Lau Kun Kee incorporated his business as a subcontractor to the construction industry in Hong
Kong as Lau Conco Ltd in 1968. The business thrived and by 1978 was involved in construction
contracts and property development projects. Capital was provided by profits, family
investments, and substantial bank loans. The company continued to grow, surviving the
occasional property slump, and by 1990 operated through three divisions – property
development, construction, and concrete making.
In 1990 the directors and their share ownership were:
Lau Kun Kee – Company Chairman,
Managing Director, and head of Conco
Property Development Division
Lau Li Man – wife of Lau Kun Kee 7%
Lau Ho Ming – son #1 CFO 10%
Lau King Sum – son #2 MD Lau Conco
Lau Hon Cheung – brother of Lau Kun Kee –
General Manager Conco Concrete Division
*Lau Conco Construction Ltd. was owned 50% by Lau Conco Ltd. and 50% by son #2 Lau King
By 2000 the Lau Conco group had expanded further and was now a significant property
development business. Although construction in Hong Kong had slowed, the company had
entered into a number of joint ventures in Shenzen, Zuhai, and Macau. On a number of occasions
Lau Kun Kee had considered listing on the Hong Kong Stock Exchange but, having obtained
sufficient capital for his projects from profits, bank loans, and joint venture partners, he was
loath to dilute the holdings of his family members.
Then in May 2007 Lau Kun Kee was faced with a major dilemma. He was approached by a New
York based hedge fund, Blue Field, offering to make a major investment in Lau Conco if it
would undertake a major property development in Macau for an American casino operating
company, in which Blue Field had a financial interest. Lau Kun Kee already knew Blue Field
well, because it had funded Lau Conco’s joint venture partner in some large projects previously.
Blue Field proposed that the large amount of additional capital needed for the new project would
be obtained by listing Lau Conco Ltd on the US NASDAQ market. They suggested that 30% of
the revised equity capital would be listed, with Blue Field subscribing for 10% and the further
20% being offered to the public. With this capital, Blue Field argued, the project would make
substantial profits and Lau Conco shareholders would benefit significantly, even given their
Lau Ho Ming, the CFO, strongly supported the proposal. He wrote the following memo to all his
family members copied to Blue Field:
“The proposal from Blue Field for Lau Conco to be the lead developer in the new MacauZuhai project offers us an enormous opportunity. At a time when it seems that other
options for property development in Hong Kong and the mainland might be cooling, this
project would set us up for the next five years and generate very substantial returns for
A listing on NASDAQ would give us considerable status and mean that we would have
international recognition. That could be of great significance to our strategic development
in the future. Our shares would become readily tradable, a major advantage to any family
member who wanted to realize the value currently locked into their shares.
My preliminary discussions with Blue Field have suggested that, as a basis for
discussion, the ownership structure after listing might be:
Lau Kun Kee 50%
Lau Li Man 4%
Lau Ho Ming 8%
Lau King Sum 8%
Blue Field 10%
Public investors 20%
Uncle Lau Hon Cheung, who has now retired from management in the business, would
be paid in cash for the 10% of the original equity that he owned.
The NASDAQ listing rules require us to have an audit committee with a minimum of
three independent outside directors, one of whom must have relevant financial
knowledge. With our family shareholdings, we would qualify as a ‘controlled company’
under the NASDAQ rules, so some of the more demanding corporate governance
requirements would be relaxed.
My initial thinking is that the revised board might consist of:
Lau Kun Kee (78) Company Chairman and CEO
Lau Ho Ming (47) CFO
Lau King Sum (45)
Blue Field nominee director
3 independent outside directors
Although the board meetings would have to be rather more formal than we have been
used to, I suggest that before each board meeting we have the usual family discussions so
that we all agree beforehand what we want to achieve.
Having listed on NASDAQ we could also list our shares on the Hong Kong Stock
Exchange, generating further share price growth. Once we meet the NASDAQ corporate
governance requirements, no changes would be needed when we list in Hong Kong.
Father and I have thought about possible INEDs, as they are known in Hong Kong, and
identified at least four people we might consider. Indeed, father has already spoken with
Poon King Sum and asked me to contact him to outline what would be involved if he
joined the board.”
This is the letter Lau Ho Ming then wrote to Mr. Poon:
Dear Mr. Poon
I know my father has already spoken with you about our plans for floating the company
in America and asked whether you would consider an invitation to join the new board as
an independent non-executive director (INED). He has now asked me to write to you
with some additional information about what we would expect of an INED.
Essentially the three INEDs are on the board to make sure that the company complies
with the listing rules. Their job is to protect the interests of the minority outside
shareholders. They do that by forming an ‘audit committee’, which meets with our
independent outside auditors to hear directly from them if there are any problems with
our accounts. I think the audit committee would only need to meet once a year after the
annual audit, to make sure that the auditors gave us an unqualified audit report.
To give some guarantees to the independent directors, who are not directly involved in
running the business, we have directors and officers insurance. Moreover, I think you can
rest assured that the checks required by the NASDAQ listing rules, the various SEC
filings, and the demands of the new American SOX Act will ensure that we do not get
into any financial trouble.
We now have an excellent top management, with professional managers running the
business divisions, and no doubt we will hire experienced management for the new
Macau project. Strategic decisions about the future of the company are taken by my
father, who discusses options with my brother and me. We also make sure that our
projects keep on budget and on time, and generate an acceptable return on capital.
The board will meet about four times a year in Hong Kong, with the board papers going
out about three days before. So your commitment would be four board meetings plus one
meeting of the audit committee each year.
Some people talk about director induction and training, even board performance
appraisal, these days. But at Lau Conco we feel that, providing the company is delivering
the financial results, the outside directors can leave the running of the business and its
projects to the family directors. We also have a clear view on all the nonsense talked
these days about corporate social responsibility. At Lau Conco we firmly believe that our
responsibility is to make money for our shareholders whilst strictly obeying the laws of
the countries in which we operate. No doubt the INEDs will make sure that we do
comply with the law.
If you have any further questions do, please, call me. I believe my father has arranged to
have lunch with you next week to discuss your involvement further.
Sincerely, Lau Ho Ming
Knowing that you have recently studied about corporate governance and management, Mr Poon
King Sum has sought your advice.
Mr Lau Kun Kee, the chairman/CEO of Lau Conco Ltd, who was a friend of Mr Poon’s father,
has raised the possibility of him joining the company as an INED following a NASDAQ listing.
He has also received a letter from the CFO of Lau Conco outlining the role of such an INED.
But Mr Poon is not sure whether the situation is quite as simple as he has been told.
Please draft a letter to Mr Poon advising him.
Total marks from Section A, Section B and Section C = 100 marks
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