Court Rejects PCCW Buyout

 

 

HONG KONG -- A Hong Kong appeals court Wednesday rejected the US$2.1 billion management-led buyout of telecom company PCCW Ltd., handing regulators in this Asian financial center a significant victory after facing months of criticism for what shareholder activists called weak corporate governance standards.

 

 

 

PCCW and the buyout group, led by PCCW Chairman Richard Li, said they will consider whether to appeal to Hong Kong's top court. But even if the group successfully appeals, Wednesday's unanimous decision by the three-judge panel to side with regulators who opposed the deal amounts to a rare official rebuke of one of the city's most prominent business leaders.

 

If the group doesn't appeal or the effort falters, Mr. Li will be faced with the task of bolstering PCCW's slow-growth operations while under the scrutiny of public shareholders. The deal would give Mr. Li's group the 52% of the company it doesn't already own.

 

The appeals court said it would release its reasoning later. But the decision followed criticism by the judges of the circumstances behind a February shareholder vote that blessed the deal. Attorneys for Hong Kong's Securities and Futures Commission had argued it should be blocked because of an unusual distribution of thousands of shares in the weeks before the deal to new shareholders by a person with ties to the Li-led buyout group, in what they alleged was an improper effort to clear Hong Kong regulatory requirements.

 

PCCW and the buyout group had said it did nothing wrong. Earlier this month a lower court approved the deal, saying the share distributions weren't illegal and the regulators' case was circumstantial.

 

The company said Wednesday it was "disappointed" with the appeals court decision but would wait for a written judgment before commenting further.

 

The decision cheered shareholder activists, who pointed to regulatory opposition to the deal as the latest sign that Hong Kong officials are getting tougher on corporate conduct issues. Hong Kong police this month raided the offices of Citic Pacific Ltd. as part of an investigation into sharp losses the company took on foreign-exchange bets last year. On Monday, the securities commission secured its second conviction against a defendant for insider dealing, after winning its first last year.

 

 

 

"It's obviously a good day for Hong Kong corporate governance," said shareholder activist David Webb, who played a role in bringing the share distributions to light. He said Hong Kong lawmakers should revisit rules regarding shareholder votes as a next step.

 

Alan Ewins, head of regulatory practice at law firm Allen & Overy, said, "It shows the SFC has been on a variety of fronts actively pursuing their mandate to protect the market, demonstrating their appetite for pursuing these investigations."

 

Regulators had endured months of criticism at a time when markets around the world have tightened their scrutiny of corporate practices. The SFC in recent months sent mixed signals about its willingness to back new stock-exchange restrictions on trading by company insiders, which Hong Kong's exchange loosened earlier this year after protests by business leaders.

 

Mr. Li -- son of Li Ka-shing, Hong Kong's richest man and an owner of local institutions ranging from supermarkets to property to utilities -- has been grappling with what to do with PCCW for much of the past decade and tried unsuccessfully to sell all or part of the company three times since its days as a dot-com highflier nine years ago. The company generates significant cash but operates in a low-growth market. Its net profit last year fell 15% to 1.27 billion Hong Kong dollars (US$163.8 million) because of higher customer-acquisition costs and other issues. Standard & Poor's Ratings Services Wednesday revised the outlook on its Hong Kong Telecommunications Ltd. unit to negative, citing slower-than-expected growth rates in some businesses.

 

Under terms of the buyout, public shareholders would have received HK$4.50 each, a 55% premium over where they traded in October but well below the HK$100-a-share or more level it reached in 2000. Mr. Li and affiliates would control about two-thirds of PCCW, while China United Network Communications Group Co. -- a state-backed mainland Chinese company -- would own the rest.

 

 

 

At issue in the shareholder vote was the distribution of shares to about 500 agents at the Hong Kong insurance arm of Fortis NV. The SFC said the distribution -- referred to in Hong Kong as "share splitting" -- was an effort to meet the legal requirement that a majority of voting shareholders outside the buyout group must approve the deal, regardless of how many shares they own.

 

The SFC alleged that a longtime associate of Mr. Li and a member of his buyout group, Francis Yuen, sought to manipulate the shareholder vote in February by instructing a top manager at the Fortis arm, Inneo Lam, to distribute PCCW shares to agents, who would profit more if the deal went through.

 

Mr. Yuen ran the insurance business when it was controlled by Mr. Li's investment vehicle, Pacific Century Regional Developments Ltd. Fortis, which bought the business from PCRD two years ago, said it knew nothing of the distribution and that the agents aren't employees. A Fortis spokeswoman said the company wasn't aware of the distributions and is conducting an internal investigation.

 

A PCRD lawyer, Benjamin Yu, told the appellate court Wednesday that Mr. Lam gave out the shares as a bonus to the agents.

 

He said Mr. Lam had considered handing out shares of another company, but he chose PCCW shares because they were less expensive and more notable due to the attention surrounding the buyout effort.

 

Mr. Yu said that several phone calls from Mr. Yuen to Mr. Lam during the buyout period -- calls that were cited earlier by the SFC -- were about an unrelated matter.

 

Justice Anthony Rogers questioned the explanation, referring to PCRD's version of events as a "series of amazing coincidences."

 

Earlier in the appellate hearing, the justices had pushed PCCW and PCRD to explain the rationale for the deal, raising pointed questions about whether small shareholders were being treated fairly.

 

"What's the difference between giving people shares to vote and giving people money to vote?" Justice Rogers asked. "You must convince me of the difference." PCCW lawyer Michael Todd said people who received PCCW shares weren't told how to vote.

 

Write to Jonathan Cheng at jonathan.cheng@wsj.com and Lorraine Luk at lorraine.luk@dowjones.com