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Corporate Governance Case Studies

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Dr.AshleyBurciaga,France,Researcher
Published Date:05-07-2017
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Corporate Governance Case Studies Edited by Mak Yuen TeenForeword Strong corporate governance and transparency are critical for business success. For investors, good governance is a good indicator of well- managed, resilient businesses. For companies, a measure of success is the ability to internalise the values, spirit and purpose behind governance rules. While the governance standards in Singapore have brought us to where we are today, we have some way to go if we want to be seen as leaders in this area. Regulators, directors, management, investors, industry groups and professional bodies all have a part to play. The collective efforts of all these stakeholders will be needed to sustain the drive to improve governance and support the government’s vision of positioning Singapore as a global financial centre. This inaugural collection of teaching case studies aims to raise awareness and promote thoughtful discussions on key corporate governance issues in companies across several markets, particularly in Asia. The authors have endeavoured to present the facts and issues based on publicly-available information covering matters such as the board, board committees, ownership structure, corporate governance rules and regulations, auditors and remuneration. Following each case study are discussion questions which we hope will facilitate a robust exchange of views to help lead efforts to advance corporate governance standards and best practices in Singapore. We would like to thank Associate Professor Mak Yuen Teen for supervising and editing the case studies produced by students of the NUS Business School. We trust you will find the cases a good starting point to study governance issues that may be relevant to your professional roles. Deborah Ong FCPA (Aust.) President – Singapore CPA Australia April 2012Preface In early 2010, I started coordinating and teaching the Corporate Governance and Ethics course at the NUS Business School. This is a compulsory third-level course for all students in the BBA (Accountancy) programme at the school. I thought that a great way for the students to learn is through case studies. Unfortunately, there are very few case studies in corporate governance, and even fewer which are Singapore- or Asian- focused. The lack of good Asian case studies in corporate governance has also been raised by practising directors and others involved in training programmes for directors. I therefore decided to incorporate a case writing component into the course by getting the students to form groups and write comprehensive cases as part of their course assessment. This publication contains the abridged versions of 18 of these cases. The cases are diverse in many ways. Eight of these cases involve companies listed in Singapore, including some foreign companies. Five involve other Asian companies in Hong Kong, India and Malaysia, while the remaining five involve non-Asian companies. However, this is a simplification as the cases often cross national boundaries. For example, there is a bribery case which involves a Singapore company and Apple in the US. The case on the failed merger between SGX and ASX is really an international case. The reason why I also included non-Asian cases is because, while there are differences in rules, regulations and norms and unique corporate governance issues in Asia, the international cases allow the learning of differences around the world and also a comparison with Singapore and Asia. In any case, with globalisation, executives, accountants and regulators will increasingly need to understand corporate governance from a more international perspective. The cases are also diverse in terms of issues raised. They illustrate that corporate governance is much more than about just rules and regulations or about legal duties and liabilities of directors. At the risk of simplification, four of the cases deal with mergers and acquisitions, two with privatisation, three with bribery, ethics and corporate responsibility, three with boardroom issues or conflicts, and five deal with corporate governance crises or scandals. However, each case inevitably touches on other issues, including regulatory frameworks; roles of directors, auditors, and regulators; executive and director compensation; shareholder activism; and so on. It should be noted that the cases are written for the purpose of generating discussion and are intended to be used for analysis. Therefore, they do not include analysis or interpretation of the situations. Teaching notes which include some analysis and interpretation have been prepared. These teaching notes are only available to the instructor or facilitator using the cases for teaching or training. I believe the abridged versions will be useful for qualifying and continuing education programmes for directors, CFOs, accountants, regulators and other professionals. Although the copyright for the cases resides with CPA Australia and me, it is not our intention to restrict the use of these cases or to profit from the copyright. Our general principle is that programmes which are commercial in nature should pay to use these cases so that funds can be generated to further this initiative or benefit charity. We would be open to free use of these cases in programmes which are non-commercial in nature, subject to permission being obtained from CPA Australia or me. Any surpluses generated from the publication of the cases will either be donated to charity or reinvested into this initiative. I would like to thank CPA Australia for its generous support of this project. I am also grateful to the students who helped in editing these cases and, of course, to the students who helped in preparing the initial cases. They are acknowledged in the first footnote of each case. I would also like to specifically mention the capable support provided by the project manager, Kellynn Khor, who is doing a BBA degree in finance at the NUS Business School and a Master of Public Policy degree at the Lee Kuan Yew School of Public Policy. I hope you will find this collection to be useful. Mak Yuen Teen, PhD, FCPA (Aust.) Associate Professor of Accounting NUS Business School National University of Singapore April 2012Content Singapore Cases C.K.Tang: The Fight towards Privatisation 6 In Deep Water: Boardroom Tussle at Asia Water Technology 17 Japan Land: The Setting Sun 27 JLJ Holdings Limited: Poisoned by Its Rotten Apple 37 Sino Environment: An S-Chip Scandal 48 The Battle for Parkway 56 The Failed SGX-ASX “Merger” 68 The Sour Apple: The Fall and Fall of New Lakeside 80 Asia Cases CITIC Pacific: Foreign Exchange Scandal 90 Dialling for Votes: The PCCW Privatisation Scandal 98 GOME: A Boardroom Fight from Prison 106 RINO: Reversing into Trouble 122 The Satyam Fiasco 131 The Sime Darby Financial Fiasco 142 World Cases Cadbury and Kraft: A Bittersweet Moment 152 Drilling into Disaster: BP in the Gulf of Mexico 162 HP: The Mark Hurd Saga 175 MicroHoo: The Attempted Takeover of Yahoo By Microsoft 184C.K.Tang: The Fight towards Privatisation C.K. Tang: The Fight towards Privatisation Case Overview In 2009, Tang Wee Sung, the majority shareholder of C.K. Tang Limited, along with his brother, Tang Wee Kit, finally succeeded in privatising the company after two failed attempts in 2003 and 2006. The major controversy surrounding the privatisation was the valuation of Tangs Plaza, a commercial property located in the prime shopping district of Orchard Road. Minority shareholders cited its undervaluation as the primary reason for rejecting the cash offer by the Tang brothers. The minority shareholders felt that the redevelopment potential of the property should have been taken into consideration. In 2011, the Tang brothers failed in their attempt to cancel out all remaining shares held by minority shareholders through a capital reduction exercise. The objective of this case is to allow a discussion of issues such as the divergence of interests between controlling and minority shareholders, the manifestation of this divergence in a privatisation situation, the different methods of privatisation which can be used and the extent to which they protect the interests of minority shareholders, and the role of the board, audit committee, independent financial adviser, regulator and shareholders in a privatisation. This is the abridged version of a case prepared by Chew Yi Ling, Goh Theng Hoon and Thomas Sim Joo Huat under the supervision of Professor Mak Yuen Teen. The case was developed from published sources solely for class discussion and is not intended to serve as illustrations of effective or ineffective management. Consequently, the interpretations and perspectives in this case are not necessarily those of the organisations named in the case, or any of their directors or employees. This abridged version was prepared by Koh Kian Sin under the supervision of Professor Mak Yuen Teen. Copyright © 2012 Mak Yuen Teen and CPA Australia 6C.K.Tang: The Fight towards Privatisation About C.K. Tang C.K. Tang Limited is a Singapore-based company founded by Tang Choon Keng in 1932. The company is in the business of departmental store retailing and general merchandising. Since 1958, the company has been operating at its flagship building, Tangs Plaza, along Orchard 1 Road . C.K. Tang is a company characterised by the presence of a major controlling shareholder. For example, in June 2003, then CEO-Chairman Tang Wee Sung, the second son of the founder, owned 69.95 per cent of 2 the company’s shares . In 1975, C.K. Tang was listed on the then Singapore Stock Exchange, 3 which later became the Singapore Exchange (SGX) . However, since 2003, the Tang family had been trying to delist and privatise the 4 company . After two failed attempts, the Tang family finally succeeded 5 and the company was delisted on 24 August 2009 . In 2011, C.K. Tang made an offer to about 500 minority shareholders who had held on to the shares of the delisted company. This offer represented a 15 per cent premium over its fair value and well above the price offered to other shareholders for the delisting in 2009. However, some of these minority shareholders were still unwilling to take up the share buyback 6 offer, and were holding out for a better offer . Board of Directors During the third and successful privatisation attempt, the board of C.K. Tang was chaired by Ernest Seow, a former PricewaterhouseCoopers (PwC) partner. Apart from Seow, there were three other directors with experience in accounting, business management and the retail industry. Among the four directors, three of them were serving as non-executive independent directors. During the company’s history, there was at least one Tang family member 7 on the board . However, in 2008, Tang Wee Sung, CEO and the majority 8 shareholder of the company since 1987 , stepped down from the board, after he was alleged to be involved in an illegal organ trading scandal. 7C.K.Tang: The Fight towards Privatisation With this development, for the first time in the company’s history, there was no Tang family member on the board. According to C.K. Tang’s Corporate Governance Report in 2009, the board would be responsible for enhancing long-term shareholder value and the overall management of the Group. This includes reviewing the Group’s performance, approval of corporate strategies and promoting high standards of corporate governance. The board delegated some of its functions to the board committees, namely the audit committee, nominating committee and remuneration committee. First Privatisation Attempt: Scheme of Arrangement On 29 October 2003, Tang Wee Sung offered minority shareholders 9 S0.42 per share via a scheme of arrangement . This represented a premium of about 35 per cent above the average closing price over the 10 last five trading days . This price also meant a 19.2 per cent discount 11 against the company’s net tangible assets as at 30 September 2002 . However, the resolution failed to pass, as the shareholders felt the offer price was too low and wanted more information on the company’s 12 prospects . Second Privatisation Attempt: Unconditional Cash Offer In December 2006, Tang Wee Sung and his brother Tang Wee Kit, 13 offered shareholders S0.65 per share through Kerith Holdings , a company equally controlled by the brothers. This second attempt was in 14 the form of a voluntary unconditional cash offer . The S0.65 per share offer reflected a 16.1 per cent premium to C.K. Tang’s latest closing price at that time. It also represented a 9.4 per cent premium to the company’s net asset value, based on its annual report for the financial year 15 ending 31 March 2006 . When the offer deadline expired, insufficient 16 acceptances had been received . The reason was widely believed to be 17 the undervaluation of the commercial property Tangs Plaza . As a result, the company continued its listing on SGX. 8C.K.Tang: The Fight towards Privatisation On 15 July 2008, at an Annual General Meeting (AGM), minority shareholders questioned the board about the company’s financial losses, as well as its plans to delist the company from SGX. The board declared that a privatisation exercise is solely the decision of the majority shareholder. The board said it owed a fiduciary duty to shareholders, 18 which is to look after the business of the company. Attempts to vote against standard resolutions such as advance payment of directors’ fees 19 were defeated, because of the Tang family’s majority holdings . Third Privatisation Attempt: Voluntary Delisting On 8 May 2009, the Tang brothers made their third privatisation attempt through an investment holding vehicle, Tang UnityThree, which submitted a delisting proposal to the company. The remaining shareholders were 20 offered S0.83 per share , which represented a 22 per cent premium over the company’s last traded share price of S0.68 prior to the offer, and a 21 per cent discount to the firm’s net asset per share price of 21 S1.05 as of 31 December 2008 . The board recommended that the minority shareholders accept the offer, based on an evaluation of the 22 offer provided by the independent financial adviser PwC . At an Extraordinary General Meeting (EGM) held on 31 July 2009, minority shareholders questioned if the offer was reasonable, given that the shares had closed at a price above the offer at that point in time. Nonetheless, the board retained its recommendation, saying that market 23 prices typically varied . This was despite earlier statements by the Tangs saying that the privatisation offer was to allow shareholders to monetise the value of their investments at a premium over its historical trading 24 prices . Shareholders also reproached the directors for failing to clarify with the Tangs about their redevelopment plans for Tangs Plaza after its privatisation. They expressed disappointment with the independent directors, saying that they had insufficiently analysed the issue. 9C.K.Tang: The Fight towards Privatisation Doubts were raised about the independence and neutrality of the CEO of the company at the time, Foo Tiang Sooi, because he was personally related to Tang Wee Sung. Foo had worked under Tang from 1999 to 25 2006. He and Tang were also former schoolmates . However, he 26 dismissed these facts as irrelevant . Foo also added that he was related to the shareholder who posed the question, but this fact was irrelevant 27 as well . Another shareholder called for a vote of no-confidence against the board chairman. After consulting with legal advisors, the board rejected the motion, with the chairman saying that the action was an attempt to 28 frustrate the meeting . Even as shareholders tried to probe further, the 29 chairman called for the vote to be taken . The resolution to privatise the company was passed with 96.25 per cent of votes in favour of the 30 proposal . Key Area of Controversy: Tangs Plaza The Singapore Code on Takeovers and Mergers (the Code) governs all takeover activity in Singapore involving public companies. Under Rule 26.2(a) of the Code, “a property which is occupied for purposes of the business must be valued at the open market value for its existing use”. However, Rule 26.2(c) provides for the case in which “such a property is valued for an alternative use. For such a case, the costs of conversion 31 and/or adaptation should be estimated and shown” . During all three privatisation attempts by the Tang brothers, the offer 32 price reflected an undervaluation of Tangs Plaza . The board stood by its stand of valuing the property according to its “existing use”, as there was no intention of deviating from it. One investor had brought up the fact that in C.K. Tang’s 2007 annual report, a property valuation report had taken into consideration the redevelopment potential of Tangs Plaza. In response, the board’s legal adviser, Yeo Wee Kiong, said it was not 33 legally required to put a redevelopment valuation on the report . 10C.K.Tang: The Fight towards Privatisation PwC stated that the property was valued at S340 million on 25 May 34 2009 . This was much lower than other nearby sites. In contrast, minority shareholders contested that the site was easily worth at least S400 million, according to an independent valuer. This value did not take into account the potential value arising from redeveloping the site, and did not consider the potential value from sub-dividing the site into small retail 35 units and leasing them to specialty tenants . The board, however, stated that regulators had told the directors that any such redevelopment was 36 not applicable . Unhappiness Amongst Minority Shareholders Several shareholders were unhappy about the perceived undervaluation of the Tangs Plaza site, as well as the fact that the offer price was less than the company’s net asset per share. Thus, they met with the Securities 37 Investors Association (Singapore) (SIAS) . SIAS stated that it objected to the exit price and that the minority shareholders had been treated with 38 39 no dignity . SIAS had also called for regulators to intervene . Ten shareholders had also signed a petition to SGX and the Ministry of Finance questioning the basis of the valuation on the property’s “existing 40 use” , in a bid to convince the regulators to allow them to obtain an 41 alternative valuation report . SGX’s reply was that C.K. Tang’s move to delist was purely commercial, and that the company had complied with 42 the listing and delisting rules . The Capital Reduction Exercise On 19 August 2011, C.K. Tang embarked on a capital reduction exercise to cancel out all remaining shares held by minority shareholders. C.K. Tang would pay each investor S1.30 per share, which represents an increase of 56.6 per cent on the exit offer in 2009. PwC had indicated that 43 the S1.30 offer is 15 per cent above its fair market value . The rationale behind the exercise was to reduce administrative burdens. Additionally, the company reaffirmed that there are no plans for the redevelopment of Tangs Plaza, and the buyout had no hidden agenda. 11C.K.Tang: The Fight towards Privatisation However, only 39 per cent of the minority shareholders in attendance agreed to the price for the share buyback, far below the 75 per cent required. Some minority shareholders cited the undervaluation of the 44 Tangs Plaza property as the reason for rejecting the offer . C.K. Tang would have to do more to convince these shareholders for the buyout to succeed. Discussion Questions 1. In cases of companies where there are controlling shareholders, explain why the interest of controlling and minority shareholders may diverge, using the CK Tang case as an example. 2. Should independent directors be primarily concerned with the interests of the minority shareholders? 3. Evaluate the independence of C.K. Tang’s board during the third privatisation attempt. Do you think this affected the actions of the board during the privatisation process? 4. Do you believe that the basis of valuation was fair? Explain. 5. With regards to the privatisation episode, suggest improvements that would help protect minority shareholders in the future. 6. C.K. Tang used three different privatisation methods. Explain how these different methods work and the pros and cons of these different methods from the viewpoints of the shareholder(s) wanting to take a company private versus minority shareholders who may prefer that the company remain listed. 12C.K.Tang: The Fight towards Privatisation Endnotes: 1 Lee, S.S. “No Tangs for the Memories.” 2 August 2009. The Straits Times. Online. Factiva. 24 March 2010. 2 Ng, Baoying. “Move to delist CK Tang passed despite protest by minority shareholders”. 31 July 2009. Channel NewsAsia. 20 March 2010. http://www.channelnewsasia.com/stories/singaporebusinessnews/ view/446038/1/.html 3 Yahya, Yasmine. “CK Tang offers 83 Singapore Cents Per Share to delist from SGX”. 8 May 2009. Channel Newsasia. 17 December 2011. http://www.channelnewsasia.com/stories/singaporebusinessnews/ view/427860/1/.html 4 Lee, S.S. “No Tangs for the Memories.” 2 August 2009. The Straits Times. Online. Factiva. 24 March 2010. 5 “Company Report: CK Tang Ltd”, 2009. Bureau van Dijk Electronic Publishing. Online. Osiris. 2 April 2010. 6 Kwok, Jonathan. “Delisted C.K. Tang dangles fresh carrot.” 19 August 2011. The Straits Times. Online. Factiva. 18 December 2011. 7 The Business Times. “Youngest Tang brother may take over at CK Tang.” 6 September 2008. Online. Factiva. 24 March 2010. 8 Ong, Isabel. “Tangs”, 3 March 2009. National Library Board. 17 December 2011. http://infopedia.nl.sg/articles/SIP_1170_2009-03-11.html 9 Kalpana, R. “Chairman offers to take CK Tang private.” 30 October 2003. The Business Times. Online. Factiva. 24 March 2010. 10 The, H.L. “A reasonable case for holding on to CK Tang.” 30 October 2003. The Business Times. Online. Factiva. 24 March 2010. 11 Lim, K. “Monday meeting will decide Tang’s future.” 7 February 2004. The Business Times. Online. Factiva. 24 March 2010. 12 Lee, S.S. “Shareholders thwart CK Tang bid to go private.” 10 February 2004. The Straits Times. Online. Factiva. 24 March 2010. 13C.K.Tang: The Fight towards Privatisation 13 Kalpana, R. “CK Tang chief unveils second privatisation bid.” 9 December 2006. The Business Times. Online. Factiva. 24 March 2010. 14 Ibid. 15 Ibid. 16 Lee, S.S. “Second offer for CK Tang fails to get enough support.” 3 February 2007. The Straits Times. Online. Factiva. 24 March 2010. 17 Goola, W. “Big Money: CK Tang’s value hinges on retailing.” 18 December 2006. The Edge Singapore. Online. Factiva. 24 March 2010. 18 Ibid. 19 Lee, S.S. “Unhappy CK Tang shareholders grill board.” 16 July 2008. The Straits Times. Online. Factiva. 24 March 2010. 20 Tay, M. “C.K. Tang launches third privatisation bid.” 9 May 2009. The Straits Times. Online. Factiva. 24 March 2010. 21 Ibid. 22 Lee, J. “Bid to delist CK Tang hits another road block.” 18 July 2009. The Business Times. Online. Factiva. 24 March 2010. 23 Lee, S.S. “No Tangs for the Memories.” 2 August 2009. The Straits Times. Online. Factiva. 24 March 2010. 24 Tay, M. “CK Tang launches third privatization bid.” 9 July 2009. The Straits Times. Online. Factiva. 24 March 2010. 25 Lee, J. “CK Tang going private, 34 years on”. 1 August 2009. The Business Times. Online. Factiva. 24 March 2010. 26 Ibid. 27 Ibid. 28 Ibid. 29 Lee, S.S. “No Tangs for the Memories.” 2 August 2009. The Straits Times. Online. Factiva. 24 March 2010. 14C.K.Tang: The Fight towards Privatisation 30 Ng, Baoying. “Move to delist CK Tang passed despite protest by minority shareholders”, 31 July 2009. Channel NewsAsia. 20 March 2010. http://www.channelnewsasia.com/stories/singaporebusinessnews/ view/446038/1/.html 31 Tan, Cheng Han. Walter Woon on Company Law. Revised 3rd ed. Singapore: Sweet & Maxwell, 2009. 32 Goola, W. “Big Money: CK Tang’s value hinges on retailing.” 18 December 2006. The Edge Singapore . Online. Factiva. 24 March 2010. 33 Chow, K. “Triumph of the minority; Privatisation bid on hold as small investors buy time.” 18 July 2009. Today (Singapore). Online. Factiva. 24 March 2010. 34 Lee, J. “CK Tang undervalued, claim some shareholders.” 14 July 2009. The Business Times. 24 March 2010. 35 Teo, J. “CK Tang urged to work out offer price with investors.” 30 July 2009. The Straits Times. Online. Factiva. 24 March 2010. 36 Lee, J. “CK Tang going private, 34 years on”. 1 August 2009. The Business Times. Online. Factiva. 24 March 2010. 37 Lee, J. “CK Tang undervalued, claim some shareholders.” 14 July 2009. The Business Times. 24 March 2010 38 Lee, J. “CK Tang going private, 34 years on”. 1 August 2009. The Business Times. Online. Factiva. 24 March 2010. 39 Ng, Baoying. “Minority shareholders of CK Tang to appeal de-listing proposal to SGX, MAS”, 13 July 2009. Channel Newsasia. 20 March 2010 http://www.channelnewsasia.com/stories/ singaporebusinessnews/view/442135/1/.html 40 Lee, J. “CK Tang undervalued, claim some shareholders.” 14 July 2009. The Business Times. 24 March 2010 41 Chow, K. “CK Tang independent directors explain valuation method.” 15 July 2009. Today (Singapore). 24 March 2010. 15C.K.Tang: The Fight towards Privatisation 42 Chow, K. “Triumph of the minority; Privatisation bid on hold as small investors buy time.” 18 July 2009. Today (Singapore). Online. Factiva. 24 March 2010. 43 Kwok, Jonathan. “Delisted C.K. Tang dangles fresh carrot.” 19 August 2011. The Straits Times. Online. Factiva. 18 December 2011. 44 Enriquez, Millet. “CK Tang shareholders unmoved by latest offer.” 27 October 2011. Channel Newsasia. 18 December 2011. http://www. channelnewsasia.com/stories/singaporebusinessnews/view/1162107/1/.html 16In Deep Water: Boardroom Tussle at Asia Water Technology In Deep Water: Boardroom Tussle at Asia Water Technology Case Overview 1 Listed on the Singapore Exchange in March 2005 , Asia Water T echnology Ltd (AWT) faced problems such as rapidly deteriorating operating cash flow problems and a breach of financial covenants relating to the bonds it issued. The board then proposed to accept an injection of funds from a new investor that involved the issue of a large number of new shares and a non-renounceable rights issue, which would substantially dilute existing shareholders. This led a substantial shareholder to propose the removal of directors on the basis that the directors had not acted in the best interests of the company. A boardroom tussle then ensued. The objective of this case is to allow a discussion of issues such as the evaluation of financing options, duties of directors in an insolvency situation, board composition, the removal of directors by shareholders and the resignation of directors. Background AWT is a water treatment specialist, providing comprehensive and integrated engineering solutions for water purification and wastewater treatment systems. Its business was conducted primarily in the People’s Republic of China through its subsidiary, Wuhan Kaidi Water Services This is an abridged version of a case initially prepared by Lim Wan Jou and Tan Pei Shi under the supervision of Professor Mak Yuen Teen. The case was developed from published sources solely for class discussion and is not intended to serve as illustrations of effective or ineffective management. Consequently, the interpretations and perspectives in this case are not necessarily those of the organisations named in the case, or any of their directors or employees. This abridged version was prepared by Lee Yinsean Vanessa under the supervision of Professor Mak Yuen Teen. Copyright © 2012 Mak Yuen Teen and CPA Australia 17In Deep Water: Boardroom Tussle at Asia Water Technology Co Ltd. The company’s main revenues came from three core business segments: water purification, wastewater treatment and other auxiliary projects. Before June 2004, AWT specialised in engineering, procurement and commissioning (EPC) contracts for water purification treatment systems. However, business opportunities presented AWT a chance to expand its business model. In 2004, AWT shifted from pure contracting to a mixture of ownership of projects and providing EPC services. Bond Subscription Agreement (BSA) As AWT’s projects were generally capital-intensive and required considerable upfront capital commitments, the company took on substantial financing. Although the shift of business model was initially successful, AWT’s business went downhill when it gradually expended its available capital. To reduce the risk of relying too much on short-term borrowing to finance long-term projects, and to access additional longer term capital to fund its expansion, AWT entered into a Bond Subscription Agreement (BSA) on 8 August 2007 with shareholders’ approval. Structured and convertible bonds worth US60 million were to be issued in two tranches, with the proceeds to be utilised for various water treatment projects. The issuance of Series 1 bonds gave AWT a capital inflow of US25.4 million, allowing the company to secure 54 new projects. Deteriorating Business Challenging economic conditions surfaced soon after and AWT was faced with rapidly deteriorating operating cash flow problems. In December 2007, AWT exceeded a gearing ratio, breaching a financial covenant relating to the Series 1 bonds issued. Although AWT obtained a waiver on the covenant breach, it breached another covenant due to the failure to complete a restructuring plan. As a result, the second US30 million tranche of bonds was cancelled. However, at the request of AWT, bondholders agreed to observe a standstill period, where they would not terminate the BSA or demand for the outstanding amounts. In exchange, the company was restricted from further investments in any projects and prohibited from executing any related EPC contracts. 18In Deep Water: Boardroom Tussle at Asia Water Technology An official waiver was subsequently obtained on 31 December 2008 but AWT was subjected to a revised set of financial covenants, requiring it to repay specific principal amounts with accrued interest on stipulated dates. For such repayments, a redemption amount of US2 million was scheduled for payment on 31 March 2009. However, unable to pick up its business within such a short time, AWT failed to meet the repayment again. It obtained an extension until 5 June 2009, pending the conclusion of an agreement for new injection of funds into the company by potential investors. When AWT did not meet the second payment deadline, bondholders granted a further extension on condition that AWT entered into a legally binding written contract with potential investors. After conducting numerous meetings and negotiations, AWT received two written offers, including an offer from SI Infrastructure. Offer from SI Infrastructure The board considered SI Infrastructure’s offer to be superior, given the 2 latter’s financial stability and the potential for synergy. Under a deal signed on 16 June 2009, SI Infrastructure would subscribe for up to 1.67 billion new shares and a non-renounceable rights issue of 98.45 million new shares at an exercise price of 2 cents per share, on the basis of one rights share for every two existing shares held. Net proceeds from this issue were estimated to be between US21.2 million and US23.9 million. With the successful completion of the deal, SI Infrastructure would hold not less than 83.3 per cent and up to 85 per cent of AWT’s enlarged share capital. The injection of capital by SI Infrastructure would improve the financial condition of AWT and allow its principal business to remain as wastewater treatment and water purification in China. AWT would be able to leverage on SI Infrastructure’s network and business expertise to expand into the waste water treatment and water purification industry. 19In Deep Water: Boardroom Tussle at Asia Water Technology Boardroom Tussle The boardroom tussle began when a substantial shareholder of AWT 3 objected to the financial rescue plan . Through EGN Nominees Pte Ltd (EGN), Kareti Venkataramana started buying AWT shares from early June 4,5,6 2009. At the highest point of ownership, EGN held 24.38 per cent of AWT. On 2 July 2009, EGN issued a notice for an Extraordinary General Meeting (EGM). It proposed the removal of four directors (Addyson Xue, Ng Fook Ai Victor, Simon Littlewood and Sha Guangwen) and the appointment of two new directors (Venkataramana and Peter Lai), as well 7 as the rejection of SI Infrastructure’s offer . SI Infrastructure’s offer was questioned as the proposal involved a 77.8 per cent share price discount and virtually all of the share value of AWT’s current shareholders would 8 be eroded. The last transacted share price was 9 cents on 12 June 2009 . Venkataramana felt that AWT’s directors had acted without considering the best interests of the company, and believed that the board should be held accountable for failing to justify the issue of shares at the grossly discounted price to SI Infrastructure. “Why should you think that heads should not roll for such 9 financial mismanagement?” — Shareholder, Mr Ong C.H., 30 July 2009 (Today, Singapore) In addition, Venkataramana felt that the significant deterioration of AWT’s financial health over the past three years indicated poor leadership. He cast doubt on the board’s ability to lead the company, citing repeatedly bad corporate decisions that he argued had been made. In Venkataramana’s view, the board has also not undertaken adequate project financing planning, given the bad cash flow management in the company. “Nobody has said that this is a bad company or that it lacks strong fundamentals. But the company is in trouble because of poor cash flow management.” — AWT Investor, 31 July 2009 (The Business Times, Singapore) 20