Hontex International Holdings Co., suspended from trading after the Hong Kong securities regulator accused it of misleading investors, agreed to pay shareholders HK$1.03 billion ($133 million) to end a lawsuit.
Hontex “accepts and acknowledges” that statements in its prospectus were false and misleading, Simon Westbrook, a lawyer for the Securities and Futures Commission, said on the 13th day of a High Court trial in which the regulator accused the fabric maker of inflating sales, profit and cash figures in its December 2009 listing prospectus.
It’s the first time the Hong Kong regulator has negotiated a share repurchase by a listed company to compensate initial public offering investors. The SFC has also proposed extending civil and criminal liability for prospectus misstatements to bankers this year after accounting scandals involving Chinese companies listed outside of China eroded investor confidence.
Hontex admitted to “being reckless” and said it isn’t able to verify what its true financial position was in the three years before the listing, said Westbrook, reading from a list of agreed facts signed by the Fujian province-based company and the regulator. High Court Judge Jonathan Harris made the order to proceed with a repurchase offer plan.
The agreement shouldn’t be taken as admissions of criminal liability by Hontex or its directors, according to an SFC statement today. Spokesman Jonathan Li said the regulator hadn’t made any deals to preclude any criminal prosecutions.
SFC Chief Executive Officer Ashley Alder called today’s compensation order “an important milestone.”
An extraordinary general meeting must be held within two months, said Hontex lawyer Alexander Li, where shareholders will vote on an offer from the company to buy back the stock at the March 30, 2010 closing price of HK$2.06 a share. Shareholders can decide whether or not they want to sell their holdings, Li said.
The repurchase plan will be partly funded from the HK$832 million of company funds that had been frozen, Westbrook said.
“The company is still a going concern, their factories in China are still operating,” Li said. Hontex plans to work with regulators to reinstate trading, the lawyer added.
Chinese companies face increased investor scrutiny after short seller Muddy Waters LLC last year alleged tree grower Sino-Forest Corp. overstated its timber holdings. Sino-Forest, which has been delisted from Canada’s stock exchange, has denied the allegations. China Forestry Holdings Co., partly owned by private equity firm Carlyle Group, said in April that an independent probe verified less than 1 percent of sales the Hong Kong-listed company previously reported.
Hontex’s share sale arranger Mega Capital (Asia) Co. was fined a record HK$42 million in April and stripped of its corporate finance license.