Hedge fund Elliott Advisors’ case against Bank of East Asia comes to court
Hong Kong-based lender is accused of “unfair prejudice” in two share placements
US hedge fund Elliott Advisors launched court proceedings against Bank of East Asia on Wednesday, accusing the bank and its directors of “unfairly prejudicing” shareholders when it placed shares in two separate deals with Japan’s Sumitomo and Spain’s CaixaBank in March 2015 and January this year.
The fund wants key clauses from the agreements annulled, and asked Hong Kong’s High Court to rule that the bank may not enter into similar agreements in the future without court approval.
If the petition is successful, the court would order BEA to release CaixaBank and Sumitomo from contractual arrangements that prevent their stakes in the Hong Kong bank from being reduced or increased from their current level of 17.2 per cent each without the bank’s approval, potentially paving the way for a takeover.
BEA has said the clauses were put in place to prevent disorderly selling down of the bank’s shares. Meanwhile, the bank’s majority shareholders have expressed support for the bank’s management and are not seeking such a sale.
Last year, a court forced BEA to make disclosures of its internal agreements and communications to Elliott, information the hedge fund is now building its case around.
BEA’s barrister Bernard Man suggested to the court that Elliott’s legal representatives are “obsessed” by the discovery process, whereby each party in a civil case request information or evidence from the other.
“This is not your usual unfair prejudice application,” said Man. “One has to carefully consider whether there should be certain parts struck out. I don’t know what the disputes are and what evidence will be posed in court.”
The presiding High Court company court judge Jonathan Harris set a date of April 7 for a case management hearing to decide what evidence will be admissable in the proceedings.
The case has brought the issue of hedge fund activist strategies back into the spotlight, and may set a precedent in Hong Kong case law for future cases.
Previously there has only been one such case, in 2006, involving British-based The Children’s Investment Fund (TCI) and Link Reit, a Hong Kong company which manages privatised Housing Authority-owned shopping malls and parking space. Investors said TCI managed to secure a board seat at Link Reit but nothing changed in the aftermath of that struggle.
Two senior hedge fund allocators credited with helping to found the Asian hedge fund industry warned that US-style activist strategy does not translate well to Asia.
Peter Douglas, founder of GFIA, Asia’s oldest hedge fund consulting firm and now a principal at the CAIA Association, said: “Aggressive activism on the whole hasn’t worked very well in Asia.
“Any change I think [as a result of the case] will be very incremental. There isn’t going to be any dramatic change now.”
Daniel Jim, managing director of Tripod Management, one of China’s oldest independent investment and advisory firms, said: “The [activist] approach is not for Asia. You can’t use a pure North American approach – people don’t react the same way here.”
According to Reuters data, Elliott Management owns 7 per cent of BEA’s outstanding shares, worth US$688 million as of the end of last year.