Darco shareholders right to let offer lapse; should push for more accountability

DARCO's deputy chairman Wang Zhi needed shareholders representing just a little over 5 per cent of the company's holdings to take up his offer to buy their shares. He was able to get acceptances of only 3.9 per cent, which suggests minorities weren't convinced by the chairman's recommendation that they take the deal. But shareholders shouldn't stop there. Recent events at Darco are not conducive to the value of the stock, and shareholders should continue to pressure the board to act on their behalf.

Mr Wang had made a general offer for all of Darco's shares at S$0.17 per share. The offer was conditional on him accumulating at least 50 per cent of the total voting rights in Darco.

The independent financial adviser (IFA) RHT Capital had, in a June 9 circular, recommended that shareholders reject the offer because the financial terms were deemed to be "not fair" and "not reasonable".

The offer price represented a 56 per cent discount to the company's audited net tangible assets per share as at end-2019.

The IFA also said that the company seems to be doing well operationally. It has sufficient current assets to cover its current liabilities, and its net cash outflow from operating activities has decreased significantly in FY2019 compared to FY2018.

In accordance with the IFA's opinion, the independent directors had therefore recommended that shareholders take no action and allow the offer to lapse. But in a startling departure, Darco's chairman Wang Yaoyu instead recommended that shareholders accept the offer.

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He had argued that the offer presented a good exit opportunity given the illiquidity of the shares and the fact that the water purification and wastewater treatment industry that the group operates in faces "significant challenges".

The offer for Darco had been triggered after Mr Wang Zhi purchased a 14.27 per cent stake in Darco from Wuhan Liankai Investment Co, a company in which Mr Wang Yaoyu has a 36.32 per cent equity stake.

Lawyers that The Business Times spoke to said that according to the Singapore Code on Take-overs and Mergers, the sale of the shares would not exclude Mr Wang Yaoyu from making a recommendation on the offer.

The note to Rule 8.3 in the Code says that directors of the offeree company who have sold offeree company shares to the offeror are not deemed to have an irreconcilable conflict of interests.

Lawrence Tan, partner and head of merger and acquisition at Rajah & Tann Singapore, said that only directors with "other interests in or financial connection with the offeror" would be excluded.

TSMP Law joint managing partner Stefanie Yuen-Thio called the requirement for directors to make a recommendation to shareholders "a heavy responsibility and one that a director should not be able to weasel out of easily".

"For this reason, the Takeover Code and the Securities Industry Council take a tough stance, granting a waiver only in 'exceptional circumstances' so that shareholders have the protection of knowing that all directors have signed off on the recommendation and are taking personal liability for the advice," she said.

Mr Wang Yaoyu's recommendation did, at least, give shareholders an idea of his inclinations. They should now ask that Mr Wang Yaoyu and the rest of Darco's board do better in representing their interests.

Since the close and lapse of the offer, Darco shares have risen as high as $0.19 each. But they fell yesterday to close at S$0.17.

At Darco's annual general meeting on June 26, two independent directors were voted off the board. One, Tay Lee Chye Lester, was voted off nearly unanimously with 99.99 per cent of votes against his re-election. The re-election of the other, Tay Von Kian, was opposed by 71.04 per cent of votes - the same percentage of votes that approved the re-election of Mr Wang Yaoyu and Mr Wang Zhi as directors.

In a subsequent announcement posted on SGXNet, Mr Tay had highlighted some unresolved differences in opinion that he had with the rest of the board relating to an Indonesian waste management project that Darco is pursuing and that he objected to. He also highlighted he was uncomfortable with aspects of a placement that Darco had proposed, and said that in light of recent corporate governance issues raised by BT he might have been uncomfortable staying on as a director in any case.

Yesterday, Darco responded to Mr Tay's statements with an announcement of its own. Among other things, Darco said Mr Tay gave the "impression that it was the two longer serving independent directors who had been upholding corporate governance standards of the company" when in fact various initiatives have been taken to enhance Darco's corporate governance.

Mr Tay's statement and Darco's response show clearly that Mr Tay has been a dissenting voice on Darco's board. His departure cannot be a good thing for minority shareholders.

The voting pattern from the AGM shows that it will be difficult for minorities to pressure the board into electing another similarly independently minded director. But they should nevertheless continue to demand greater accountability from Darco's board.

Read more: Darco defends Indonesia project, says financially rewarding 'if carefully managed'