With shareholders like this, who needs enemies?

NZSA Disclaimer

While most of the New Zealand investment community were agog at the events impacting a certain building materials company, an announcement made to market by PGG Wrightson (NZX: PGW) late on February 13th caught NZSA’s attention. It seems that PGW’s 44% shareholder Agria is seeking a special meeting to remove three of the independent directors of PGW, appoint (another) one of their own and add three further independent directors.

This is not good news for minority shareholders of PGG Wrightson.

Guanglin “Alan” Lai, proposed as an additional Agria director on the Board of PGW, is well-known to PGW’s shareholders. He served as Chair until October 2018, resigning to “spend more time with his family”. That does a dis-service to those of us who do ACTUALLY want to spend more time with their family – only two months later, Alan Lai (and Agria) reached a settlement with the US Securities and Exchange Commission that resulted in a fine and him being banned as a director for a period of five years in the US. Shortly afterwards, an action brought by the Overseas Investment Office under the ‘good character’ test resulted in another agreed settlement, with Agria being forced to reduce its stake in PGW to below 50%, fines for both Agria and Alan Lai, and Alan Lai being banned from being on the Board of PGW for a period of five years.

It is surely no coincidence that Alan Lai is seeking re-election to the Board of PGW less than two months after the expiry of that ban.

PGW shareholders should take note of the reasons behind Alan Lai’s settlement with the SEC – alleged market manipulation, misleading statements and accounting irregularities are not features that we wish to see associated with New Zealand’s public capital markets.

The proposed special meeting to reinstate Alan Lai comes after last year’s effort by fellow Agria executive Lee Joo Hai, who neglected to inform the market (and PGW executives) as to alleged breaches of Singapore information disclosure rules. The company was relatively quick to sideline Lee Joo Hai, although not quick enough for some commentators. U Kean Seng, another Agria representative, replaced him as Chair in July.

Alan Lai is also proposing to replace three independent directors, Sarah Brown, Charlote Severne and Garry Moore with three new independents – Beijing-based Wilson Liu, former Contact Energy exec (and current Summerset Director) Vena Crawley and Traci Houpapa. From an outsider’s perspective, it is unclear as to the relevant skills that these individuals would add to the current Board nor why they would wish to be nominated by Agria.

Minority Interest Voting

For that matter, is it right that a major shareholder in a company has the right to nominate ‘independent’ directors? Surely, it’s up to the minority shareholders to determine just who would be able to represent their interests. Currently, of course, any shareholder can nominate any director. All well and good. However, who should determine the nature of their independence status? Right now, that is up to the Board of a listed issuer; one cannot help feel that should Lai be successful with his proposed resolutions, the outcome of the ‘independence’ decision is something of a fait accompli.

In many cases, the influence of a controlling shareholder is relatively benign when it comes to the appointment and determination of independent directors. No one would question the independence of James Miller, Prue Flacks or Mark Verbiest on the boards of Mercury or Meridian, as supported by the ‘in favour’ votes of minority shareholders (ie, when excluding the Crown vote).

But Agria and its representatives seem to operate with a different corporate governance ethos to the New Zealand Government. Regardless of your thoughts on PGW, this set of proposed special resolutions is likely to result in a poor outcome for PGW shareholders – and sets a dangerous precedent for investors in other NZX companies dominated by a controlling shareholder. Agria’s attempt to stack the deck against minority investors is a clear example of NZSA’s reasoning for the introduction of a minority interests voting regime in New Zealand.

There are a total of 42 listed issuers in New Zealand (out of 128) who have a ‘controlling shareholder’ – one owning more than 30% of the shares (view that data at this link). This is before you get into the nuance of shareholders acting ‘in concert’; for example, Metro Performance Glass does not appear on that list, although as we discussed in an August 2023 blog, it is likely that a group of shareholders control shares above our proposed 30% threshold. NZSA believes a 30% threshold is appropriate given typical shareholder voting patterns and the significant number of shares held by passive funds.

In some ways, our market is a unique beast. If NZX needs to be a fit-for-purpose regional exchange, it follows that we need fit-for-purpose listing rules. Surely, with a third of our listed issuers having a major or ‘controlling’ shareholder above 30%, that warrants worthy consideration of our proposal?

Unfolding events at PGW Wrightson simply add another layer of evidence and logic to our argument.

PGG Wrightson

Somewhere in amongst this impending governance disaster, there is a good company trying to go about its business. PGW is subject the usual cyclical trends, upsides and downsides associated with New Zealand agriculture and real estate. Given the nature of its people and inherent capabilities, it has laid the foundations to be a world-class business. Jarden’s most recent research note on PGW is headlined with “Core business strength supporting through a soft outlook” – a reasonable summary of the situation. PGW is still generating cashflows and profitability at a ‘bottom-of-the-cycle’ market, a situation that is leaps and bounds ahead of its predecessor businesses.

The current Board – with the capable Deputy Chair Sarah Brown as its seemingly de-facto leader – seem eminently able to govern PGW in the best interests of the company.

But the best interests of the company are not necessarily the same as the best interests of Alan Lai.

Going back to 2018, one of Alan Lai’s last acts during his time as Chair was to engineer the sale of the company’s seeds business for $434m (then, around half of the company’s assets) to a Danish outfit. The sale was controversial – but with Agria controlling (then) over 50% of the shares was bound to be supported. Was the sale in the interests of PGW? Or Alan Lai? Lai’s action now again raises the spectre of a conflict between the interests of PGW and the interests of Alan Lai.

The likelihood is that there will be some testy conversations around the table, however, with Chair, U Kean Seng (from Agira), and current independent Board member Meng Foon spared the wrath of Agria’s proposals.

We’d rather see Agria exit its PGG Wrightson investment completely than continue to allow the reputation and long-term growth of PGG Wrightson be sullied by the nature of its 44% shareholder. Agria is no longer an appropriate owner for PGW. Agria’s investment in PGG Wrightson is still subject to the threshold applied by the Overseas Investment Office (25%) and an associated ‘good character’ test. It’s time for the OIO to take another look at Agria and its representatives in New Zealand.

PGG Wrightson

If there is to be a special meeting – and let’s face it, this looks highly likely – this is one time where you need to be counted and actually vote. This is not the time for apathy or to assume that there are others out there who know better than you do.

44% is not 50%. It may require close to a 100% voting turnout, but there is still a chance for minorities to have their say. For any shareholder, whether individual, local institution, fund manager or wealth manager – NZSA is always happy to accept your proxy and vote on your behalf (you can sign up here). We’re independent, objective and credible – and we will vote to protect the interests of investors.

In the case of PGW, that protection is needed right now.

Oliver Mander

UPDATE: late in the afternoon of February 16th (a few hours after this article was published), the PGW Board removed U Kean Seng from his position as Chair, replacing him with independent director Garry Moore. NZSA is pleased to see the PGW Board putting up a fight against Agria’s standover tactics.

CORRECTION: The article was corrected on February 18th to offer greater clarity on the respective jurisdictional actions taken by the US SEC and New Zealand’s Overseas Investment Office.