What next for the Capitol project?

Wed, Nov 29, 2017

Lee Meixian

AFTER the Court of Appeal two weeks ago threw out Perennial Real Estate Holdings' application to wind up its joint entities with Capitol Singapore co-deve-loper Pontiac Land, both sides have been left with two options - neither of them easy.

The winding-up application, if it had been successful, would have allowed a buyer to swoop in and take the entire development - its retail mall, residential development, hotel and the refurbished theatre - off the hands of the two developers.

With that option now struck off, what is left is for one party to sell its stake to the other. This is challenging because the question of "who should sell to whom" could unravel into another dispute.

According to the April 2017 court judgement, Perennial had made it clear in oral submissions that it did not wish to sell its stake, but wanted to buy Chesham's instead. (Chesham is a Pontiac affiliate company that owns half of the Capitol development.) That was the reason that it had hoped for a court-ordered buy-out instead of exercising the exit mechanism to offer to sell its shares to Chesham at fair value.

In its submissions to the court, Perennial had also said that if the companies were placed in liquidation and the liquidator decided to sell the Capitol project, Perennial would be "prepared to make a bid".

Judicial Commissioner (JC) Kannan Ramesh noted that Perennial's intent had never been to cash out of the project, but to buy over it instead.

The second option would be for Perennial CEO Pua Seck Guan and Pontiac and Chesham director Kwee Liong Seen to attempt cordial discussions to make things work, ironing out differences with each side making compromises where needed.

But this could also prove to be another uphill task, as the court judgement showed that the relationship between Mr Pua and Mr Kwee had grown "increasingly acrimonious, and they had not been on speaking terms for more than a year at the time of the applications" in April 2016.

The feud reveals the inherent difficulty with 50-50 partnerships, which is that in times of dispute, there will be clear stalemate. One person's stake entirely cancels out the other's, and no business decision can be moved forward if both sides have conflicting views.

In the case of Capitol, such disagreements "severely stunted" progress at the Capitol Project, JC Ramesh said, causing the development to "(fall) into economic slumber".

The impasse led to a delay in the opening of the six-star hotel, The Patina. It got its temporary occupation permit in October 2015, but remains unopened as Mr Pua allegedly refused to countersign payments for various expenses incurred by the hotel. If not for this dispute, the hotel could have already started operating and generating income.

The court judgment also said that Perennial had remained unpaid for the retail leasing services that it provided to the mall since its opening in 2015. These days, although most tenants have fitted out their stores, Capitol Piazza remains mostly quiet except for Food Republic at the basement that draws the lunchtime crowd on weekdays.

As for sales at its luxury residential project, Eden Residences Capitol, only 16 of the 39 units have been sold as at end-October.

Lawyers whom The Business Times spoke to said that joint venture agreements (JVAs) - even between equal-share partners - will usually include deadlock prevention and resolution mechanisms.

Dispute resolution mechanisms can include Party A giving Party B the right of first refusal to buy its shares before it is entitled to enter into any transaction with a third party. Even in 50-50 partnerships, there can still be one controlling person with a casting vote that allows one party to decide on an issue when the votes on each side are equal.

To be sure, the shareholding structure did not start out as a 50-50 equal partnership but came about after one of the original shareholders, Top Global executive chairman Sukmawati Widjaja, sold her stake, followed by a series of transactions also involving OSIM founder Ron Sim and Perennial's reverse takeover with entertainment business St James Holdings in 2014.

JC Ramesh aptly noted that: "It must be said that every party entering into a commercial relationship takes the risk that the relationship may sour or that the bargain may turn out to be a bad one."

The fact that there was such trust between the initial three parties that they did not think it necessary to document their relationship in a JVA and were content to have their working relationship proceed on the basis of unwritten mutual agreements despite the scale, complexity and risk of the investment, spoke volumes.

However, following Mdm Widjaja's exit, the JVA went through several drafts but was never signed as the disputes compounded.

Perhaps in this case, a signed JVA that properly builds in deadlock prevention and resolution mechanisms could have provided more guidance for both developers through this perplexing episode.