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Darco minority shareholders raise disclosure, conflict of interest issues

MAS says it is reviewing a complaint on alleged market misconduct in Darco Water shares

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Minority shareholders who own a combined 15 per cent stake in Darco Water Technologies are pressing for a special audit of internal controls and a review of potential conflicts of interests at the board level, amid concerns that the company has lost its direction following a surprise change in leadership.

Singapore

MINORITY shareholders who own a combined 15 per cent stake in Darco Water Technologies are pressing for a special audit of internal controls and a review of potential conflicts of interests at the board level, amid concerns that the company has lost its direction following a surprise change in leadership.

Darco shares have collapsed by 66 per cent since April last year, when non-executive deputy chairman Robert Wang Zhi launched a coup by voting out the entire board except for executive chairman Wang Yaoyu and lead independent director Lester Tay. Mr Wang Zhi had become Darco's controlling shareholder through a placement in 2018.

Mr Tay had served as the chief financial officer of another water company, Asia Water Technology, when Mr Wang Yaoyu was its executive director.

To avoid thrusting the company into limbo, however, the Wangs, who are unrelated, later chose to re-elect all its directors. Thye Kim Meng, Darco's chief executive since 2001, as well as two other directors, then agreed to resign. They did so one by one in May 2019.

Mr Wang Zhi is set to cement control in Darco through a general offer at S$0.17 a share. The offer closes on Tuesday evening and is conditional on him getting no less than 50 per cent of the total voting rights in Darco. Mr Wang Zhi has been buying shares on the open market to get closer to that threshold. He had a 44.43 per cent stake as of Monday.

Shareholders have raised a number of issues with the offer and with Darco's disclosures to Darco's board and the Singapore Exchange, in letters seen by The Business Times.

First, the offer was triggered after Mr Wang Zhi bought a 14.27 per cent stake in Darco at S$0.17 per share from an entity at which Mr Wang Yaoyu is a director and controlling shareholder.

Darco had an audited net tangible asset of S$0.39 per share as at Dec 31, 2019, so shareholders have been advised by an independent financial adviser (IFA) to reject the S$0.17 per share offer.

But Mr Wang Yaoyu has told shareholders that they should accept the offer anyway because Darco operates in an industry that faces "significant challenges", among other things.

Shareholders have questioned Mr Wang Yaoyu's position, and his interest in the offer.

Minority shareholders including Robert Stone, who has an 11.68 per cent stake in Darco, wrote to the board on June 11: "The IFA has stated that the group has sufficient assets to cover its liabilities and the group's net cash outflow from operating activities has decreased significantly from FY2019 as compared to FY2018, which suggests that prospects are improving for the company.

"The basis and reasons provided by the chairman for his differing recommendation to shareholders to accept the offer (are) unclear and/or weak... Please highlight the steps taken by the board to mitigate or manage such conflict of interest, if any."

BT approached Darco to seek out both the Wangs for comment but was told that the chairman is in China, while the deputy chairman is tied up with the general offer till Tuesday.

Second, Darco is expected to require fresh funding of up to S$46 million in order to invest in a waste management project in Indonesia that Mr Wang Zhi has been pushing for.

The board had earlier planned a controversial S$6.55 million private placement to China-based investors at S$0.35 per share.

But this was aborted in March after minority shareholders led by Sofos Infrastructure Investment Fund argued that the placement - which would be at a discount to Darco's NTA - should be put to a shareholders' vote since the company was not in any distress.

Darco's board had also failed to disclose that Joanna Ong Joo Mien, who became an independent director after the coup last year, is linked to Qarah Consultancy, which would have collected a finder's fee if the placement had gone through.

Little is known of Qarah, though BT understands that Qarah was introduced to Darco by Mr Wang Zhi.

Qarah Consultancy was registered to Ms Ong's home address when Darco proposed the placement on Jan 13, and she was Qarah's company secretary as well, according to its corporate records. Qarah has since changed its registered address to International Plaza.

Ms Ong's husband was Qarah's sole shareholder until Aug 22 last year. He transferred his shares to one Alyssa Pek less than five months before the placement was announced.

When shareholders dug further, they found that Ms Pek shares a home address with one Gregory Pek, who became a Darco shareholder late last year. According to share variance reports seen by BT, Mr Pek had sold 6,100 Darco shares on Dec 17. Mr Pek did not immediately respond to BT's requests for comment.

Third, on that same day Mr Stone had witnessed unusual trading activity in the stock and had subsequently written to alert Darco's board of it.

In a letter dated Dec 18, he described what may have been an attempt to knock Darco's shares down. In one example, he said he "had an order to buy 2,000 shares at S$0.35 and just seconds before the close someone sold 2,200 shares at S$0.25".

Mr Stone said he has not seen any similar activity since, but added: "As soon as I saw that, I stopped trying to buy and I've stopped buying since Dec 17."

It is not known who put in the sell orders seen by Mr Stone. Darco is a thinly traded stock and the day's volume of 18,300 was already higher than usual.

Mr Stone received a response to his letter from Darco's new CEO Poh Kok Hong, who said that he was unaware of who was behind the trades.

On June 3, minority shareholders reported the incident and their findings to the police. The case has been referred to the Monetary Authority of Singapore (MAS).

An MAS spokesperson said: "MAS is reviewing a complaint on suspected market misconduct in the shares of Darco Water Technologies that was initially lodged with the Commercial Affairs Department. As the review is confidential, we are unable to comment further on its status."

Finally, shareholders remain leery of Darco's venture into the Indonesia waste management project. The seller of the project is a unit of Hong Kong-listed Yunnan Water Investment Co. Mr Wang Zhi was previously a director of one of its subsidiaries, Yunnan Water International.

Shareholders have argued that Darco, which is in the business of water treatment, has neither the resources nor the expertise to go into waste management.

In response to these concerns and other queries from the Singapore Exchange, Mr Wang Zhi said last November that he will fully reimburse Darco for any and all costs incurred in pursuing the acquisition if for any reason Darco decides not to proceed with it.

But this still leaves Mr Wang in a position of conflict, shareholders said. They wrote to Darco's board last week requesting that Mr Wang Zhi recuse himself from taking part in further discussions on the Indonesia project, but have not yet received a reply.

Darco shares last traded at S$0.17 on Monday.

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