Jardines faces another shareholder revolt

In April 2000, a group of minority shareholders in Jardine Group staged a rebellion against the defensive cross-shareholdings between Jardine Matheson and Jardine Strategic Holdings at the Group’s annual general meeting in Bermuda. It was a moment of high drama for Hong Kong’s original great firm, and highlighted how bad corporate governance practices have led to its decline. The rebels lost that battle but are gearing up for a new attempt to change Jardine’s ways – and perhaps return it to its former glory.

Brandes Investment Partners, a California-based investment advisory firm, has recently notified Jardines of four resolutions it will formally propose at the next AGM, to be held on 17 May. The resolutions are designed to force the senior managers of the Group to unwind the cross-holding with the aim of boosting the fortunes of the undervalued stock.

These resolutions call for the privatization of Jardine Strategic via a cash offer; the establishment of independent committees charged with nominations and remunerations of the Board of Directors; and to list the company again in Hong Kong.

Aside from calling for privatizing Jardine Strategic, these resolutions are new, designed to force management to make public decisions related to international best practices, says Brent Woods, managing partner at Brandes. After last year’s showdown, minorities looked for signs that management had seen their point of view. The evidence was negative: cash from the sale of Robert Fleming to Chase Manhattan Bank, as well as from share buybacks at subsidiary Hongkong Land, only went to bolstering the cross-holding structure, says Woods.

The cross-holding structure was created in 1986, a time of decline for the Group, in which Jardine Strategic was created in order that the family of Henry Keswick, while only owning around 5% of the Group stock, could safely ensure no outsiders could stage a takeover. Jardine Matheson holds 74% of Jardine Strategic stock, which in turn owns 50% of Jardine Matheson. Control is cemented by six overlapping directors who control 60% of Jardine Matheson’s votes and 67% of Jardine Strategic’s votes.

Minority shareholders complain that this obsession with control prohibits, by eliminating the prospect of becoming a takeover target, shareholders from realizing the deep discounts of share prices to the underlying net asset value (NAV). “We don’t want an outside takeover, but we see other ways of preventing it,” says Woods. “The Group has been overly concerned about protection mechanisms, and will suffer in the future.”

Of the four resolutions, the only repeat from last year is the call to privatize Jardine Strategic. But this time, Brandes is being more specific about the terms it wants the Board of Directors to undertake. Last year’s proposal was vague, giving the Board space to criticize it as potentially dangerous. Now Brandes is calling for the privatization by 30 September, with the purchase price of Jardine Strategic to be paid in cash for not less than $4.25-$5.25, fixed between the minimum and maximum purchase price at an amount equal to the highest minimum purchase price, based on the average of Jardine Strategic’s NAV.

The resolutions calling for independent non-executive directors to nominate directors of the Board, as well as determine their remuneration, comply with standard practice in the United Kingdom, and would prevent Jardine Group directors from nominating themselves a la the Vatican, explains Woods. He adds currently there is no information available to Jardine Matheson shareholders outlining Group policy regarding executive pay for Board members.

Last, the call to list again on the Hong Kong Stock Exchange is a bid to be included once again in MSCI indices, demonstrate public support for China and most importantly boost its value among Hong Kong investors. Mark Mobius, president of the Templeton Emerging Markets Fund in Hong Kong, told FinanceAsia last year that he believes Jardine Matheson shares would be worth three times their present value if the company had not decamped to Singapore in 1994. That move was undertaken in part to avoid Hong Kong’s looser takeover code, as well as to flee from mainland China’s political grip; the long history between Jardine Matheson and the Communist Party in Beijing is full of acrimony.

Woods believes this approach has a better chance of success than last year’s proposals. “The Board will have to take a position on what are sensible ideas in public. They would have to say [if voting no] that independent shareholders can not consider a cash offer for shares. It is a concrete proposal with no quibbling over price, which makes it more compelling.”

He adds that other minority investors are openly supporting the resolution, including London-based Marathon Asset Management and Delaware Investment Advisors, Toronto-based Spruce Grove Investment Management and New York-based Tweedy Browne. If you remove the influence of the cross-holding, Woods says this accounts for 32% of Jardine Matheson shares and 37.5% of Jardine Strategic. He notes that in last year’s battle, each resolution was supported by the majority of shareholders when adjusted for the cross-holding.

Last year, Henry Keswick argued that overlapping directors were necessary to protect the Group from a hostile takeover; that a ‘poison pill’ structure was ‘very American’ and wouldn’t go down well in the UK; that such reforms would leave the Group vulnerable to the whims of short-term investors. Yet the current structure has done nothing but depress the share price (see FinanceAsia magazine’s cover story, July/August 2000).

It seems that Henry Keswick believes there is only one true long-term investor, namely himself. The AGM in May will reveal whether Brandes and its allies will succeed in dragging Jardine Group into modernity – and perhaps if a new commitment to shareholder value and transparency will be able to make Jardines once again a great name in corporate Asia.