On March 31, we wrote to regulators, Bursa Malaysia Bhd and the Securities Commission, in response to two public consultation papers issued recently.

 

The first of these papers is on a proposed update of the guidelines on offer documentation in the Malaysian Code on Takeovers and Mergers 1998, while the second deals with suggested amendments to Bursa Malaysia’s listing requirements on privatising listed companies by disposal of assets.

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In all this, the issue that stands out like a sore thumb is the proposal that “shareholders who object to the asset disposal must not be more than 10% of the value of the shareholders present and voting either in person or by proxy at the general meeting.”

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Plainly, this means that one-tenth of all voting shareholders can object to such a disposal. The upshot of this proposal is that a very small number of investors could be given the power to block the disposal of a company’s assets.

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Take the example of Company A, which has an issued and paid-up capital of RM150mil and has 15,000 shareholders. Let’s assume only 1,500 members vote at the AGM/EGM and they collectively hold RM90mil of the outstanding shares of the company.

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As per the new proposal, a mere 10% of the RM90mil can veto the disposal of assets. This means the votes are based on the value of the shares that these voting shareholders represent, and not the total number of outstanding shares.

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If we adopt the regulators’ proposal of 10% of the value of shareholders voting at the AGM/EGM being able to halt asset disposals, it would take only 6% (RM9mil out of RM150mil) of the total shares outstanding of the company to stop a deal in the above example.

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This would be regardless of how much – or rather how few – shares these few investors own in the company.

 

Does this seem fair?

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We are quite baffled that the regulators would even consider granting such disruptive power to a minority. So we have run through various scenarios in which such power would not be in the interests of all company’s stakeholders, and come up with two key concerns on which the regulators must chew:

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1. How do we know how proxies are counted?

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2. Why are only voting shareholders counted?

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Let’s take each concern in turn. First, a quick scan of those who attend general meetings will tell you that there are few institutional shareholders among them. This is because such shareholders are constrained by the so-called two-proxy rule.

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Many companies in Malaysia still adhere to the rule in the Companies Act that a company has the right to appoint a maximum of two proxies to attend and vote in such meetings, unless the company’s articles of association state otherwise.

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This restriction in the number of proxies is a hitch for most institutional fund managers. So they engage custodian banks to represent and protect their interests in a company. This means the bank is registered as a member of the company, not the fund manager.

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However, because the details of the votes of general meetings are not usually published, we do not know how or if the proxies are counted. The only way to ensure that your vote is counted is to have your proxy attend the AGM in person. This, of course, comes back to the first issue, which is the current restrictive two-proxy rule.

 

Against this backdrop, perhaps the regulators should consider:

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●  mandating poll voting;

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●  requiring electronic voting systems; and

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●  reviewing the number of proxies allowed per securities account by an authorised nominee.

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We are also puzzled as to why the regulators would even consider such a rule when the Hong Kong bourse, which they seem to like to use as their benchmark, insists that such a veto be given only to those who hold at least 10% of issued shares in the company concerned.

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The veto is also based on the principle of one vote per share and not, as the Malaysian regulators suggest, on who votes at a general meeting.

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All told, the regulators’ initiative of having dialogue sessions with various participants in the capital market is a good move towards ensuring that everyone involved understands the dynamics specific to each participant.

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Clearly, every market has its own issues, just as every market proposal needs to be thought through thoroughly before it is tabled. Following what, say, Hong Kong “sort of does”, as someone put it, is a cut-and-paste approach that does not make for a successful policy change.

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For our part, we will work in principle to avoid any unnecessary risks to our clients, who are usually minority shareholders. So we would like to propose that the regulators adopt the global best practice of giving veto power only to those who hold at least 10% of outstanding shares in a company.