Independent directors: More than minimum compliance is needed

First published by The Business Times on October 16, 2018

By Mak Yuen Teen and Chew Yi Hong

We refer to our article headlined “The things independent directors do for shareholders” (BT, Sept 19, 2018) and would like to reply to the two companies that have responded it.

Gaylin Holdings responded on Sept 26 through an SGX announcement to questions we had raised about the relationships between the three independent directors (IDs) and the private equity fund, ShawKwei & Partners, which is Gaylin’s controlling shareholder.

The company cited the absence of shareholding and family relationships and significant recent payments to the IDs that could affect their independence. Gaylin also said that it had obtained advice from a law firm regarding their independence.

Such legal advice may not have sufficiently considered the underlying principles in determining independence, which require a consideration of factors beyond those specifically listed out in the Code of Corporate Governance. It is also unclear whether the legal advice was obtained at the time of the directors’ appointment or after the directors were already appointed as IDs.

The company justified the independence of S. K. Lim by saying that even though he is a director of Schmid Singapore Pte Ltd, a company owned by ShawKwei, Schmid is a small company with revenue of less than S$55,000. In Mr Lim’s biography in Gaylin’s annual report, it is stated that he “is a director of several private limited companies in Singapore, representing the interests of the majority shareholders based overseas”. Was Mr Lim appointed to Schmid Singapore to represent ShawKwei’s interests? Similarly, is he representing the interests of ShawKwei on Gaylin’s board? If so, he should not be considered independent.

Further, another ID, Alan John Hargreaves, sits on the board of Beyonics which has merged with another ShawKwei company, Chosen. The merged entity had a turnover of US$250 million in 2016. If the small size of Schmid is considered relevant for determining the independence of Mr Lim, then wouldn’t the larger size of Beyonics cast doubt on Mr Hargreaves’ independence? It is not the size of the company but the closeness of the relationships that matter.

The company also did not explain why US-based David Hudson, despite being a senior advisor for ShawKwei, should be considered independent. In a ShawKwei press release in November 2016 unrelated to his appointment to Gaylin, it was said that he “provides on-the-ground representation with the United States private equity funds community”. This sounds like fairly substantial involvement with the fund.

In the case of Mr Lim and Mr Hargreaves, Gaylin also said that there are no plans for the related companies to do business with or to compete with Gaylin and therefore, there is no conflict of interest possible for the IDs. We find this statement puzzling because the IDs played a critical role in opining on the terms of the proposed acquisition of Amos International, which is an interested person transaction (IPT), since Amos is also controlled by ShawKwei. The issue is whether they will be perceived to be independent in doing so.

Incidentally, in the EGM results announcement for the Amos acquisition and the related placement of shares, Gaylin stated that “no parties are required to abstain from voting on the aforesaid resolutions”. This was clearly an error since the Amos acquisition was an IPT and the EGM circular had disclosed that certain interested parties would abstain from voting for both resolutions.

Wheelock Properties responded to us on Oct 5 in a letter to BT (“Recommending directors have complied with all the requirements”). We had pointed out that the recommending directors (two of whom are IDs) in the voluntary offer for the company had given the advice to shareholders to accept the offer, “unless they are able to obtain a price higher than the offer price on the open market, taking into account all commissions and costs”.

In its reply, the company said the Singapore Code on Takeovers and Mergers required the recommending directors to state upfront their intention to accept or reject the offer with no option for the directors to give a conditional acceptance. We fully agree.

We feel that if the recommending directors had followed their advice to shareholders fully, they would have declared their intentions to reject the offer and subsequently sell into the market. This is because the market price was higher than the offer price every day from the date of the offer on July 19 until the offeror confirmed that there was not going to be a revised offer on Sept 24. We are cognisant that it may be difficult for the directors to do so if they are involved in further negotiations to try to increase the offer price. Nevertheless, having decided to accept the offer upfront does, in our view, create the optics that the recommending directors had not followed their own advice fully, especially given that the IFA had said that it was not a compelling offer when the recommending directors made their decision. However, the recommending directors have fully complied with the takeover code.

Our article was intended to highlight the struggles that IDs face with perceptions about their independence because they are effectively appointed by controlling shareholders in most companies. Relationships they have with the company, its officers or major shareholders, or their actions, may affect such perceptions. Changing the way independent directors are appointed (and removed) will, in our view, help strengthen investors’ confidence in independent directors.