Li Ka-shing's New Captive Trust
Singapore prides itself on high standards of corporate governance. But one aspect of its securities laws is being used by Hong Kong mogul Li Ka-shing to find a new way of doing what he does best – promoting his holding company's interests at the expense of downstream companies and outside shareholders.
His Hutchison Whampoa Ltd (HWL) group is to spin off a big chunk of its huge global ports business into a separately listed outfit to be based and quoted in Singapore, not Hong Kong.
Does Hong Kong's richest man really love Singapore so much that he wants to give its stock market a boost to the apparent detriment in Hong Kong? It seems unlikely, even though Li has big property interests there as elsewhere. Indeed, the Port of Singapore Authority is global rival to Hutchison, at least in theory although they have some cross shareholdings and joint ventures including its main ports operating vehicles Hutchison Port Holdings and Hutchison Port Investment. Nor is Li just returning a favor to a Singapore government which owns PSA through state holding company Temasek.
The overriding reason for the Singapore listing is that Singapore law makes provision for a so-called Business Trust. This is not possible in Hong Kong. In this case Hutchison's port interests in southern China are being put into Hutchison Port Holdings Trust of which the trustee will be a subsidiary of HWL. The trustee can only be removed by a vote of 75 percent of the shareholders which effectively means that the trust is a permanent captive of HWL. It can maintain this control with just 25 percent of the HPH shares. Thus godfather Li is going to be able to raise several billion dollars by selling off a majority stake while retaining effective control. That would be impossible if HPH was a company not a trust. There may also be some Singapore tax benefits from the trust status.
The trust concept is thus an even better way for Li to enlarge his empire without having to increase his own stake than the existing pyramid structure and cross holdings by which his 42 percent owned Cheung Kong Holdings controls listed 49 percent owned HWL which controls CK Infrastructure which controls HK Electric (38 percent).
In the short run this listing may benefit HWL shareholders by providing a heap of cash to offset the continued losses of Hutchison's international telephone operations. But prospective investors should beware of Li's ability to manipulate the group's ownership structure to the best advantage of his interests, primarily represented by his Cheung Kong stake.
The HPH deal has led to some anguish in Hong Kong that the city is losing out to Singapore by not having a similar law enabling the creation and listing of business trusts. Singapore introduced the concept in 2004. However this is clearly the last thing Hong Kong needs if businesses are able to use it to make a mockery of corporate and securities laws designed to protect investors, be they majority or minority, from abusive behavior by controlling parties.
The trust concept can work if the trustees are genuinely independent and look after the interests of shareholders not sponsors. But they are open to easy abuse in Hong Kong, where they have been created not be independent promoters but, in the case of Real Estate Investment Trusts (REITs) used by property companies, to attract yet more money into the property sector and into which they can dump otherwise unwanted assets. REITS have not been a great success in Hong Kong partly because, unlike many jurisdictions, they offer no tax benefits and partly because investors have learned to be skeptical of REITs controlled by developers. They generally trade at substantial discounts to their net asset value. (Asia Sentinel March 30 2008).
Given the extent to which Hong Kong investors are regularly exploited by companies shuffling assets between public and private entities and by a Securities and Futures Commission which enjoys little support from the administration, the last thing Hong Kong needs is a new way for insiders to exploit outside investors as offered by Singapore-style business trusts.