GOME: A Boardroom

Fight from Prison

Amalina Syaharani (1706131471)
Fildzah Imas Maulidina (1706131654)
Laras Antania Hanjani (1706131723)
Riandy Ar Rasyid (1706131875)
 The Growth of GOME

1987 2004 2005 2008

GOME Founded, GOME listed on Huang Guangyu Huang Guangyu
well-known to its the Hong Kong was ranked the was arrested for
best-price Stock Exchange richest man in suspicion of
strategy. (HKSE) China by Time bribery, insider
Huang Guangyu Magazine trading, and
became Founder money
and Chairman laundering
The Bribery Scandal (Jun 2006)
Beijing Municipal State Taxation Bureau ordered
six provincial taxation bureaus to investigate GOME
over tax evasion issues

Insider Trading and Other Offences (Apr-Sept 2007)

Huang engaged in insider trading involving shares in
Shenzhen-listed Beijing Centergate Technologies Holding
Company Limited (‘Centergate’)

Share Repurchase Scandal (Jan 2008)

Huang organised a large share repurchase with
his wife, to sell their shares in GOME back to the
company

The Arrest of Huang (2008)

Huang was arrested and placed “under investigation” for
suspicion of bribery, insider trading and money
laundering, among other breaches.
 The Boardroom Shuffle (Jan 2009)
Chen Xiao started to lead GOME

Jailed, but Still in the Game (Aug 2010)

GOME board filed a lawsuit against Huang for breaches of
fiduciary duties as a director and damages for the illegal
share repurchase.

The End of Power Struggle (Nov 2010)

GOME announced its agreement in allowing
two of Huang’s representatives onto the board.
 Question 1

For a family-controlled company seeking capital, the pros of a public

listing would likely outweigh the cons. Do you agree with this statement?

Answer
Agree. The needs of public listing on family owned business would like to gain
more pros than contra. It occurs because the principles of good corporate
governance is not only implied in the corporate business but also in the family
owned business. According to Hussain (2017), GCG in encourage disclosure
and transparency within family companies and determine the boundaries of
accountability for the behavior and actions of boards of directors, executive
management, and other employees of the company. The family business will
benefit significantly by introducing the principles of disclosure, transparency,
and accountability since family members will have to abide by those principles
for the good of the company. As going public, family business will certainty
improve the overall operations, efficiency, and performance.
 Question 2

Under the OECD Principles of corporate governance, the board of directors

should be able to exercise objective judgement independently, especially from
management. This outlines the importance of having a clear separation between
board and management. To what extent can Huang’s actions in relation to
GOME be attributed to the lack of such a separation?
 Answer no. 2

So far, what Huang did to GOME was like fully by his own control without any
interference by management sides. When creating the company rules and
regulations, it should be clear that the management have rights to prevent any
crime that could make the company lose it's value in share market.

Insider trading and market manipulation should be prohibited and the applicable
rules enforced. Particularly for enforcement purposes, and to identify potential
conflicts of interest, related party transactions and insider trading, information
about record ownership needs to be complemented with current information
about beneficial ownership.
Beside, the company also should protect its private data that would prevent the
insider trading.Companies management are also well advised to establish and
ensure the effectiveness of internal controls, ethics, and compliance
programmes or measures to comply with applicable laws, regulations, and
standards, including statutes criminalising the bribery of foreign public officials,
as required under the OECD Anti-Bribery Convention, and other forms of bribery
and corruption. Such compliance programmes will also underpin the company’s
ethical code.
 Question 3

“This fight has no winners … GOME is undervalued and its share price will
reflect how quickly they remove uncertainties,” remarked BNP Paribas analyst
Charlie Chen in response to GOME’s boardroom battle. How were minority
shareholders hurt in the entire GOME saga? Would any of GOME’s existing
shareholders be considered “winners” in this leadership struggle?
 Answer no. 3

Minority shareholder was loss on their share because of illegal share repurchase
of Huang’s stake in GOME. Huang has also set the strategy, including had organ
ised a large share repurchase with his wife, Du Juan, to sell their shares in GOM
E back to the company. At the same time, he and Shine Group Ltd, which was w
holly-owned by Huang, transferred around 140 million shares of GOME respecti
vely to other “family members”. It seems like Huang’s interest is decreased due t
o share repurchase, but the fact is “family members” did not. Huang still have a c
ontrol through the family.
 Answer no. 3

This buyback scheme caught the attention of Hong Kong’s Securities and Future
s Commission (SFC). It had resulted in an artificial upward manipulation of GOM
E’s share price, allowing Huang to dispose of his shares at higher prices through
indirect means. Indeed, after the last day of buybacks, GOME’s share price plum
meted by 74.6 per cent from HK$4.405 to HK$1.12, resulting in a loss of about H
K$1.6 billion dollars to shareholders. Because of the share repurchase, it was a
great loss for the non-controlling shareholders, despite the ruling’s intention to pr
otect minority interests. Minority shareholder can not do anything to protect their
shares.
 Answer no. 3

Actually, we could say the winner of the shareholder in this case is Huang, beca
use after Chen Xiao resigned as a chairman and replaced by Zhang Dazhong, it
appears that Zhang’s plans about GOME would see a shift from the “Chen-plan”
to the “Huang-plan”. Zhang plans to developed to expand the company’s presen
ce to tier-two and tier-three cities in China, with 60 per cent of new shop opening
s in those cities. It was same like Huang’s plan that he have done before, but Ch
en focus to cut the cost and make GOME more efficient as he decided to close s
everal store which were deemed to be insufficiently profitable.
 Question 4

Huang vehemently opposed Bain’s investment in GOME in June 2009, a stark

contrast to his receptiveness to institutional investors a few years ago. Taking
into account the roles played by private equity investors and institutional
investors in a company, explain possible reasons for Huang’s strong opposition
to Bain’s investment. Were Huang’s motivations in the best interests of the
company?
 Answer no. 4

Because Bain’s investment in GOME could means that Bain will become the
majority or moreover the controlling shareholder in GOME. If Bain would be really
become the controlling shareholder of GOME, this could mean that Bain could
develop and change anything that Huang had set in governing GOME. Eventually
, Huang will lose his control over the GOME which it was a company that he built
from scratch.
That kind of risk probably something that drive Huang to oppose Bain’s
investment in GOME. Generally, Huang is no longer suitable to do business in
GOME because, any kind of violation he did to OECD’s Principal of GCG is only
harming GOME’s existence in market share and thus, there should be a new
revolution in GOME’s business. Probably that will occur if Bain’s investment and
Chen’s plan was going smoothly without any intervention by Huang.

The good change that Chen brought to GOME could be indicated by the raise of
GOME’s share price during the Chen’s plan era.

Note: GOME’s share price during the day Chen’s resignation 11 March 2011 was
HKD 2.31, and the most recent GOME’s share price was HKD 0.85 as of 13 April
2018.
 Question 5

Identify the regulatory parties involved in the GOME scandal. Do you

think these regulators played effective roles in monitoring and
enforcement?
 Answer no. 5

No, the regulators not playing the effective role.

The Beijing Municipal State Taxation Bureau had ordered the assigned team
to investigate GOME over tax evasion issues.

But the reality is two of the key members from the assigned team, Liang
Conglin and Ling Wei, received bank cards with RMB 500,000 worth of
credit for their very “lenient” actions in granting fines to GOME. In addition,
senior tax officials Jing Hongli and Sun Haiting received RMB 1,5 Million and
RMB 1 Million respectively from Xu Zhongmin (Huang’s business partner),
who was also found to bribe police and tax officials.
 Question 6

At the end of the case, several options were open to Huang.

In your opinion, which of these options would be in the best
interests of GOME’s shareholders?
 Answer no. 6

In our opinion, the best interests of GOME’s shareholder is when Huang resigned
because of his inability to perform as a director, and replaced by Chen. Chen
foccused on cutting down expenses, and make a huge efficiency. Chen Xiao also
built stronger relationship with investor, and also paid more attention to their
investors.

We also supported Chen’s intention to “broaden GOME’s shareholder base and

shore up its finances” by scouting for private equity investors to boost GOME’s
declining financial performance and to solve its debt issues. Because when the
company has financial problems, it will have an indirect negative impact on
market prices.
 Question 7

What are the risks for minority shareholders investing in a

company like GOME? Given the recent developments,
would you be prepared to invest in GOME?
 Answer no. 7

Corruption can cause huge reputational and financial damage to companies.

Corrupt company like GOME take many forms that include bribery, insider trading
and market manipulation. Its existence reduces GOME credibility and profits
when Huang Guangyu misuse their positions for personal gain. When the news
about corrupt business from GOME’s professionals breaks, minority shareholders
lose respect and trust.
 Minority shareholders are skeptical of doing business with GOME that are known
for corruption. GOME will have a much harder time finding willing investors when
bribes or in-kind favors are required, or the business has a history of corruption
within its ranks. Minority shareholders steer clear of businesses with a
corrupt history like GOME.
Thank You!
References:
Hussain, Saleh. (2017). Corporate Governance in Family Owned Business: Importance
of Constitution and Governance. Accessed from www.ebookit.com.
Organisation for Economic Co-operation and Development (2015) Principles of Corpora
te Governance. Accessed from https://www.oecd.org/daf/ca/Corporate-Governance-Prin
ciples-ENG.pdf