Richard Li Gets a Lesson In Singapore

Singapore doesn’t normally spring to mind when democracy is under discussion but in terms of democracy for shareholders the island state has something to teach its financial center rival Hong Kong. This was vividly illustrated when Singaporean authorities insisted on giving minority shareholders in Richard Li’s Singapore-listed Pacific Century Regional Developments the final say on Li’s plan to sell his controlling stake in PCCW, Hong Kong’s largest telecommunications company.

Meanwhile minority shareholders in the Hong Kong-based PCCW will not even be consulted on this increasingly complex deal because ways have been found of driving a coach and horses through Hong Kong’s lax takeover rules.

We’ll get back to the regulatory side of things in a moment but first let’s review the history of this saga where center stage is hogged by Richard Li, the second son of Li Ka-shing, Hong Kong’s most influential businessman. Since he created PCCW out of the colossus which used to be known as Hongkong Telecommunications (HKTel), Li Junior has presided over the most dramatic destruction of shareholder value on the local bourse.

At the height of the dotcom boom in 2000 Li bought a controlling interest in HKTel from Britain’s Cable & Wireless plc, which had been planning to sell it to Singapore Telecommunications but was thwarted by HKTel’s independent directors who scuppered the Singaporean offer by combining anti-foreign sentiment with the kind of fawning often seen towards the family headed by Li Ka-shing.

With the help of Francis Leung, Li Senior’s banker and consigliore in the investment world, Li Junior raised an impressive portfolio of loans to make the acquisition. These heavy borrowings were quickly shifted onto PCCW’s books and remain there to this day, helping to explain why the company, which once ranked at the top of the Hong Kong stock market’s capitalization list, now languishes somewhere around 50th.

Li Junior promised that the new PCCW would become Asia’s, if not the world’s, leading telecommunications player, creating synergies and innovative services all over the place. The reality was a series of failures in most of the company’s new ventures (aside from property development), mass layoffs of staff, fire-sale disposals of assets, an ever mounting debt burden and an even more rapidly shrinking share price.

At the beginning of this year Richard Li decided he wanted to do what a lot of rich kids do best – he wanted to quit. So he let it be known that he would sell, and two companies came forward with offers to buy. Both the Australian Macquarie Group and the US-based equity buyout specialists TPG-Newbridge put offers on the table but again the bogey of foreign ownership was raised, this time from PCCW’s second biggest shareholder, China Netcom, a partly-privatized Chinese state-controlled company.

Many people in Hong Kong had long believed that if Li junior ran into trouble Li Senior would step in to help him out. However, in July Li announced that he had shunned these two bids in favor of a lower one from a totally independent third party, namely a consortium led by Francis Leung. This immediately sparked speculation that yet again Leung was acting on behalf of his long term client Li Senior but Li Junior denied this was so. In a recent statement to Hong Kong legislators Richard insisted that he did not even know his father was involved in the deal and had he known he would have established an independent committee to examine the offer.

Meanwhile Leung rather more wisely refused to comment on Li Senior’s involvement when the deal was announced. The reason for his silence soon became apparent when it was revealed, thanks to Singaporean disclosure rules that do not apply in Hong Kong, that Li Senior had loaned him the money to make the deposit on the deal. Yet the fiction was maintained that Li senior’s involvement was only temporary because Leung promised to disclose the names of members of the consortium he had formed to make the acquisition.

On 12 November these names were finally revealed and to the surprise of practically no one it became apparent that the biggest participant in Leung’s consortium was Li Ka-shing, acting through his privately controlled Li Ka-shing Foundation. The foundation will, if the deal goes through, own 12 percent of PCCW, Leung will privately hold just 3 percent and Spain’s Telefonica will become an 8 percent shareholder. Richard Li, meanwhile, will retain a 3.8 percent share.

The big winner in this frantic shuffling of assets will be China Netcom, which will become the biggest PCCW shareholder even though it only owns 20 percent of the equity. Netcom already has an alliance and cross shareholdings with Telefonica which would bring their joint stake in the company up to 28 percent.

The upshot of all this is that minority shareholders, who still collectively own a majority of the shares, will see control of the company change hands without any kind of offer being made for their shares nor even any indication being given of the new owners’ intentions.

This lack of consultation with minority shareholders is made possible by the Hong Kong Takeovers Code, which stipulates that a general offer to shareholders is only required when a minimum of 30 percent of a company’s equity is acquired by a new owner. However there are provisions which prohibit parties acting in concert from obtaining 30 percent or more of the shares and not making a general offer to other shareholders.

The Hong Kong Securities and Futures Commission has determined that although Li and Leung may be acting in concert there is no evidence that they have been joined by China Netcom or Telefonica, thus there is no need to trigger the requirements of the Takeovers code. Considering that Leung has presented both Netcom and Telefonica as members of his consortium, it is extremely hard to understand how they can be understood not to be working in concert.

Moreover it is clear that Li Junior had plans for circumventing the code from the outset by telling interested parties that they should focus on buying PCCW’s telecoms assets while not buying the company itself. This would have left PCCW as an empty shell which could rapidly have been privatized. However this transparent device for leaving minority shareholders on the sidelines disintegrated when TPG-Newbridge and Macquarie were forced to abandon their bids. This, incidentally, raises the still unanswered question as to whether PCCW’s board fulfilled its statutory duty of care towards shareholders by accepting a lower offer from Leung when more was on the table from other parties.

In Singapore, Li Junior’s attempts to ignore minority shareholders in PCRD were brushed aside by the authorities, who saw clearly what he was up to in disposing of the company’s major asset, its holding in PCCW, and told him not only that he must put it to a vote but also that, as the company’s majority shareholder and a participant in a connected deal, he would have no right to take part in the ballot.

The Singaporean shareholders will gather for an EGM on November 30. At least they have a chance to express a view and protect their interests, no such choice is available in

Hong Kong.