October 8, 2014

Hong Kong chief executive CY Leung in September. Photo: AFP

TIMELINE

Oct 2011: DTZ hit by liquidity crisis. Directors and the company's bank, the Royal Bank of Scotland, decide to run a fast-tracked sales process.

Nov 7 2011: DTZ tells London Stock exchange its shares likely to be worthless.

Nov 8 2011: DTZ directors, including CY Leung, vote to enter into deal with UGL as "preferred bidder".

Nov 24 2011: Leung announces intention to resign from DTZ board, effective December 4 2011.

Nov 28 2011: Leung announces he is running for Hong Kong CEO post.

Dec 2 2011: Leung signs letter of offer from UGL to receive payments in return for supporting sale of DTZ and promoting it.

Dec 4 2011: DTZ enters administration and sale to UGL completed. Unsecured creditors get nothing.

March 25 2012: Leung wins Hong Kong election.

Dec 2012: Leung receives first UGL fee.

Hong Kong chief executive CY Leung faces questions over secret $7m payout from Australian firm

October 8, 2014

Nick McKenzie, Richard Baker and John Garnaut

Hong Kong chief executive CY Leung, centre. Photo: AP

Hong Kong's embattled chief executive, CY Leung, has pocketed millions in secret fees from a listed Australian company in return for supporting its Asian business ambitions, a Fairfax Media investigation can reveal.

The arrangement is outlined in a secret contract dated December 2, 2011, before he was elected chief executive, in which Australian engineering company UGL agreed to pay the Beijing-backed politician £4 million (more than $A7 million).

Richard Leupen at a UGL analyst presentation. Photo: Michel O'Sullivan

The payments were made in two instalments, in 2012 and 2013, after he became Hong Kong's top official.

The payments relate to a deal in which UGL bought an insolvent 200-year old British property services firm he was associated with called DTZ Holdings, whose prospects depended on Mr Leung's network of managers and clients in Hong Kong and mainland China.

Mr Leung, who is currently battling unprecedented pro-democracy protests, strenuously defended his judgment to not declare the payments on his register of personal interests, when Fairfax brought them to his attention.

The sale left Mr Leung with a secretive financial windfall – including an additional guarantee that UGL would pay to him an outstanding £1.5 million bonus owed by the insolvent firm – but left DTZ's other shareholders and unsecured creditors with nothing, wiping out investments and debts worth tens of millions of dollars.

Mr Leung's side deal equated to more than 5 per cent of the purchase price.

A statement from his office said the payments related to past, not future, service and they were agreed at a time when he held no official position and before he was elected chief executive.

"The payments therefore arise from Mr Leung's resignation from DTZ, not any future service to be provided by him," said Mr Leung's spokesman, Michael Yu.

"Both the resignation from DTZ and conclusion of the agreement with UGL took place before Mr Leung was elected as the chief executive," he said. "There is no requirement under our current systems of declaration for Mr Leung to declare the above."

Mr Leung's statement added that he had stepped down as a member of Hong Kong's executive council on October 3, 2011, prior to DTZ's sale to UGL, Mr Leung was a director of DTZ and chairman of its Asia-Pacific operations when he and fellow board members decided to appoint administrators to sell the company's assets to UGL for £76 million.

He announced his resignation from DTZ on November 24, formally confirmed his candidature for the role of Hong Kong chief executive on November 27 and signed the lucrative contract on December 2, 2011.

Mr Leung's resignation took effect on December 4, 2011, the day that UGL acquired DTZ.

The arrangement raises transparency questions for Mr Leung and also the Australian purchasing company, which is in the process of selling the DTZ business on to a US private equity firm, TPG.

DTZ's administrators, Ernst & Young, and its chairman at the time of its sale to UGL, Tim Melville Ross, said they were not aware of the Hong Kong politician's agreement with the Australian company.

The terms are set out under a cover letter from UGL's chief executive, Richard Leupen.

"It has been a pleasure getting to know you during this time and I look forward to continuing our relationship into the future," wrote Mr Leupen. "Your achievements in Hong Kong and China have been outstanding."

An attached schedule shows Mr Leung agreed to ensure that nominated members of his Asian management team remained in place and also that he would "provide such assistance in the promotion of the UGL Group and the DTZ group as UGL may reasonably require".

He also agreed to not to compete with UGL and to act as "a referee and advisor from time to time", adding in a handwritten note that his support was on the condition it "does not create any conflict of interest".

The wording appears to clash with Mr Leung's statement that the payments only related to past dealings.

The terms also contrast with DTZ's 2011 annual report, which states that Mr Leung was not to receive any payments beyond those statutorily required if his employment ceased due to a change of ownership.

In detailed answers to questions, the Australian company UGL underscored Mr Leung's immense importance to the Chinese operations of the company they were purchasing.

Crucially, UGL said the payment agreement was made not in hope of soliciting favours for the business but out of fear that he could destroy it.

"It was entered into solely to ensure CY Leung did not move to a competitor or set up or promote any business in competition with DTZ, or poach any people from DTZ, and hence to ensure the business retained its value after the UGL acquisition," said UGL.

"The China/HK business was critical to UGL's assessment of DTZ's value at the time of the acquisition," it said.

"It is standard business practice to pay for such undertakings, as you are requiring the individual to take on obligations and to forgo future opportunities."

UGL said the documentation did not include a clause to invalidate Mr Leung's payment in the event that he succeeded in his bid for office because management did not think that he would win.

"At the time of the negotiations, media coverage suggested that other candidates were favoured to be elected, so the possibility of CY Leung securing office was not the focus of UGL's negotiations," said UGL.

Leading Australian corporate integrity expert Neville Tiffen said the lack of transparency around the payments raised serious probity questions.

These questions extend to whether Mr Leung or UGL disclosed the proposed payments to DTZ's UK administrators or directors at the time the administrators and DTZ board agreed to the beleaguered company's rapid sale.

Such questions have come at an awkward time for Mr Leung, who is battling to assuage tens of thousands of students and supporters who have paralysed much of the city's central business district over the past ten days, calling for his resignation.

The protesters accuse Mr Leung of working for Beijing, at the expense of Hong Kong's promised democracy and autonomy, and failing to defend the institutions that underpin one of the world's most vibrant and successful cities.

Both sides have retreated from earlier positions and protest numbers have thinned ahead of anticipated negotiations.

UGL, the Australian firm, conceded that Mr Leung's multimillion-dollar payment deal was not disclosed in any public document but said there was no duty otherwise.

It said the main creditor, Royal Bank of Scotland, was aware of the payment and deducted the amount from the DTZ purchase price.

"This was a matter for the seller, as it was a necessary payment for the protection of the value of the business," said UGL. "The acquisition would not have proceeded if this value was not protected and assured."

DTZ's administrator, Ernst and Young, said in a statement it did not know about the arrangement.

"The Administrators have no detailed knowledge of any specific arrangements made between UGL and any other party."

The former chairman of DTZ, Tim Melville Ross, also said he was unaware of the deal between Mr Leung and UGL..

"If there were any discussions between Mr Leung and UGL, these were quite separate from the negotiations between DTZ and UGL," he said.

Corporate integrity expert and former head of global compliance for Rio Tinto, Neville Tiffen, examined the secret documents for Fairfax Media.

Mr Tiffen said: "Whenever you are offering financial benefits to public officials or directors of a company, dealings must be transparent. Without transparency, people's conduct is brought into question."

CY Leung: UGL Q&A

Date: October 8, 2014

John Garnaut

ASIA PACIFIC EDITOR FOR FAIRFAX MEDIA

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Richard Leupen at a UGL analyst presentation. Photo: Michel O'Sullivan

UGL Q&A with Fairfax Media

1. Was the board and remuneration committee of UGL fully informed of the arrangement to pay 4 million pounds to CY Leung?

Yes.

2. Was it disclosed in any public document anywhere? Why not? How was it accounted for?

No. It was a confidential commercial arrangement, which is standard business practice for such non-poach, non-compete regimes.

UGL negotiated a reduction in the initial purchase price to allow for the payment to CY Leung. This was a matter for the seller, as it was a necessary payment for the protection of the value of the business. The acquisition would not have proceeded if this value was not protected and assured.

The arrangement was a standard non-poach, non-compete arrangement. It was entered solely to ensure CY Leung did not move to a competitor or set up or promote any business in competition with DTZ, or poach any people from DTZ, and hence to ensure the business retained its value after UGL acquisition.

It is standard business practice to pay for such undertakings, as you are requiring the individual to take on obligations and to forgo future opportunities.

3. Given that CY Leung was explicitly running for office at the time how could UGL have neglected to insert a clause that invalidated the agreement if he did secure office?

If CY Leung returned to UGL's employment, the arrangement was invalidated, as there was then no issue with competition or poaching. At the time of the negotiations, media coverage suggested that other candidates were favoured to be elected, so the possibility of CY Leung securing office was not the focus of UGL's negotiations.

The agreement ensured both non-compete and non-poach arrangements, to ensure key personnel remained with DTZ post the acquisition, as demonstrated by the fact that payment was subject to satisfaction of these provisions (including a proportional reduction for each senior manager that left DTZ's employment during the term of the agreement).

4. What did DTZ management and board know about the deal with CY Leung?

DTZ Holdings plc senior management was fully aware of, and involved in, the negotiation of the arrangements with CY Leung, to protect the value of DTZ's China and HK business by preventing competition and poaching, to ensure that the acquisition could proceed. UGL is not privy to, and was not made aware of, any other prior arrangements.

5. There is no documentation that we can find that confirms that banker RBS and DTZ administrators, Ernst & Young, were aware of the CY Leung deal. Please confirm what they knew and how they knew?

RBS and their advisers were aware of the arrangements and RBS agreed to the resulting reduction in the purchase price of DTZ Holdings plc, to offset the payment to CY Leung. It was recognised that the payment to CY Leung was necessary to ensure that he did not set up nor promote any business in competition with DTZ, or poach any people from DTZ, to ensure the business retained its value. Without this protection in place UGL would not have proceeded with the acquisition.

6. What arrangements were made with administrators and relevant company directors to ensure the payments to CY Leung did not break the UK Insolvency Act or relevant UK corporate laws?

UGL was not a party to discussions with the administrators. All communications were with DTZ Holdings plc management, RBS and their advisers.

7. Were the directors of DTZ informed and did they approve the deal?

We cannot speak for all of the directors of DTZ Holdings plc at the time; however, DTZ Holdings plc board representatives, management, financiers and advisers were all involved with and aware of these discussions.

CY Leung statement

October 8, 2014

CY Leung. Photo: AFP

Statement from the office of Hong Kong chief executive CY Leung:

Mr Leung was the Asia Pacific Director of DTZ. He announced his resignation from DTZ on November 24, 2011, which took effect on December 4, 2011. According to an agreement between UGL (which was at that time acquiring DTZ) and Mr Leung on the conclusion of his employment with DTZ, UGL undertook to make payments to him over two years and to underwrite for DTZ the payment of outstanding agreed bonus. The payments therefore arise from Mr Leung's resignation from DTZ, not any future service to be provided by him.

Both the resignation from DTZ and conclusion of the agreement with UGL took place before Mr Leung was elected as the Chief Executive. There is no requirement under our current systems of declaration for Mr Leung to declare the above. Mr Leung resigned from the Executive Council on October 3, 2011, well before the agreement was concluded.