Case Overview In 2009, Tang Wee Sung, the majority shareholder of C.K. Tang Limited, along with his brother, Tang Wee Kit, finally succeeded in privatising the company after two failed attempts in 2003 and 2006. The major controversy surrounding the privatisation was the valuation of Tangs Plaza, a commercial property located in the prime shopping district of Orchard Road. Minority shareholders cited its undervaluation as the primary reason for rejecting the cash offer by the Tang brothers. The minority shareholders felt that the redevelopment potential of the property should have been taken into consideration. In 2011, the Tang brothers failed in their attempt to cancel out all remaining shares held by minority shareholders through a capital reduction exercise. The objective of this case is to allow a discussion of issues such as the divergence of interests between controlling and minority shareholders, the manifestation of this divergence in a privatisation situation, the different methods of privatisation which can be used and the extent to which they protect the interests of minority shareholders, and the role of the board, audit committee, independent financial adviser, regulator and shareholders in a privatisation. About C.K. Tang C.K. Tang Limited is a Singapore-based company founded by Tang Choon Keng in 1932. The company is in the business of departmental store retailing and general merchandising. Since 1958, the company has been operating at its flagship building, Tangs Plaza, along Orchard Road1 . C.K. Tang is a company characterised by the presence of a major controlling shareholder. For example, in June 2003, then CEO-Chairman Tang Wee Sung, the second son of the founder, owned 69.95 per cent of the companys shares2 . In 1975, C.K. Tang was listed on the then Singapore Stock Exchange, which later became the Singapore Exchange (SGX)3 . However, since 2003, the Tang family had been trying to delist and privatise the company4 . After two failed attempts, the Tang family finally succeeded and the company was delisted on 24 August 20095 . In 2011, C.K. Tang made an offer to about 500 minority shareholders who had held on to the shares of the delisted company. This offer represented a 15 per cent premium over its fair value and well above the price offered to other shareholders for the delisting in 2009. However, some of these minority shareholders were still unwilling to take up the share buyback offer, and were holding out for a better offer6 . Board of Directors During the third and successful privatisation attempt, the board of C.K. Tang was chaired by Ernest Seow, a former PricewaterhouseCoopers (PwC) partner. Apart from Seow, there were three other directors with experience in accounting, business management and the retail industry. Among the four directors, three of them were serving as non-executive independent directors. During the companys history, there was at least one Tang family member on the board7 . However, in 2008, Tang Wee Sung, CEO and the majority shareholder of the company since 19878 , stepped down from the board, after he was alleged to be involved in an illegal organ trading scandal. With this development, for the first time in the companys history, there was no Tang family member on the board. According to C.K. Tangs Corporate Governance Report in 2009, the board would be responsible for enhancing long-term shareholder value and the overall management of the Group. This includes reviewing the Groups performance, approval of corporate strategies and promoting high standards of corporate governance. The board delegated some of its functions to the board committees, namely the audit committee, nominating committee and remuneration committee. First Privatisation Attempt: Scheme of Arrangement On 29 October 2003, Tang Wee Sung offered minority shareholders S$0.42 per share via a scheme of arrangement9 . This represented a premium of about 35 per cent above the average closing price over the last five trading days10. This price also meant a 19.2 per cent discount against the companys net tangible assets as at 30 September 200211. However, the resolution failed to pass, as the shareholders felt the offer price was too low and wanted more information on the companys prospects12 . Second Privatisation Attempt: Unconditional Cash Offer In December 2006, Tang Wee Sung and his brother Tang Wee Kit, offered shareholders S$0.65 per share through Kerith Holdings13, a company equally controlled by the brothers. This second attempt was in the form of a voluntary unconditional cash offer14. The S$0.65 per share offer reflected a 16.1 per cent premium to C.K. Tangs latest closing price at that time. It also represented a 9.4 per cent premium to the companys net asset value, based on its annual report for the financial year ending 31 March 200615. When the offer deadline expired, insufficient acceptances had been received16. The reason was widely believed to be the undervaluation of the commercial property Tangs Plaza17. As a result, the company continued its listing on SGX.On 15 July 2008, at an Annual General Meeting (AGM), minority shareholders questioned the board about the companys financial losses, as well as its plans to delist the company from SGX. The board declared that a privatisation exercise is solely the decision of the majority shareholder. The board said it owed a fiduciary duty to shareholders, which is to look after the business of the company.18 Attempts to vote against standard resolutions such as advance payment of directors fees were defeated, because of the Tang familys majority holdings19 . Third Privatisation Attempt: Voluntary Delisting On 8 May 2009, the Tang brothers made their third privatisation attempt through an investment holding vehicle, Tang UnityThree, which submitted a delisting proposal to the company. The remaining shareholders were offered S$0.83 per share20, which represented a 22 per cent premium over the companys last traded share price of S$0.68 prior to the offer, and a 21 per cent discount to the firms net asset per share price of S$1.05 as of 31 December 200821. The board recommended that the minority shareholders accept the offer, based on an evaluation of the offer provided by the independent financial adviser PwC22 . At an Extraordinary General Meeting (EGM) held on 31 July 2009, minority shareholders questioned if the offer was reasonable, given that the shares had closed at a price above the offer at that point in time. Nonetheless, the board retained its recommendation, saying that market prices typically varied23 . This was despite earlier statements by the Tangs saying that the privatisation offer was to allow shareholders to monetise the value of their investments at a premium over its historical trading prices24 . Shareholders also reproached the directors for failing to clarify with the Tangs about their redevelopment plans for Tangs Plaza after its privatisation. They expressed disappointment with the independent directors, saying that they had insufficiently analysed the issue. Doubts were raised about the independence and neutrality of the CEO of the company at the time, Foo Tiang Sooi, because he was personally related to Tang Wee Sung. Foo had worked under Tang from 1999 to 2006. He and Tang were also former schoolmates25. However, he dismissed these facts as irrelevant26. Foo also added that he was related to the shareholder who posed the question, but this fact was irrelevant as well27 . Another shareholder called for a vote of no-confidence against the board chairman. After consulting with legal advisors, the board rejected the motion, with the chairman saying that the action was an attempt to frustrate the meeting28. Even as shareholders tried to probe further, the chairman called for the vote to be taken29. The resolution to privatise the company was passed with 96.25 per cent of votes in favour of the proposal30 . Key Area of Controversy: Tangs Plaza The Singapore Code on Takeovers and Mergers (the Code) governs all takeover activity in Singapore involving public companies. Under Rule 26.2(a) of the Code, a property which is occupied for purposes of the business must be valued at the open market value for its existing use. However, Rule 26.2(c) provides for the case in which such a property is valued for an alternative use. For such a case, the costs of conversion and/or adaptation should be estimated and shown 31 . During all three privatisation attempts by the Tang brothers, the offer price reflected an undervaluation of Tangs Plaza32. The board stood by its stand of valuing the property according to its existing use, as there was no intention of deviating from it. One investor had brought up the fact that in C.K. Tangs 2007 annual report, a property valuation report had taken into consideration the redevelopment potential of Tangs Plaza. In response, the boards legal adviser, Yeo Wee Kiong, said it was not legally required to put a redevelopment valuation on the report33 . PwC stated that the property was valued at S$340 million on 25 May 200934. This was much lower than other nearby sites. In contrast, minority shareholders contested that the site was easily worth at least S$400 million, according to an independent valuer. This value did not take into account the potential value arising from redeveloping the site, and did not consider the potential value from sub-dividing the site into small retail units and leasing them to specialty tenants35. The board, however, stated that regulators had told the directors that any such redevelopment was not applicable36 . Unhappiness Amongst Minority Shareholders Several shareholders were unhappy about the perceived undervaluation of the Tangs Plaza site, as well as the fact that the offer price was less than the companys net asset per share. Thus, they met with the Securities Investors Association (Singapore) (SIAS)37. SIAS stated that it objected to the exit price and that the minority shareholders had been treated with no dignity38 . SIAS had also called for regulators to intervene39 . Ten shareholders had also signed a petition to SGX and the Ministry of Finance questioning the basis of the valuation on the propertys existing use40, in a bid to convince the regulators to allow them to obtain an alternative valuation report41. SGXs reply was that C.K. Tangs move to delist was purely commercial, and that the company had complied with the listing and delisting rules42 . The Capital Reduction Exercise On 19 August 2011, C.K. Tang embarked on a capital reduction exercise to cancel out all remaining shares held by minority shareholders. C.K. Tang would pay each investor S$1.30 per share, which represents an increase of 56.6 per cent on the exit offer in 2009. PwC had indicated that the S$1.30 offer is 15 per cent above its fair market value43. The rationale behind the exercise was to reduce administrative burdens. Additionally, the company reaffirmed that there are no plans for the redevelopment of Tangs Plaza, and the buyout had no hidden agenda. However, only 39 per cent of the minority shareholders in attendance agreed to the price for the share buyback, far below the 75 per cent required. Some minority shareholders cited the undervaluation of the Tangs Plaza property as the reason for rejecting the offer44. C.K. Tang would have to do more to convince these shareholders for the buyout to succeed.Discussion Questions 1. In cases of companies where there are controlling shareholders, explain why the interest of controlling and minority shareholders may diverge, using the CK Tang case as an example. 2. Should independent directors be primarily concerned with the interests of the minority shareholders? 3. Evaluate the independence of C.K. Tangs board during the third privatisation attempt. Do you think this affected the actions of the board during the privatisation process? 4. Do you believe that the basis of valuation was fair? Explain. 5. With regards to the privatisation episode, suggest improvements that would help protect minority shareholders in the future. 6. C.K. Tang used three different privatisation methods. Explain how these different methods work and the pros and cons of these different methods from the viewpoints of the shareholder(s) wanting to take a company private versus minority shareholders who may prefer that the company remain listed.