Ho Hup's legal tussle could set far-reaching precedent

KUALA LUMPUR (May 7): The long-drawn legal tussle for Ho Hup Construction Company Bhd over the development right of the 60 acres (24ha) of land in Bukit Jalil, Kuala Lumpur, could have far-reaching implications on corporate governance for public listed entities.

A recent ruling by the Court of Appeal over the land tussle takes the position that shareholder approval is not required for transactions involving subsidiaries of a public listed entity.

If this ruling is upheld by the Federal Court, the apex judicial body in the country, corporate lawyers said subsidiaries of public listed company can independently pursue corporate transactions, including the disposal of core assets that generate the bulk of the parent company's earnings.

Ho Hup's application for leave to appeal against the Court of Appeal's decision will be heard by the Federal Court on May 17.

In a nutshell, the outcome of the legal suit will set a precedent that shareholder approval is not required for transactions in the subsidiaries of a public listed entity, should the Court of Appeal's decision stay.

The joint development agreement between Ho Hup's 70%-owned subsidiary, Bukit Jalil Development Sdn Bhd (BJD), and Pioneer Haven Sdn Bhd is the bone of the contention. Pioneer Haven is a unit of Malton Bhd.

In June last year, Ho Hup's new management thought that it had won back the development right of the tract in Bukit Jalil.

The High Court ruled in favour of Ho Hup when it declared that the joint development agreement to co-develop the tract with Pioneer Haven Sdn Bhd was not valid.

The court ruled that the previous board of directors had acted in breach of their duties to Ho Hup by signing the agreement just before they were ousted in an EGM.

However, six months later, the Court of Appeal overturned the decision on the High Court's decision on the grounds that the approval of Ho Hup's shareholders was not required for the joint development agreement its BJD entered with Pioneer Haven.

Ho Hup's previous board of directors, led by former substantial shareholder Datuk Vincent Lye, signed the joint development agreement hours before an EGM in March 2010. And the EGM was called to remove him and then group managing director Lim Ching Choy and four other directors.

Ho Hup's new board then took legal action to reclaim the parcel of land, which is currently the only asset that would revive the company's financial footing. Ho Hup's shareholders strongly opposed the joint development agreement because their approval was not sought for the deal.

Furthermore, the agreement was seen as not favourable to the company because returns from the land would have been higher if Ho Hup had opted to sell the land or develop it on its own.  

The Court of Appeal concluded that only the shareholders of BJD were required to approve the agreement and that the shareholders of Ho Hup were not required to do so. Also, the judgment said Ho Hup did not have the requisite standing to sue.

Lawyers said the Court of Appeal ruling stands in sharp contrast to the listing requirements of Bursa Malaysia, which require the board of directors to seek shareholders' consent for major corporate exercises to uphold high level of corporate governance.

Ho Hup's regularisation plan, which will bring in Raymond Tan, who is a well-known figure in the local property scene, has been halted due to the courtroom tussle. But Tan's interest in the company hasn't diminished.

Tan has gained interest in Ho Hup is through his holdings in Formis Resources Bhd. His investment vehicle Red Zone Development Sdn Bhd holds a 19.36% equity stake in Formis Resources that in turn holds a 20.59% equity stake in Ho Hup, according to the filing to Bursa Malaysia.

Formis Resources is the second largest shareholder of Ho Hup after Low Chee & Sons Sdn Bhd, the founder's family, which holds a 22.67% shareholding.

Its share price took a beating in the past few months. The stock has declined from 71 sen in December after the Court of Appeal's decision to 45 sen last Thursday. It was not traded last Friday.