By Mak Yuen Teen

Between March 2, 2017 and August 6, 2018, Spackman Entertainment Group Limited (SEGL) announced five share swap transactions with shareholders of its HK associate company, Spackman Media Group Limited (SMGL). Through these transactions, SEGL increased its stake in SMGL from 27.4% to 43.88% at US$3 per share. These transactions are summarised in my recent post “Spackman Entertainment Not Thrilling for Shareholders” on August 22 which can be found here (https://governanceforstakeholders.com/2020/08/22/spackman-entertainment-not-thrilling-for-shareholders/).

The article also explains how SMGL became an associate of SEGL in the first place – through a share swap transaction with then newly-incorporated SMGL, whereby SEGL’s stake in Spackman Media Group Private Limited (SMGPL) was swapped for its initial 24.53% stake in SMGL.

At the time of these transactions, I had raised questions as part of another article I posted on June 11, 2018, called “Query System Needs to be Reviewed”, which can be found here: (https://governanceforstakeholders.com/2018/06/11/query-system-needs-to-be_reviewed/)

Under my supervision, my students also wrote a case study, and an abridged version was published in Volume 8 of the annual Corporate Governance Case Studies publication by CPA Australia, which I edited. The abridged case study can be found here: (https://governanceforstakeholders.com/2020/08/18/spackman-entertainment-case-study/)

On August 18, SEGL announced that it had signed a non-binding MOU to sell its entire 43.88% stake in SMGL to its substantial shareholder, Spackman Equities Group Inc (SQG), listed on the TSX Venture Exchange in Canada. The proposed price is to be no less than KRW2,000 or S$2.30 per share, and is to be finalised. The proposed price is a far cry from the US$3 per share SEGL paid to increase its stake in SMGL. Further, SQG looks to be a company in trouble.

Using public information on SMGL obtained from public company records in Hong Kong, and US court records available online, I was able to establish the third parties who were involved in the five share swap transactions in 2017 and 2018.

  • Share swap 1: On March 2, 2017, SEGL announced that it would acquire an additional 1 million shares or 3.27% stake in SMGL at US$3 per share, bringing its stake from 24.53% to 27.8%, through an issue of 26,161,491 SEGL shares (or 6.56% of the issued shares prior to the transaction). The third parties were described as “certain existing shareholders” of SMGL, and the company said none of the directors or controlling shareholders of SEGL has any direct or indirect interest in the proposed acquisition of SMGL shares, or are related to SMGL. The share swap was completed on March 20, 2017. SGX did not query who the “certain existing shareholders” were.

SMGL’s records show that on August 18, 2017, one million SMGL shares were acquired by SEGL. The three shareholders who sold their stakes were Lian Sheng (Gold Dragon Edition) Asset Management Ltd, a BVI-incorporated entity; an individual with a registered address in Singapore; and another BVI-incorporated company called DVG Limited. Interestingly, the one million shares were recorded as being transacted at HK$1 each, not US$3.

A BVI court-ordered document included a sworn affidavit dated February 2019 available online from court records shows that the last beneficial owner of DVG was a Mr Jae Seung Kim. Another affidavit by Mr Charles Choi Spackman in May 2019 also available online states that Mr Jae is Mr Spackman’s brother-in-law, by virtue of Mr Spackman’s marriage to Mr Jae’s sister, Ms So Hee Kim.

Mr Spackman is of course the founder of SEGL and was its executive chairman until his resignation on December 19, 2017. Was the announcement about absence of direct or indirect interest accurate?

Why were all those shares recorded as been transferred at HK$1 each, when SEGL announced that it was US$3 each?

HK company records also show that on August 18, 2017, DVG transferred 200,000 SMGL shares to Singapore-incorporated Constellation Agency Pte Ltd and another 30,000 SMGL shares to an individual in Korea, all at just HK$1 per share.

On December 22, 2017, SEGL announced that it was acquiring 100% of Constellation Agency for S$16.6 million through the issue of 144.8 million SEGL shares, equivalent to 28.09% of SEGL’s total issued share capital as of the date of the announcement. The interest of Constellation Agency in SMGL was not disclosed.

  • Share swap 2: On October 11, 2017, SEGL announced another share swap for 900,000 SMGL shares at US$3 each, with SEGL issuing 28,451,000 shares or 6.14% in exchange. Again, the sale and purchase agreement (SPA) was said to be with “certain existing shareholders” of SMGL. Interestingly, the company said that this would increase its SMGL stake from 26.17% to 29.12% even though the earlier transaction was to have increased its SMGL stake to 27.8%.

This was because on the same day that SEGL acquired the one million shares in the first share swap – i.e., August 18, 2017 – SEGL transferred 497,250 of those shares to a Korean individual named Mr Kim Junyoung at HK$1 each. The number of shares was exactly the difference between 27.8% and 26.17%. Why this was done and at HK$1 is not clear, and there was no announcement by SEGL about it.

The SMGL shareholders who swapped their shares with SEGL in this second transaction were DVG (500,000 shares), and four individuals with registered addresses in Hong Kong, Macau, PRC and US who each swapped 100,000 shares, all at US$3 each.  These were recorded in the HK records on November 21, 2017.

That same day, BVI-incorporated GD Enterprise also transferred four million SMGL shares at US$1 each to another BVI-incorporated company called Azur Investissement Ltd.  Publicly available court records online show Mr Jae Seung Kim as the last beneficial owner of GD and the sole director and shareholder of Azur.

Note that throughout the first two transactions, Mr Spackman was SEGL’s executive chairman.

  • Share swap 3: On December 22, 2017, SEGL announced a third share swap to increase its stake in SMGL from 29.12% to 32.13% by acquiring 920,000 SMGL shares for US$3 each. SEGL was to issue 32,432,432 shares, equivalent to 6.29% of all SEGL shares as at the date of the announcement. Again, the share swap was said to be with “certain existing shareholders” and there was the same statement about no director or controlling shareholder having any direct or indirect interest in the transaction.

SMGL’s records show that on January 2, 2018, 920,000 shares were transferred from DVG to SEGL at US$3 per share. That same day, GD transferred another 300,000 SMGL shares at US$3 each to Constellation Agency.

Before the fourth share swap transaction described below, on February 22, 2018, GD transferred 3,503,850 SMGL shares to BVI-incorporated Trinity Capital Advisors Ltd at HK$1 per share. DVG also transferred 383,333 SMGL shares to Trinity at HK$1 per share and 250,000 SMGL shares to BVI-incorporated Zymmetry Investments Ltd.

Public court records show that Mr Jae Seung Kim is a director of Trinity, while his wife and Mr Charles Spackman’s sister, Ms So Hee Kim, is the sole beneficiary shareholder.

By this time, Mr Charles Spackman had stepped off the board. Mr Anthony Wong Wei Kit, an independent director, was re-designated as independent chairman. On January 18, 2018, 43 year-old Mr Richard Lee, who was the head of business development of SEGL, was appointed as interim CEO and executive director of SEGL. On February 20, 2019, he was re-designated to non-executive director. He was also – and remains as – chairman and interim CEO of Spackman Equities Group (SQG) and executive director of SMGL.

  • Share swap 4: On May 22, 2018, SEGL announced its fourth share swap transaction. This time, it was for 2.3 million SMGL shares at US$3 each, equivalent to 7.52% interest in SMGL. A total of 101,607,865 new SEGL shares were issued. Again, it was said to be with “certain existing shareholders” but this time, added that they were “unrelated third parties”.

The transaction was to increase SEGL’s stake from 33.76% to 41.28%. The previous transaction had increased the stake to 32.13%.The difference of 1.63% is equivalent to 500,000 SMGL shares held by Constellation Agency which was acquired by SEGL.

SMGL’s records show 2.3 million SMGL shares were transferred on June 14, 2018 from five SMGL shareholders – Azur (825,000 shares), Trinity (825,000 shares), Zymmetry (250,000 shares), and two Singaporeans by the name of Ms Leong Lai Yee and Mr Soo Kee Wee. The first two are of course owned by Mr Spackman’s sister and brother-in-law. It is unclear who owns Zymmetry but Zymmetry had just three months earlier acquired the 250,000 SMGL shares from DVG for just HK$1 each.

Ms Leong and Mr Soo were shareholders of SMGL from the beginning. SMGL’s records show that Ms Leong received 1.5 million SMGL shares and Mr Soo 375,000 SMGL shares on December 1, 2015 as part of a share swap agreement. It would appear that they were shareholders of Spackman Media Group Pte Ltd (SMGPL), which was a partly-owned owned subsidiary of SEGL after SEGL divested some of its shares, and then swapped their shares of SMGPL with SMGL to acquire their initial interest in SMGL.

On June 6, 2018, SEGL responded to SGX’s queries about this fourth share swap transaction. It was the first time that SGX had queried these transactions.

  • Share swap 5: On August 6, 2018, SEGL announced the last of the share swap transactions for SMGL shares. This time, it was for 1,345,288 shares again at US$3 each, increasing its stake from 41.28% to 43.88%. A total of 94,634,034 shares were issued in exchange. The announcement again mentioned that the vendors of the SMGL shares as “certain existing shareholders” of SMGL and “unrelated third parties”.

SMGL’s records show four transfers involving a total 1,345,288 shares at US$3 each on September 7, 2018 from the following: Singapore-incorporated ICH Gemini Asia Growth Fund Pte Ltd (583,288 shares); Trinity (550,000 shares), BVI-incorporated Yellow Pearl Investment Holdings Ltd (35,333 shares) and a Singapore-based individual (176,667 shares).

SGX issued another set of queries on August 23, 2018, including asking SEGL to tabulate the series of transactions relating to the acquisition of stakes in SMGL and the corresponding SMGL vendors in each transaction.

The company only disclosed the number of vendors for the four share swaps over the last 12 months and declined to disclose the identities of the vendors “due to confidentiality reasons”. It is surprising that SGX accepted such a reason as the identities of the vendors are a matter of public record in HK and from public court filings. Through court documents, I have also been able to show certain relationships involving these vendors.

Before SEGL started its series of share swap transactions for SMGL shares, there were numerous transactions, the vast majority involving DVG and GD transferring shares to individuals and entities. According to publicly available SMGL records, most of these transactions were at less than US$3 per share, with many at HK$1 each.

Public court records available online show that on March 4, 2019, the BVI Commercial Court issued a worldwide injunction against Azur, Trinity, DVG and GD. Mr Jae Seung Kim is listed in the public court records as the sole beneficial owner of Azur, DVG and GD, while Ms So Hee Kim is listed as the sole beneficial owner of Trinity. Mr Charles Spackman is listed as the presumed beneficial owner for all four companies.

The injunction covers disposing of or dealing in any shares in SMGL. However, Azur and Trinity appear to have breached the injunction as public records show that they together sold 5,753,968 shares to HK-incorporated Plutoray Pte Ltd for HK$1 per share on April 24, 2019. These records also show that a few months later, all the shares were transferred to Cayman-incorporated Republic Park Productions for HK$1 each.

In addition to the above share swaps, SEGL has also undertaken several placements. Even though SEGL disclosed that the subscribers are unrelated to the company, this may not be the case. For example, as I pointed out in my August 22 article, on May 27, 2020, SEGL announced a proposed placement of more than 743 million shares which represented 38.7% of the enlarged share capital. The company disclosed the identity of 11 subscribers and said they currently do not have any connections or relationships (including business relationships) with the Group, any of the Directors and/or substantial shareholders of the Company, save for two corporate subscribers who are current shareholders of SEGL.

However, an annual return dated October 13, 2019 for SMGL obtained from the HK Companies Registry shows that two of the individuals who are subscribers, Ms Leong Lai Yee and Mr Soo Kee Wee, are still listed as shareholders of SMGL. So was the statement by the company accurate?

I believe there is a need to review the share swap and placement transactions of SEGL over the last few years to determine if the letter and spirit of the rules have been complied with. Regulators should also look into whether the directors and continuing sponsors have discharged their responsibilities in reviewing and overseeing the transactions and disclosures.

This case shows the deficiencies in our regulatory oversight of companies. Until regulators demand that companies are transparent with third parties they transact with, whether they are share swaps, placements, acquisitions or divestments, minority investors are at the mercy of those in control. There are also other risks when offshore entities such as those incorporated in BVI and Cayman Islands are used – and from my experience, this is rather common for SGX-listed companies.