Date: April 6, 2022
First published in Business Times on 18 March 2022
Shareholders regularly have to vote on various corporate actions either at annual general meetings (AGMs) or extraordinary general meetings (EGMs).
Sometimes, the issues at hand are fairly routine – such as the reappointment of directors and auditors – and so voting would be relatively straightforward.
Other times, though, the issues may be complex – in which case small shareholders might rely on expert views.
Playing an increasingly prominent role in this regard are activist fund managers who, as sophisticated investors, are able to tap considerable expertise and research to present convincing arguments that help small shareholders make up their minds.
This was very much the case back in 2020 when Quarz Capital, together with fellow activist fund manager Black Crane, managed to convince minorities to block a proposed merger between Sabana Industrial Reit and ESR-Reit on the grounds that the merger price was at too large a discount to net asset value, and that there was conflict of interest as ESR-Reit and Sabana Reit have the same controlling shareholder in ESR Cayman.
While expert views should undoubtedly be sought, individual shareholders should bear in mind that there are always two sides to an argument and that the interests of some experts may not necessarily align with their own.
Small investors would therefore be prudent to consider all views as well as their own personal financial situation before deciding which way to vote.
A good case in point is Quarz’s recent campaign to get shareholders to vote against the 3 resolutions to be tabled at Sabana’s AGM to be held in April.
The first is the appointment of Chan Wai Kheong as an independent director (ID). According to the Code of Corporate Governance 2018, to be considered independent, the person must not have received significant payments from the company during the current or immediate past financial year, and that S$200,000 is the recommended guide for significance.
According to Quarz, Chan received a premium of about S$22 million over market price for his sale of his stake in ESR-Reit from ESR Cayman and is a substantial unitholder of Aims Apac Reit, a major competitor to Sabana.
The total consideration was in fact S$96.8 million, very much above the $200,000 threshold.
In short, Quarz argues that not only had Chan had a previous significant financial dealing with a party connected to Sabana, his stake in a Sabana rival means he cannot be deemed independent.
These concerns were actually raised by Quarz last year. Sabana’s reply to the first point was that Chan’s sale was more than 4 years ago, which is outside the prescribed period of the current or immediate past financial year.
As for Chan’s substantial holding in Aims Apac Reit, Sabana replied that the regulations and listing rules do not regard a director to be non-independent by virtue only of his investment in another real estate investment trust (Reit), even if that other Reit is a competitor.
It pointed out that Chan is neither on the board nor involved in the management of Aims Apac Reit. Despite the issue cropping up, Chan has not clarified if the investment in Aims Apac Reit is for his own personal portfolio or is made with other strategic intent.
Notwithstanding Sabana’s justifications, the key issue here is that although Chan fits the definition of an ID on paper and in terms of form, a good case can be made against his independence if substance is the defining criteria.
Receiving a substantial payment from the controlling shareholder of Sabana’s manager, as well as holding a significant stake in a competitor clearly calls into question his independence – even if the rules have been followed. No doubt, Quarz has a defensible case to oppose this proposal following the letter of the law and not the spirit of the law.
Right to issue units
Quarz’s opposition to the second resolution, which is to grant the manager leeway to issue new units, is less straightforward. Quarz’s argument is that Sabana’s leverage at 35 per cent of total assets is one of the lowest among all Singapore Exchange-listed Reits (S-Reits), which means that Sabana has ample capacity to borrow rather than issue new units.
Granted, in the world of finance, debt financing is usually preferable as the cost of equity is always higher than the cost of debt. Also, after the restructuring and repositioning of Sabana in the past 2-3 years, it should have no problem accessing debt given its credit standing with the banks.
But that interest rates are widely expected to rise in the near future, which would make borrowing more expensive.
Unitholders will therefore have to consider carefully whether to block this resolution. Perhaps an alternative is for the Reit to seek unitholders’ approval for a specific issue of new units only when the Reit is proceeding with an identified acquisition. By doing so, unitholders avoid a carte blanche situation and retain their right to approve the issuance of new units only when it is deemed accretive to unitholders.
Distribution reinvestment plan
Quarz’s aforementioned concern is founded on the dilutive impact of unit issuance. It therefore also objects to allowing distributions of units in lieu of cash.
But it can be argued that unitholders who see value in the Reit would want such an option.
Quarz’s objection should be viewed holistically – a distribution reinvestment plan could dilute its own holdings and reduce its voting power if it chooses cash over units.
When considering this resolution, unitholders should factor in their own financial positions and investment goals instead.
- The writer is Mr David Gerald, Founder, President and CEO of the Securities Investors Association (Singapore)