By Mak Yuen Teen
In the Business Times report “Datapulse shareholders grill board on potential haircut over Wayco sale” (17 November, 2018), I was quoted as saying: “We want to move forward, but I am also a strong believer in accountability….If the board wants to move forward, I would like to strongly urge the board to review whether there’s any basis for legal action against any (past) directors.”
The report mentioned that I was referring to the potential $200,000 loss on the Wayco deal. It is not just the difference between the original purchase price and the “buyback” price that I was referring to. In one of the questions that I had posted before the AGM, this is what I wrote:
“Can the board let shareholders know if it intends to review whether there is any basis for legal action to recover from certain directors any losses from the acquisition, the costs of the compliance review, professional fees and legal costs (including costs of filing a defamation suit against Ascapia Capital), since all these are directly linked to the Wayco acquisition which was conducted without due diligence and with a difficult-to-enforce buyback undertaking?”
According to the Lee & Lee report on the compliance review, the minutes of the board meeting to discuss the Wayco deal had used the words “without due diligence”.
The report said that, on 27 November 2017, Ng Siew Hong arranged for a casual and informal lunch meeting, which was attended by Ng Cheow Chye, Ang Kong Meng, Low Beng Tin, Ng Der Sian Thomas and Kee Swee Ann. The report said, based purely on interviews with those involved, 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, Low Beng Tin, Rainer Teo Jia Kai and Thomas Ng conducted fact finding on Wayco, had “informal reviews” of the assets and liabilities of Wayco based on financial statements presented by Ang Kong Meng, paid “informal visits” to retailing points of Wayco’s products, and conducted “informal searches” on the background of Ang Kong Meng and market feedback.
The board then made the deal to buy the company one day after it was formed and completed the deal within the same week. Formal due diligence that was conducted through the Ernst & Young financial and tax due diligence was largely an afterthought – and surprise, surprise, it concluded that Wayco was not sustainable on its own.
There were many indicators that the Wayco deal was a questionable one to begin with, and I have highlighted many of them in various articles I have written as soon as the deal was announced, with my first article questioning it appearing on 19 December 2017, just seven days after the deal was first announced. These include, among other things, valuation of properties that made up a significant part of the acquisition by valuers appointed and paid by the vendor; the significant dependence of Wayco on other group companies (that were not part of the acquisition) to distribute its products; the small market share in a highly competitive market dominated by multinational giants; declining sales in the various distribution channels; low profitability; ageing assets; questionable ownership and expiration of trademarks; and questions over valuation of assets – and the fact that it was in effect an interested person transaction (IPT) that was not caught by our weak IPT rules.
The reason why I suggested that the new board should review whether there is any basis for legal action against certain directors is because it is the “proper plaintiff” in the first instance in any private action against any of the previous directors. However, should the new board decide against taking action, shareholders can initiate a statutory derivative action under the Companies Act, which now allows such actions for listed companies. Shareholders can write to the board to request that it takes legal action, and if the board does not do so, shareholders can then apply to the Court to sue on behalf of the company. If the Court agrees, the costs can be borne by the company, although there would still be legal costs involved in making an application to the Court. Obviously, there are still legal cost impediments which explain why we have yet to see any case of a statutory derivative action for listed companies here and why small shareholders have little access to justice – an issue that I see more countries in this region addressing or trying to address, but not here.
However, it is not only the new board and shareholders that should be left to hold previous directors accountable for any breach of duties. We have laws and rules in place that are supposed to do so, including those relating to director duties under the Companies Act, and of course listing rules that directors must comply with. To repair investor confidence in the market which has, in my opinion, being badly damaged by one too many cases of extremely poor corporate governance and/or wrongdoing, regulators must vigorously enforce the listing rules and laws.
In the Datapulse case, regulators must look at potential breaches of laws and rules spanning over several years, and not only in relation to the Wayco deal. It may not only be those who are named as directors who are culpable, but those who may be acting as de facto or shadow directors, and other parties who may have facilitated breaches.
The inability or unwillingness of boards, shareholders and regulators to hold directors accountable creates moral hazard and results in a downward spiral in behaviour in our market.
Investors should factor in the level of investor protection when deciding whether to invest in the stock market and which market to invest in.
