By Mak Yuen Teen

On November 10, 2020, Quarz Capital and Black Crane Capital, which advise entities that collectively hold more than 11% of Sabana REIT’s units, gave notice to the Sabana REIT manager to convene an EGM for Sabana REIT unitholders to consider passing five resolutions.

Mr Donald Han, the CEO of the manager, was quoted in a Business Times report on November 12 that the letter requisitioning the EGM is being taken seriously and that it was seeking advice from its advisers. Regarding the highly contentious re-designation of Ms Ng Shin Ein from non-independent to independent director, Mr Han “reiterated that her independence has been ‘thoroughly evaluated’.”

The notice requisitioning the EGM was given pursuant to Para 4.1(b) of Appendix 6 of the Code on Collective Investment Schemes (CCIS) which reads as follows: “a general meeting may be convened at the request in writing of not less than 50 participants or participants representing not less than 10% of the issued units in the property fund.”

Para 4.2 of the CCIS states: “In the convening and conduct of general meetings, regard should be had where appropriate to the relevant provisions of the Companies Act (Cap. 50) and principles in the Code of Corporate Governance 2012.” Section 176 of the Companies Act states that on receiving such a requisition, the directors shall “immediately proceed duly to convene an extraordinary general meeting of the company to be held as soon as practicable but in any case not later than 2 months after the receipt by the company of the requisition”.

Meanwhile, the manager is convening an EGM to approve proposed amendments to the Sabana trust deed for the proposed merger with ESR-REIT on December 4 at 2 pm, followed 30 minutes later by the scheme meeting to approve the merger.

The requisitionists face at least two potential challenges. First, the directors of Sabana REIT manager may decide not to convene the EGM on the grounds that the proposed resolutions are not valid resolutions, giving the reason that the resolutions deal with matters that are not under the purview of unitholders. Second, by the time the EGM they requisitioned is convened, the scheme meeting would almost certainly already have taken place (barring any regulatory intervention).

The first two resolutions are seeking greater transparency about: (1) the circumstances surrounding Ms Ng’s re-designation and any other relationships, arrangements or payments between her and ESR Cayman (the controlling shareholder of the managers of both ESR REIT and Sabana REIT); and (2) the circumstances surrounding the hiring of three ex-ESR employees at Sabana REIT manager.

I had on September 22 posted an article “Sabana REIT: Independent Overnight?” on this website questioning the re-designation of Ms Ng. On October 5, the Sabana REIT manager published a six-page response to my article justifying the re-designation. On October 27, I published an article “Trust Us, We are Really Independent” on this website, with a shorter version in the Business Times. The longer version responded point-by-point to the justifications provided by the manager. I said: “…the response does not address the perception that she (Ms Ng) may be or feel obliged to support the current controlling shareholder of the manager especially as there were no details about the sale price and how it was determined, which I had raised.” I also asked: “Was she appointed with a view to supporting a certain strategy, which would raise questions about her independence?”

Those questions were based on my review of public information relating to Ms Ng’s history with the Sabana REIT manager, including her earlier service on the board from November 2010 to May 2017; the sale of her 4.5% indirect stake to a wholly-owned subsidiary of ESR Cayman; her return to the board in August 2019; and her re-designation to independent director in November 2019. I did not receive any information from the requisitionists or any other sources when I wrote those articles. To me, they are natural questions to ask if a director has sold his or her stake to a controlling shareholder, and is then involved in a corporate action involving the controlling shareholder.

The questions about Ms Ng’s independence have not in my view being satisfactorily addressed even if the CEO of the manager claims that it has been “thoroughly evaluated”. In fact, the “addendum” published on September 21, more than five months after the release of the annual report on April 7 and nearly seven months after the date of the report of February 28, should rightly be called an “erratum” because the disclosures about Ms Ng were simply wrong.

In the annual report, under “Board Composition and Guidance”, it said:

“The Board currently consists of four Independent Non-Executive Directors , that is, they have no relationship with the Manager, its related companies, its substantial shareholders, or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the Director’s independent business judgment with a view to the best interest of the REIT, and they are able to exercise objective judgment on corporate affairs independently from the management and its substantial shareholders. Furthermore, the Independent Directors are considered independent for the financial year under review under the Securities and Futures (Licensing and Conduct of Business) Regulations because they are not substantial shareholders of the Manager and are not substantial Unitholders of the REIT, they do not have management or business relationships with the Manager and its related companies as well as the REIT and its subsidiaries and they are independent from the substantial shareholder of the Manager and substantial Unitholders of the REIT…” (emphasis mine).

The September 21 addendum no longer said that all the independent directors do not have business relationships and that they are all independent from every substantial shareholder of the Manager and every substantial unitholder of the REIT.  It now said that Ms Ng is not considered independent in accordance with these provisions of the regulations. However, the NC and the board have deemed her to be independent nevertheless.

The fact that the addendum was issued after the annual report – and so long after – clearly raises questions as to whether all the information relevant to determining Ms Ng’s independence was disclosed by the time when she was re-designated. If they were not, then the NC and the board would have re-designated her without adequate information. It cannot be acceptable to rely on disclosures made after the re-designation to justify the re-designation, in the same way that it is not acceptable to undertake a corporate action before the board has received the necessary information, properly considered the information and passed a board resolution.

I view Resolution 1(A) proposed by the requisitionists in this light. It is important to know if the necessary disclosures were made before Ms Ng was re-designated. The additional information sought may also cast further light on Ms Ng’s independence.

Resolution 1(B) questions whether the board simply relied on Ms Ng’s declaration or disclosures at face value or whether it made its own independent enquiries and investigations. This goes to the robustness of the process used by the board to deem Ms Ng as independent. The board should not be solely reliant on what a director discloses in determining independence.

However, Resolutions 1 and 2 in my view raise questions beyond the independence of Ms Ng and her re-designation. They also raise questions about the conduct of the various parties involved. The answers can either absolve these parties, or taint their conduct and the proposed merger.

For example, Resolution 1(C) asks about the date, price and valuation of various transactions involving ESR Cayman, Blackwood Investment Pte Ltd (which owned a 45% stake in Sabana REIT manager) and Ms Ng, and  whether Ms Ng received any other payments. If she sold her stake at a higher price or received other payments, then it raises the question as to why. Resolution 1(D) asks whether the board is aware of whether Ms Ng had played a role in the sale of the remaining 90% stake of Blackwood to ESR Cayman. The answers to 1(C) and 1(D) are relevant to my point about perception regarding whether Ms Ng may be or feel obliged to support the current controlling shareholder of the manager or to support a certain strategy, such as the merger.

One way or another, answers supported by evidence should be forthcoming. If the manager takes a technical position and refuses to disclose the information to unitholders, regulators should still make their own enquiries into the matters raised.

Coming on the heels of the Eagle Hospitality Trust (EHT) debacle, regulators must send a clear message that they expect the highest standards of corporate governance and transparency in the sector and that they will not hesitate to take action to protect the interests of unitholders – even if we are not talking about a total meltdown as we are witnessing at EHT here.