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This is an abridged version of a case initially prepared by Keh Guat Teing Jasmine and Lee Yi Wen under
the supervision of Professor Mak Yuen Teen. The case was developed from published sources solely for class
discussion and is not intended to serve as illustrations of effective or ineffective management. Consequently, the
interpretations and perspectives in this case are not necessarily those of the organisations named in the case,
or any of their directors or employees. This abridged version was prepared by Sreevardhan Agarwal under the
supervision of Professor Mak Yuen Teen.
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Dialling for Votes: The PCCW Privatisation Scandal
In 2008, PCCW’s businesses were hit hard by the global recession. Profit
slumped 20 per cent in the first half of the year4. However, some key
financial indicators, such as EBIDTA and earnings per share remained
stable. After declaring a dividend of HK$0.133 per share, PCCW ended
the year with a stable financial position despite the impact of the crisis.
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Dialling for Votes: The PCCW Privatisation Scandal
executive director also has a term of three years and the maximum term
of office for each non-executive director is three years5.
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Dialling for Votes: The PCCW Privatisation Scandal
part of Richard Li’s buyout group, and instructions were given to Inneo
Lam, Regional Director at Fortis, to distribute the shares to 500 Fortis
agents. Without these insurance agents, the buyout plan would only gain
marginal support, with 903 approving and 854 opposing8. Such a slim
majority would not have met the headcount rule’s requirement of 75 per
cent support by number of shareholders.
“These people have put their life savings into it, and they’ve got
nothing left. Look what happened - it [the stock price of PCCW]
has gone down from HK$120 to nothing! It’s pathetic … there’s
a difference between a takeover and a squeezing out10.”
Many institutional investors, having invested for the short term, accepted
the proposal due to the premium of the offer price over the prevailing
market price. However, the Court of Appeals highlighted the plight of
retail investors, saying, “These small shareholders are not realising their
investment but in fact are being left behind ... I can’t see it's going to do
the company any good.”11
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Dialling for Votes: The PCCW Privatisation Scandal
Another important issue was that the buyout plan was drafted in a manner
that would greatly benefit Richard Li and China Netcom. According to
the proposal, after PCCW was privatised, Richard Li and China Netcom
would be awarded a special dividend that would cover the entire cost of
taking the company private, plus provide an extra HK$2.9 billion once
the process was completed.12 Since management did not justify the
decision to award the special dividend to the parties making the buyout
offer, one of the judges hearing the case commented that the proposal
was “outrageous”13. These issues exacerbated the concerns of minority
shareholders, many of whom were elderly investors who had to leave
the meeting before casting their vote since it dragged on for more than
7 hours14.
The evidence of vote rigging did not technically violate Hong Kong’s market
regulations because there were no laws against splitting shareholder
votes. However, since it went against the spirit of the headcount rule,
Richard Li and China Netcom had to withdraw the proposal based on the
Court of Appeal judgement.
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Dialling for Votes: The PCCW Privatisation Scandal
Discussion Questions
1. What is the “agency” problem typically confronting companies like
PCCW with a controlling shareholder?
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Dialling for Votes: The PCCW Privatisation Scandal
Endnotes:
1
“Cyberport Critics Get Stake Hint.” 21 March 1999. The Standard. 6
December 2011. <http://www.thestandard.com.hk/news_detail.asp?pp_
cat=&art_id=25641&sid=&con_type=1&d_str=19990321&sear_year=1999>
2
Bloomberg. “PCCW Investors Approve Li’s $2.05 Billion Buyout bid (Update
2)”. 4 February 2009. <http://www.bloomberg.com/apps/news?pid=newsarc
hive&sid=apYGAEz9.AzQ>, accessed on 6 December 2011
3
“Hong Kong Exchange Rejects Carving Up of PCCW.” 27 April 2011. Wall
Street Journal. 6 December 2011. <http://online.wsj.com/article/SB1000142
4052748703778104576287800475886730.html>
4
Bloomberg. “PCCW Investors Approve Li’s $2.05 Billion Buyout bid (Update
2)”. 4 February 2009. <http://www.bloomberg.com/apps/news?pid=newsarc
hive&sid=apYGAEz9.AzQ>, accessed on 6 December 2011
5
PCCW. “Annual Report, 2009.” 2009. <http://www.pccw.com/staticfiles/
PCCWCorpsite/About%20PCCW/Investor%20Relations/Financial%20
Results/2009/e-Annual%20Report.pdf>, accessed on December 2011
6
Loh, Timothy. “The PCCW Privatization: A Guide to the Applicable Law for
Schemes of Arrangement.” 2 March 2009. <http://www.timothyloh.com/
Publications/090302_PCCW_Privatization.html>,
accessed on 6 December 2011
7
Wang, Tina. “PCCW Saga Goes Into Extra Innings.” 2 May 2009. Forbes.
10 April 2010. <http://www.forbes.com/2009/02/05/pccw-richard-li-markets-
equity-0205_china1.html>
8
Chung, Olivia. “Shocked, Shocked!!” 28 April 2009. Asia Times Online.
December 2011. <http://www.atimes.com/atimes/China_Business/
KD28Cb01.html>
9
Securities and Futures Commission. “Court of Appeal stays decision on
PCCW privatization.” < http://www.sfc.hk/sfcPressRelease/EN/sfcOpenDoc
Servlet?docno=09PR41>, accessed on December 2011
10
Scent, Benjamin, “It’s Outrageous” 21 April 2009. The Standard. 6
December 2011. <http://www.thestandard.com.hk/news_detail.asp?pp_
cat=30&art_id=81081&sid=23531732&con_type=1&d_str=20090421&sear_
year=2009>
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Dialling for Votes: The PCCW Privatisation Scandal
11
Scent, Benjamin. “It’s outrageous”. 21 April 2009. The Standard. 26 January
2012. <http://www.thestandard.com.hk/news_detail.asp?sid=23531732&art_
id=81081&con_type=1&pp_cat=30>
12
Wang, Tina. “PCCW Saga Goes Into Extra Innings.” 2 May 2009. Forbes.
10 April 2010. <http://www.forbes.com/2009/02/05/pccw-richard-li-markets-
equity-0205_china1.html>
13
Chung, Olivia. “Shocked, Shocked!!” 28 April 2009. Asia Times Online.
December 2011. <http://www.atimes.com/atimes/China_Business/
KD28Cb01.html>
14
Wang, Tina. “Li Pulls The Plug on $2 Billion PCCW Bid.” 23 April 2009.
Forbes. 6 December 2011. <http://www.forbes.com/2009/04/23/li-pccw-
court-markets-equity-hong-kong.html>
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