Why a vulture is right to peck at Hong Kong’s last family-owned bank

Bank of East Asia is the last family-owned bank still standing in Hong Kong, and it intends to stay that way. A hedge fund has other ideas, though. Last week Elliott Associates, which is sometimes called a “vulture fund”, complained to the Hong Kong courts that BEA’s sale of HK$6.6 billion (€0.75) of shares was “inappropriate and unfair” and is “likely to deepen the entrenched position” of the Li family, the descendants of the man who founded the bank in 1918.

The bank claims that it made the sale to increase its capital buffer ahead of the new Basel III banking regulations. But others suspect that the reason was to shore up the family’s control because the purchaser of the new shares, Japan’s Sumitomo bank, is friendly to the Lis. Either way, the other shareholders’ power is now diluted. Unlovely as they might be, Elliott’s lawyers have a point. 

Elliott’s financial interest in BEA began in January, when firms connected to it began buying shares in the bank. They currently own about 3%. So in terms of the length of their interest, and the size of their holding, it is hard to have too much sympathy with them.

No doubt they would argue that their legal action also promises to help other small shareholders. The ethical basis of their argument is that one-share-one-vote is a good principle. It can be, and Hong Kong’s financial system is sympathetic to the view. (Different classes of shares with different voting powers are banned in new Hong Kong listings, which is why Chinese online shopping giant Alibaba listed in New York.)

But it is also easy to argue that long-termist founding family share-ownership is good for performance, for example this well-known paper shows that family-controlled S&P500 companies perform better than non-family controlled ones, which of course is good for minority shareholders.

However, there are other studies such as this one which argue that in Asia the situation is significantly different to the west because close family relationships allow firms to do things that they wouldn’t if the market operated more effectively, such as take on debt. It also argues that the “perception of endless growth opportunities” leads to bad deals being done. That is enough to raise worries. 

Any suggestion that BAE’s (admittedly opaque) management is all bad would be unfair. Its profits in 2014 were HK$6.8 billion (€0.77 billion), and early in May Zacks, a well-respected investment data provider, upgraded its rating for BEA from “sell” to “hold”, specifically mentioning that it is “the largest independent local bank in Hong Kong”.

But the fact remains that small shareholders deserve to know what is going on, and whether the family they trust to make good deals really is doing so. Private ownership does not have to be secretive. So Elliott’s scrutiny, which includes demands that minutes from meetings are published, is welcome. For their own sake, BEA should do the right thing and comply with their demands.