KUALA LUMPUR (Jan 14): South Malaysia Industries Bhd (KL:SMI) is challenging the Securities Commission Malaysia's (SC) decision to allow the appointment of six new directors nominated by a company that is seeking to take over SMI before the offer document has been dispatched, alleging that the regulator's decision had breached takeover rules designed to protect minority shareholders.

The conflict stemmed from Target 1 Sdn Bhd's nomination to appoint six new directors to SMI's board before the official offer document was circulated to shareholders. Target 1 emerged as its largest shareholder after acquiring a 30.67% stake in SMI last year. Target 1, together with persons acting in concert (PACs) with it — Honsin Apparel Sdn Bhd and its sister company HiQ Media (M) Sdn Bhd — control an aggregate 50.05% in SMI, triggering the mandatory takeover offer of SMI at 45 sen per share in August last year.

Target 1 is controlled by Leong Seng Wui, executive director of Hong Seng Consolidated Bhd (KL:HONGSENG) and cash-strapped Revenue Group Bhd (KL:REVENUE). Honsin is controlled by Techbase Industries Bhd (KL:TECHBASE), formerly known as Prolexus. Techbase also owns 51.91% of HIQ Media.

According to SMI, citing takeover rules, such board appointments are ordinarily not allowed as the listing rules stipulate that no nominee of an offeror or persons acting in concert with it can be appointed to the board of the offeree — nor can they exercise voting shares or voting rights — until the offer document or the whitewash circular has been dispatched to shareholders. An exception to the rule is when permission is granted by the SC to do so, which the SC did in a letter dated Nov 13 last year.

SMI contested this decision, arguing that appointing directors nominated by the offeror before the offer period compromises the board's independence and ability to provide unbiased advice to shareholders. They submitted an application to the SC on Nov 29, 2024 to review its decision, but the SC dismissed this on Jan 9 and affirmed its original decision.

In response, SMI has filed a judicial review application with the Johor Bahru High Court last Friday (Jan 10) to seek permission from the court to challenge the SC's decision, and a certiorari order to quash the SC's decision that allowed the directors' appointments. It is also seeking for a stay of the SC's decision pending the outcome of the judicial review.

This is the second time that SMI is taking the SC to court in the last one year. 

SMI had, in March last year, also filed a judicial review application against the SC to compel the regulator to come up with a decision on a complaint it made in 2023, alleging that Honsin Apparel and HIQ Media had taken control of over 33% of SMI's shareholdings without making a mandatory takeover offer. The application was rejected by the High Court in July last year. SMI had said it would appeal the decision.

Prior to this, Honsin had in 2023 tried to remove SMI's board of directors through an EGM, but the meeting did not materialise as both parties were subsequently embroiled in a series of legal battle. 

In a related development, SMI said it has received a sealed copy of a lawsuit from Velocity Capital Sdn Bhd, who called for the EGM on behalf of Target 1 to appoint the directors. 

Velocity Capital's suit seeks to validate the EGM held on Jan 9 this year, but SMI maintains it as having been "illegally convened", citing lack of a proper notice issued to all shareholders. 

SMI said it is currently seeking legal advice regarding this separate legal challenge, and reiterated that no proper EGM took place on Jan 9 due to the alleged procedural failings. 

On Jan 9, following the EGM, Target 1 announced that the resolutions to appoint the six new directors, including former Perak police chief Datuk Pahlawan Mior Faridalathrash Wahid, had been passed and that the appointments were to take immediate effect. Other directors appointed to SMI’s board were: She Pei Sze, Lee Keng Fatt, Datuk Sok One a/l Esen, Ho Pui Hold, and Leong Weng Loong.

Target 1 said in a statement last week that those who were present at the EGM by proxy held a total of 105.08 million shares — representing 50.05% of SMI’s total issued shares of 209.94 million — voted in favor of all the resolutions, reflecting a 100% approval rate. 

In the meantime, the SC has granted Target 1 another one-week extension, till up to Jan 14, to dispatch its offer document to SMI shareholders. The unconditional mandatory takeover offer was first triggered in August last year.

SMI shares dipped 1.5 sen to close at 38 sen on Monday, for a market capitalisation of RM78.78 million.