THE HONGKONG
THE HONGKONG DAILY PRESS, MONDAY, NOVEMBER 24TH, 1913.
HOTEL CO., LTD.
REPLY BY MR. LOWE TO RECENT STATEMENTS BY DIRECTORS.
The following letter has been sent by Mr. A. R. Lowe, C.A., to shareholders of the Hongkong Hotel Co, Led, in reply.. to statements made by Directors and others at the recont extraordinary general meeting of shareholders:-
Hongkong, 21st November, 1913. To the Directors and Shareholders
of the Hongkong Hotel Company, Limited,
DEAR SIRS,
Hongkong..
Upon my return to the Colony, I have read the speech of Dr. Noble as issued by the Company attached to an undated notice to shareholders relating to the Extraordinary Meeting of the Shareholders of the Hongkong Hotel Company, Limited, held on the 27th October, and I find the action of myself and co-Auditor referred to in such terms as are calculated to give the shareholding public an erroneous view of the matter:
deplore the necessity of defending myself in this manner, but I was away from the Colony when the meeting was called and I cannot permit Dr. Noble's remarks, which have appeared in the public Press, to pass without challenge, as he has attacked me.
AUDITOR'S VIEWS.
An Auditor's duties, although seemingly not well known to some local directers, are fairly clearly defined by both text and case law. His "lot is not a happy one," and he should receive the moral support of the shareholding public in carrying out what frequently proves in this Colony to be a bitter and difficult task-the preaching of the -gospel of exactness as far as possible in regard to Balance Sheets.
My unfortunate experience has been that local directors are very apt to treat any proper writicism of the manner in which they carry out their office in relation to Accounts as a personal affront
I do not mean to imply that any local director is capable of acting dishonestly, but every Board of Directors is liable, even when acting in the best interests of the Company, to perform an ultra mires act. Directors, usually chosen from among responsible and successful businessmen, canuct be expected to specially study. "Directors, their duties and liabilities," as contained in varicus Ordinances and legal tomes before taking up a seat on the Board of Public Company, but I may remark that these duties and habilities were fairly fully set out in a recent series of articles which appeared in the Hongkong Telegraph.
When, in the exercise of his proper duties, the Auditor points out that a course of action is ultra wires and if persisted in might result in the directors being made personally liable for a large sum of money, one would think that the auditor, in addition to baving performed bis duties, would be entitled to more thanks than kicks.
This, however, has not always been my experience.
I have actually on occasions been told, or had conveyed to me (not in the actual case under discussion), that if I persisted in my desire to do the right thing (the words used were, of course, not quite these) I should use part of my living. Perhaps I have lost some of the jam:
The actual facts of the present case are as follows:-
On the 20th September, 1912, whilst considering the New Companies Ordinance, I came to the conclusion that the Directors of the Hongkong Hotel Company, Limited, had no power by which they could pay dividends in The law is that a Company an only do so if authorised by its proportion to the paid-up value of the shares. Articles, and the Company's Articles were silent upon this point. As a matter of fact this authorisation was included in the old Articles of 1853, when a pricr new issue of shares was contemplated, but excluded from the new Articles passed in 1000 Mr. E. Osborne (Chairman) then said, "With the assistance of our lawyers, we have produced an almost new set, complete so far as the combined intelligence of our lawyers and ourselves are able to make them, and all- are of a practical and useful character," and be summarised the principal alterations, one of which (No. 7) was "Revision of clauses bearing upon the disposal of Profits." It does not, therefore, appear that what was done in 1900 was a flaw, omission or clerical error, but was so done deliberately and after due and careful consideration, and the shareholders must abide by it..
letter to the Chairman and Directors on the subject and quotéd Du the 28th September, 1912, I addressed a them two appeal enses in which the particular point had been considered.
My solo object was to assist the Directorate and to enable them to take the necessary steps to right themselves before the Accounts were next presented for audit. I had previously had occasion to differ with the views of the Directors as to their Balance Sheets, but this did not influence me to hold the information up until the last moment. They received this information from me five months before the next Balance Sheet had to be issued, and from the Auditors' Report both old and row shareholders saw the point at ore and the same time, and therefore if cortaia people are to be dubbed speculators," in its meaning as gamblers, for buying, surely this applies equally to sellers.
To my letter I received no official acknowledgment. I did receive a private chit from one of the Directors, now absent from the Colony, asking for details of the eases to which I had referred the Board, and to this. I replied giving what details I possessed and advising that the Company's Lawyers should be asked to look the matter up, possessing as they did the legal books of reference, which I had not,
In the same letter, dated 27th September, 1912, I advised the calling up of the Unpaid Capital as being the only proper way out of the impasad
I heard afterwards that the Directors were very angry with me and considered that I was interfering with a matter which did not concern the Auditors. This point of view would be quite unintelligible to a practising Accountant at home, for Lord Justice Lindley in the Kingston Cotton Co. (No. 2) (1890) 2 Ch. 284 (0.A.) said: Auditors are, in my opinion, bound to see what exceptional duties, if any, are cast upon them by the Articles of the Company whose Accounts they are called upon to audit. Ignorance of the Articles, and of exceptional duties imposed upon them, would not afford any legal justification for not observing them."
now Shareholders, and our. Mr. Jeffries and I were appointed Auditors to protect both the old and the
All we have to do is to see these interests are in accordance with remuneration is paid jointly by both parties. the law of the land as modified by the Company's Articles, and wher one class was seen to be obtaining an advantage, innocently or otherwise, of the other we regarded it as our duty to point it out. We still hold to this opinion in spito: of anything Dr. Noble now. EAYS.
The next phase developed when on February 6th. 1913, I saw the announcement that "subject to audit" the balf-yearly dividend on old and new shares would be paid as before. On February 7th, I again addressed the Chairman and Directors, and stated that it would appear that the Board had gone into the matter and found they were acting correctly and that I should be much obliged if I may be allowed to inspect the legal opinion in order that I may satisfy myself and co-Auditor that the payment out is correct for the past half year."
To this request, the Board acceded on February 12th, with a somewhat ill grace.
Mr. Jeffries and I read and did not agree with the opinion of the Company's legal advisers, and, to protect ourselves, we sought the advice of Mr. C. D. Wilkinson before signing the Balance Sheet of 31st December, 1912.
Our legal adviser, Mr. C. D. Wilkinson, under date of February 24th, sen me his opinion supporting us in our contention and a copy of this letter we immediately sent to the Directors for their information, together with the signed Balance Sheet, which was being pressed for as the Directors had decided to hold the meeting on the 6th March.
Dr. Noble, in his speech of the 27th ultimo, quoted a portion of Mr. Wilkinson's letter to me and then added these words of his own: This advice cur Auditors do not seem to have acted upon."
If Dr. Noble had continued to read to the shareholders. Mr. Wilkinson's letter they would have heard these words:-
Nevertheless it seems to us in the present instance that it might be held that "a true and correct view of the state of the Company's affairs" would not he exhibited in the balance sheet if no mention were made in it, under the heading of "Liabilitias," of the contingent liability of the Company to pay out of its reserve fund the balance of the amount which should have been paid to the holders of the new shares
and, for this reason, we think that a contingent liability in this respect ought to be mentioned in the balance sheet."
I venture to think the shareholders will gather a very different impression on reading this further quotation from Mr. Wilkinson's letter, from the one left upon them by Dr. Noble. In fact the Auditors did act up to their legal advice.
Another point which Dr., Noble sought to make was that I had voted against my own resolution and used certain words-of-mine- passed in ordinary conversation which seemed to corroborate his point of view.
Is it possible that Dr. Noble does not even now understand the position? ̄ ̄ ̄ ̄ ̄
t.་
The resolution is not mire, and as evidenced by my letter of September 27th above qucted. I have always thought that the easiest and the only really equitable way out of the difficulty was to call up the unpaid capital. I further told Dr. Noble so at an interview of over two hours duration ut his office, and, at-his-request, in-94th June last, when he himself read cut the draft resolution he now describes as mine for my approval, and I then said, if he would enlarge it to make it retrospective, it would satisfy me as an auditor if the shareholders passed it. He informed me then they would not pass it, but demanded the calling up of the capital to make all the shares alike under the terms of the resolution creating the additional shares; further, that the additional capital obtained was to be used to pay off the current liabilities and any balance in buying back the debenture debt, and as a quid pro quo they would not claim the dividends short paid for past years. My reply was-It was a very generous compromise on the part of the new shareholders, and that all I could advise the Directors to do was to jump at such an offer. At this date, I was not a shareholder and was shares informed by Dr. Noble it was practically impossible for me to buy the shares, but that if I did buy new I would be a loser:
The above clearly shows that the resolution was neither a measure of mine nor favoured by me, and for Dr. Noble to treat it as such, and use it as a denunciation for my voting against it, is, to say the least, incorrect and unfair and calculated to mislead.
New shareholders are entitled in my oninion to say:We will not give up our rights conferred upon us by the conditions of the issue of the partly paid shares, and even if we do not reoui lo be paid back dividends, ve do elain future dividends and are prepared to pay our uncalled capital so that there can be no injustice to the present fully paid-up shareholders."
As an Auditor I say to the Directors: As things are, I cannot give you a clean certificate unless your Articles. permit you to pay pro rata dividends, and the way to do this is to alter your Articles if the shareholders will pass the alteration. You must also satisfy me that there is no contingent liability for past years."
The account of the reasons governing the withdrawal of the original resolution, at the first meeting and its revival at the second meeting is interesting, but if its retrospective nature is not acknowledged, I should like to know how the Directors intend to get over the difficulty of dividing profits already made, say, to June last. under an Article which cannot come into force until long afterwards and therefore cannot apply retrospectively. Was not, therefore, the hint Dr. Noble took from me a good one?
Mr. Maitland has something to say about equity, but when the Company has paid the Directors' expenses for a legal opinion which turns out to be wrong, I fail to see the equity of refusing to pay the Auditors legal expenses for an opinion which was right. The Auditors have had to meet these expenses out of their meagre fees.
The role of the "scapegoat" is one I have no faney for, and perhaps it is time shareholders should know that an auditor's duties do not wholly consist of making blue pencil ticks in nice clean ledgers and seeing that payments for the office stationery are duly youched:
SHAREHOLDER'S OPINION.
As a shareholder, as distinct from an auditor, I have the following remarks to make:-
It was not until 22nd July last that I bought any Hotel shares, and I hold in my name both old and new shares for myself and clients, so it will be seen that I bought long after the recent rise had taken place and got no In fact he market value is lower now advantage from any special knowledge in my possession in September, 1912 since I bought. The transfer deed states I bought them "subject to the several conditious on which the transferor held the same, ze. I bought whatever rights the old shareholder possessed. Now some of the new scrip which came into my handa was in the name of the Dairy Farm Co., Ltd.. and transferred to me by its directors:-Mesars. J. W. Noble Dr. Noble says:-The trouble has arisen because some of the old and J. Scott Harston, under a recent transfer. shareholders have been tempted by the profit offered and sold their "new" issue also," It is all the result of speculation; gentlemen, nothing else. It is wrong in principle it is not sound business."
Dr. Noble told me of the attitude he was taking on June 24th last, so he knew, and I knew, what was happening. If Dr. Neble, as director of the Dairy Farm C has taken my money for certain rights in the shares I purchased, I fail to see on what equitable grounds he can object to my trying to preserve what I have paid a full market price for. I think I have every right to say, as he does, "It is wrong in principle, it is not sound business," but with more justification,
Dr. Noble says: What trading is done on the strength of this uncalled capital? Wo have two classes of. creditors. Tho Bank, to who wo owe $80,416. The debenture holders, who have contributed $750,000 for us to trade with. The last published accounts showed the Bank, a oveditor for 8138,701, so De, Nobile's figures have not been before the shareholders and presumably are those at date, but he has omitted any mention of sundry creditors, usually about $30,000 to $40,000, and, that a dividend is payable which requires further borrowing from the Bank to meet, so that in addition to debentures there is about $150,000 owing which, if the simres are called up, can be mot aud leave, a qof excessive sum in hand for any ordinary capital expenditure requirements without borrowing and thus place the Hotel in a very independent position as regards its finances, hvid, it seems strange that the Hongkong Hotel Directors object to be placed in this enviable position which directors in other Companies strive to allain. Granted this. ia the position now, it is not fair to assume this credit obtained from the uncalled capital was not of much more use during the past four years.
In the June, 1905, report (when the Company owed the Bank $100,000) there, appeared the following →→→ As there is urgent need of additional funds to repay the overdraft to the Hongking and Shanghai Banking Corporation, and to complete the payments for the new building on the reclamation, known as Hotel Mansions,? the difcotore desire, at an early date, to obtain the sanction of the shareholders to the issue of additional new capital which they hope can be floated at a high premiom," and at the subsequent general meeting the Chairman said:The Bank has not called for repayment, but the Directors consider that in the interests of the Hotel Company it would be better that new capital from shareholders should take the place of a large overdraft.” The profits dropped after this, so it may be supposed that no new capital was forthcoming at a high premium, nor could the Directors sell the per cent. debentures which Mr. Maitland now ranks so highly, for in March, 1904, the Chairman said-We shall be happy to sell them. I may tell you they are in the Bank, which is advancing money on the strength of the debentures, but they would be glad to have the money. We are going to furnish the new building with the money from these debentures, but at present we have not got it.". There were then only $200,000 worth sold, and at the time of the new share issue, June, 1909, only £350,000 sold and $100,000 waiting sale, and it was not until the end of 1012 that these excellent debentures were fully disposed of, when it can be said that the spending of capital obtained from the new issue and the borrowing from the Bank duefly on the strength of them and the uncalled capital had so enhanced the value of the security on which the debentures are charged as to make thon, as Mr. Maitland says, "As safe as Barik of England Stook.
As a matter of fact, the capital expenditure in view in 1909 to turn this Hotel into frat-class condition was really $619,800, viz.:-Property account $97,000, furniture and ekeric plant $181,800, spent as follows:-1909, $199,000 ;- 1910, SE19,000; 2011, $107.006-as shown by the halance sheets, which also show how it was met, viz, :-
By further mortgaging the property
By oving increased amounts to the Bank and the
creditors--from 9283,000 to $401,080
By issuing further capital paid-up By providing out of profits
$122.000
118,000-
200,000
74,500
$614,500
It will thus be seen that the inercass of the capital by $400,000 in 1909 was required and was justified, and, any forthcoming official denial fotwithstanding, it is nonsense to assume that the Bank did not lock to the uncalled capital of $200,000 as their best readily available security when they agreed to the gradual increase of the overdraft froia 2204,000 to $368,000, at 31st December, 1911, especially as their security in unissued debentures was gradually decreasing and did decrease by $122,000 during this period."
Dr. Noble apparently tried to draw a red herring across the track in making so much of the debenture holders looking to this uncalled capital of $200,000 as their chief security, beenuse be practically withdrew attention from the small Bank balance of, assume from his figures, $50,415 last month. Why did he not explain that the reason for the reduced Bank balance was the sale of $20,000 debentures since 1st January 1909, and its reduction from $138,000 last December by the profils of the present year less the dividend paid in March 1 I explained this particular reason! for the reduction in the Bank overdraft to him on the 94th June last. Why was he not frank, or was his memory at fault? It is true, as Dr. Noble points out, that there is not so much use for this credit of uncalled capital now, but there has been, and the advantage gained has been absorbed by the old shareholders at the expense of the new during the past four years.
Now as to the intention of the Company in issuing new share capital.. I have already pointed out that the Directors considered it in the best interests of the Company that they should not owe a large overdraft. Again, in September, 1908, the Chairman said, referring to the rebuilding scheme:-"We must have money and indicated the increase of the mortgage debenture issue from $600,000 to $750,000, and a new issue of capital. At the extraordinary meeting in February 1909, the Chairman said: The time has now arrived when we and it necessary to call up fresh capital to meet the expenses of the new South Block-there will be an issue of 8,000 new shares of $50 each-that is, at par; the first call of 935 will be payable on ta May not ranking for dividend from hand date. The balance of the capital will probably be required about six month later. The estimated cost of the new hlode is $339,000. The iron framework has arrived and is being erected, the date for the completion of this part of the work is 27th May. while the whole building is due to be finished 15 months later, or, say, August next year.' There were no further comments and the following resolutions were proposed : ~ :
(1.) That the capital of the Company be increased to $1,000,000, by the creation of 8,000 additional] shares of $50 each ranking for dividend and in all other respects purri queson with the existing sharea in Company,"
the
(2)That the said 8,000 additional shares he offered in the first instance al par F. all members of the Company registered as sharobolders on the first day of March, 1909, in the proportion of twa now shares for every three origing shares held by them and upon the footing that fifty per cent, of the full amount of each now share taken shall be paid to the Company on acceptance of the offer and that such offer be made by notice specifying the number of shares to which the member is entitled and limiting a time within which the offer if not accepted by payment, will be deetand to be declined and that the directors be empowered to dispose of the shares, not taken in response to such offer as they consider expedient in the interests of the Company.".
Mr. Maitland seconded, and the resolutions were carried
The Company.
Dr. Noble says: The Company did not sell 8/20ths of the concern to the ice Shareholders. sold new Shures to vid shareholders, a very different matter,' Will Dr. Noble stato if thors were any shareholders who failed to take up their option and if there was a balance of shares left to the Directors to dispose of to the public or to old shareholders in addition to their own options, which is the same thing? Perhaps a broker was not employed, so that soino old shareholders obtained any such additional shares for. 825 instead of something like $42, the market quotation in May, consequently using the premium the Company.
The new shares were issued at par to old shareholders in the proportion of new shares for 3 old ones. - It, is evident there was no chance of obtaining any premium, as the old shares were quoted at ex dividend in March after the announcement of the new allotment at par. They had dropped from 90 before the new shares were offered and after the payment of a 83 dividend. There was evidently no rush for the new shares, for on 10th May the quotations were 71 and 42 sales and sollers. It will be seen that on the day of the announcement of the new issue, February 20th, the shares were 00. Three shares were therefore saleable for $270 (lcns 9 dividend 8261), and there was 350 to pay for the call on the 2 nety shares allotted on 1st March, together 311. On May 7th, after the call was paid, these 2 old shares and 2-new shares at 71 and 2 respectively would have feteled 2213 and $81, together $297, or loss by taking up the new issue of $14 on 3 old shares, Notice again the difference in premian: $9) on a fully paid $50 share and S17 on apartly paid $25 share, practically the same, which indicates that from the first in the public mind there was eve any doubt but that the shares would he shortly fully paid and bo treated as rauking shortly for dividend (or was it from 1st May they were to rauk fully as an inducement to take the ap) and in all respects parri pasen with the old shares.
.
It is quite clear that the old shareholder said-You can have a share, for $71 or a new $23 share for $42. which, when you have paid the balance call of 935 in 6 months time, will then rank equally with mine and you will: then have a fully paid share costing you $87. Look at these figures; they mean that it was possible to buy (if what Mr. Maitland supposes is true) a fully paid share in the same Company yielding as they have done ner cent, per annum (or what they should legally have done 74 per cent.) on the investment of $71, or a partly said share which has sinco What lunatics the people were who returned 7.14 per cont. on 342 and should have returned & per cent or $67. bought the new shares in preference to the old unless they had dief in the terms of the resolution, the credit of the Hongkong Hotel as a respectable Company, and in the statement of its Chair of Directors on 6th February. 1909 Dr. Noble and Messrs. Maitland and Bowley and such old shareholders, whether they have sold or retained their how shares, please take note; or do they consider this and also the resolution how proposed by the present Directorate. to be smart business? Did not the sellers cat their enke when they accepted the same menium on new shared as on ohlt
The Articles provide that the Directors could have called up, and can still call up, this suoney unpaid on the shares ne 14 days notice under pralt of interest at 12 per cent per aan, or they can give a further 13 days notice, and falling payment of call and interest anay forfeit surb shares.
It is reasonable to suppose the new shareholders know at that time of this heavy liabihty due practically at a moment's notice, and must have made arrangements to meet me, olderwire to keep many more or less idle, hence the light difference in the premina: There was some trase alewed-on lait sides 6 months the Chairmen stated--but I think after that time the new shareholder did liek, and the only reason they did not kick with any effect was because. they did not know the law as they do now. It is only fair to state that the Directors do not appear to have known either.
Why this change of attitude on the part of the Directors took place was because they found that they had obtained a contract to provide funds from the new shareholders up to $200,000 a practically a moment's notice on which they were not paying any interest, dividend or other compensation, and with the help of this advantage they were able to borrow money from the Bank at 6 per cent. Are they going to say now the Rant would have lent without this security!
For the half-year ending 20th June 1910, 848,000 was paid away in dividends, viz.: $3.00 on old shares, and $1.50 on the new. If the balance call of $200,000 had been collected on 31st December, 190s, the Company would have. saved $6,000 additional in Bank Interest, but the whole 20.000 shares would have been fully paid up. The dividend divisible would have been $34,000, or $2.70 per share, e, the old shairs would have had their dividend redured from 12 per cent to 10.8 per cent. per annum then and since.
In June, 1003 (before the new issue), the dividend was at 12 per cent, per annum, en the capital paid up, and this has been maintained ever since except in 1909, when the dividend dropped to 10 per cent, per annum.
Now the contract with the new shareholders was without doubt incant to be if profits continued to be made on the old basis, a 10.6 per cent. dividend on $400,000, the amount of the new capital, and instead of this the Directors gave a 12 per cent, dividend to the old shares on their full capital paid in and 12 per cent, to the new shareholders, not on their full capital for which they wer, liable, but on only 3200.000, or half of it. I think Dr. Noble and Mr Maitland would much prefer to have $400,000 invested at 10.8 per cent., than $200,000 at 18 per cent., and stand the risk of having to find another investment for their 6200.000, suitable for realisation at 27 days notice.
In other words, the contract or bargain was for 8/20ths of the profits and any other value in the assets of which any share in the Company has a right to participate directly or indirectly The Directors changed this to 5/20ths, If no not the Company, and the Directors are now trying to get the Company to agree to legalise this reduction. reduction is now being attempted, as Dr. Noble infers, then why is this new resolution necessary!
Why should the Directors, who are paid to look after the interests of all the shareholders alike, and not merely the old ones, want to give advantage to ono class of shareholder, or partner in the Company, to the disadvantage of the other? For, as will be seen above, this is what it amounts ta.
Dr. Noble, in his speech, does acknowledge that the present new shareholders do not want to take advantage of the present old shareholders by demanding an equal dividend without first paying up the balanos call. Why was this not made clear in the notice issued by the Directors on 1st October, and again in the undated notio after the meeting on the 26th ultimo, for there is no doubt that shareholders holding only old shares must have received the impression. that the new shareholders were legally entitled to, and were demanding, an equal dividend, although only half as much was paid up on the new shares? Dr. Noble adris the new shareholders have not been deceived by the Company, that they got nothing more than half the dividend paid on the old shares, they expected nothing more, so long as the shares were partly paid. Perhaps true, but they did expect more at the end of months from 1st May, 1909, or else they disbelieved what the Chairman told them at the meeting of 96th February, 1909. I am sure the Company did not Does Dr. Noble mean that the Directors did deceive them? wish to deceive them, and by this I mean the old shareholders.
I trust for the credit of the Company that he will now acknowledge the Directors made a mistake in making the new contract with the Bank for an extended overdraft at 6 per cent. before completing, and now trying to wipe out, this contract with the shareholders. It does not matter whether he says the bargain was made with the old shareholders: or the new. The bargain-was made with the then surebolders, nil a great number sold this bargain with such rights as the bargain gave them All the old and new shareholders had a right to expect was 10.8 per cent dividend from 1910 onwards as proâts have turned out, and what has happened has been the old have received 12 per cent. Some part, therefore, of the shareholders have lost on the bargain, and they are the new shareholders: Is it so unfair, so wrong in principle, or such unsound business, that the sufferers should now after three years ask for that original bargain to be fulfilled and yet waisé compensation?.