It is a Monday and I thought this was a Monday morning joke. I was still reeling from the stupid traffic jam caused by the police irresponsible act of blocking motorists from entering the city for reasons only best known to them. The city dwellers are already suffering the increase in costs of living caused by the petrol hike and of course the police are not making it any easier for all of us by mounting indiscriminate roadblocks all over the place. Don’t they realise how much petrol is wasted while all the vehicles were caught in the standstill? But I suppose they wouldn’t care less.
Anyway, back to the real story. MV Augusta was bought during Dr Mahathir’s regime for 70 million Euro, which was equivalent to RM368 million or thereabout. When Dr Mahathir was gone, his blue eyed boy Tengku Mahaleel, the then CEO of Proton was also gone. Syed Zainal became CEO. And for reasons best known to only the Proton Board of Directors, MV Augusta was sold for 1 Euro. That is ONE EURO. The entire purchase price of RM368 million was then written off. Exactly how this massive writing off passed the auditor’s checking was quite beyond me. At the very least, there ought to have been a qualification by the auditors of Proton’s financial statements for that financial year for the following reasons:
· If the sale of MV Augusta for Euro 1 was seen as an ordinary and acceptable sale, than the auditors should have queried the purchase of the company at RM368 million as obviously the purchase was at an overvalue.
· If the purchase was seen as an ordinary and thus, acceptable transaction, conversely, the sale at 1 Euro would have to be looked into because quite obviously, it was a sale at a massive undervalue.
· Whatever it was, surely the sale at 1 Euro would have to be queried further as to its methodology and valuation process. Was it at arm’s length? Was it a related party transaction? Surely something which was bought at RM 368 million cannot be sold at 1 Euro without raising an eyebrow. How could there be such disparity over the purchase value and the sale value? It just does not make any sense.
Proton apparently paid RM 368 million for a 57.75% stake in MV Augusta. At the time of sale, it had a debt of Euro 107 million. For financial year ending 31.3.2006, Proton had to make provisions of RM 136.2 million for MV Augusta’s liability. In a statement, Proton was quoted as saying “in the event MV Agusta falls into bankruptcy, Proton would have been subjected to a contingent liability for an amount of up to RM923.1 million”. That was because, I believe, under Italian laws, the parent company (Proton) had to be liable for MV Augusta’s liabilities. If all these are true, surely the purchase of Proton at RM 368 million had to be questioned. What was the methodology used? How was the valuations done? Was there premium paid? Was it at arm’s length?
When the Proton’s Board decided to sell MV Agusta for a mere 1 Euro, it would of course appear that the Board did not view MV Augusta to be worth anything more than Euro 1. It would be impossible for a company to lose so much value just within a year or so of its purchase. If we take the decision to sell at Euro 1 on the face of it, than common sense would have demanded the Board to investigate into the propriety of the purchase of the company at RM 368 million. Was there an investigation done? If so, what was the result?
Under the law, Directors owe fiduciary duties to the Company on which Board they sit as Directors. These duties, among others, entail the duty to protect the assets of the Company. The law also requires the Directors to act in the best interest of the Company at all time. So, it was the duty of the Board of Directors to investigate the purchase at RM 368 million when the same Board was of the opinion that the value was only Euro 1. The duty does not stop there. After the investigation is done, it would be the duty of the Board to take action to recover the losses caused by the previous management. In this case, since the present Board thinks that the value is only 1 Euro, it must then bring action against the previous Board for squandering about RM 367 999 996.00. But that was never done despite them forming the opinion that the company was only worth Euro 1 (or about RM 4).
Now, the sage doesn’t end there. CNN on 11.7.2008 reported that MV Augusta was sold to Harley Davidson for USD 109 million !!! That would be around RM 348 million. It is unclear whether the purchase was for 100% or only 95% of the company. The purchase price includes the absorption of a debt of about USD 70 million by Harley Davidson. That means the nett purchase price was USD 39 million. Whatever it is, it was not bought for Euro 1 or thereabout.
Assuming the report is talking about the same MV Augusta which Proton bought for RM 368 million and sold for 1 Euro, somebody in Proton will, and should, pay for this colossal financial stupidity. If Proton now have a new Board of Directors, than the new Board owes a duty to the Company to launch an action against the old Board which decided to sell MV Augusta for only Euro 1. If there are now new Directors, apart from the old Directors who decided to sell for Euro 1, these new Directors then owe a duty to the Company to take such action.
What if the Board doesn’t change? In that event, no action will be taken because it would be unlikely for the Board to sue itself. Or what if the current Board doesn’t want to take action? Do not fret. Any shareholder can take action on behalf and for the benefit of the Company as a whole. That is called a derivative action. And serious questions should really be asked during Proton’s next AGM on this matter.
Because something just doesn’t seem right.