearly, they could not have said otherwise, as that would mean that they may have fettered their discretion as directors and NSH may be considered a shadow director.
The report said that those present claimed that no decision to acquire Wayco was made at the informal meeting on 27 November and the Wayco acquisition was only one possible option. Further, we are told that between 27 November and 10 December 2017, RT, TN and LBT conducted fact finding on Wayco, had “informal reviews” of the assets and liabilities of Wayco based on financial statements presented by AKM, paid “informal visits” to retailing points of Wayco’s products, and conducted “informal searches” on the background of AKM and market feedback. The directors were also informally appointed since there was no properly functioning nominating committee, their independence was informally reviewed and they informally appointed KSA too.
The report did not provide an opinion about such “informal” practices – opting instead to just make recommendations on good practices, which can be interpreted as an indirect critique of the company’s practices. This is another indication that the report tried hard to avoid being critical.
While the above directors were “informally” going about their work, NSH sent a draft sales and purchase agreement on 6 December 2017 by email to AKM, TN, RT and KSA, together with 2016 audited and 1H 2017 management accounts for Wayco, and information relating to trademarks. NSH requested that these be forwarded to the proposed directors for their consideration before the board meeting on 11 December 2017. It appears that NSH was the one organising the board meeting. The report mentions that the reviewers did not sight any board paper or information memorandum for the acquisition. The acquisition was duly approved.
Did NSH and AKM, who are not Datapulse’s directors, attend the meeting and participate in the discussions and advocated for the acquisition?
There was no mention as to how long the board took to deliberate on the acquisition. We know that there was not much discussion of issues relating to the acquisition.
For example, it was noted that LBT asked if the Wayco acquisition was an IPT, and KSA said no. There was no evidence of any detailed discussion about the basis for KSA’s answer. KSA did not have any experience as a listed company director and, based on his background, does not appear to be someone knowledgeable about the SGX listing rules. Yet the directors – including two directors with no experience as directors of listed companies – were apparently happy to rely on KSA.
The report also said that the reviewers did not sight any discussion of whether any director and controlling shareholder had an interest in the acquisition, the possible application of chapter 10 rules on acquisitions, and whether shareholder approval was required for the proposed diversification. Of course, we already know that things are done very informally with this group of directors.
The board met again on 13 December 2017 when it was informed that the vendor wanted to proceed with the acquisition. According to the report, it was minuted that the board agreed to proceed “without due diligence” provided the vendor agreed to a buyback undertaking. Since the board’s own minutes had said that it was proceeding “without due diligence”, why did the company take exception to media reports using those same terms? It should also be noted that the Board agreed to proceed before the company had received the valuation reports for the three properties supplied by the vendor on 14 December 2017.
The report noted that the valuation report for Property 2 included photos which showed the letters “RW” on the building. I had pointed out this fact in my articles.
There are no indications of any further Board meeting following the receipt of the valuation reports or any questions raised about the fact that the building included the letters “RW” instead of Wayco’s name, before the acquisition was completed. The Board said that it had asked AKM for a personal guarantee and that he had refused. The supplemental agreement incorporating the buyback undertaking was signed on 15 December 2017 and the sale completed that same day.
The report confirms what many have suspected all along – that the supplemental agreement containing the buyback undertaking does not elaborate on or define what constitutes “material adverse effect” and “material extent” and therefore what constitutes as “material” is subject to interpretation. This would clearly make the buyback undertaking difficult to enforce.
Conclusions
After waiting more than five months for the release of the report, it turned out for me to be a huge disappointment. I believe such reviews do more harm than good to the credibility of our market as they would be seen as exercises in damage control rather than truly getting to the bottom of issues. This just adds to my disillusionment with the current state of our market.
