Frankly Speaking: RPTs and conflicts of interest

Related party transactions (RPT) between listed companies and their major/controlling shareholders are normally frowned upon for valid reasons. The most obvious is whether the listed company and its minority shareholders will get a fair deal or the short end of the stick. What is a fair price or valuation can be subjective and any financial benchmark can be used to promote one’s view. In RPT transactions, independent advisers are appointed to review and offer their opinion to minority shareholders and the board of directors, which will have independent directors whose role is to look after the interest of minorities.

A vigorous scrutiny of RPTs is therefore important, all the more if it could potentially involve a huge price tag of around S$1 billion, or RM3.5 billion, as is the case of the proposal by one of IOI Properties Group Bhd’s controlling shareholders and its CEO, Lee Yeow Seng. Yeow Seng, who controls IOI Properties with his brother Datuk Lee Yeow Chor, has offered to sell a Singapore company, Shenton 101 Pte Ltd (which is owned privately by Yeow Seng alone), to IOI Properties. Shenton 101 had last November won a tender for Shenton House in the city’s central business district with a bid of S$538 million (RM1.8 billion) and will undertake a redevelopment that could cost an equivalent amount.

Now, IOI Properties says Yeow Seng is offering to sell Shenton 101 to mitigate a potential conflict of interest issue. And to show that he will not make any gain from the proposal, the price to be determined will include only the initial cost of his equity investment in Shenton 101, the cost of buying Shenton House and other upfront costs like consultant fees, tender and approval costs as well as finance costs.

When Yeow Seng’s Shenton House deal was announced last November, eyebrows were raised and questions asked about how a privately held company could have the financial power to undertake such a big deal and whether there would be a conflict with IOI Properties, which has its own projects in Singapore. Another question was this: If the Shenton House redevelopment was potentially lucrative, why didn’t IOI Properties itself bid for it? These questions may be all water under the bridge now that Yeow Seng is offering Shenton 101 and Shenton House to IOI Properties, but if the company was not keen then, why should it be keen now?

It is of course left to the independent adviser, which will be appointed to offer its recommendation, and to the IOI Properties board (excluding Yeow Seng and perhaps even Yeow Chor, as his brother) and minority shareholders to vote on it. Nonetheless, it should be a lesson for controlling shareholders to tread carefully when doing private deals that can create conflict of interest situations.