A version of this article was published in the Business Times on February 27, 2019.
By Mak Yuen Teen
In recent years, the lack of effective investor protection in our market has become rather evident. For S-chips and other foreign listings, regulatory enforcement has often been hampered by the inapplicability of laws, cross-border enforcement barriers or runaway miscreants. However, the Datapulse Technology (DT) case shows that even for Singapore-incorporated, Singapore-based companies, investor protection leaves much to be desired.
First, the case highlights the deficiencies in our listing rules in protecting minority investors, especially the Chapter 9 rules on “Interested Person Transactions (IPTs) and the Chapter 10 rules on “Acquisitions and Realisations”. DT was able to acquire a company from a vendor who had significant business and employment relationships with both the controlling shareholder and the CEO without being caught by the IPT rules – and it later emerged that the vendor and controlling shareholder had together discussed the acquisition of the controlling stake from the previous controlling shareholder.
It also acquired one part of a company group first, avoiding crossing the shareholder approval threshold under Chapter 10, and then engaged a third party to undertake a “strategic review” which to no one’s surprise, identified the acquisition of the other two companies in the group as an option. If all three companies in the group had been bought together, DT could very well have crossed the threshold immediately. DT just drove a truck through the rules. There are other ways that companies can get around these rules.
Second, even where the listing rules and regulation appear adequate, companies can breach them with apparent impunity. Take the case of Chapter 7 on “Continuing Obligations” and Appendix 7.1 on “Corporate Disclosure Policy” in the listing rules and sections 199 and 203 in the Securities and Futures Act on false or misleading statements and continuous disclosure. DT had many instances of questionable disclosures, some of which appear to be clear breaches of the rules.
In this commentary, I summarise the rules which I believe have either been broken or there are sufficient grounds for regulators to investigate for potential breaches. This is based on the more than 30 articles I have written about this company over the past 14 months and additional public information I have gathered.
Disclosure breaches
In July 2017, when DT announced that it was selling its Tai Seng property which housed its manufacturing activities, it said that it intended to use part of the proceeds to buy a new property to continue its existing operations. When it held the EGM on September 28, 2017 seeking shareholder approval for the disposal of this property, it withheld material information from shareholders. The company disclosed information that clearly suggested that it was still on track to move its operations to the replacement property in Toa Payoh that it was proposing to acquire. However, it failed to disclose that by September 22, it had already received two letters from NEA rejecting the company’s application for change of use of this property.
On November 9, 2017, DT held its AGM. According to the AGM minutes, the board still did not disclose the NEA rejection letters. The board made certain statements about the state and direction of the existing business of the company, despite the company still having no new premises to house the operations.
At that AGM, Ng Cheow Chye (NCC) – the controlling shareholder, CEO and deputy Chairman – was re-elected as a director. However, the very next day, he entered into an agreement to sell his entire 22.3 percent stake at $0.55 per share, or 52.8 percent above Datapulse’s previous closing price.
It was only on November 14, 2017 that the company finally disclosed the termination of the option to purchase the Toa Payoh property and the receipt of the two NEA letters.
Had shareholders known that the continuation of the company’s existing manufacturing activities was in doubt when they were asked to approve the sale of the Tai Seng property, they may have voted in larger numbers and questioned the use of the proceeds and the company’s plans. Excluding the 26 percent of shares held by NCC, his daughter and then executive director Si Yok Fong, who had given undertakings to vote for the disposal, only four percent of the shares held by other shareholders voted on the disposal. Importantly, the second largest shareholder who held 16 percent evidently did not vote. If full disclosures had been made by the company, the voting outcome could well have been different.
This seems to be a clear case for enforcement action. If regulators do not act, it would send the signal to other companies that they too can withhold material information from shareholders. A pro-investor market regulator might have acted to nullify the results of the EGM held on September 28 as soon as it became aware that material information was withheld from shareholders.
Questions have also been raised about many of the other disclosures made by the company, such as the status of its then manufacturing activities; trademarks; discrepancies between asset values reported to SGX and in the accounts of Wayco Manufacturing (the haircare company bought in December 2017); profitability of Wayco; and the circumstances surrounding the appointment of the new board. Yet, SGX seems to have accepted the company’s disclosures and explanations without any detailed probing – even when these disclosures contradicted each other. It is a stretch to argue that many of DT’s announcements relating to concerns raised were “factual, clear and succinct” and “balanced and fair” as required under Appendix 7.1.
And how about the “inadvertent omissions” of Low Beng Tin (LBT) when he was appointed as chairman and failed to disclose regulatory actions and a petition for winding up in other companies where he was a director – and it emerged that those “inadvertent omissions” were also made in other companies where he was appointed as a director. One would have thought that this is a straightforward case which would trigger prompt regulatory action but there has been none – certainly not publicly (private sanctions have little deterrent value). Not surprisingly, DT has become a bit of a “role model”, with other companies citing “administrative oversight”, “inadvertent omissions”, “administrative inadvertences” and “honest mistake” when they have made similar or other incorrect disclosures which may have misled shareholders.
Shouldn’t the above instances be investigated for possible non-compliance with listing rules and relevant regulation?
Most of these disclosure issues were not covered in the compliance review conducted by Lee and Lee. I had also raised concerns about the disclosures and transactions surrounding DT’s investment in Goldprime, a subsidiary of Lian Beng Group (LBG). On June 1, 2018, SGX Regco sent further queries to Lee and Lee about this investment and a further review relating to the acquisition and disposal of the company’s interest in Goldprime was said to be undertaken by Lee and Lee. It has been nearly nine months of silence since then.
Placement and subsequent purchase of shares
In June 2015, DT placed out 65 million shares to LBG, equivalent to 9.9 percent of DT’s enlarged share capital, at $0.11235 per share or a discount of slightly less than 10 percent. After a 3-for-1 share consolidation in November 2015, LBG held 21,666,667 shares. The adjusted placement price was therefore $0.337 per share (or $0.331 if adjusted for a dividend that was paid shortly after the placement). DT’s share price declined substantially in the year following the placement. LBG bought another 1,185,700 shares at various prices between March and July 2016.
At the time of the placement, DT announced that it had complied with rule 812 of the SGX Rulebook that the shares were not placed to a director or substantial shareholder.
On July 21, 2016, LBG sold its entire 10.43 percent stake in DT to NCC at $0.332 per share, very close to the adjusted placement price just over a year earlier. By that time, DT’s share price had declined to $0.209 per share. NCC paid a 58.8 percent premium for the shares.
Shouldn’t the regulators investigate whether rule 812 was complied with under such circumstances, even if the placement shares were sold to the director just over a year later? What is to stop companies from placing shares to third parties with the understanding that they will later be sold to their directors or substantial shareholders?
Access to material non-public information
It is quite clear that certain individuals were privy to information about the fate of the company’s digital storage business and the acquisition of Wayco before this information was publicly disclosed. This naturally leads to the question as to whether some individuals traded on material non-public information.
According to the Brokers Desk, seven shareholders (one whose identity is unknown) sold their shares through married trades to Ng Siew Hong (NSH) when she acquired her 29 percent stake. Based on the lists of top 20 shareholders in the company’s annual reports between FY2015 and FY2017, three of these shareholders increased their stakes sometime between September 2015 and October 2016, and again between October 2016 and October 2017. NCC had of course bought LBG’s stake during this period. Two of these seven shareholders maintained their stakes over this period.
LBT, who was later appointed chairman, also increased his stake from zero as at July 21, 2016 to 979,066 shares as at October 2017, before selling more than 700,000 of those shares to NSH.
One other shareholder also increased its stake over these two periods. This shareholder did not sell its stake to NSH. It held exactly one percent of the shares and if it had sold its shares to NSH, NSH would have hit the 30 percent threshold for a mandatory general offer.
It would seem that regulators should look into whether there were any parties who traded on non-public information. In addition, perhaps the Securities Industry Council should more actively investigate the possible existence of concert parties, especially when a new shareholder acquires shares amounting to just below the 30 percent threshold.
Directors’ duties
Regulators should review whether directors who were on the DT board at various times exercised reasonable diligence in ensuring that the company complied with the relevant rules, including rules governing continuous disclosure of information and false or misleading statements. They should also review whether any directors allowed their personal interests to undermine their duty to act in the best interest of the company.
The actions of the four directors who were appointed to the DT board on December 11, 2017 and bought Wayco the next day for $3.43 million should be subjected to particularly close scrutiny. When they were questioned about the high price-to-earnings ratio for the acquisition, they cited the value of the three properties that were included in the acquisition, even though the valuation of those properties were undertaken by valuers engaged and paid by the vendor. When questioned about the lack of proper due diligence, they cited the buyback undertaking. When they were asked whether the buyback undertaking was enforceable, they evaded the question. As many have suspected, Wayco turned out to be a lemon and the buyback undertaking unenforceable. The directors then resigned and were presumably paid fees for their “contributions”.
Less than eight months after the acquisition, the entire goodwill of $1.14 million of the acquisition was written off. The company will now take a haircut of 7.5 percent of the acquisition price to sell back Wayco. It would already have incurred a considerable sum for the fees paid to Ernst & Young (EY) for the strategic review on the haircare business and financial and tax due diligence for Wayco and to Lee & Lee for the compliance review, and increased audit fees because of issues raised about Wayco.
Are our regulators even remotely interested in holding directors accountable for discharging their duties? Do the actions of these directors now provide the benchmark for assessing discharge of director duties?
Regulators should seriously consider incorporating directors’ duties into the listing rules and/or securities laws, to broaden the range of sanctions that can be imposed and to extend these duties to directors of companies incorporated outside of Singapore.
While regulators must ratchet up their enforcement actions, the reality is that such actions would rarely help investors recover their losses or even help prevent further destruction of shareholder value. As the DT case shows, minority shareholders – nearly 9,000 of them – don’t stand a chance. If regulators don’t hold those responsible accountable, it would just rub salt into the wound.
On March 14, the company will convene an EGM for shareholders to vote on seven resolutions including the proposed disposal of Wayco and the proposed purchase of a hotel. Minority shareholders may have escaped a bad $3.4 million haircut, but they should now be wary about being haunted by a $42.7 million hotel in Seoul.
