Governance is substance over form

Last week, Genting Malaysia Bhd (GENM) announced the proposed acquisition of the remaining 51% stake in Genting Empire Resorts LLC (GERL), which owns the Empire Resorts (ER), from Kien Huat Realty III Limited (KH) for US$41mil.

The purchase consideration also includes the settlement of an inter-company loan owed by ER to KH of US$39.7mil.

Here’s a look of the web of ownership. Empire is 100% owned by GERL, which in turn is 49% owned by Genting ER Limited (GER) and 51% by KH.

GER is an indirect wholly-owned subsidiary of GENM via the latter’s 100% equity interest in Genting (USA) Limited.

As GENM is buying the 51% stake from KH, this has become a related party transaction (RPT) as KH is indirectly wholly-owned by Golden Hope Limited (GHL) as trustee of the Golden Hope Unit Trust (GHUT).

Tan Sri Lim Kok Thay and his son, Datuk Lim Keong Hui are directors and substantial shareholders via their deemed interests of 49.35% equity interest in GENM.

According to the announcement made to Bursa Malaysia, GENM also indirectly owns 100% of Series F, Series G, Series L, and Series M Convertible Preferred Stocks in Empire, through Genting ER II LLC, its indirect wholly-owned subsidiary.

Kok Thay and Keong Hui have indirect interests in KH by virtue of them being beneficiaries of the discretionary trust, which owns 100% of the voting interest in GHUT.

Hence, this is in effect the final time GENM would be involved in any sort of RPT involving Empire, as the latter will now become an indirect wholly-owned subsidiary of GENM.

No EGM

The current proposal to acquire the remaining 51% stake in GERL does not require an Extraordinary General Meeting (EGM) to be called, as the threshold limits requiring GENM to do so have not been breached.

According to GENM, the proposed acquisition is deemed a non-recurrent RPT under the Main Market Listing Requirements (MMLR) as the highest percentage ratio applicable to the proposal of USD41.0 million is 1.5% based on GENM’s audited consolidated financial statements for the financial year ended Dec 31, 2024.

Interestingly, GENM has been involved in one way or another with Empire over the years, starting with its initial purchase of US$164.4mil for a 49% stake in the company, which was completed in November 2019.

No EGM was called then either. The transaction value did not breach the listing requirements as the highest percentage ratio applicable was only 3.78%.

Subsequently, GENM subscribed to multiple issuances of convertible preferred stocks issued by Empire. These include US$40mil in March 2020; US$150mil (September 2020); US$20mil (March 2021); US$150mil (October 2021); and US$100mil (January 2024).

In addition, GENM also acquired convertible preferred stock from KH for US$100mil in December 2022.

All in, GENM has poured US$765.4mil or RM3.27bil based on the current exchange rate in Empire. Even the subscription to various issuances of preference shares did not trigger any threshold limit that would require GENM to call for an EGM for shareholders to approve the transaction.

Worse, since acquiring Empire, the asset has been a drag on GENM and has caused severe losses to GENM to the tune of RM1.1bil between 2019 and 2024, as was disclosed in the last six GENM’s annual reports.

In its initial acquisition in 2019, the audit and risk management committee took the view that the acquisition was in the best interest of the company, fair, reasonable, and on normal commercial terms, as well as not detrimental to the interest of GENM’s minority shareholders.

Market reaction

In 2019, during the initial acquisition of Empire, both GENM and its parent, Genting Bhd, were key constituents of the FTSE Bursa Malaysia KLCI index, and the announcement to acquire a minority stake in Empire was not well received at all.

The share price of both companies tanked. GENM fell 11.9% after first announcing the deal, while its parent company, Genting, fell by 7.1% on the next trading day. Despite the assurances given by the non-interested board members, the market did not like the deal.

The key concern among investors was the nature of the transaction itself, as it was a RPT, and minority shareholders could only vote with their feet.

Revisiting MMLR

The reason GENM was able to avoid calling for an EGM to approve its investments in Empire was obvious, as it fell below the threshold level of the highest percentage ratio when making the acquisition.

Interestingly, GENM investments in Empire’s convertible preferred stocks did not require any shareholders’ or regulators’ approval either.

Surely, a piecemeal acquisition, when measured on a collective basis, would have hit the thresholds that are set under MMLR, especially if these acquisitions were not equity purchases but convertible preferred stocks.

Hence, regulators must revisit the current MMLR and incorporate acquisitions done on a piecemeal basis, where the threshold should be adjusted to include previous acquisitions in whatever form.

The threshold will thus be a creeping one and should include any form of investment or even funding for an associate company, especially when involving a RPT.

As for GENM, being one of the largest corporations in Malaysia, it should practice greater governance standards and not muscle its way through to acquire a loss-making entity at the expense of minority shareholders.

GENM should have called for an EGM even when it first acquired the 49% stake, although it did not hit the highest percentage ratios applicable.

In this way, it could have taken the higher ground that it is leaving it to minority shareholders to decide whether the acquisition is in the best interest of the company or otherwise.

This also reflects badly on the market as investors worry that other corporations may use similar tactics, which are detrimental to minority shareholders, especially if they are RPT.

After all, governance is substance over form and not just ticking the boxes when it comes to MMLR and ensuring RPT is not detrimental to minority shareholders.