By Mak Yuen Teen

Spackman Entertainment Group Limited (SEGL) listed on SGX&rsquo s Catalist board in July 2014 through a private placement of 69.44 million shares at $0.26 each, reaching a high of S$0.52 post-listing. It closed at $0.008 on August 22, 2020 and is yet another sorry Catalist listing.

The full sponsor for the listing was PrimePartners Corporate Finance, which remained as SEGL&rsquo s continuing sponsor until March 7, 2018, with RHT Capital taking on that role ever since.

My students wrote a case study which I edited and it can be accessed here:

https://governanceforstakeholders.com/2020/08/18/spackman-entertainment-case-study/

Over the past few years, SEGL has made many announcements on SGXNET regarding upcoming Korean movies produced by the Group and big movie ticket sales, which have not translated into improved financial performance. Its unaudited results for the six months ended June 30, 2020 showed comprehensive loss widening to US$4.8 million from US$695,000 the year before. For its full year ended December 31, 2019, the audited results showed total comprehensive loss widening to US$3.9 million from US$2.5 million the previous year.

Proposed Divestment

On August 18, SEGL announced that it has entered into a non-binding MOU with Spackman Equities Group Inc (SQG). SQG is listed on the TSX Venture Exchange in Canada and currently owns 7.55% of SEGL. Richard Lee, a non-executive director of SEGL, and Na Kyoungwon, an Executive Director, President and COO of SEGL, are directors of SQG. Richard Lee is Chairman and Interim CEO of SQG.

Under the MOU, SEGL is proposing to sell its entire 43.88% stake in Spackman Media Group Limited (SMGL) to SQG for no less than KRW 2,000 (S$2.30) which the company said is equivalent to the most recent significant transaction of SMGL&rsquo s shares, with the total consideration amounting to no less than S$32.1 million. SQG will issue shares for the acquisition, with the issue price to be discussed and agreed. The consideration is to be further negotiated and agreed upon between SQG and SEGL.

In response to a SGX query on August 23, 2018, SEGL disclosed that the directors of SMGL were Richard Lee and Na Kyoungwon, the same SEGL directors who are on the board of SQG. An online search and a HK Companies Registry return dated October 13, 2019 show that both remain as the only two directors of SMGL.

The divestment of SMGL is expected to be a major transaction and an interested person transaction (IPT) requiring shareholders&rsquo approval under the Catalist rules. On August 21, 2020, SEGL responded to a set of queries from SGX about the proposed transaction.

How SMGL Became an Associate Company of SEGL

It may be useful to consider how SEGL came to own 43.88% of SMGL.

In April 2015, a subsidiary of SEGL called Spackman Media Group Pte Ltd (SMGPL) was incorporated, with SEGL citing &ldquo internal reorganisation&rdquo .   The following month, SMGPL started issuing new shares, and SEGL&rsquo s shareholding was diluted following multiple share subscription agreements with various &ldquo independent investors&rdquo whose identities were not disclosed. SEGL received gross proceeds of US$7.1 million from these share issuances.

In May 2016, SEGL completed a share swap, transferring its remaining 45.8% interest in SMGPL for a 27.4% interest in SMGL, which had just been incorporated in Hong Kong. A HK Companies Registry return showed that the amount paid or regarded as being paid for each SMGL share was HK$3.3747 or just under S$0.60.   SMGL thus became an associate company of SEGL. SEGL said that SMGL was considering a listing on SEHK. The proposed HK listing never happened.

On 1 March 2017, SEGL entered into a sale and purchase agreement (SPA) to purchase one million SMGL shares at US$3 per share from what it said were independent vendors which it did not name, in exchange for more than 26 million newly-issued SEGL ordinary shares at an issue price of S$0.161. The previous day&rsquo s closing price of SEGL shares was S$0.174.

The US$3 price was well above the S$0.60 per share regarded as being paid for SMGL shares for the share swap involving SMGPL shares only about nine months earlier.

Several more SPAs were entered into by SEGL in 2017 and 2018 as it increased its stake in SMGL to its current 43.88% for US$3 per share. Most of these SPAs were said to be with unrelated third parties or certain existing shareholders whose identities were not disclosed, with the company citing &ldquo confidentiality reasons&rdquo .

In total, five SPAs were entered into between March 2017 and August 2018. The SMGL shares acquired through these five transactions which increased SEGL&rsquo s stake from 27.4% to 43.88% were valued at nearly US$19.4 million (about S$26.2 million).

Now SEGL is proposing to sell its entire stake in SMGL for no less than S$2.30 per share. If it is sold at S$2.30, it would be considerably lower than the US$3 per share SEGL had paid to acquire the additional shares in 2017 and 2018. In response to SGX&rsquo s queries, it said that the value of SMGL shares has declined &ldquo due to unexpected economic conditions which have affected SMGL, including the prolonged China ban on South Korean entertainment and the current COVID-19 situation&rdquo .

When SEGL increased its stake in SMGL in 2017 and 2018 at US$3 per share, the ban already existed, as it had been in place since 2016. In fact, on August 23, 2018, in response to SGX&rsquo s queries about the SPAs, the company cited &ldquo geo-political issues between China and Korea&rdquo   for the delay in SMGL&rsquo s listing in HK and said that this &ldquo allowed the Group to increase its stake at attractive valuations&rdquo . In other words, US$3 was considered a good price and was possible because of the issues between China and Korea.

Spackman Equities - A Company in Financial Distress?

It is not only the proposed selling price of SMGL shares that is of concern. It is the fact that it will be selling to an interested party SQG in exchange for SQG shares, with SQG becoming a subsidiary.

SQG share price last closed at C$0.015 on August 21, and its financials have been abysmal especially in the last three years, as can be seen here:  https://web.tmxmoney.com/financials.php?qm_symbol=SQG.

It made losses between 2017 and 2019, and reported a loss of C$1 million for the quarter ending March 31, 2020. As of March 31, 2020, it had only C$77,056 in cash and had negative retained earnings of C$12.1 million. Its quarterly filing is here:  http://spackmanfilings.com/filings/20200601%20Spackman%20Equities%20Group%20Consolicated%202020.pdf.

SEGL said that &ldquo SQG is planning to engage in the development, production and financing of US Hollywood film investments and expand the talent representation business into North America&rdquo . Based on its financials, SQG looks more like a company needing to be saved than a company that is going to conquer Hollywood.

Interested Person Transaction

Even if the transaction is subject to approval by &ldquo independent shareholders&rdquo as an IPT, it may be difficult to ascertain whether " independent shareholders" are really independent. This is because the company has undertaken several share swaps with &ldquo unrelated third parties&rdquo and &ldquo certain existing shareholders&rdquo most of whom identities were not revealed. SEGL has also made two placements in the last five years.

Even if those involved in the share swap transactions or placements are declared as unrelated, it is impossible to know if this is correct. For example, on May 27, 2020, SEGL announced a proposed placement of more than 743 million shares which represent 38.7% of the enlarged share capital at S$0.0072 each. In the announcement, the company disclosed the identity of 11 subscribers. It said: &ldquo The Subscribers currently do not have any connections or relationships (including business relationships) with the Group, any of the Directors and/or substantial shareholders of the Company, save for their shareholding interests in the Company as set out in paragraph 1.3 above&rdquo . Paragraph 1.3 disclosed that two of the subscribers, Vanilla Sky Marketing Agency Pte. Ltd. and Starlight Corp. Pte. Ltd. are current shareholders of SEGL.

However, a HK Companies Registry search of SMGL found an annual return dated October 13, 2019 which showed the following:

• one individual shareholder who was to subscribe for more than 55 million SEGL shares, held 175,000 SMGL shares or 0.5%
• another individual shareholder who was to subscribe for more than 27 million SEGL shares, held 800,000 shares in SMGL or 2.5%, after transferring 500,000 shares to a corporate shareholder on May 20, 2019 and
• a corporate shareholder which was to subscribe for nearly 82 million SEGL shares, transferred all its 300,000 SMGL shares to another corporate shareholder on May 24, 2019.

All three have been shareholders of SMGL since 2016 or 2017, based on HK Companies Registry records. Even if they have disposed of their shares in SMGL after October 13, 2019, can we truly say that they do not have any connections or relationships with the Group, when SMGL is an associate company?

I believe that SGX should take all possible steps to ensure that those who vote in the IPT are indeed &ldquo independent shareholders&rdquo . It should also ensure that there is a robust review of the transaction and its terms, and proper due diligence on the purchaser SQG. Strong oversight over the selection of the IFA and its work is necessary in my view.