Crappy Related Party Transactions

Related Party Transactions - A business deal or arrangement between two parties who are joined by a special relationship prior to the deal. For example, a business transaction between a major shareholder and the corporation would be deemed a related-party transaction.

While the great majority of related-party transactions are perfectly normal, the special relationship inherent between the involved parties creates potential conflicts of interest which can result in actions which benefit the people involved as opposed to the shareholders. Parties are related if one has control, or joint control, or significant influence over the other [IAS24R.9]. Significant influence is relevant when it relates to financial or operating decisions. Parties are also related when they are under the common control of another entity. The existence of control, joint control or influence can affect the terms on which the two parties transact. An understanding of the relationship and the terms on which two related parties have transacted is therefore relevant in understanding an entity's financial statements.

Why RPT deserves very close attention:

a) potential for collusion

b) minority interests are ignored or diminished or decimated

c) cashing out at the expense of one related party, which comes at the expense of the minority shareholders of the affected company

d) RPT generally devalues the perceived integrity of a company, collectively they devalue the integrity of the stock market

I am certain that the Securities Commission has a mandate to closely monitor RPTs. However, corporate owners will always try to circumvent rules or push through RPTs. Lately, in light of the current global financial turmoil, we have seen a rise in questionable RPTs. Some are deliberately designed to bypass the Securities Commission. When they are designed that way, it should be more questionable. I hope the SC and Bursa can still impose "discretionary powers" to regulate these RPTs.

Example #1: MMC-Senai Airport deal

This was supposed to be an all shares deal, which would have had to be approved by SC. They changed it to an all cash deal which only requires the approval of shareholders. Syed Mokhtar owns 51.8% of MMC, and as the controlling shareholder will usually abstain from voting. There is nothing that says that some of the minority shareholders may still be linked or connected to the controlling shareholder. The RM1.95bn shares deal was changed to RM1.7bn all cash deal. Though Senai Airport Terminal was valued at RM2.2bn, there are still a lot of questions. Why should MMC buy over the company? The extensive landbank does not gel with MMC's business model. If you really want value, you should consider listing Senai Airport Terminal when the market recovers.

Doing it now looks like somebody needs the cash. MMC is cash rich, is SAT in trouble with cash flow? If it is, then the deal would be detrimental to MMC's minority shareholders. If it is not, SAT would be better off with its own listing with its extensive landbank. If SAT cannot list because it is not profitable, why should MMC even consider buying then?

A prudent board would ask for SAT to go through a public bidding if the said value is RM2.2bn, why no such thing was considered? There shouldn't be an all cash deal for some asset that is still not profitable. An all shares deal would be more advisable.

Example #2: Magnum's asset disposal

Magnum proposed to divest some non-gaming assets to company director Lawrence Lim. Even that first sentence assumes all readers are stupid. The rationale was that Lim would then procure the buyers for the assets and probably make a cut for himself. This silly move again bypasses SC's jurisdiction. Lim is paying only RM3m downpayment for the assets worth RM130m - you go to a bank to buy a house also requires a minimum of 10% deposit, what is this crap? If he cannot get a buyer at a higher price than RM130m, he basically loses just RM3m. What a good betting opportunity. I mean at least IOI lost a huge bundle when it decided not to buy Menara Citibank, at least thats fair.

As a company director, shouldn't it be prudent to engage an investment bank to dispose off these assets?

It is so hard to write without profanities when describing these RPTs. I hope the SC will step in with their discretionary powers. When did we revert to a cowboy market?