Bank of East Asia Shares Fall After Elliott’s Legal Action

  • Lender slumps most in two weeks in Hong Kong trading
  • Elliott’s action escalates battle against BEA management

Bank of East Asia Ltd. shares dropped the most in two weeks in Hong Kong after Elliott Management started legal action alleging that the family-run lender acted improperly when issuing stock, which it says diluted minority investors and entrenched management control.

The stock sank as much as 2.8 percent on Tuesday, the biggest intraday slide since July 6. The bank traded 1.4 percent lower at HK$31.25 as of 1:23 p.m. local time, compared with the benchmark Hang Seng Index’s 0.7 percent decline.

Billionaire Paul Singer’s Elliott said it had started legal proceedings against the lender and directors including Chairman David Li in a statement Monday, marking an escalation in the activist hedge fund’s battle against BEA. The bank will “vigorously oppose” Elliott’s petition, BEA said in a Hong Kong exchange statement filed later in the day. The first court hearing is scheduled for Sept. 21, the lender said.

“Investors are taking a profit as it’s still uncertain about how the legal action will go,” said Edmond Law, a Hong Kong-based analyst with UOB-Kay Hian Holdings Ltd.

The stock has gained 49 percent from a seven-year low reached in February, which is when Elliott had issued a statement calling on the bank to explore a sale of itself. Ahead of BEA’s annual investor meeting in April, the hedge fund also voiced concerns about Li’s re-election as chairman and a board mandate to sell shares.

Elliott is seeking rulings including that board resolutions connected with the lender’s placement of new shares to Japan’s Sumitomo Mitsui Banking Corp., completed in March last year, were “passed for an improper purpose.” The fund also asks the court to release the Japanese firm and Criteria Caixa SA -- the parent of Spain’s CaixaBank SA -- from any undertakings that restrict them from boosting or cutting their stakes.

“What Elliott is trying to achieve is to increase its influence in Bank of East Asia,” Law said. “In turn, they can get a higher return in case Bank of East Asia sells itself.”

BEA’s recent rally means its equity is now trading at the same value as its net assets for the first time since August, data compiled by Bloomberg showed. A price-to-book ratio of two times would be “pretty attractive” to Elliott, according to Law.

Independent Banks

Elliott or affiliated entities have held BEA shares since July 15, 2010, according to the filing, when the bank’s shares closed at HK$28.95. The shares have gained 9.5 percent between then and yesterday, outperforming an 8 percent loss in the Hang Seng Finance Index.

The Hong Kong bank is one of only two remaining independent banks listed in the city. It’s a “prime takeover target,” Elliott said in its legal filing, alleging that the defensive moves by the Li family had “increasingly reduced the ability of the independent shareholders to influence or change the management of the company or accept a takeover offer which is not recommended by the board.”

Elliott’s opposition to the company’s general mandate to sell shares stems from five placements by BEA since 2007 that have made friendly shareholders Sumitomo Mitsui Banking and Criteria Caixa the lender’s largest investors. The transactions have increased the number of BEA’s shares by about 37 percent since 2007.

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