China New Materials Holdings, which will list on the main board of the Hong Kong stock exchange on December 13, faces a legal dispute with an unnamed former investor. The company's Hong Kong lawyers have received a letter purportedly from those of the former investor challenging the validity of the company's action in relation to a charge on the shares of its mainland subsidiary, Dongying Shengli A&C Chemical, its IPO prospectus said. A writ of summons for unspecified damages was issued on February 4 in Hong Kong's High Court against founding chairman Zhang Kaijun, Dongying Shengli and Full Smart Development, subsidiaries of China New Materials. The prospectus did not state who was behind the legal action but said it was probably connected to the former investor. The legal dispute originated in 2007, when the former investor offered to make a conditional pre-IPO investment of HK$100 million for 20 per cent of China New Materials. In connection with this investment, a charge on shares of Dongying Shengli was registered with the Administration for Industry and Commerce (AIC) in Dongying city. The investor later withdrew his investment. Subsequently, in November 2008, Dongying Shengli deregistered the charge. China New Materials' controlling shareholders will indemnify the company against any damages and costs associated with the legal dispute, the prospectus said. 'We are confident of the Hong Kong lawsuit. They never served us the writ, so according to Hong Kong law, we are under no obligation,' China New Materials chief executive Huang Cheng said. The company's prospectus said: 'There is no assurance that the previous investor will not continue to initiate legal proceedings in China to challenge the validity of the deregistration of the Dongying Shengli charge.' Meanwhile, founding chairman Zhang made a quick profit of HK$55.48 million from an existing pre-IPO investor, Suo Lang Duo Ji. On October 29, Zhang gained HK$55.48 million 'for his personal use' from Suo, chairman of Lumena, a Hong Kong-listed chemical producer. Suo was a partner of mainland firm Sichuan Tengzhong Heavy Machinery in its attempt to acquire US special utility vehicle maker Hummer. The deal was called off in February because it failed to win approval from Beijing. On August 12, Suo invested HK$70 million for 5 per cent of China New Materials. On October 29, Zhang entered into an agreement with Suo which revalued the latter's 5 per cent stake from HK$70 million to HK$125.48 million. Suo paid Zhang the HK$55.48 million difference on the same day, the prospectus said. The company delayed its IPO for a few days because of discussions with the Hong Kong stock exchange on 'minor technical issues' regarding shareholders which have been resolved, said Eric Wong, managing director of CCB International. CCB International and Piper Jaffray are joint sponsors of the IPO. China New Materials plans to issue 292.5 million shares in the IPO at HK$2.33 to HK$3.33 per share, which will raise HK$681.53 million to HK$974 million.