Minority Uprising

The

se are queasy days for investors. Stalled stock markets are upsetting enough. Adding to the unease is the Enron scandal, the cloud over corporate accounting, and questions about the impartiality of stock analysts. In the U.S., few of the checks and balances designed to ensure retail investors get a fair shake appear to be functioning properly.

Likewise, in Hong Kong—never a bastion of shareholders' rights—minority investors are complaining about rough treatment at corporate hands. In April, Boto International, one of the territory's many publicly traded but family-controlled companies, announced plans to sell its manufacturing operations. The buyer? An entity co-owned by Boto's own chairman Michael Kao Cheung-chong and by Carlyle Group, a $13 billion U.S. private investment firm that boasts heavyweight advisors such as former U.S. President George Bush Sr. Unfortunately for outsiders holding Boto stock, manufacturing is the only part of the company that makes money.

The privatization plan "is a joke" designed to enrich insiders while minority shareholders get the shaft, says Mark Mobius, manager of the Templeton Developing Markets fund, which owns Boto shares. "They basically want to gut the company of its best assets for an unreasonably low price." Stockholders are being offered four cents a share to part with the manufacturing division. Mobius says the offer, at around six times Boto's per-share earnings, should be almost double that considering the company's predicted growth rate. (Boto officials did not return several phone calls, and the Carlyle Group declined to comment.)

Before the dispute erupted, few had even heard of the company. Boto's main business is manufacturing artificial Christmas trees and lawn furniture, operations that last year accounted for practically all of the company's $116 million in revenue. Three years ago, David Webb, who makes his living researching and investing in overlooked Hong Kong companies and is also a self-styled stock-market watchdog, saw Boto as a buy. On his website (webb-site.com), Webb recommended the stock because of its solid growth prospects—revenue grew 19% last year—and for its conservative managment team that, said Webb, "had not indulged in property or stock-market speculation, nor tried to dotcom itself."

Bitter irony alert: Boto later started a profitless digital animation business, run by the son of chairman Kao, Francis Kao. If manufacturing is spun off, the dud animation unit is all shareholders will wind up owning. "What do these guys know about the animation business?" says Webb. "This is not what we invested in." Webb and Mobius are leading a group of independent shareholders to vote down the deal.

History is against the independents. Family-run companies in Asia have a lengthy record of lining the pockets of relatives and friends at the expense of ordinary investors through sometimes murky backroom deals. Last year, for example, a family controlling Hong Kong-listed leather trader Dah Hwa International awarded itself an unsecured, interest-free loan of $6.3 million. There was nothing illegal about it, nor is there anything illegal about the proposed Boto deal. But it's hard to argue that directors have minority shareholders' interests at heart.

Asian stock investors are starting to demand more respect, though. In Japan, apparel company Tokyo Style is fending off a rare revolt by shareholders who want a bigger dividend from the company's $1 billion cash reserve. Looking to boost investor confidence in the market, Chinese regulators have launched a campaign against embezzlement by listed companies. In Malaysia, private investors have established the Minority Shareholders Watchdog Group, and a similar body has been formed in Taiwan.

In Hong Kong, a series of questionable backroom transactions—including the proposed Boto deal—has so raised the ire of stock owners that Andrew Sheng, chairman of the Hong Kong Securities and Futures Commission, was forced to respond. His open letter to investors offered no succor. Sheng wrote ". . . if it is purely an issue of competence or a history of bad decision making impacting on value, and the rules have not been violated, the ultimate practical remedy for investors may be to sell."

Webb and Mobius chose the impractical remedy: they're trying to line up enough votes to block the deal at a shareholders' meeting scheduled for July. They have a chance. The Hong Kong Exchanges and Clearing committee on April 18 banned Boto's executive directors and managers from voting their shares. Maybe once in a while, the little guy can win.