Activist David Webb to HSBC shareholders: don’t waste your money on legal action, you have no case

10 Apr, 2020 23:49
source: Singularity Financial

Singularity Financial Hong Kong April 10, 2020 – by David Lee

Dividend stocks have traditionally been coveted by investors because they provide guaranteed returns to shareholders, typically paid out annually out of the company’s profits or reserves. The HSBC and other large British lenders on March 31 announced the suspension of payouts in a co-ordinated industry response to a request from the regulator to save their capital as a buffer against expected losses from the economic fallout from the coronavirus pandemic.

Roughly $4 billion was due to come from HSBC. The decision to withhold the payouts angered top executives, retail investors, and even reopened the debate on whether the bank should redomicile in Hong Kong, where 35% of its customer accounts are held.

The decision promptly sent its shares down by 14 per cent last week, wiping out HK$123 billion in market capitalisation. Fellow British bank and Hong Kong note issuer Standard Chartered suffered similarly on being instructed to do the same by the British Prudential Regulation Authority – a regulator far away from the banks’ biggest market in Hong Kong.

Shares in HSBC have lost 34% year-to-date due to the COVID-19 pandemic. In 2019, it paid an annual dividend of $2.55 per share.

HSBC, which plans to cut about 35,000 jobs globally by 2022, however, is sticking with its plan to hire 500 additional wealth managers and retail bankers in Asia to tap into the fastest-growing wealth-management market in the world.

HSBC are subject to a regulator 6,000 miles away

HSBC is listed and headquartered in London but it derives most of its profits from Hong Kong and Asia. Hong Kong is the lender’s biggest market, but it has been domiciled in the UK since 1993. The bank opted to keep its headquarters in London after a review four years ago.

Ever since the banking giant relocated its global headquarters to London in 1993, there have been periodic talks about returning to its historical home in Hong Kong. Last time, the rumours were triggered by the turmoil of Brexit.

The dividend cancellation renewed calls by investors for HSBC to move its headquarters back to Hong Kong, where it was founded 155 years ago.

Both HSBC and Standard Chartered generate more than half of their revenue in Asia.

An uphill battle for HSBC minority shareholders

Activist investor David Webb said: “the board of directors of HSBC was acting within its legal powers when it decided to cancel the payment of the fourth interim dividend following pressure from the Bank of England. So don’t waste your money on legal action, you have no case.”

A group of Hong Kong-based retail investors who own 2% of HSBC Holdings’ shares are demanding a scrip dividend in place of the cash distribution that was canceled by the bank for the first time in 74 years under pressure from U.K. regulators, and are threatening to mobilize to force a special shareholders’ meeting.

The group, which includes wealthy people as well as low-income earners who rely on the bank’s dividend stream for income, said it might sue HSBC in Hong Kong courts.

“Hong Kong could certainly do with more grassroots activism: the city doesn’t have a class-action lawsuit system for minority investors to sue companies. Instead it relies on shareholder activists like David Webb, who campaigned to stop Kerry Properties being taken private on the cheap in 2003 during the SARS outbreak. And much of the rest is left to larger outfits like Elliott Management and Oasis Management.” according to Brendan McDermid from Reuters, “anger from retail investors appears short-sighted. ”

Even if the rebel shareholder manage to convene an EGM will still be an uphill battle to table a vote and win it said Stephen Chan, a partner at law firm Dechert.

Regulatory bodies and labour union keep eyes on the fight

HSBC Shareholders Alliance, which claimed to have the backing of 3,000 shareholders, made four demands and asked the company to reply within a week. They include institutional investors, family trusts, professional investors and minority shareholders.

Led by Surich Asset Management, the alliance wants HSBC to pay dividends in the form of additional shares rather than cash and to ax directors’ fees for a year. This follows HSBC canceling its fourth interim dividend of US$0.21 (HK$1.64) per share for 2019, which was scheduled to be paid on April 14.

It also intends to rally shareholders representing at least 5 percent of the voting power to convene an extraordinary general meeting. Shareholders representing at least 5 percent of voting rights are able to ask directors to call an extraordinary general meeting, according to Hong Kong’s new Companies Ordinance.

Retail investors could succeed in calling an EGM, and that would provide a forum to air ongoing complaints about the group’s structure.

“We profoundly regret the impact this will have on you, your families and your businesses,” HSBC chief executive Noel Quinn wrote in a letter to Hong Kong shareholders.

At a Legislative Council meeting on Monday, James Lau, Secretary for Financial Services and the Treasury, said HSBC’s move to scrap dividends is in line with the British banking regulator’s capital requirements to financial institutes. But, he added, he understood that the decision greatly impacts investors and pension funds, noting Hong Kong authorities “have been in close touch with overseas counterparts”.

Lau said the Hong Kong Monetary Authority will keep tabs on the situation.

Representatives of Hong Kong Federation of Trade Unions, the largest labour group in Hong Kong with 420,000 members, gave a letter to Financial Secretary Paul Chan Mo-po this week, urging him to intervene on behalf of investors.

“We have received a large number of complaints from our members, including workers and retirees,” said Michael Luk Chung-hung, a lawmaker who represents the union.

Luk said Hongkongers stand to lose about HK$10 billion (US$1.3 billion) from the cancellation of the fourth-quarter dividend alone.

From retirees to large pension funds, cutting the cash dividend has been particularly harsh for Hong Kong investors, who have come to rely on it as a steady source of income. About a third of the bank’s shareholders in Hong Kong are retail investors and its shares are a common gift for graduates and newlyweds.

HSBC’s dividend yield at 5.8 per cent is much higher than the average saving rate at banks which that is close to zero or time deposit at about 2 per cent.

“We believe the abrupt cancellation of dividends severely tarnishes the trust in Hong Kong’s banking industry,” said Thomas Pang Cheung-wai, chairman of another group of disgruntled shareholders with about 100 members.

HSBC top executives waive bonuses and donate pay

Both HSBC and Standard Chartered said on Thursday that their top executives would waive their bonuses this year and donate part of their salaries to helping fight the coronavirus pandemic.

The move came just over a week after both banks said they would cancel their dividends and not pursue share buy-backs after a request from the Prudential Regulation Authority (PRA), an arm of the Bank of England and their chief regulator. The PRA also said it expected banks would not pay “any cash bonuses to senior staff” including all material risk-takers.

In an internal memo released on Wednesday afternoon London time, HSBC said that its chief executive, Noel Quinn, and its chief financial officer, Ewen Stevenson, would waive their cash bonuses for 2020 and donate a quarter of their salary for the next six months to charity. The donation would equal about £159,000 (US$197,300) for Quinn and £93,000 for Stevenson.

Mark Tucker, the HSBC chairman, also would donate his entire fee for 2020 – £1.5 million – to charity, according to the memo seen by the local media.