China’s Shanshui Cement prepares to go after ex-directors

Group takes first step to pursue former chairman Zhang Caikui and his son for alleged illegal conduct

PUBLISHED : Friday, 04 December, 2015, 10:03am
UPDATED : Friday, 04 December, 2015, 10:01pm

China Shanshui Cement Group, whose largest shareholder, Tianrui Group, took control of its board this week after a seven-month battle, is taking steps to pursue Shanshui’s former chairman and founder Zhang Caikui and his son Zhang Bin for alleged illegal conduct while serving on its board.

It had advised lawyers to begin legal proceedings against the Zhangs two days after wresting control over Shanshui from them, Shanshui said in a filing to Hong Kong’s stock exchange late on Thursday.

The allegations against the Zhangs were “in connection with alleged unlawful course of conduct and breach of fiduciary duties”, it added without elaborating. Shanshui’s legal adviser, Wilkinson & Grist, has been appointed to handle the case.

The announcement came after a seven-month brawl between Tianrui Group, which raised its stake in Shanshui to 28.2 per cent from 10.5 per cent in April and became its largest shareholder, and the Zhangs, who previously controlled Shanshui’s board via China Shanshui Investment with a 25.1 per cent stake.

Taiwan-listed Asia Cement raised its stake in Shanshui to 20.9 per cent from 13.1 per cent a year ago.

State-backed Hong Kong-listed China National Building Material (CNBM) bought a 16.7 per cent stake late last year.

After Tianrui’s stake increase, trading in Shanshui shares was suspended from mid-April since only 9.2 per cent of its shares were owned by other public shareholders, failing to meet the 25 per cent required by listing rules.

A series of lawsuits ensued, including one in Hong Kong by 2,426 employees of Shanshui against Zhang Caikui in a dispute over ownership of shares in parent China Shanshui Investment. Zhang Caikui was the employees’ trustee in managing the affairs of the parent.

Matters came to a head on Tuesday when 96 per cent of shareholder votes cast at a meeting chose to eject all eight directors of Shanshui, including Zhang Bin, and to appoint nine new ones. Zhang Caikui was removed by a shareholders vote in October.

The new Shanshui board is led by Tianrui chairman Li Liufa.

One of the nine new directors, Stephen Liu Yiu-keung, a managing director of transaction advisory services at accountancy EY and a receiver of China Shanshui Investment amid its share ownership dispute, told the South China Morning Post neither Asia Cement nor CNBM voted on Tuesday and neither has representation on the new Shanshui board.

He said Tianrui had invited Asia Cement and CNBM to nominate directors onto the new Shanshui board, but they have not done so.

Asia Cement has not responded to a request by the Post for comment. A source close to CNBM said it refused to attend and vote in Tuesday’s Shanshui shareholders meeting because it believed the previous board of directors led by the Zhangs was highly qualified, based on their experience, capabilities and reputation, adding it did not support the voting results to oust the Zhangs and the other directors but would welcome any proposal to resolve Shanshui’s debt crisis.

On Tuesday, Liu accused the Zhangs of illegally changing the articles of association of Shanshui’s principal subsidiary in Shandong to tighten their grip.

The Zhangs would not comment, but a source close to them said they were bitter about being ousted and doubted whether Tianrui was acting in the interest of all of Shanshui’s shareholders and bondholders.

Liu said Tianrui had obtained a 3 billion yuan credit line from Industrial and Commercial Bank of China that could be lent to Shanshui to redeem a US$500 million bond if the bondholders exercised their right to do so upon the change of control in Shanshui.