Dangerous precedent at Ho Hup
The ex parte injunction obtained by the Companies Commission of Malaysia (CCM) to prevent a substantial shareholder of Ho Hup Construction Company Bhd from voting in a crucial shareholders meeting scheduled for this week sets a dangerous precedent.

This is probably the first time the CCM has stepped into a boardroom battle between two factions fighting for control of a company. Very rarely does the CCM interfere in the affairs of listed companies, let alone seek a court order because the Securities Commission Malaysia and Bursa Malaysia are there to regulate listed entities with their string of rules.

But in the case of Ho Hup, the CCM has obtained an ex parte injunction to stop major shareholder Datuk Low Tuck Choy, his sister Low Lai Yoong and their family company Low Chee & Sons Sdn Bhd from exercising their rights as shareholders in the upcoming extraordinary general meeting or any other shareholders meeting until the disposal of the suit.

The reason is that Tuck Choy and Lai Yoong, as substantial shareholders of Ho Hup, did not notify the company within seven days of a change in their shareholding.

While there is no doubt that the CCM has its reasons to take action in this particular case, it’s common knowledge that there are many such instances involving other listed companies.

What’s more telling is that the order comes a few days ahead of Ho Hup’s crucial EGM this week. At the EGM, the faction aligned to Low that controls at least 24% of Ho Hup is seeking to oust Ho Hup’s present management led by Datuk Vincent Lye. Hence, every vote is crucial. More importantly, decisions taken at shareholders meetings are hard to reverse.

Assuming that the suit is not disposed of before the EGM and the shareholders meeting goes on without the Low faction being able to exercise their rights, wouldn’t they be at a disadvantage?

This is not the first time a Ho Hup boardroom battle has come to court. The EGM was supposed to be held a month ago, but it was stopped after a major shareholder obtained an order to declare that the notice of the meeting was invalid.

Now, the EGM calling for the removal and appointment of directors may not take place as scheduled because of the injunction filed by the major shareholder to stop the meeting. Adding spice to the whole proceeding is the CCM jumping into the ring to stop certain shareholders from voting.

The fight for control of Ho Hup has gone on far too long. The company needs to be restructured but this cannot be done until and unless the tussle is settled once and for all via an EGM. As far as possible, the courts and authorities should not be used to stop a shareholders meeting from taking place.

DIS Tech’s distressing news
There are no ifs, ands or buts about it — somebody must take responsibility for the RM82 million worth of sales that are now in doubt in ACE Market-listed DIS Technology Bhd. The company must also do right by shareholders and explore every possible option, even filing police reports and taking civil action against those responsible to recover the money.

Based on filings with Bursa Malaysia, Hong Kong-based Starlight Marketing (HK) Ltd, which is a major customer of DIS Tech, reported an alleged fraud by one of its employees. The fraud put in question the legitimacy of RM82 million worth of sales that the Malaysian company made with Starlight.

The alleged fraud may have occurred over 1½ years or six consecutive financial quarters. That management did not detect any problems with the customer until the end of the sixth period is a damning indictment of the lack of proper oversight.

Over the six quarters, total sales to Starlight came up to RM131.33 million — RM30.18 million in 2008 and RM101.15 million in 2009. In other words, the fraud must have gone undetected for several reporting periods. How is this possible? When the company’s receivables were rising with shareholders’ funds at less than RM27 million, wasn’t it a concern for management? Was the board briefed on the rising receivables?

The entire episode raises questions for the management and the board: Who brought in Starlight as a customer? How could the company allow one customer to account for so much of its contributions? Who was responsible for the deals with Starlight?

The problem may ultimately be Starlight’s, but some people in DIS Tech must also take responsibility.

The shareholders will be worse off because of this failure. The company could see its shareholders’ funds drop into negative territory if the RM82 million is not recovered. The company’s trade receivables amounted to RM131.41 million and its shareholders’ funds to RM26.67 million as at Dec 31, 2009.

Assuming the RM82 million is not recovered, DIS Tech’s shareholders will be in a deficit to the tune of RM55.4 million. Should that happen, the company will be an affected issuer under Bursa’s Practice Note 17 (PN17), and by its own admission, will have trouble repaying creditors and borrowers.

To recap, DIS Tech announced its FY2009 results on Feb 25, reporting a small net loss of RM555,000, mostly due to one-time write-offs. It reported a full-year revenue of RM181.4 million, which means that more than 50% comprised sales to Starlight.

But less than two weeks after it unveiled its 4Q results, on Feb 25, DIS Tech announced its problems with Hong Kong-based Starlight.

To the company’s credit, it has engaged a legal firm to investigate the case. However, this is small consolation for shareholders, who will likely see their investments disappear if the money cannot be recovered.

Since the fraud pertains to Starlight, DIS Tech must take every option open to it to recover the money from Starlight. It must also act against those at DIS Tech who conducted the transactions.

Have bridge, will grow
The plan for a bridge to replace the Causeway linking Johor and Singapore bounced back into the news last week when the Johor sultan told a news daily that he was willing to mediate on issues that stand in the way of the project.

The economic benefits of upgrading the 87-year-old Causeway are apparent to anyone who has had to endure the paralysing traffic jams at the border checkpoint. However, navigating through the diplomatic minefield that separates the two countries’ negotiating positions has been a tough call.

Singapore has taken a “balance of interests” approach, which bundles with the bridge project issues such as the sale of sand to the republic and the use of Malaysian airspace, while the Malaysian government’s approach has been to consider the “scenic” bridge separately from other negotiations. As a result, agreement has eluded both sides. Nevertheless, for the benefit of all, a mutually agreeable solution must be reached in due course.

A third link, between Desaru in eastern Johor and Changi on the island, that was proposed by Prime Minister Datuk Seri Najib Razak in May 2009, is somewhat different. Instead of alleviating congestion as the Causeway project would do, it would open up access to Iskandar Malaysia for capital-rich investors from Singapore, and so stimulate growth in a backwater of Johor. The benefits in terms of property development, industrial activity, job creation and consumer spending are clear.

A look at the number of links between land-scarce Hong Kong, bustling Kowloon and the New Territories will show the important role that bridges and tunnels play in creating access to new growth areas. At home, the Penang Bridge, which was considered a prestigious project once upon a time, now makes the second bridge a natural next step. The link will certainly be a key driver of economic growth for the southern part the island and the Batu Kawan hinterland on the mainland.

It will probably be quite a while before the negotiators on both sides of the Causeway get to iron out their differences and get the third bridge project off the ground.

Open tenders for big items too
The idea of having four developers making their pitch to Kuala Lumpur’s Kampung Kerinchi flat owners for the redevelopment of the area sets a good example for the award of public contracts. The plan is for flat owners to be briefed on the proposals of the four developers, followed by a secret ballot and the immediate announcement of the selected developer.

In contrast to the Kampung Kerinchi development, numerous big-ticket projects in the pipeline look likely to be awarded without open tenders being called. This practice continues to prevent market discipline from bringing project costs down to the most efficient level, and for this reason is simply unjustifiable. Besides, it ignores the Treasury’s rule that contracts worth more than RM500,000 are subject to the open tender process.

Despite previous announcements by government leaders that open tenders will be introduced to improve transparency and improve budgetary discipline, last November the Minister of International Trade and Industry Datuk Mustapa Mohamed announced that the RM628 million Matrade Convention and Exhibition centre project had been awarded outright to Naza TTDI Sdn Bhd in exchange for 65.2 acres of land in the Jalan Duta area. The Naza group has plans for a RM15 billion development on the piece of land in a public-private partnership.

The message such a deal brings across is that as far as the major contracts are concerned, the old ways have not changed. Nor is the Matrade project the only case on the cards. Under Budget 2010, parcels of federal government land in Jalan Cochrane and Cheras and 2,000 acres belonging to the Rubber Research Institute in Sungai Buloh have been identified for sale.

With Malaysian Resources Corp Bhd’s (MRCB) name being mentioned in connection with both properties, the best way to dispel suspicions of a sweetheart deal taking place is to offer the land for sale by open tender, something that has been promised by Najib. Similarly, having open tenders will be a boon for financing the West Coast Highway in a tight fiscal environment.

This article appeared in The Edge Malaysia, Issue 797, Mar 15-21, 2010