It turned out that Baoneng had used premium from its popular Universal Life Insurance product -- which promises policy holders short-term returns -- as well as leveraged loans from asset management plans to build up a 43 billion yuan war chest to finance its accumulation of Vanke shares.

While questionable insofar as its legality was, Baoneng’s source of funding was at least controversial.

“Takeovers are normal market actions, but what’s happening in China is very different from the leveraged buyouts of Wall Street,” said Hong Hao, managing director of BOCOM International in Hong Kong.

Unlike the Wall Street buyouts of “Barbarians at the Gate” fame, which sold junk bonds or used bank loans to finance their takeovers, Baoneng tapped short-term debt that lead to “pump and dump” transactions in the stock market, Hong said.

These aggressive moves, including the plan too oust the entire management team, also hurt the operational stability of the takeover target, he said.

Some analysts criticised the use of low risk appetite money from insurance policy holders and banks to fund a leveraged equity competition may expose investors to huge credit risks.

Raising money through multiple layers of banks, security firms, insurance and even online platforms was a “crazy capital game,” said the Wuhan University of Science & Technology’s finance researcher Dong Dengxin.

The saga exposed the dire need for a level of collaboration and policy coordination across the regulators responsible for China’s insurers, banks and brokers, which is difficult, he said.

“Regulators are behind the curve”, JPMorgan analysts led by Ryan Lisaid in a report in July after Baoneng’s funding source was exposed. “The tightening of loopholes is essential to abate financial risks,” they said.

● Governance Mess

It didn’t take long for Vanke’s chairman Wang Shi, a marathoner and Everest mountaineer, to fight back to repel Baoneng’s entreaties, but not before dismantling the veneer of his company’s corporate governance.

Vanke suspended the trading of its shares on the exchanges of Hong Kong and Shenzhen on December 18 last year, declaring a “material asset restructuring.”

It would take Wang three months to unveil that restructuring plan, leading minority shareholders to suspect Vanke’s shares were halted with no plan in hand.

Vanke proposed to issue new shares to buy assets from Shenzhen Metro Group, using the city’s subway operator as its white knight. The plan would dilute the holdings of every major shareholder, especially Baoneng’s stake, removing its takeover threat.

The plan soon ran into a mountain-size hurdle in the form of China Resources Holdings Co., a state-run conglomerate with businesses from brewing to real estate and supermarkets.

With a stake of 15.29 per cent, China Resources was contented at being the largest single shareholder until Baoneng showed up, leaving Vanke’s management to Wang’s team, who controlled a combined 8.41 per cent of the developer with its staff union.

Wang’s rescue plan would have diluted China Resources’ stake along with Baoneng’s.

The conglomerate, which has three seats on Vanke’s board, first learned of the rescue plan through Vanke’s public statement, not during the board meeting, chairman Fu Yuning said in March.

“Apparently Wang and his management team didn’t communicate sufficiently with shareholders” before trotting out the white knight, said David Hong, head of research at consultancy China Real Estate Information Corp.

The proposal remained in a stalemate, and Vanke’s shares didn’t resume trading until July, exceeding the six-month suspension limit imposed by the Shenzhen stock exchange.

On the Hong Kong exchange, Vanke’s H shares were trading throughout the Shenzhen suspension.

The Shenzhen bourse said it queried Vanke about its trading halt, although it hadn’t taken punitive action against the developer.

The episode shows that Vanke has no respect for regulations, said Peking University’s professor of economics law Deng Feng.

●Minority Shareholders’ Interest

A new suitor emerged in June in the form of China Evergrande Group, the country’s second-largest developer and one of the most indebted companies in the industry.

Owned by tycoon Hui Ka-yan, Evergrande began accumulating Vanke shares from the open market, with successive disclosures that raised its holdings from 5 per cent in August until it reached 14.07 per cent. All in, Evergrande spent an estimated 36 billion yuan buying Vanke’s shares. In the process, Vanke’s A shares jumped from 17.88 yuan in Shenzhen to a record 27.72 yuan.

Evergrande’s stake made it either a potential king maker for control of Vanke, or put it in striking distance for control itself.

In early December, a year after Baoneng declared its hand, China’s regulators took action.
The China Securities Regulatory Commission’s chairman Liu Shiyu went off-script during a speech in Beijing, and took time to denounce companies that had used unauthorised funds to finance their leverage buyouts as “barbarians,” “robbers’ and “ghouls.”

The unusual language also spurred the insurance regulator into action, suspending the Universal Life Insurance product sold by Baoneng’s unit Foresea Life, and banning Evergrande Life from investing in the stock market.

“China’s financial regulatory system is immature, and some companies have seized regulatory loopholes,” said Wuhan University”s Dong.

“The Vanke incident has highlighted the conflicts policy makers have faced between encouraging financial innovation and avoiding financial risks,” he said.

On the weekend of December 17, Evergrande’s vice chairman and president Xia Haijun went on state television CCTV, declaring that his company had no intention to take control of Vanke. The battle was essentially over.

Vanke shares have been taking a roller coaster ride in the past year and plunged after the government adopted tough measures on raiders.

The most critical problem in the battle is the damage it’s done to minority shareholders’ interests as they had no say in the fight, said Hong of the China Real Estate Information Corp.

“Unlike western counties, China has yet to establish a rounded system to protect minority shareholders,” he said.

Still, Capital Link International Holdings chief executive officer Brett McGonegal takes heart in the absence of the Chinese state from the tussle, as most of the headlines were created by the shareholders and the company in the fight.

“My hope is that the next set of headlines boast one big happy family aligned with the goals of value creation, not an unhappy shareholder looking to win an emotional battle,” he said. “All in all, the system never really wins until it’s challenged and pressured and it proves its fitness and wins.”