Governance standards in Singapore

Strong corporate governance and transparency are critical for business success. For investors, good governance is a good indicator of wellmanaged, 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 2012 Preface

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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 Asianfocused. 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. Read about Corporate Governance at Wipro

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 2012 Content Singapore Cases C. K.

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 6 C. K. Tang: The Fight towards Privatisation 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 Road1. 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 the company’s shares2. In 1975, C. K. Tang was listed on the then Singapore Stock Exchange, which later became the Singapore Exchange (SGX)3. However, since 2003, the Tang family had been trying to delist and privatise the company4.

After two failed attempts, the Tang family finally succeeded and the company was delisted on 24 August 20095. 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 offer, and were holding out for a better offer6. About C. K. Tang 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 on the board7. However, in 2008, Tang Wee Sung, CEO and the majority shareholder of the company since 19878, stepped down from the board, after he was alleged to be involved in an illegal organ trading scandal. 7 C. 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. On 29 October 2003, Tang Wee Sung offered minority shareholders S$0.42 per share via a scheme of arrangement9. This represented a premium of about 35 per cent above the average closing price over the last five trading days10. This price also meant a 19. 2 per cent discount against the company’s net tangible assets as at 30 September 200211. However, the resolution failed to pass, as the shareholders felt the offer price was too low and wanted more information on the company’s prospects12. First Privatisation Attempt: Scheme of Arrangement In December 2006, Tang Wee Sung and his brother Tang Wee Kit, offered shareholders S$0. 65 per share through Kerith Holdings13, a company equally controlled by the brothers.

This second attempt was in the form of a voluntary unconditional cash offer14. The S$0. 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 ending 31 March 200615. When the offer deadline expired, insufficient acceptances had been received16. The reason was widely believed to be the undervaluation of the commercial property Tangs Plaza17. As a result, the company continued its listing on SGX. Second Privatisation Attempt: Unconditional Cash Offer 8 C. 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, which is to look after the business of the company. 18 Attempts to vote against standard resolutions such as advance payment of directors’ fees were defeated, because of the Tang family’s majority holdings19.

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 offered S$0. 83 per share20, which represented a 22 per cent premium over the company’s last traded share price of S$0. 68 prior to the offer, and a 21 per cent discount to the firm’s net asset per share price of S$1. 05 as of 31 December 200821. The board recommended that the minority shareholders accept the offer, based on an evaluation of the offer provided by the independent financial adviser PwC22.

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 prices typically varied23. 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 prices24.

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. Third Privatisation Attempt: Voluntary Delisting 9 C. 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 2006.

He and Tang were also former schoolmates25. However, he dismissed these facts as irrelevant26. Foo also added that he was related to the shareholder who posed the question, but this fact was irrelevant as well27. 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 frustrate the meeting28. Even as shareholders tried to probe further, the chairman called for the vote to be taken29. The resolution to privatise the company was passed with 96.25 per cent of votes in favour of the proposal30. 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 and/or adaptation should be estimated and shown” 31.

During all three privatisation attempts by the Tang brothers, the offer price reflected an undervaluation of Tangs Plaza32. 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 legally required to put a redevelopment valuation on the report33.10 C. K. Tang: The Fight towards Privatisation PwC stated that the property was valued at S$340 million on 25 May 200934. This was much lower than other nearby sites. In contrast, minority shareholders contested that the site was easily worth at least S$400 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 units and leasing them to specialty tenants35.

The board, however, stated that regulators had told the directors that any such redevelopment was not applicable36. 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 Investors Association (Singapore) (SIAS)37. SIAS stated that it objected to the exit price and that the minority shareholders had been treated with no dignity38. SIAS had also called for regulators to intervene39.

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 use”40, in a bid to convince the regulators to allow them to obtain an alternative valuation report41. SGX’s reply was that C. K. Tang’s move to delist was purely commercial, and that the company had complied with the listing and delisting rules42. 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 S$1.30 per share, which represents an increase of 56. 6 per cent on the exit offer in 2009. PwC had indicated that the S$1. 30 offer is 15 per cent above its fair market value43. 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. 11 C. 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 Tangs Plaza property as the reason for rejecting the offer44. 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
4. Do you think this affected the actions of the board during the privatisation process?
5. Do you believe that the basis of valuation was fair? Explain.
6. With regards to the privatisation episode, suggest improvements that would help protect minority shareholders in the future.
7. 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.

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