C.K. Tang failed to delist the company until the third attempt in 2009.
Many shareholders were upset with the management, accusing the latter of diluting shareholdings through employee stock options to facilitate delisting.
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The management was holding close to 90 percent of the company and offered a delisting price of $0.83. To many it was seen as a low ball offer considering the fair value of $0.93.
The company went ahead with the delisting and subsequently offered an exit for the remaining shareholders at $1.30, two years later.
Delisting at a low offer price relative to valuation is one of the most common ways of taking advantage of the minority shareholders and C.K. Tang was among one of the handful in history.
One might question the existence of shareholders’ rights.
From the Shareholders’ Angle
I think it is not difficult to think from the perspective of a shareholder since most of us have been one.
We talk a lot about investing in companies that have good management, who would act in the interest of shareholders.
It is easy to say we invest in good management, but it is very difficult to assess one.
Does someone with no bad record constitute good management? It is not fool proof because we have people like Bernie Madoff who had good track record and reputation but ended up as fraud too.
It is difficult to know ex ante but obvious ex post.
Shareholders seem to assume the management is on the same boat as themselves, and acting in concert for each other’s benefits. But reality could not be further from the truth.
From the Management’s Angle
Now, let’s have a little fun with our imagination.
Imagine you are an executive director running a listed company in Singapore.
You worked hard the entire year but the market was not kind to your business and your efforts could only result in a loss for the company.
The AGM is around the corner and you have to respond to shareholders’ questions.
One of them questioned your receipt of the pay package since the company did not perform. The company has made a loss and there was no dividends. Shareholders were not rewarded for investing in the company and were upset about it.
You probably thought, “I navigated the company and stressed over the viability of the business while the shareholders carried on with their lives. They were not involved in the business and now expected me to answer for my actions. It was a difficult year but they will never understand what I have went through.”
As a director, most likely you would reply in politically correct answers and dismiss shareholders’ concerns. You would also think that it is just a day of the whole year that you need to go through this AGM. Let’s get over and done with.
What’s the value of shareholders to you?
The Premise of A Public Company
If conflict of interests exist between the management and shareholders, why do companies seek to go listing in the first place? We will need to go through the life cycle of a company to understand the agenda.
Let’s say you had inherited a recipe to sell lemonade and you have a crazy passion for making the best lemonade in the world.
You made lemonades for parties and your friends loved it. This social praise propelled you to start a business to sell lemonades.
You raised some money from your family and friends as your initial capital. You have made them shareholders. They are not going to interfere with your business and happy to let you make all the decisions. The monetary support was as much as a moral support for you.
Your business did well and oh boy, the customers really loved the lemonades. You grew into 5 stores within the first year by borrowing some capital from the bank.
Although the business was prosperous, it wasn’t enough to fulfill your dream – to serve the best lemonades to the world. You realised that you need to invest in a franchise system to grow faster, and also a factory to produce the lemonades at a much faster pace. No bank was willing to lend you this amount of money because it was too risky.
So you seek an alternative source, that is to list the company and raise money for your business expansion.
You hired an investment bank to underwrite the Initial Public Offering (IPO). The deal was smooth and you have raised the capital you have seek. Your business expanded as plan and within 10 years your lemonades were sold worldwide.
Your company is a giant now. Many shareholders come and go, including some of your friends and relatives who supported you early in the business.
You do not know the shareholders. They are all strangers to you. You do not know how long they have been with you. You could not separate the long time supporters from the traders who just want to profit off a slight increase in your company’s share price.
Despite the strange relationship, you have to serve them because they are your shareholders. You do not actually need them anymore. You needed them most during the start up and IPO. Regardless, they are here to share your wealth and your success.
What have the new shareholders done to deserve the reward?
One may argued that the company could still raise money through rights issue from shareholders. But the interesting fact is that “[n]et issuance of corporate equity in the U.S. over the past decade has been negative $287 billion, according to the Federal Reserve“. Listed companies are not raising money by selling shares in general.
Shareholders seem to have little value to listed companies.
The problem I have described above is known as the Principal-Agent Problem, where the agent (management) is expected to act in the interest of the principal (shareholders).
The irony is that the agent would tend to act in his own interests more than anything else. The conflict of interest thus arose.
This problem is prevalent in corporate finance because shareholders do not really have the power they assumed to have.
Shareholders are dispersed
Most shareholders are passive in nature and do not want to interfere in the running of the company. They just want to grow their money while they focus on their careers. Shareholders are more likely to be strangers with one another and unlikely to act in concert.
Shareholders also have differing attitudes and expectations toward the company. They would not collectively come together to consolidate their power to vote against unfavourable actions by the management.
Most shareholders do not even attend AGMs. Only a small number do. Shareholders, though legal owners of the company, do not have much voting power as a result.
The management knows that shareholders are powerless and the former can exploit if they want to.
Ideals Require Enforcement To Become Reality
Ideals require enforcement. I do not see any effective enforcement of shareholders’ interests. It solely remains an ideal. An Utopia.
The closest thing we have ever seen as enforcement is shareholder activism. This is a common sight in U.S. with activists like Carl Icahn, Bill Ackman and David Einhorn pressuring management act in favour of shareholders.
We have not seen a credible shareholder activist in Asia, lest to say in Singapore.
The possible reasons for the rarity are both cost and culture. It is expensive to mount a takeover. It is also a culture of harmony which Asians tend to preserve.
Without activism, upholding shareholder rights remains a dream.
I agree that capital intensive businesses that have to own and operate infrastructure should be listed. REITs which have to own properties, and telecommunication companies that have to own satellites are good examples. Many companies which remains profitable but have no growth plans to require shareholders’ funds should delist and stay private.
As shareholders, we should not expect the management to take care of us or think in our shoes. Stop naively believing that management are here to serve shareholders because there are agendas that ranked higher than shareholders’ interests. The world does not revolve around the shareholders. We were made to believe that.
Therefore, it is a privilege, not an entitlement, for the management to uphold the morals of taking care of shareholders’ interests.
Next time do not get too upset if the management act against shareholders. They are designed to.