Frankly Speaking: More questions for GenM independent directors

This article first appeared in The Edge Malaysia Weekly, on August 19, 2019 - August 25, 2019.
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Genting Malaysia Bhd has come out to defend its purchase of a 35% stake (fully diluted) in Empire Resorts Inc, a financially troubled US casino, from Kien Huat Realty III Ltd, which is left with an estimated 51% shareholding.

GenM said the related-party transaction (RPT), which cost US$128 million (RM538 million), was a “worthwhile investment” and gave a long list of reasons in arguing its case.

The company was queried by Bursa Malaysia after The Edge Financial Daily reported on Aug 13 that Empire Resorts had disclosed to US regulators and its shareholders on Aug 9 that it was running out of cash and may have to file for voluntary Chapter 11 bankruptcy. Empire Resorts added that it had been informed by Kien Huat on July 25 that it would not commit further funds beyond what it was obliged to.

The disclosure came three days after GenM announced the stake purchase on Aug 6.

We are asking whether the seven independent directors of GenM who approved the purchase were informed of the casino’s financial woes. If yes, why was Empire’s problems not disclosed in GenM’s announcement to Bursa?

Empire Resorts’ financial woes only came to light because The Edge carried out checks on the company after GenM announced the purchase. Is it not incumbent on GenM to fully disclose the health of the company it is investing a huge sum in, especially an RPT?

The casino has said it is saddled with over US$400 million (RM1.6 billion) in debt. As such, GenM will likely have to provide financial support, whether it is through a cash injection, shareholder loan or guarantee, as Kien Huat has said that it will not.

The cost of investing in Empire Resorts will thus be much more than the purchase price.

GenM avoided having to get approval from minority shareholders at an EGM for the purchase because the US$128 million price tag is just below the threshold of 5% of its total assets.

But if it has to provide financial support, the amount it will have to spend on Empire Resorts will surely breach the 5% threshold.

That being the case, in the spirit of the law if not the letter, it is only right that GenM gets approval from minority shareholders for this controversial RPT. Will the independent directors, whose duty is to protect the interests of minorities, call for an EGM?

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