Can Polling Solve Abusive Related Party Transactions?

One of the best investment advice regarding a corporate management was given by legendary investor Philip Fisher.

• The management of a company is always for closer to its assets than its shareholders. And without even breaking any laws, there are number of ways that the management can benefit themselves and their families at the expense of the minority shareholders, for example employing their relatives, buy-and-selling of properties between relatives at above market rates or the issuing common stock options.

Management benefiting themselves and their families at the expense of the minority shareholders. That means that the minority shareholders are considered OPM (Other People's Money) and they are there to be taken advantage off, they are there to be screwed!

And yes, buying-and-selling of properties between relatives or as they now calls it 'Related Party Transactions (RPT)'.

But before I continue, why is the management issue important? Why is the issue of trust in a management important?

Now if the company is not a traded entity or a stock, do you want to invest in a company which has a management or owner you do not trust? Would you buy a stock or enter a joint partnership in a company with someone that you do not trust completely?

Now I am pretty sure the answer is you WOULD NOT make such an investment because you would simple be afraid that your partner could find every possible way to benefit themselves and not you.

So why should it be any different when it comes to investing in stocks?

That's why I find it so strange that investors forgets about this issue when it comes to investing in stocks! I mean it's like telling the management, the owners, the major shareholders that it's perfectly ok that they take advantage of the minority shareholders and that they can embark on corporate exercises that will benefit themselves and not the minority shareholders.

Does it make sense?

No, it does not. Not for me and I would not prostitute myself in any such circumstances! Hell no! I would not allow the major shareholders to make a fool out of me and my money.

Now back to Related Party Transactions (RPT). What is this RPT?

This is a corporate transaction or a business deal between two parties that are related. What's wrong with such deals? Well since the deals are done within related parties, there is no way the minority shareholder can ascertain that both parties are not in collusion to seek monetary benefits for themselves and not for the minority shareholders. Yes, the interest of the minority shareholders are ignored. Simply put, the deal is aimed to benefit themselves at the expense of the minority shareholders.

Now if this wasn't a listed company, would you want to be a business partner? Do you want to be a business partner with a partner who constantly seeks ways to benefit himself/herself more than benefiting you?

I am sure again the answer is NO. So why should it be different with investing in a stock?

Past examples of RPT: Lion Diversified Acquisition of Subsidiary at RM61.55 million!, Flashback On Lion Diversified's RPT Transactions.

The recent Genting Malaysia RPTs. MSWG Slams Genting Malaysia For Its RPT Land Deal! and Genting Malaysia's UN Fortunate Entry Into UK Casino Business

The famous MMC-SAT saga!

MMC And Its Senai Airport Terminal Purchase! and More On MMC And Its Senai Airport Terminal Purchase!.

In regards to the MMC and SAT deal, MWSG did tried it best: MSWG Gains Vital First Victory In Its Battle Against MMC's Senai Airport Terminal Purchase but sadly it was not to be, Another Sad Day For Corporate Malaysia As MMC's Senai Airport Deal Is Approved!. Why? This was because minority shareholders were few in number when it came to the crucial voting time!

Yes, the minority shareholders did not come to vote and the deal that was clearly lopsided was approved! :(

Now on today's Business Times.

• 'Call for a poll when voting on related party transactions'
  
  By Adeline Paul Raj Published: 2010/08/10
  
  SHAREHOLDERS should insist on a poll when voting on related party transactions (RPTs), says an expert on the subject.
  
  A poll, rather than the usual show of hands, would be a fairer way of voting particularly when it comes to questionable RPTs, said Lee Kha Loon, the Asia Pacific head of the CFA Institute, a not-for-profit association of investment professionals.
  
  Shareholders don't realise how important a role they can potentially play in voting out "abusive" RPTs, he told reporters on the sidelines of the Financial Market RPT conference in Kuala Lumpur yesterday.
  
  "Malaysia is still voting by hand, but you can call for a vote by poll. You have to go in and demand for a vote by poll," he remarked.
  
  Lee was part of a task force that helped the OECD (Organisation for Economic Cooperation and Development) come up with a guide on fighting abusive RPTs.
  
  Stock market regulator Bursa Malaysia Bhd, which is seeking to enhance its listing rules, has included this matter in a consultation paper issued three weeks ago.
  
  "This issue of poll voting...we've not mandated it now but it's something which we will look into," its chief regulatory officer Selvarany Rasiah said after speaking at the conference.
  
  Investors need to be vigilant when RPTs are tabled for shareholder approval. Only non-interested shareholders can vote on such deals and, under present rules, they can request to vote by poll, she said.
  
  Selvarany pointed out, however, that RPTs, while prevalent in Asia given that there are many family-owned and state-owned companies, are not all bad.
  
  Some RPTs do not exploit minority shareholders and are actually beneficial to the companies involved, she said.
  
  Both Selvarany and Lee felt that Bursa had a regulatory framework that was comprehensive enough to safeguard investors from abusive RPTs.
  
  "Where there is non-compliance, we take enforcement action. We don't see any concerns with regard to abusive RPTs, as such," Selvarany said, when asked if RPTs deemed detrimental to minorities were on the rise in Malaysia.
  
  RPTs here need shareholder approval only when they breach at least 5 per cent of relevant ratios like the value of assets or shareholders funds.
  
  If they don't breach the 5 per cent threshold, then the company need only make a disclosure about the RPT, which Bursa will monitor.
  
  Entities that have undertaken RPTs in recent times that have come under close investor scrutiny include the Genting group.
  
  Genting Malaysia Bhd, a casino and hotel operator, late last year bought two firms which owned properties in Kuala Lumpur - the 25-storey Wisma Genting and two parcels of land in Segambut - for RM228.6 million from its parent, Genting Bhd.
  
  It did not need to get the approval of shareholders or regulators for the purchases as the price did not exceed 5 per cent of its shareholder funds.
  
  The Minority Shareholder Watchdog Group, however, felt that it should have, under the spirit of good corporate governance, sought shareholder approval given the dominant board structure, common major shareholders and directors involved.

Sadly when it comes to POLLs and VOTEs, I am sceptical.

Yes, needless to say that as a minority shareholder, one should really use their common sense and vote against all these abusive RPTs because these transaction clearly benefited the owners and not the minority shareholders but sometimes our minority shareholders does not want to help their own self because they fail to show up during the crucial voting time.

So if I am forced to give my one worthless one sen advice, I would say avoid companies that have had a history of abusive RPTs!

Yes, we need to learn to forgo any opportunities in such stocks. Treat the companies as business and not stocks and avoid them like plague!

This way, one is guaranteed NOT to be disappointed with poor polling results, like in the case of MMC-SAT deal!

And yes, sadly, I do not think that polling can solve these abusive Related Party Transactions!