William Lo, a well-known financial writer in Hong Kong, contributed this article to NextInsight
Deliberate amendments to the Articles of Association by H-share companies infringe shareholders’ interests
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As an international financial centre, Hong Kong is an important platform for raising foreign capital for China. Over the last two decades, government officials, executives of regulatory bodies, and professionals have established a regime that can accommodate the specific conditions in China while synchronizing with provisions in the international capital marketplace. It has been this regime that nourishes development of many innovative financing strategies and structures in Hong Kong, providing the framework for all participants to follow by the book to fuel the flourishing expansion of enterprises using this financing platform. |
The incident involved differences in opinion between substantial shareholders and the Board of Directors of Huishang Bank Corporation Limited (03698) as to how the Listing Rules and the Company’s Articles of Association are being applied.
As background, Huishang Bank was established in 2005 by reorganization of all commercial banks and urban credit cooperatives in Anhui Province. It was listed on the Main Board of the Stock Exchange of Hong Kong in 2013. When launching its share offering, Huishang Bank positioned itself as the largest city commercial bank in Central China. It ranked seventh among total city commercial banks in China in total assets and fourth in total loans and deposits.
According to the listing prospectus, before Huishang Bank was listed, its domestic shareholders include Anhui Guoyuan Holdings (Group) Company Ltd and three other SOEs in Anhui (10.26%) and Zhongjing Sihai Co. Ltd (5.44%). Immediately after listing, the majority shareholders become China Vanke Co. Ltd. (8.28%), Anhui Guoyuan Holdings saw its interest fell to 7.5%, other shareholders include Chow Tai Fook, Jiangsu Huijin Group, etc.
Articles of Association should protect interests of H-share investors
Effective on the same day as the listing date were the Articles of Association of Huishang Bank. This 127-page of Articles of Association has become the code of practice that this H-share listed company protects its shareholders and relevant stakeholders. Articles of Association documents like this are mostly prepared on templates that cover most of the areas, with detail descriptions customized for individual companies.
Shortly after the listing, Huishang Bank’s Independent Director Mr Wen Jinghui resigned for personal reasons, according to athe Company’s filings. In less than a week, the Company issued a clarification notice, saying to Mr. Wen has been under investigation by China Securities Regulatory Commission since July 2013 for alleged offences under China Securities Law. Yet Huishang Bank launched its IPO in late October 2013. The fact was that CSRC imposed a ban that restricted Mr Wen from serving as a director of listed companies for a period of 10 years. Within the following year, Huishang Bank saw resignations of a number of independent directors, supervisors and the company secretary, an unusual phenomenon rarely seen in other commercial banks listed in Hong Kong. Yet these resigned executives were members of the Company’s Related Party Transaction Control Committee and Audit Committee.
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Raising eyebrows |
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“Resignations of individual directors or supervisors might be attributed to their individual conduct or their personal reasons. Shareholders might not find these relevant to their immediate interests. Yet Articles of Associations persistently under amendment to accommodate the Company’s "specific needs" are raising eyebrows.” |
In less than a year since listing, Huishang Bank initiated the first round of amendments to its Articles of Association. In addition to some minor amendments, that round contemplated to enlarge the Board of Directors from 15 members to 15-19 members, which significantly outnumbered boards of giants in the same industry such as the 12-member board of HSBC Holdings (0005).
Record high opposition votes raised eyebrows
In May 2015, Huishang Bank announced plans to issue shares for trading on domestic exchanges in China (A-shares), and proposed further amendments to the Articles of Association. Some 1.325 billion shares, representing 19.15% of the total number of shares, voted against these amendments. This is rarely seen among other H-share listed companies in Hong Kong.
In 2016, in the third move of its kind, Huishang Bank contemplated amendments to its Articles of Association again. Its independent director Zhu Hongjun resigned in less than two weeks after the announcement, saying that he has no disagreement with the Board of Directors. In a month another independent director Fung Weichang resigned. This round of amendments saw 1.136 billion shares voting against, or 15.74% of the total issued capital. Bear in mind the total issued capital had been enlarged by additional share issuance earlier.
In the fifth anniversary of the H-share listing of Huishang Bank in 2018, also the two years after its failed attempt to issue and list A-shares, the Bank tabled another round of amendments to its Article of Association for shareholders’ approval. A group of major shareholders, more conveniently referred to as the “Zhongjing consortium” holding 1.991 billion shares in aggregate or 18.01% of the total issued capital, voted against the amendments. A representative from the Zhongjing consortium, in his statement delivered in the special general meeting, pointed out that the proposed amendments contravened the existing Articles of Association because they involved infringements of rights of a specific category of shareholders without getting approval from the H-share shareholders. Huishang Bank’s legal counsel, which was a law firm based in Mainland China, had failed to address concerns for this abrupt contravention to the satisfaction of the Zhongjing consortium.
| The tension between the Zhongjing consortium and Huishang Bank’s Board of Directors reached a new high in the Company’s annual general meeting on 30 June 2019. The Board tabled proposals to reinitiate plans to issue A-shares and further proposed amendments to the Company’s Articles of Association for shareholders’ approval. The Zhongjing consortium representative delivered a 10-plus-page speech along with its votes against all the resolutions. The consortium pointed out that the proposed amendments involved infringements of rights of a specific category of shareholders without seeking prior approvals from this shareholder category. The resolutions were passed despite having received more than 2 billion shares voted against. Another independent director Hu Jun resigned three months after the meeting. |
In early 2020, the Board of Directors of Huishang Bank resolved to participate in the establishment of a new commercial bank and the acquisition of some assets and liabilities of other banking financial institutions. The Board also planned to issue new shares, including the domestic shares and H-shares, to replenish the Bank’s capital adequacy and Tier 1 capital. Yet the shareholders and the market were not informed that the assets to be acquired were actually from four branches of the troubled Baoshang Bank, and liabilities of this Baoshang Bank until they read the details from the shareholder circular before the special general meeting for approval of these proposed moves was hosted. The Zhongjing consortium representative, in a speech delivered during this meeting, accused the Board of negligence in keeping shareholders adequately informed of these major proposed moves. The resolution for participation of establishment of the commercial bank received shareholders represented 20.69% of the total issued capital voted against. The resolution for acquisition of assets and liabilities of Baoshang Bank received shareholders representing 20.96% of the total issued capital voted against.
Despite having this record high proportion of shareholders voting against, the resolutions were still passed in the SGM. This unfair outcome raised eyebrows as to how investors’ interests are protected when investing in H-share companies. Bear in mind again that the Zhongjing consortium was already very rich in resources to hire a professional legal team to highlight issues in these proposals tabled by Huishang Bank’s Board of Directors. This is very much the exact area that the Hong Kong Securities and Futures Commission (“SFC”), as the prime regulator of the city’s financial sector, needs to step in to protect investors’ interests.
Yet the market has yet to hear from the SFC if any case that warrant further investigations has been opened for any complaint against shareholder interest infringements. To this end, the usual “sell when in doubt” recommendation against further shareholder interest advocacy moves simply is not relevant in this context. As pointed out earlier, the robustness of Hong Kong as a financing platform for Chinese enterprises largely depends on how observant the participants are to play by the rules and the willingness of the regulatory bodies to maintain active supervisory oversight. These two pillars have obviously failed in the Huishang Bank incident. Allowing these malpractices to propagate will simply impair the confidence of foreign investors in H-share companies listed in Hong Kong.
This article reflects the views of the writer and not NextInsight.