The two interlinked companies, Heritage International Holdings and China United International Holdings, want to stake a combined HK$250 million to take a 50 percent interest in Found Macau Investments International, a holding company recently established by the stepfather of Heritage's managing director and two partners to make gambling and entertainment investments in Macau.

Heritage told its shareholders in a circular distributed Friday that Found Macau ``expects to enter into preliminary agreements shortly'' to invest in a HK$240 million-HK$300 million deal for a vacant site to build a casino hotel and a HK$150 million deal to buy an existing hotel and renovate it to include a casino. It added, however, that no progress had been made on the deals in the past month.

Heritage, which has already invested in Macau junket agents, has proposed to its shareholders that it take a 20 percent stake in Found Macau. The investment would take the form of a HK$100 million unsecured, interest-free loan, half in cash and half a bond convertible into Heritage stock.

China United is similarly slated to buy 30 percent of Found Macau and provide a HK$150 million loan. Unity Investments International, another interlinked listed company, will buy 1percent of Found Macau and extend a HK$5 million loan.

Heritage's three independent directors - Chan Sze-hung, To Shing-chuen and Frank Miu - concluded the proposed deal is ``not fair and reasonable'' to Heritage public shareholders and ``not in the best interest of the company and its shareholders,'' according to a letter from the group attached to the deal circular. The directors base their recommendation to shareholders to reject the deal on the advice of Kim Eng Corporate Finance (Hong Kong).

Kim Eng's attached report found the deal to be unacceptably risky to Heritage's shareholders given the uncertainty over whether Found Macau will generate any profit and the potential dilution of shareholders' stake in the company from 90 percent to 64 percent. That dilution would occur through the convertible bond to be issued to Found Macau and another HK$100 million-HK$150 million in interest-free convertible bonds Heritage would issue to raise funds to finance the shareholder loan to Found Macau.

The new debt would also ``have a material adverse impact'' on the company's financial position, the bank determined.

Independent directors and their financial advisers rarely object to deals in this way in Hong Kong.

A lawyer specializing in corporate finance estimated that opposition arises in less than 2 percent of proposed transactions.

A higher profile protest by the directors of eSun Holdings led its shareholders to reject a buyout offer from parent company Lai Sun Development in 2003; most public shareholders of SmarTone Telecommunications also followed advice to reject a buyout from Sun Hung Kai Properties the same year.

The Found Macau deal will not be sidetracked as easily. The independent directors of China United came to the same conclusion as their counterparts at Heritage after receiving identical advice from Kim Eng, yet all of the 515.8 million independently held shares voted at China United's extraordinary general meeting last Monday were cast in favor of management's Found Macau plan, according to a company announcement.

Of China United's 1.5 billion shares outstanding, 989.7 million were eligible to be voted on the proposal.

Shareholders are scheduled to vote on Heritage's Found Macau plan on March 14. Its last annual report listed casino tycoon Stanley Ho as holding 4.2 percent of Heritage shares.

The small size of Unity Investment's proposed contribution means it can proceed without a shareholder vote.

zach.coleman@singtaonewscorp.com