By Boo Kok Chuon

Consider this fictitious scenario:

The Han family runs a successful family enterprise, the Chin Holdings Group (CHG), a multi-industry conglomerate founded in 1911, and has since been passed down through generations of inheritance. Throughout the historical development of the CHG, although there was a major power shift in 1949, the control of the enterprise remains in the hands of the descendants of the Hans. Having survived numerous ordeals and crisis throughout her development, CHG has risen to become one of the largest enterprise in the economy.

Han & Kelvin Corporation (HKC) used to be an independent business entity founded by one of the adventurous and enterprising descendent of the Han family. In 1997, its major investor, who was also a customer, Brits & Co (B&C) sold its shares to CHG as part of its exit plans, predominantly as a strategic move in strengthening of its business relationship with CHG. The deal came in the form of a 60% ordinary shares with voting rights and an additional portion of convertible preference shares which could be converted to an additional 20% of ordinary shares, with no voting rights until conversion takes place. The acquisition has triggered objections from some of the board members of HKC, who were originally implanted by B&C (the B&C Camp) as part of its surveillance and monitoring plans. As an effort to appease the board in the spirit of amicability, CHG has agreed to preserve the independence of the governance structure of HKC for at least 50 years, and subsequently, appointed one of the descendent of HKC’s founder, Carrie Han, as the Chairman and CEO of HKC. This move had unequivocally managed to pacify the B&C Camp, as after all, the fact remains that B&C has officially relinquished the ownership of HKC in the first place.

The resentment within the B&C Camp continued to breed years after the acquisition, notwithstanding the fact that the irrevocable acquisition has already been a reality. Though on the surface, they appeared to conform to the leadership of Carrie, they have been attempting to collude with its patron, the B&C, behind the scene, in attempting to overturn the power of Carrie with the ultimate goal of regaining control of HKC. On the other hand, B&C has been appealing to its parent company, Sam & Co (S&C), the largest company in the economy as well as the largest customer of CHG, in exerting pressures on both HKC and CHG to replace Carrie Han’s leadership. Internally, the B&C Camp continues to sow discords and wreck havoc within HKC. The intensifying politickings and deliberate destructive actions internally and externally of HKC, obviously affected the investors confidence, which led to a substantial decline in HKC’s value and cornered HKC into a management and financial crisis.

To mitigate the crisis, CHG was forced to intervene the escalating tensions within HKC. However as CHG was bounded by the promise in 1997 to preserve the independence in HKC’s governance, CHG’s options of interference in HKC is after all constrained. CHG subsequently adopted the strategy of ‘starving’ HKC, by re-allocation of resources within HKC to other subsidiaries controlled by CHG as an attempt to ‘punish’ HKC. Not only did such move failed in mitigating the situation in HKC, it aggravated it. However, there exists a backdoor strategy that CHG could adopt, but it is a last resort nonetheless, as CHG was also under the threat of S&C on the commercial front.

Recently, a wave of crisis hit the business of S&C. Internal unrests erupted within S&C which led to rapid exhaustion of its resources. CHG immediately seized the opportunity, and sought to activate the backdoor strategy that it has all along intended: simply by converting the 20% preference shares into ordinary shares to attain special voting rights to pass extraordinary resolutions in reforming the governance structure in HKC, and swapping the CHG’s shares for more voting rights with other shareholders of HKG. Obviously, when the EGM notice for the conversion action was circulated, the B&C Camp, B&C and S&C were all infuriated. To the extent that B&C and S&C had started influencing the shareholders to short sell the shares of HKC. Eventually, though B&C and S&C did manage to persuade a small portion of the shareholders to dispose HKC’s shares, majority of which chose to accept the share-swap offer by CHG.

Question: If you are one of the shareholders in HKC, will you take up CHG’s offer?

Now, replace…

CHG with China

HKC with Hong Kong

B&C with Britain

S&C with the United States