It doesn't add up
The privatisation saga of PCCW in 2009 stirred up a huge debate, prompting many to focus on the Companies Ordinance. The buyout attempt eventually collapsed but it highlighted the restrictions that one contentious provision has placed on privatisation deals.
Under this rule, shareholders who want to push ahead with privatisation not only have to secure over 75 per cent support from individual shareholders, they also need approval from over half of the shareholders attending a shareholders' meeting.
This so-called headcount rule has created a loophole whereby people could boost their chances of success by 'planting votes', which means splitting up the shares to create a bigger headcount. The majority required is based on the number of shareholders rather than the value of their shareholdings.
To address the problem, the government has, since 2006, launched five rounds of public consultation on a Companies Bill that seeks to update the law. During the review of the headcount rule, the government collected 164 submissions from business groups that represent listed companies, professional bodies, business chambers, and both the barristers' and solicitors' associations. All vehemently opposed the rule.
Despite such strong opposition, the government retained the rule in the bill, gazetting it two weeks ago and tabling it for a first reading at the Legislative Council on Wednesday. It believes the rule is vital in protecting the interests of small investors. As a result, the administration only proposed to add a provision that would empower the court to overturn a ballot result based on the headcount when needed, in a bid to prevent manipulation.
The bill is expected to be cleared before the term of the current legislature ends next year. And, after the drafting of further subsidiary legislation, the new law could be implemented in 2014.
The official in charge, Secretary for Financial Services and the Treasury Chan Ka-keung, has failed to provide a convincing argument to support the bill. The case has once again proved that government consultation exercises are nothing more than political gestures to placate the public.
If we examine the PCCW case, we can see that the headcount rule is totally outdated; not only will it not protect the interests of small shareholders, it will create undesirable hurdles for any privatisation exercise. It will block genuine deals that may help benefit small shareholders and create opportunities for abuse.
This rule is a double-edged sword; it could harm all parties concerned if not managed properly. The practice of vote-rigging based on the headcount rule is morally unacceptable, even though it is not illegal. Its existence could seriously damage the long-term development of listed companies in Hong Kong and our securities and futures sector.
In this major overhaul of the legislation, Chan has tried to enhance corporate governance to make the regulatory regime more effective and business-friendly by, for instance, maintaining the current rule on the 'blackout' period that restricts stock-trading leading up to a results announcement, and the disclosure of price-sensitive information.
Chan also has little choice but to follow the views of the Securities and Futures Commission and the powerful Hong Kong Association of Banks and keep the headcount rule. But, still, he has no leg to stand on with the defence that the rule can safeguard small shareholders. In this electronic age, there are really no minority shareholders any more because 90 per cent of shares, big and small, are registered and held by a centralised share registry. Sometimes, voting is done in bulk without even having to inform the individual shareholders.
Chan should be reminded that his job is to strengthen the city's financial infrastructure and reinforce our position as an international financial centre. He must act as a strong gatekeeper and should never back down, even when he is up against powerful forces. He should show us that he can really do his job before his term expires next year.
Albert Cheng King-hon is a political commentator