An indication of the potential issues that need to be unscrambled by the Listing Committee of the Hong Kong Stock Exchange before it can sign off on MGM China Holdings’ listing came to our attention recently.
And it seems one is so complex that even Macau’s normally loquacious lawyers don’t want to talk about it. It’s this…..under a technicality of Macau law, the actual legal right to run a gaming concession belongs not to the public gaming companies listed in Hong Kong or New York, but to a tiny ‘shell’ or subsidiary company incorporated only in Macau. These mini companies are known in Portuguese (one of the two official languages for the drafting of laws in Macau) as sociedade anónima. Insisting that the legal right for a foreign or outside company to operate in a market should reside in a local company isn’t unusual when it comes to foreign direct investment—especially in China. But here’s why it matters in relation to MGM China Holdings, its proposed Hong Kong IPO and Pansy Ho.
According to a media report last week, one of the issues the HK Stock Exchange wants clarified is just how much control Pansy Ho will have over the MGM Macau casino operation even if she sells down to 29% of the equity in MGM China, post IPO. The Hong Kong authorities know that until or unless they get clarity on that, they are likely to have United States gaming regulators and possibly other US bodies breathing down their necks. Nevada—unlike New Jersey—signed off on Pansy Ho’s involvement with MGM. But no one should pretend that Nevada hasn’t been placed under some pressure by New Jersey’s stand. That’s one reason why Pansy Ho selling down her interest in MGM Macau could be seen politically as a good thing.
On the face of it, if you have only 29% of a company you can’t control it. Yet Stanley Ho never technically held a majority stake in STDM, but you’d be hard put to find anyone in Hong Kong or Macau who didn’t think that for all practical purposes Dr Ho ran that operation for many years. The Chinese way is not to pummel the other shareholders into submission until they go away and leave you standing on top of the mountain. The Chinese way is to control power either within a company or in society at large, via blocs of interest groups. That way it looks like you’re merely first among equals—and you still get to do what you want. The fact that Stanley Ho controlled STDM without technically controlling it didn’t matter so much to Hong Kong financial regulators back in 2008 when STDM listed there, because Dr Ho didn’t have any gaming operations partners in Western markets. Pansy Ho does—namely MGM Resorts International, the biggest single player by venue coverage on the Las Vegas Strip.
This analysis is not about imputing bad faith on the part of Pansy Ho or her partners MGM Resorts. It’s about exploring the bounds of what the law allows you to do. Pushing the boundaries—whatever the boundaries are perceived to be and wherever they are generally perceived to lie—is surely the basis of success for any commercially significant company.
According to a filing with the US Securities and Exchange Commission, after the flotation of MGM Macau in Hong Kong (via MGM China Holdings), Ms Ho will be reducing her stake in the joint venture to 29%. This would leave MGM Resorts International with a controlling 51%, Pansy Ho with 29% and public investors with 20%.
But if Ms Ho doesn’t want an executive role in STDM (Macau law says you can’t run two concessionaires and/or sub-concessionaires at once), it looks like she could sell down to zero equity in MGM China Holdings and still theoretically stay as managing director of the MGM Macau concession.
That’s because provided Ms Ho keeps 10% of the issued share capital of the sociedade anónima, she can still qualify as managing director of the concessionaire even if she had zero equity in MGM China Holdings. Macau’s Legal Framework for the Operations of Casino Games of Fortune—otherwise known as Law 16/2001—says in Article 7:
“The operation of games of fortune and chance is reserved to the Macau Special Administrative Region and may only be conducted by sociedades anónimas incorporated in the Region, to whom a concession shall be granted through an administrative agreement, under the terms of the present law.”
Article 19 of the same law requires that all gaming concessionaires and sub-concessionaires be run by a managing director who holds at least 10% of the share capital of that sociedade anónima, irrespective of any holding that managing director may have in the company responsible for day to day casino operations. It states:
“The management of concessionaires shall be mandatorily delegated to a managing director.
“The managing director mentioned in the preceding paragraph must be a Macau Special Administrative Region permanent resident and holder of, at least, 10% of the share capital of the concessionaire.”
When our sister publication Inside Asian Gaming approached several Macau lawyers for clarification on this point, the magazine was politely told they preferred not to get involved—even on a non-attributable basis. This might be connected with lawyers’ natural and reasonable reluctance to do pro bono work on behalf of freeloading journalists. It didn’t seem that way.
As one lawyer put it: “I am afraid I cannot help, at least at this stage. This has various signs that it is a complex matter that requires study and careful analysis of the law and the facts.”
That sounds like an understatement. Best of luck to the Hong Kong Listing Committee.
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