New World woe shows danger in Cayman safe haven

Glorious Property Holdings

18/06/2014 04:36

(The author is a Reuters Breakingviews columnist.  The opinions 
expressed are her own.) 
     
    By Una Galani 
    HONG KONG, June 18 (Reuters Breakingviews) - New World 
Development's  0917.HK  woes reveal a danger lurking in its 
Cayman Islands safe haven. Shareholders with less than 1 percent 
of the votes used the offshore centre's archaic rules to block a 
$2.4 billion attempt by the Hong Kong property group to buy the 
rest of its China unit. It's a reminder that a Cayman domicile 
brings risks as well as rewards for the region's power-hungry 
tycoons. 
    The obstacle to the New World buyout was Cayman's "headcount 
rule", which requires certain types of takeovers to be approved 
by 75 percent of the votes cast and also by a majority of 
shareholders who vote. Hong Kong abolished the rule earlier this 
year, but it remains in place in the Cayman Islands and Bermuda, 
which are home to 75 percent of Hong Kong-listed companies, 
according to Webb-site.com. 
    In New World's case, shareholders with 99.8 percent of the 
independently-held shares supported the deal. But they accounted 
for only 34 percent of the voting shareholders. Cheng Yu-tung's 
property company isn't the first to trip up on the headcount 
rule. Chinese billionaire Zhang Zhirong suffered a similar 
stumble last year when he tried and failed to take Glorious 
Property Holdings  0845.HK  private for $589 million. 
    The headcount rule was designed to protect minority 
investors from being bullied by large shareholders but it is 
open to abuse. In 2009, a Hong Kong court blocked tycoon Richard 
Li's attempt to take telecom operator PCCW  0008.HK  private 
after the Securities and Futures Commission said the ownership 
of shares had been split to meet a headcount requirement. The 
rule also makes it easier for hedge funds or individuals 
disgruntled with a particular company to stir up trouble. 
    Asian tycoons favour offshore domiciles for tax reasons but 
also because they tend to be friendlier to controlling 
shareholders than local rules. For example, such jurisdictions 
permit cross-shareholdings, and also place fewer restrictions on 
loans between the company, its controlling shareholder, and 
related entities. New World's stumble won't stop companies going 
offshore. But it's a reminder that the preferred haven of 
tycoons isn't always so safe.  
 
     
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    CONTEXT NEWS 
    - Independent shareholders on June 16 blocked a proposal by 
New World Development to take its China subsidiary private in a 
deal worth HK$18.6 billion ($2.4 billion). 
    - Investors representing 99.8 percent of the 
independently-held shares voted in favour, comfortably passing 
the requirement that 75 percent of the shares by value accept 
the deal. 
    - However, the offer failed to clear a "headcount" rule 
which also requires the approval of a simple majority of 
individual independent shareholders. Only 34 percent of 
shareholders cast their votes in favour of the deal. 
    - The rule is still in force in the Cayman Islands, where 
New World Development China is domiciled.  
    - Hong Kong abolished the headcount rule earlier this year 
in favour of a rule that allows investors to block a deal if 
shareholders representing more than 10 percent of the company 
vote against it. 
    - New World Development and its related parties own more 
than 72 percent of New World China. 
    - New World Development has completed a $1.8 billion rights 
issue which was supposed to part-finance the deal, but was not 
conditional on the offer going ahead. 
    - Shares in New World China fell almost 17 percent to 
HK$5.30 following the announcement of the result. The buyout had 
valued the company at HK$6.8 per share. 
    - New World announcement: http://bit.ly/1oDb0Co 
     
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    - For previous columns by the author, Reuters customers can 
click on  GALANI/  
    (Editing by Peter Thal Larsen and Katrina Hamlin) 
    ((una.galani@thomsonreuters.com))     
    ((Reuters messaging: 
una.galani.thomsonreuters.com@reuters.net)) 
 
 
Keywords: BREAKINGVIEWS NEW WORLD CHINA/BUYOUT