KINGBOARD COPPER FOIL: Best case, worst case scenarios for court appeal outcome

Lotustpsll contributed this article to NextInsight. He worked 32 years with a global banking group before retiring a few years ago.

My previous article “Privatisation a just measure to settle legal dispute” was published in April 2016.

Nearly a year has passed and it is opportune for me to provide a short update on this highly unusual case involving a Singapore-listed company.

Next month, the Court of Appeal in Bermuda will hear an appeal by Kingboard Laminates and Kingboard Chemical (KC), the ultimate holding company of Kingboard Copper Foil. (Note: Kingboard has announced that the hearing dates are March 6 and 7).

♦ How it started

Kingboard Copper Foil entered into a license agreement with Harvest Resource Management after the Petitioner (Annuity & Re Life Ltd) had vetoed the proposed general mandate for interested person transactions at the AGM of the Company on 29 April 2011.

The Supreme Court of Bermuda found that, as the majority shareholders failed to promptly initiate negotiations with the minority shareholders with a view to resolving the impasse and take into account the interests of shareholders as a whole following the blocking of the IPT Mandate, the license agreement was a commercially prejudicial means of enabling the Company to circumvent the Petitioner’s legitimate exercise of its right to veto the IPT Mandate.

Listed in Hong Kong, Kingboard Laminates is the majority shareholder (65.95%) of Kingboard Copper Foil which is listed in Singapore.

Kingboard Laminates and KC are appealing against the findings of the Supreme Court of Bermuda on “the Harvest License Transaction”. (See court judgement here)

EY was appointed by Kingboard Copper Foil’s audit committee (after discussions between the Company and the SGX-ST) to conduct an Independent Review.

An EY report, released in October, has affirmed that the findings of the Bermuda Court are consistent with its own findings.

copperfoil2.17 Electrolyzed copper foils are the main product of Kingboard Copper Foil, which operates out of Fogang and Lianzhou in Guangdong Province. Photo: InternetThe EY report is damaging for KC, and has raised other matters as well concerning corporate governance and transfer pricing issues. The lapses in corporate governance are serious.

I have consulted a long-time friend, a Senior Corporate Lawyer practising in Malaysia. In his opinion, after reviewing the EY report, it will be an uphill task for the appellant to challenge the Supreme Court’s “findings of facts and decisions of law”.

My friend expects the EY report to be tabled in court to refute KC’s appeal.

Best case scenario – Rejection of KC’s appeal by the Appeals Court and the Supreme Court decisions are upheld. This may mean a buyout of all minority shareholders.

The likely formula for calculating the buyout price is:

♦ Shareholder equity divided by number of issued shares plus loss of earnings due to the Harvest Licence Transaction.

The Court may add a punitive cost for “abuse of court process” by the appellant for challenging (without merits) the Supreme Court decisions.

Note: Shareholder equity per share based on latest reported financials is about 67 cents. (This is substantially higher than the 29 cents that Kingboard Copper Foil stock recently traded at).

Worst case scenario – Appeals Court accepts the appeal and rejects the earlier Supreme Court decisions. Legal dispute may then drag on.

Kingboard Copper Foil ("the Company") says:

“The Court has yet to determine the precise relief to be afforded to the minority shareholders and invited counsel to apply for specific directions in relation to the relief to be granted.

"The Company’s Bermuda counsel is of the view that, if the judgment of the Court is upheld, it is likely that the majority shareholders will be the ones to bear any relief ordered by the courts and such relief will involve the majority shareholders being ordered to buy-out the shares held by the minority shareholders, at a market price to be determined with reference to when the prejudicial effect of the license agreement began. If the parties fail to agree on a buy-out price, it would be necessary to hold the hearing to determine such price. In other words, the Company, as a nominal respondent in these shareholders’ proceedings, will unlikely become ordered to “buy back” the minority shareholders’ shareholding.”

(Source: Paras 2 and 3 on page 3 of company anouncement on SGX website dated 22 Jan 2016)

Kingboard Copper Foil has net cash of SGD 0.35 and current assets of another SGD 0.35, and no debt.

The reasons why it's so undervalued (share price about 29 cents) are the absence of dividends for many years and the uncertain outcome of this litigation.

The defendants are mainly KC and Kingboard Laminates. Kingboard Copper Foil is only a third party, and will not bear any litigation costs or liability.

This is a long-drawn saga stretching over 6 years already. Let’s hope justice is finally served.

Please do your own due diligence. Am vested.

Comments

+1 #5 lotustpsll 2017-03-02 17:54

Trading halt extended. For the reasons given, a privatisation of minority shares seems imminent.

#4 lotustpsll 2017-02-27 13:04

On the other hand this doesn’t mean that the class remedy is “dead in the water”.

The following Judgements should also be noted (page 85) :-

“Mr Wong SC (lawyer for the Respondents) did not dispute the argument that section 111 is fundamentally a class remedy. In principle it seems to me that all minority shareholders must have a right to be heard at the relief stage of the present Petition. However, I would give liberty to apply for any specific directions in this regard rather than making directions at this stage without affording counsel a further opportunity to be heard”.

I am more confident of class remedy supported by the order of 11 January 2016.

#3 lotustpsll 2017-02-27 12:30

The point made by Hu Say is relevant. It is advisable for interested investors to do your own due diligence and to read the Court Judgements.

Please note that there was a subsequent order made by the Court on 11 January 2016 which read :-

“The Fifth Respondent (" the Company") shall forthwith give notice to all the Company' s shareholder who wishes to have its shares in the Company redeemed upon the same terms and conditions as the Petitioner shall give notice to the Company and the Company shall provide the Petitioner with copies any such notices forthwith upon receipt thereof ”.

#2 TTI 2017-02-27 02:29

Quoting Hu Say:

Most people I know of who has some idea about the case are of the view that the Appeal will fail. What is uncertain is the relief that the court will order. There is a possibility that any buyout by the Controlling Shareholders will apply only to minorities who still hold the shares since before the 2011 IPT began or before the Petition by Pope began. The rest who bought in subsequently can be said to knowingly invested in Kingboard inspite of the IPT that has no mandate from shareholders.

Yes, this comment is exactly right.
The article states "Rejection of KC’s appeal by the Appeals Court and the Supreme Court decisions are upheld. This may mean a buyout of all minority shareholders."

Not quite "all minority shareholders".
I wonder how many people who are buying on the back of this appeal, understand this fact. Most probably didn't bother to read the specifics of the judgement.
So I'll quote the relevant part here:
"It was not disputed that these shareholders (the Pope Holdings) were in principle entitled to relief. Mr Woloniecki invited the Court to rule that in principle minority shareholders unconnected to the Petitioner should be afforded an opportunity (perhaps by notification via the SGX) of any future hearing in relation to the grant of buy-out relief. However, as I have already found above, the Petitioner is not entitled to seek relief in respect of shares in the Company purchased after the presentation of the Petition on August 3, 2011. "

There are still many other considerations, so this itself is not reflective of the investment merits or dis-merits at this stage.
But I wonder how many current shareholders jumping on the bandwagon understand this salient point.

#1 Hu Say 2017-02-25 15:55

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KINGBOARD COPPER FOIL: Best case, worst case scenarios for court appeal outcome

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