Photographer: Justin Chin/Bloomberg

The Murky Side of Hong Kong's Stock Market Has Its Day in Court

A case winding its way through Hong Kong’s courts is shining a light on a murky corner of the city’s stock market that has drawn increased scrutiny from regulators.

Jones Chan, founder and chief executive officer of property design firm Aeso Holding Ltd., claims he’s the victim of a plot to wrest his company from him after its January initial public offering on the Growth Enterprise Market for small companies. Chan alleges hostile investors wanted to flip Aeso for a quick profit to a buyer seeking a Hong Kong listing.

Periodic freezes on new listings in China have spurred investors to turn to Hong Kong, where small businesses could go public and then be snapped up and have assets injected into them in a move known as a backdoor listing, or reverse takeover. That method became popular among mainland companies seeking a route to a public listing.

Ashley Alder, head of Hong Kong’s Securities and Futures Commission, said as far back as October 2015 that the agency was “very conscious of issues to do with small public floats ripe for manipulation, problems with backdoor listings as well as other instances of corporate misconduct.” In March the regulator announced stricter screening of GEM offerings.

In the Aeso case, Chan, who is also chairman, said in court filings that he sold a 49 percent stake in the company in the months before filing for an IPO to financier Wilson Liu. Chan said he had an understanding that Liu would not interfere in Aeso’s operations -- a promise that was broken, according to Chan.

Three months after the firm raised HK$40.6 million ($5.2 million) in its IPO, five shareholders requested a vote to remove the board. Chan alleges in court documents that Liu was working with the five -- together, they controlled just over half the company’s shares -- to take over Aeso so they could flip it to a buyer. Chan didn’t say who the potential acquirer would be.

In an August ruling, Justice Bebe Pui Ying Chu said the evidence “overwhelmingly” suggested that the attempt to remove Aeso’s board “was really a device in a larger fraudulent scheme and the shares placed to the placees were sham transactions.”

Chan and Liu declined to comment. In court filings, Liu said the allegations are “baseless.”

Like many Hong Kong small-caps, Aeso has concentrated ownership, with just 10 investors holding 83 percent of the company’s publicly-issued shares at the time of the IPO.

That concentration partly explains how a hostile attempt to take over a company can be launched. Hong Kong Exchanges & Clearing Ltd. in June proposed new rules for small-company listings, including a two-year restriction on stock sales by controlling shareholders. Concentrated ownership also often means that there’s little buying and selling -- after heavy volume and a 281% surge on its debut, Aeso’s shares rarely traded.

Justice Chu in August suspended the outcome of the shareholder vote, stalling for now any attempt to replace the directors. Aeso’s shares remain halted as other, related cases work through the courts, and Liu has filed a second appeal against Chu’s decision.

— With assistance by Fox Hu, Yue Qiu, and Hannah Dormido

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