The extended suspension of Evergrande’s shares has helped push the worth of frozen shares in Hong Kong to a file US$61bn, throwing into stark reduction the town’s restricted shareholder protections.
Troubled property developer Evergrande halted trading of its Hong Kong-listed inventory and that of its property providers unit on October 4, stating in an alternate submitting from the latter that the transfer had been taken forward of a “potential normal supply” for its shares. However after greater than two weeks, the corporate has but to reveal anything concerning the obvious deal, nor make any assertion about 5 missed funds totalling greater than $275m to worldwide bondholders.
Company governance professionals mentioned the stonewalling of shareholders by Evergrande, whose high-profile liquidity disaster is being monitored by international markets, struck at Hong Kong’s popularity for offering a base for investing in China grounded in worldwide monetary norms.
The suspension has additionally helped to push the worth of shares underneath a buying and selling halt to a file excessive of simply over $61bn, based on Refinitiv information, up from simply $3.9bn on the finish of 2020.
“Therein lies the draw back to having a market the place you do have quite a lot of listed firms with majority shareholding,” mentioned Jane Moir, analysis director on the Asian Company Governance Affiliation, referring to the benefit with which controlling shareholders can freeze buying and selling. “Minority shareholder rights are being eroded daily . . . [Evergrande] is a barometer for Hong Kong.”
An individual near a few of Evergrande’s offshore bondholders described the shortage of disclosure pertaining to its liquidity points as “odd and out of line”.
“It’s such a high-profile state of affairs, it will be onerous to assume the alternate was not writing to the corporate [about the issue].”
The itemizing guidelines of Hong Kong Exchanges and Clearing require that any suspension “ought to be for the shortest potential interval”. However the metropolis’s listing of frozen shares now stands at about 140, based on Refinitiv information — constituting 6 per cent of the market’s whole. A suspension can final 18 months earlier than an organization dangers being delisted by HKEX — triple the restrict of the London Inventory Alternate.
HKEX declined to touch upon the suspension of Evergrande shares, however an individual conversant in the alternate’s considering mentioned that its precedence was stopping shares from buying and selling improperly.
An organization can request a buying and selling halt on its shares for a lot of causes, equivalent to if it has been topic to a takeover supply or goes into liquidation. The alternate can individually droop buying and selling if it detects unexplained or uncommon actions in an organization’s shares.
Different exchanges internationally, together with these in New York and London, additionally enable the suspension of shares underneath particular circumstances, however Hong Kong’s buying and selling halts are recognized for his or her frequency and size.
“It might be straightforward to deduce that Evergrande is utilizing the suspension for tactical causes to keep away from speaking with buyers,” mentioned Nigel Stevenson, an analyst at Hong Kong-based GMT Analysis. “Evergrande has clearly didn’t preserve the market knowledgeable about why a buying and selling suspension continues to be wanted.”
The electric vehicle subsidiary of Evergrande, which has no excellent bonds and can be listed in Hong Kong, has continued to commerce freely in current weeks.
On a name on October 8, advisers to bondholders mentioned they’d received no “meaningful engagement” from the developer and expressed issues over the potential sale of the property providers unit in addition to the sale of a part of a stake in a regional bank in China.
Traders in Evergrande have raised issues with attorneys within the metropolis concerning the lack of disclosure, based on one individual near the matter. A lawyer who had seemed into the state of affairs on behalf of buyers mentioned the developer “nonetheless has an obligation to make disclosures round materials price-sensitive occasions” regardless of the buying and selling suspension.
The lawyer acknowledged that there “is probably not any breach per se” because the firm is entitled to droop buying and selling pending announcement of a possible transaction. “However normally in these instances a proper announcement follows imminently, inside every week.”
Critics and company governance proponents mentioned that the alternate has improved enforcement lately. In late March, HKEX suspended buying and selling in about 150 firms, largely for failing to submit annual monetary outcomes. In January, HKEX delisted Huiyuan — as soon as China’s largest fruit juice maker — regardless of a number of appeals from the corporate.
However that decision was of restricted assist to minority shareholders, who make up a lot of Hong Kong’s investor neighborhood because of the massive variety of issuers who’re managed by both majority or household shareholders. At Evergrande, as an illustration, 71 per cent is held by its chair Hui Ka Yan, previously the richest man in China.
“It’s a reminder of how troublesome it’s as a minority shareholder in Hong Kong to take any remedial motion in opposition to these firms,” mentioned Moir from the ACGA. “The system is just not constructed for the underdog.”
Moir added that there was little recourse for shareholders locked into holding suspended shares in Hong Kong. Taking firms to courtroom over buying and selling halts is prohibitively costly and the sort of outdoors shareholder strain that’s widespread in London or New York is normally rendered impotent by majority management.
Even probably the most dogged makes an attempt at shareholder activism have yielded little pay-off. US hedge fund Elliott Administration spent greater than six years pushing for the sale of lending operations at Financial institution of East Asia, which was co-founded in 1918 by Hong Kong’s highly effective Li household. In the end, BEA agreed to promote solely its life insurance coverage unit to Asian insurer AIA for about $650m.
This 12 months, the activist fund informed buyers it was leaving Hong Kong. BEA continues to function branches all through the town.
Further reporting by Thomas Hale in Hong Kong