Caymans gives Hong Kong tycoons a head start

A man smokes a cigar as he walks along Seven Mile Beach in George Town, Cayman Islands, April 27, 2010. REUTERS/Gary Hershorn (CAYMAN ISLANDS - Tags: TRAVEL) - GM1E65105SC01

HONG KONG, Aug 11 (Reuters Breakingviews) - A tweak to an archaic takeover rule in the Caribbean will help Thomas Lau to succeed where his sibling did not. The Hong Kong billionaire is offering $240 million to buy out minority shareholders in Caymans-registered Lifestyle International (1212.HK), his department store chain. His timing means the deal won’t have to pass the so-called headcount test that ended a similar tilt at developer Chinese Estates (0127.HK) by the family of his brother Joseph. Dropping the rule makes governance sense, although it removes one means for small shareholders to scupper poor offers.

Several Hong Kong tycoons have fallen foul of the notorious tests, which the Cayman Islands will scrap at the end of this month. The rule stipulates that a deal needs to be approved by a majority of voting shareholders present, as well as by ownership. Joseph Lau’s family failed to buy the 25% it didn’t own in developer Chinese Estates, valuing it at $979 million, after a majority in the room blocked the deal despite holding just $8.4 million worth of shares.

It's a rule open to abuse. Richard Li’s 2008 privatisation offer for his telecoms operator, PCCW (0008.HK), passed the test but he dropped the bid after it was revealed shareholdings had been split to boost headcount support.

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The tests – and failures – have been common in Hong Kong because of the number of tycoon-controlled companies and their use of schemes of arrangement, a court-supervised process where disinterested shareholders, but not the bidders, vote. Hong Kong dropped the rule in 2014, but is home to just 8% of the city’s listed companies. The Caymans hosts 59% of them while Bermuda, domicile of Chinese Estates and around a fifth of Hong Kong-listed companies, still requires the test.

Many tycoon buyouts come at notably weak moments for the shares. The Chinese Estates offer was a 38% premium to the undisturbed price, but a massive 69% discount to the net value of the company’s prime properties. Lifestyle shares last week hit their lowest in at least a decade when Thomas Lau made his offer for the 25% he does not already own.

Hong Kong replaced its headcount test with a rule allowing 10% of minority shareholders by ownership to block a scheme of arrangement, regardless of domicile. Resistance under that rule is perhaps harder to organise than mobbing a meeting, but it’s fairer on fellow shareholders.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

CONTEXT NEWS

Hong Kong-based Lifestyle International said on Aug. 7 that Chairman and 75% shareholder Thomas Lau has offered to take the department store operator private in a deal valuing the company at HK$7.5 billion ($957 million), or HK$5 a share.

The price, which Lau declared is final, represents a 62% premium to the shares’ undisturbed level.

Lifestyle is domiciled in the Cayman Islands, which at the end of August will drop a requirement for the so-called headcount test. This stipulates that deals such as taking a company private require approval both from the majority of shareholders participating in the vote by number as well as by voting power.

Almost 60% of primary-listed Hong Kong companies are domiciled in the Caribbean tax haven.

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Editing by Antony Currie and Katrina Hamlin

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Jennifer joined Breakingviews after three years as Reuters’ Asia Finance and Markets Editor. Prior to that, Jenn spent 18 years at the Financial Times covering various aspects of banking, finance and markets in London and New York before her move to Hong Kong in 2012. Jennifer has a BA in History from the University of Exeter and won a Knight-Bagehot fellowship to study at Columbia University, where she earned an MSc in Journalism studying alongside the MBA class.