Photographer: Qilai Shen/Bloomberg

China Inc.’s Rising Shareholder Fights Latest Risk for Investors

  • Yingde Gases spat highlights hazards in consolidation trend
  • Shareholder disputes will be a significant source of risk: JPM

Investors in Chinese companies now have one more risk to calculate: shareholder battles.

Yingde Gases Group Co., the nation’s biggest industrial gas producer and an acquisition target, became the latest firm to be involved in a struggle for control as two founders stripped of executive power challenged a share placement plan. Its notes dropped to as low as 78 cents on the dollar in December. China Vanke Co. saw $10 billion of market value erased at the end of 2016 amid a takeover fight for the homebuilder. China Shanshui Cement Group Ltd defaulted on several bonds in the past 14 months after a boardroom fray stymied financing.

The mood in China’s corporate boardrooms is turning more hostile as a slowing economy has prompted more consolidation in many industries. The more challenging environment has also raised questions about whether companies are being efficiently run, with some shareholders disagreeing on strategy. The friction is adding further difficulties for foreign investors already wrestling with a lack of transparency and other corporate governance issues with Chinese companies. 

“Shareholder disputes and corporate governance will be a significant source of risk that investors need to price in going forward,” said Anne Zhang, vice president at the private banking arm of JPMorgan Chase & Co. in Hong Kong. “Such disputes typically introduce high volatilities in asset prices as they introduce uncertainties to the companies’ current operation and future direction.”

Hostile shareholder fights had been rare in China compared to some developed markets because for many Chinese companies, significant stakes are held by the state or founding families. More than one in five Chinese companies listed in Hong Kong have fewer than 30 percent of their shares that are freely tradable. That compares with only 6 percent of the firms listed in the U.S. that have their shares as tightly held. 

“Many industries are still very fragmented in China and companies are not efficiently run,” said Leong Wai Hoong, senior portfolio manager for Asian Fixed Income at Nikko Asset Management in Singapore. “This may prompt more mergers and acquisitions, and tussles for the control of companies as the process of consolidation continues.”

Key events in Yingde Gases’ shareholder battle:

  • November 2016: 
    • Board removes Zhongguo Sun as chief executive officer and Trevor Raymond Strutt as chief operating officer
    • Announces plan to sell new shares to Originwater Hong Kong Environmental Protection Co. in order to repay a bank loan; share placement would dilute Sun’s and Strutt’s stakes in the company
  • December 2016: 
    • Sun, Strutt call for an extraordinary general meeting to regain executive power on board and remove five other directors; company later says the requisition is invalid
  • January 2017:
    • Yingde Gases terminates proposed share placement to Originwater
    • Filing shows that Air Products & Chemicals Inc. made a preliminary offer for Yingde Gases of HK$5.50 a share on Dec. 29
    • Sun, Strutt seek another EGM to remove all directors appointed since the last annual general meeting, including the CEO; Yingde Gases says its chairman requests EGM to remove Sun and Strutt