Sembmarine revised statement on directors' intent to subscribe for rights issue after EGM

FEEDBACK from readers is sometimes encouraging, and sometimes crushing. But some of the reader feedback I have received in the course of covering Sembcorp Marine's controversial S$1.5 billion rights issue has also been quite useful.

Just over a week ago, one reader complained to me that Sembmarine had, among other things, not properly disclosed the intentions of its directors with respect to their rights entitlements.

The reader pointed out that Sembmarine's rights issue circular dated Aug 4 stated in Paragraph 12.2 that "the directors who have interests in the shares have indicated to the company that they intend to subscribe to their rights entitlements, in accordance with the terms and conditions of the rights issue".

Yet, four out of Sembmarine's nine directors did not eventually take up their full rights entitlements - including the company's chairman Mohd Hassan Marican and chief executive Wong Weng Sun.

The reader went on to point out that Sembmarine's Offer Information Statement (OIS) dated Aug 26 - three days after the EGM - included a revised statement of its directors' intentions.

This document stated that "the directors who have interests in the shares have indicated to the company that they intend to subscribe to their rights entitlements in full or in part, in accordance with the terms and conditions of the rights issue."

Shareholders of Sembmarine would have relied on information in the rights issue circular when they voted at the extraordinary general meeting (EGM) on Aug 23 to approve the rights issue.

Would they have voted differently at the EGM if they knew that some of the directors were not going to take up their full rights entitlements?

Why was the statement of the directors' intentions in the OIS revised to include the words "in full or in part"?

When I asked Sembmarine for comment, a spokesperson said the words "in full or in part" were added in the OIS for "a more precise description of the directors' intentions and for greater clarity".

But the spokesperson added: "The difference in wording was not due to any change in the intention of the directors. We therefore do not believe that shareholders were misled in any way."

If Sembmarine was indeed aware from the outset that some of its directors were not going to fully subscribe to their rights issue entitlements, it should, in my view, have stated this more plainly in the rights issue circular.

In any case, Sembmarine should have highlighted the fact that it had added the words "in full or in part" in the OIS in order for investors to have the full benefit of this "more precise description" of the directors' intentions.

Big holders held back

Many minority shareholders of Sembmarine may think it hypocritical for the company's board to have recommended a rights issue that they did not intend to fully support personally.

Investors may also - quite rightly - view the unwillingness of the board to fully subscribe for their rights issue entitlements as a sign of their lack of confidence in the future performance of the stock.

Yet, it's worth keeping in mind that top officials at public-listed companies often receive a significant portion of their remuneration in the form of shares. Taking up their full entitlements to a particularly large rights issue, especially after the shares they are already holding have collapsed in value, could put them at personal financial risk.

Tellingly, the four directors of Sembmarine who did not fully subscribe to their rights entitlements were relatively large holders of the stock.

In particular, the more than 22.9 million shares held by the CEO of Sembmarine resulted in him being given a provisional allotment of nearly 34.4 million rights shares. This would have cost him more than S$2.75 million.

He eventually took up only 2.5 million rights shares, which would have cost him S$200,000.

Sembmarine's chairman held almost 5.1 million shares, which entitled him to more than 7.6 million rights shares costing some S$609,231. But he ended up subscribing for just over 3.8 million rights shares, which would have cost S$304,616.

Would it be more useful to look at the behaviour of Sembmarine's board members with the smallest holdings? With their limited exposure to the company's stock, wouldn't they be the most inclined to take a gamble on the deeply discounted rights issue?

Interestingly, Sembmarine's lead independent director Eric Ang Teik Lim is the only board member with no direct interest in the stock. His wife, however, held 49,110 shares prior to the rights issue. This would have entitled her to 73,665 rights shares.

Mr Ang's wife not only subscribed for her full rights entitlement but also applied for 225 excess rights shares to round up her post-rights issue holding to 123,000 shares.

The rights and excess rights shares would have cost her some S$5,911.

Directors are "insiders"

Returning to the matter of Sembmarine's shifting disclosure of its directors' intentions with respect to their rights entitlements, many retail investors may well have not closely read the rights issue circular before deciding how to vote at the EGM.

Indeed, many retail investors did not even bother to vote at the EGM.

As this column noted last month, fewer than 6.6 billion - or 52.4 per cent - of the 12.6 billion Sembmarine shares outstanding at the time were voted at the EGM. Assuming Temasek voted all the 5.4 billion shares it owned, that would mean only about 1.2 billion shares belonging to minority investors were voted.

Yet, this cannot possibly be an excuse for Sembmarine disclosing the intentions of its directors in a manner that easily risked misinterpretation.

Directors are generally regarded to be "insiders", possessing deep knowledge of a company's future prospects. This would be especially so in the case of Sembmarine, which is trying to navigate an industry-wide slump and considering a combination with the offshore and marine arm of Keppel Corp.

All things considered, I am inclined to take Sembmarine's hazy disclosure of its directors' intention to subscribe for their rights entitlements more negatively than the fact that some of its directors did not fully take up their rights shares.

As for the readers among you who have taken the trouble to share your insights and observations with us, keep the feedback coming. We may not always act immediately, but we are listening to everything you say.