ZCMA6072: Business Ethics & Governance

INDIVIDUAL ASSIGNMENT 1

Lecturer Name: Prof. Dr. Mohd Fairuz Md. Salleh

Prepared By: LOW WEI KANG - P127308

Q1) In cases of companies where there are controlling shareholders, explain why the
interest of controlling and minority shareholders may diverge, using the CK Tang case as
an example.
There are several causes for the shareholders to switch their interest in the company. The
difference of opinion regarding the company's direction in the management of the company and
decisions taken by the Board of Directors (BOD) will inevitably lead to conflict between
shareholders. During the Annual General Meeting (AGM), shareholders select or appoint the
Board of Directors (BOD) and voting power is equally offered to share controls by the respective
shareholder. When the portion of supporters is larger, the greater their power to make decisions
and influences inside the company. This condition can be noticed when the shareholders are
divided between controlling and minority shareholders.
Usually, controlling shareholders want to set the company's direction, decisions, and
behavior for the BOD to follow. While the minority is concerned about the decision's investment
and returns. Any move that threatens or provides a lower return than they believe they can obtain
will end in the conflict. Due to the controversy over the BOD decision in the CK Tang case, the
interests of controlling and minority shareholders have diverged as follows:
• Sensational feelings from the minority shareholders
CK Tang was established by Tang Choon Keng in 1932 and was listed in the Singapore
Stock Exchange (SGX) in 1975. After two failed attempts by the majority in 2003 and
2006 to delist the firm from the SGX, they succeeded in 2009 but failed to cancel out
the remaining shares held by 500 or so investors who still hold their shares. Until 2017,
the majority shareholder has made four attempts to buy out the 500 or so remaining
minority shareholders.
It is believed that the minority emotional has a personal relationship to the company
because of their long-term investment in the company since the day it went public. The
feelings they have is one of the reasons the minority is willing to overlook the majority's
offers in the four attempts. Even though the offer keeps increasing and the independent
financial advisor has advised accepting the offer, the minority continues to hold the
shares and wait for a better offer.
• Inexperience BOD regarding on valuation made on Tang’s Plaza building
The minorities are dissatisfied towards the chairman disregarded their reasoning over
the assessment of the Tang's Plaza building. The corporation was delisted due to the
reason of disappointment that started with the first and second privatization. The BOD
and the majority neglected to take the minority's opinion into account, and this issue
has persisted to this day because of minority negotiating. They believe that the lower
valuation placed on that building contributes to the undervaluation of the corporation.
The Tang's Plaza, which is now located in the country's center has a substantial current
significance to the minority.
• Lost of promises to shareholders
 The minority has been guaranteed that their investment will be valued at a premium
over the historical trading values in the third attempt. After the shares were closed for
trading, the share price changed and rose above the majority's first offer.
Q2) Should independent directors be primarily concerned with the interest of the minority
shareholders?
In my opinion, independent directors play a crucial role in corporate governance by
providing an objectives perspective and securing the company’s decisions are made in the best
interest of all shareholders. They should treat their shareholders impartially regardless of the
shareholder group they represent and balance against any conflicts of interest that may arise among
the executives and controlling shareholders. The goal of having independent directors is to give
investors peace of mind about their investments by providing them with someone who does not
have any personal stake in the firm and who acts professionally while making strategic decisions.
If the independent directors act in accordance with the minority's first claim regarding the
Tang's Plaza Building's valuation by compelling the BOD to seek a second opinion from
unaffiliated parties, the relationships between stakeholders could be impacted and the number of
minority shareholders who would maintain their share would likely decrease.
In the third attempt, if the offering price falls below the market closing price, the
independent director should likewise tell the BOD of this. The minority now feels oppressed and
mistreated by the majority due to all these unresolved and unentertaining disputes.
Q3) Evaluate the independence of C.K. Tang’s board during the third privatization attempt.
Do you think this affected the actions of the board during the privatization process?
During the 3rd privatization, 3 of the board's 4 members were non-executive independent
directors during the and the chairman, Ernest Seow was one of them. At that time, none of Tang's
relatives were present on board. The CEO of the company has been accused of having a personal
link to the Tang Family, however this charge is ignored.
The board must respect the Tang Family as the largest stakeholder of the company even
though they are not represented on the board and cannot thus influence their decisions. However,
to ensure the board operates in a responsible and equal manner, it should not ignore any disputes
raised by the minority. In conclusion, the Tang’s family was the one that propose the privatizing
the business, therefore they can own it’s right.

Q4) Do you believe that the basis of valuation was fair? Explain.
The offering price of $0.83 per share and the valuation of Tang’s Plaza building are the 2
factors that related to the valuation created by the BOD. For example:
In offering price, the minority has been guaranteed that their investment will be valued at
a premium over the historical trading values in the third attempt. After the shares were closed for
trading, the share price changed and rose above the majority's first offer. In order to uphold their
promise to the shareholder, the board should take this into account and revise the offering price.
In Tang’s Plaza building, the Singapore Code on Takeovers and Mergers said that the
property should be evaluated at the open market value for its existing use, but board valued the
building by looking at its "existing use" value. Looking at this valuation basis will undoubtedly
cause the minority to disagree. Minority agrees to the condition of having less influence but invests
with the aim of getting the highest return on the firm values they can.
In conclusion, both valuations are unfair.
Q5) With regards to the privatization episode, suggest improvements that would help protect
minority shareholders in the future.
There are a few improvements that would help protect minority shareholders in the future:
• Enhance the ole of independent directors on the board prevent unbiased cases
happen and secure the interest of minority shareholders.
• Allow minority shareholders to admittance the company information and financial
report to enable them to assess the company’s information.
• Strengthen strict regulatory oversight to prevent illegal activities from happening,
for example: insider trading, market manipulation and other activities that could
affect the benefits of monetary shareholders.
• Creates a clear and fair valuation of assets during transactions to prevent potential
undervaluation happening.
• Improves the audit committees and external audit processes to ensure accurate
financial reporting is generated and prevent potential mismanagement.
Q6) C.K. Tang used three different privatization methods. Explain how these different
methods work and the pros and cons of these different methods from the viewpoints of the
shareholder(s) wanting to take a company private versus minority shareholders who may
prefer that the company remain listed.

I. 1st Privatizing Attempt: Scheme of Arrangement

A general offer is made to all shareholders of the target company by the bidder in a
contractual takeover offer. An alternative to a contractual offer is a statutory
procedure known as a scheme of arrangement. Between the target company and its
shareholders, there is a formal agreement.

Tang Wee Sung, the majority shareholder, has made a scheme of arrangement offer
to the minority shareholders for the price of S$0.42, which represents a premium
of nearly 35% over the average closing price for the previous 5 trading days.
 Pros
➢ 90% of all securities needed to
start forced acquisition after a
takeover proposal are typically
viewed as higher thresholds than
the "majority in number and 75%
in value" shareholder approval
standards for a plan.
➢ A flexible timetable.
➢ Freedom to include provisions in
a plan that a takeover bid would
not allow.
➢ The assurance of acquiring 100%
ownership should the plan be
accepted.
Cons
➢ Execution risk is introduced by
the necessity for court approval
and increased regulatory body
involvement in the plan process,
which is not applicable to the
same level in takeover bids.
➢ Changes to a scheme's conditions
are challenging and time-
consuming.
➢ It will take a significant amount
of time and money to carry out
the plan.

II. 2nd Privatization Attempt: Unconditional Cash Offer

When making a takeover offer, an unconditional cash offer is one that becomes
"unconditional as to acceptances" once the bidder has gained enough shareholder
approvals. This effectively indicates that the target company's shareholders have
accepted the bidder's offer to buy.
Pros Cons
➢ Price assurance - Using a cash ➢ Liquidity risk - Using the
transaction gives you the company's cash reserves after
advantage of a guaranteed price losing its most liquid asset.
over the stock's volatile pricing. ➢ Potential debt issues - If the
➢ No dilution of ownership – The money is obtained through loans,
shareholders of the acquired firm this will cause debt management
will own a portion of your challenges.
company if its shares is
exchanged for stock in the target
company to finance the purchase.

III. 3rd Privatization Attempt: Voluntary Delisting

When a public company's shares are voluntarily delisted from a national securities
exchange or inter-dealer quotation system, the shares are also deregistered under the
Exchange Act, which suspends or ends the company's Exchange Act-required public
reporting obligations.
 Pros Cons
➢ Requirements for corporate ➢ A lawsuit by stockholders against
governance can be made simpler. the board of directors is possible.
➢ The business will have more ➢ There will probably be a
discretion to consider potential considerable decrease in trading
unusual corporate deals. activity and analyst attention.
➢ Significantly decreased ➢ Absence of public exposure can
management time commitment harm a company's business as
and operating costs for well as its presence in the
compliance and reporting financial markets.
activities.