What is Bank of East Asia and Elliott’s dispute about?
The directors of Bank of East Asia and hedge fund Elliott Management are in court this week in the latest development in their ongoing conflict.
Elliott alleges that the bank is being poorly run and ought to be put up for sale, an argument that the bank’s directors reject.
This latest stage in the long running-saga relates to agreements BEA made with two strategic shareholders, Sumitomo Banking Corporation (SMBC) from Japan, and Criteria Caixa a Spanish holding company which also controls Caixa Bank in Spain.
Under the arrangements as they currently stand, neither shareholder can buy more shares in BEA or sell its stake as a block.
Elliott alleges that the agreements were made for an improper purpose.
Who are the directors of Bank of East Asia?
Bank of East Asia is Hong Kong’s third largest bank by branch network, and the second largest foreign bank in mainland China by the same measure. It is one of two remaining Hong Kong banks that are not part of any larger organisation. BEA was founded by a group of Hong Kong businessmen, including Li Koon-chun, the grandfather of the current chairman and chief executive, David Li Kwok-Po. Li’s two son’s Adrian Li Man-kiu and Brian Li Man-bun are executive directors and deputy chief executives of the bank. In all 18 directors of the bank are included in Elliott’s petition. The list also includes Richard Li Tzar-kai, chairman of PCCW, Peter Lee Ka-kit, vice-chairman of Henderson Land, as well as David Li’s brother, Arthur Li Kwok-cheung, and his cousins, Aubrey Li Kwok-sing and Stephen Charles Li Kwok-sze.
What is Elliott Management?
Elliott is a hedge fund with US$32 billion of assets under management. It was founded in 1977 by Paul Singer who remains the fund’s co-chief executive. Over the years Elliott has made headlines with a series of high profile interventions in the companies in which it invests. At present it is campaigning for changes in the management structure of Australian mining giant BHP Biliton. In May the hedge fund lost a court case in which it attempted to have Dutch paint maker Akzo Nobel’s chairman removed from his position. Elliott first invested in BEA six years ago.
Who are BEA’s largest shareholders?
Sumitomo Banking Corporation: 18.7 per cent
Criteria Caixa: 17.05 per cent
Guoco: 13.5 per cent.
Elliott: 8 per cent
David Li Kwok-po: 3.25 per cent
Arthur Li: 1.47 per cent
Aubrey Li, Stephen Li, Brian Li and Adrian Li combined own a 1.38 per cent stake.
All figures are according to Thomson Reuters data.
What does Elliott allege?
Elliott alleges that BEA is being poorly run by its current management, and that this is harmful to the interests of its shareholders. In a letter to shareholders in February last year the fund called for the bank to begin an auction process by means of which BEA’s board could explore the sale of the bank.
The letter also called upon the bank to release its two strategic partners, SMBC and Criteria Caixa from agreements they have with the bank’s directors. Under these agreements, neither investor can buy additional shares or sell its holdings in BEA as a block.
Elliott also claims that the share placements resulted in a dilution of independent shareholders’ stakes by 23 per cent.
How has BEA responded?
BEA said in a statement in July last year:
“We will vigorously resist Elliott’s attack on the bank and its directors. Their actions are self-serving and calculated to distract the management team and board who remain committed to maximising shareholder value. In today’s challenging operating environment, we continue to believe the best way to achieve that now is to focus on executing on our strategy.
We have heard Elliott’s arguments before and continue to believe that their bullying tactics only seek to serve their own short-term interests, and not the interests of the bank’s shareholders as a whole.”
What are the legal proceedings that have followed?
BEA directors and Elliott first came to court in 2015 after Elliott issued a summons seeking an order for the disclosure of documents by BEA and its directors relating to a placement of shares by BEA to SMBC.
In July last year, Elliott issued a petition asking a Hong Kong court to declare that the bank acted improperly in its share placements to SMBC and Caixa. Elliott are asking the court to order that the agreements with the two organisations (the agreements which do not allow them to buy more shares, or to sell their existing holdings as a block) be overturned.
BEA has applied to have Elliott’s petition against them “struck out”. This case is being heard by Mr Justice Jonathan Harris from July 17-19.