China City Construction: HK judge dismisses suit over lost Bank of Zhengzhou shares, disregards claimed defenestration threat - Debtwire

China City Construction: HK judge dismisses suit over lost Bank of Zhengzhou shares, disregards claimed defenestration threat

13 November 2017 - 12:00 am

China City Construction Holding Group (CCCH), the keepwell deed provider of China City Construction International Corp’s (ChiCit) defaulted dim-sum bonds, appears to have lost ownership of at least 254.5m shares in Bank of Zhengzhou as part of a HKD 540m loan agreement reached last year, according to a Hong Kong court judgment.

 

The Hong Kong Court of First Instance judgment, which was released last week, was in regard to a lawsuit brought by minority shareholders of CCCH, including a unit of former majority shareholder Huinong Capital. They accused certain officials of group subsidiaries of engaging in the “wrongful disposal” of the bank shares, in part by allegedly coercing a then-manager to relinquish his role to someone more favorable to the transfer. The plaintiffs in part were seeking to amend an earlier flawed petition over the same matter.

 

However, Justice Madam B. Chu struck out the plea, maintaining the transfer was “clearly consensual” and that “the central part of the [original] pleadings is so defective that it is not a matter of simple amendment but of reconstituting the claim”.

 

ChiCit, which has been in default on its dim-sum bonds ever since failing to fulfil a change-of-control mandatory offer in June 2016, has long touted a plan to sell its own position of 113.8m shares in Bank of Zhengzhou to cover belatedly the redemption.

 

A ChiCit spokesperson maintained that the shares at the center of the court case do include the 113.8m shares in the bank ChiCit disclosed in July 2017 as owning. He also said that ChiCit has no immediate plans to monetize the bank shares to cover the outstanding CNY 1.22bn 5.3% notes and instead is focused on trying to cover the redemption through new financing backed by its 500m shares in China Huarong Asset Management, said the spokesperson.

 

ChiCit has been long touting its plan to monetize the Huarong shares, initially blaming its inability to do so on a trading lock-up that expired on 29 August. The spokesperson clarified that ChiCit’s ownership of the shares is indirectly as an investors in a fund.

 

ChiCit is not listed in Huarong’s October 2015 IPO prospectus as one of the Chinese special-asset investor’s large shareholders.

 

The Huarong shares are worth HKD 1.835bn as of Friday’s (10 November) close. ChiCit’s 113.8m in Bank of Zhengzhou shares are worth HKD 500m and the 254.5m shares formerly owned by its parent company are worth more than HKD 1bn.

 

Connections
One of the three plaintiffs in the lawsuit is Huinong Delta Investments, a unit of Chinese private equity firm Huinong Capital whose acquisition of a 99% stake in CCCH in early 2016 from an entity owned by China’s Ministry of Housing & Urban Rural Development triggered the change-of-control provision covering the bonds. While Huinong subsequently sold down most of its acquired stake in August 2016, the transfer of the bank shares happened while it was still the majority owner of CCCH.

 

CCCH, in order to obtain a CNY 1.19bn 1.5% per month one-month loan and a HKD 540m, 1.5% per month three-month loan around mid-2016, transferred the effective ownership of the bank shares to the lenders and its affiliates, as per the judgment. In addition, ChiCit provided as security for the HKD loan an unspecified amount of its Bank of Zhengzhou shares, which the plaintiffs alleged was somehow misappropriated, as per the judgment, which does not elaborate on the ownership status of those shares, other than they are held via individual and corporate nominees.

 

The CNY loan was provided by a number of unspecified mainlanders, while the HKD loan was entered into between ChiCit and a company called Amuse Peace Limited. Amuse Peace is controlled by Zhang Xiaodong, who was a vice president of Shenzhen Baoneng Investment Group Co and a general manager of Baoneng Commercial Co, according to a stock exchange filing.

 

Baoneng, a Shenzhen-based insurance company well-known for its failed hostile takeover last year of leading developer China Vanke Co, was named by a number of Chinese news outlets in mid-2016s as the white knight of CCCH.

 

Days after entering into the two loan agreements in June 2016 – described by the judgment as “partly oral and partly written” – CCCH on 17 June transferred a 73% stake in subsidiary CCCC Financial Limited to two investment companies, both defendants in the case. CCCC Financial in turn owns a BVI entity called Lightning Triumph, which is the direct owner of the 254.5m Bank of Zhengzhou shares, as per the judgment.

 

While neither of the two investment companies are openly related to the lenders, the plaintiffs’ case highlighted actions following the takeover of CCCC Financial that hint at a connection. For one, at the time of the takeover, two new directors were appointed to the originally one-member board of CCCC Financial, one of which the plaintiffs alleged was a member of the Baoneng camp, the judgment recounts.

 

More to the point, a month after the takeover, the two new directors called a board meeting and caused a vote to sell Lightning Triumph to an individual named Chen Weiqin, who was one of the lenders of the CNY loan. Chen then caused Lightning Triumph to sell the bank shares to an entity controlled by Wang Jian, according to the judgment. While there is no indication who this Wang Jian is, a report in Chinese news portal 21st Century in late 2016 describes a person with the same name as being the point person in the campaign by Baoneng’s founding Yao brothers to acquire a large stake in Bank of Zhengzhou.

 

Baoneng in mid-2016 had been aggressively acquiring shares in Bank of Zhengzhou on the public market, as per disclosures.

 

In their plea, the plaintiffs alleged that during the negotiation process over the loans, Yuan Qing, the then-only director of Lightning Triumph, was “forced to resign” and was “threatened” and “coerced into signing a number of documents under duress”, as per the judgment. Yuan testified that in a meeting held on 26 June 2016, he was asked to provide all documents in relation to the Bank of Zhengzhou shares and in response to his initial refusal, “10-odd strong men threatened to throw him down the building from the 12th floor”, the judgment states.

 

However, Justice Chu questioned why no immediate legal action was taken by the plaintiffs in response to the threats, noting that Yuan only made a report to the police in September 2016.

 

Justice Chu, in her strike out order, opined the transfers “were clearly on the instructions” of the plaintiffs.

 

by Terence Wong