A share sale by Bank of East Asia Ltd. to Sumitomo Mitsui Banking Corp. was an “inappropriate and unfair use” of a mandate pre-approved by stakeholders, hedge-fund firm Elliott Management Corp. argued in a Hong Kong court.
The HK$6.6 billion ($850 million) sale is “likely to deepen the entrenched position” of Bank of East Asia Chairman David Li’s family, Charles Sussex, a lawyer for the New York-based fund, said at the hearing Tuesday. It diluted the interests, especially voting power, of independent shareholders, he said.
Companies linked to Elliott, Paul Singer’s $28 billion hedge-fund firm, have built up a stake of just over 3 percent in the Hong Kong bank. They are seeking a court order to compel the lender and its directors to share confidential documents related to the deal, which was announced in September, according to a document seen by Bloomberg.
Elliott is mounting the legal challenge in a region where banks and other companies are often resistant to pressure from shareholder activists. Last year, Elliott failed in its campaign to pressure Singapore’s Oversea-Chinese Banking Corp. into sweetening its deal to acquire another Hong Kong-based lender, Wing Hang Bank Ltd.
“We’re not satisfied with what we have seen so far,” said Sussex. “What we’ve seen raised more questions.”
Bank of East Asia’s capital adequacy ratios were already above the regulatory minimum, Sussex said. Nor did strategic collaboration with Sumitomo Mitsui justify the share placement as the Japanese bank was already a shareholder, he added.
Hong Kong Monetary Authority officials, in exchanges with Bank of East Asia executive directors, advised the bank to “proactively manage” its capital position and “build a stronger buffer” against changes in the external environment, the bank’s lawyer Jat Sew-tong said in response.
Bank of East Asia’s current capital position is sufficient to support business growth under normal circumstances, Jat said. The bank considered it “prudent” to raise more capital given advice from the regulator and the Basel III accord that raises requirements, he told the court.
Using general mandates to issue new shares is permitted under listing rules and about 80 percent of capital-raising by listed companies in Hong Kong in the past four years was done through share placements, Jat said, citing a Goldman Sachs Group Inc. presentation.
Rights issues normally depress share prices, while the placement of new shares to strategic investors may not have such an effect, he told the court.
To nullify the placement, Elliott will have to show not only that the Bank of East Asia board was motivated by an “improper purpose,” but also that the Japanese bank was aware of such a purpose, said Jat.
“If they had a viable claim that the placement was improper, they shouldn’t have sat on their hands,” Jat said. “They could have sought an injunction.”
Documents Elliott is seeking include the share sale agreements signed with Sumitomo Mitsui, notes and papers from Bank of East Asia board meetings, board resolutions and communication between directors related to the agreements. The hedge fund also asked for documents reflecting the Hong Kong bank’s capital position and requirements as well as details on its proposed strategic partnership with the Japanese company.
Bank of East Asia completed the sale of 222.6 million new shares, increasing Sumitomo Mitsui’s stake to 17.4 percent from
9.7 percent, according to a March statement to the Hong Kong stock exchange.
The five companies linked to Elliott initially bought 200 shares each in Bank of East Asia in mid-January, two days before they sought the court order, said Jat. They cannot challenge “the issue” if they bought the shares with knowledge of it, he added.
Judge Jonathan Harris reserved his judgment at the end of the hearing.
Elliott is known for its legal tussle with Argentina. It has been seeking to enforce U.S. court judgments against the country over its 2001 default on $95 billion of debt. NML Capital, a unit of Elliott, sued for full repayment and won judgments worth $1.7 billion from a U.S. court, which Argentina refuses to pay.
The case is Artan Investments Ltd. v. the Bank of East Asia Ltd., HCMP 125/2015, Hong Kong Court of First Instance.