This article first appeared in The Edge Malaysia Weekly on January 27, 2025 - February 2, 2025

WHEN Eco World International Bhd (KL:EWINT) announced last December that its recently appointed non-independent non-executive director from Paramount Corp Bhd (KL:PARAMON) Benjamin Teo had resigned from the board, speculation was rife as to whether things were not going as planned between the two property developers following Paramount’s 21.54% stake acquisition in EWI last May.

The resignation came less than six months after his appointment, on the grounds of “avoiding potential conflict of interest”, given the similar nature of business of EWI and Paramount — where Teo is a deputy CEO and executive director. He is also the major shareholder of Paramount, with a combined 28.8% direct (1.5%) and indirect (27.3%) interest in the company.

“It’s nothing of that sort.  In fact, we are visiting the UK soon to see the land [owned by EWI] for ourselves. The idea is we want to assess the potential for ourselves,”  says Paramount CEO Jeffrey Chew in a recent interview with The Edge, debunking speculation of a falling out between the two companies.

Notably, EWI has substantial land bank in the UK and some in Australia, with a combined gross development value of £4.6 billion (RM25.18 billion) and A$700 million (RM1.94 billion).

While Paramount remains committed to its investment in EWI, with Chew reiterating that it was a good deal for the former, it is nonetheless concerned about the potential conflict of interest that could occur by being on the board of EWI, given the similar nature of both companies’ businesses.

“The issue of conflict of interest in the Companies Act recently gained a lot of public attention. Shareholders are increasingly more informed now and because of this awareness, there were instances where action was taken against the CEO or the directors,” says Chew, adding that after two board meetings, Paramount realised that the situation was becoming a little challenging because of Teo’s position in EWI that inhibits him from sharing any information with Paramount’s management, out of concern that it could be rendered as insider information or be a conflict of interest.   

A case in corporate Malaysia that has come under the spotlight recently is the issue with IOI Properties Group Bhd (KL:IOIPG) group chief executive Lee Yeow Seng’s bid for the Shenton House redevelopment project in Singapore that was done in his private capacity through privately owned Shenton 101 Pte Ltd.

Section 218 of The Companies Act stipulates the following:

A director or officer of a company shall not, without the consent or ratification of a general meeting —

(a)    Use the property of the company;

(b)    Use any information acquired by virtue of his position as a director or officer of the company;

(c)    Use his position as such director or officer;

(d)    Use any opportunity of the company which he became aware of, in the performance of his functions as the director or officer of the company; or

(e)    Engage in business which is in competition with the company, to gain directly or indirectly, a benefit for himself or any other person, or cause detriment to the company.

If found guilty of contravening the section, the director or officer is liable to imprisonment for a term not exceeding five years or a fine not exceeding RM3 million or both.

The other main reason Paramount decided to forego its board seat in EWI is because of the accounting treatment under MFRS 128 that Chew felt, when applied, is not reflective of the actual situation and could put the company at a disadvantage.

The standard, which prescribes the accounting for investment in joint ventures and associates, would require Paramount — which bought EWI shares at a discount — to recognise a substantial negative goodwill, estimated at some RM180 million. This would essentially inflate its profit and loss statement (P&L) and shareholders’ fund, and in turn distort performance indicators such as return on asset and return on equity of the group.

It would also have to bear with any potential losses that could come from EWI in the future, which would mean volatility to the group’s financials going forward.

“We don’t think it is justifiable to tell our shareholders that our shareholders’ fund has increased by RM180 million just because we did the acquisition — we believe that the projects have to be launched and sold before the book value can be recognised. There will also be losses and potential impairment that we have to charge to our P&L every quarter.

“So, from the perspective of our shareholders, how do we explain to them the fluctuations of operating profit every time we absorb these adjustments?” says Chew.

He adds that after serious deliberation with Paramount’s auditors and EWI, the group decided that it would treat the stake in EWI as an investment, which can be achieved if Paramount gave up its board seat at EWI to demonstrate that it has no influence over the latter, despite its 21.3% stake.

In this case, Paramount will merely recognise the dividend it receives from EWI as income, and will not apply the share of profit method to its books.

“We do not have influence on the board [of EWI] anyway, whether we’re on the board or not, because we are not involved operationally. Nor do we have any joint-venture agreement with EWI. Basically, we’re just another director in a public listed company at the courtesy of Tan Sri Liew Kee Sin, who invited us to sit on the board,” says Chew. 

He also points out that as EWI has highlighted in its financial statements that it has no plans for new launches until the market conditions in the UK turn more conducive and it is able to project expected returns with greater confidence, there is not much benefit for Paramount to be on the board at the moment.

Nevertheless, he does not discount the possibility of Paramount seeking board representation in the future, especially if Paramount invests more, but it would depend on the situation of both companies. Chew says that Paramount would have to address the matter of conflict of interest and as for the accounting treatment concerns, goodwill may not be so substantial anymore as the fair value of assets would change, and with profit visibility, there would be less of a drag on Paramount’s P&L. 

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