Vanke takeover lays bare the frailties of China’s corporate governance structure

Company managements ‘can tell lies without cost, and show no respect to the law or to minority shareholders’, says leading economics law expert

PUBLISHED : Sunday, 18 September, 2016, 6:40pm
UPDATED : Sunday, 18 September, 2016, 9:46pm

The landmark China Vanke takeover battle, which has involved a growing cast of large companies and regulatory bodies, has most-certainly become the country’s highest profile corporate tussle to date.

But it has also fully exposed just how far behind the country still is when it comes to corporate governance, compared with what are considered “modern” standards.

Vanke has long been considered one of China’s best managed firms, and chairman Wang Shi has often used his company as a showcase of modern enterprise.

However, throughout the fascinating 10-month conflict between its leading shareholders, Vanke’s senior management has consistently shown a lack of respect for investors and regulations, from arbitrary trading halts, to allowing its independent directors to post insider information on social media.

“Wang always said entrepreneurs should follow rules – but he himself has no respect for rules,” said Deng Feng, a professor of economic law at Peking University.

The country’s biggest home builder has been fending off a potential hostile takeover by Baoneng Group, a Shenzhen-based property-to-finance conglomerate, since late 2015.

The company first suspended trading in its shares on the Shenzhen Stock Exchange on December 18, for what it called “material asset restructuring”. But it wasn’t until March that it first revealed a deal that would make Shenzhen Metro – the city’s underground operator – its majority shareholder.

The Shenzhen bourse’s rules limit halts in share trading to a maximum of three months for companies involved in major asset restructuring, and a maximum six months before trading has to resume.

Vanke shares resumed trading in July after seven months, and now nearly ten months have passed and the corporate slugging between the parties concerned still shows no sign of being settled.

[Vanke chairman] Wang always said entrepreneurs should follow rules – but he himself has no respect for rules
Deng Feng, professor of economic law at Peking University

Minor shareholders suspect Vanke’s trading halt was made at a time when it hadn’t actually found any potential partners, as its Hong Kong shares were not allowed to stop trading.

Deng said although the Shenzhen bourse kept issuing documents to Vanke questioning its motives for the suspension, it still hasn’t taken any concrete actions to punish the company.

In Hong Kong last year, Li Ka-shing restructured two major companies in his US$100 billion business empire, but only suspended its share trading in the city for a few days.

Citing this example, Ricky Tam, chairman of the Hong Kong Institute of Investors, says Wang suspended trading in Vanke for his own purposes, in the hope that Baoneng’s leveraged investment in the company would come under pressure from the halt.

“Vanke has the largest market capitalisation of any mainland property A-share, and during the trading halt period foreign funds failed to redeem their investment – that’s a bad example to set, and simply reminds the world that this is a capital market that still lacks proper regulation,” he said.

Vanke’s independent non-executive director Hua Sheng, who continues commenting on the fight on his own blog, has also raised serious regulatory concerns.

He stands with the Vanke’s management in criticising the company’s two largest shareholders Baoneng and China Resources, who both opposed the developer’s proposal to introduce Shenzhen Metro as a white knight investor.

It was Hua who also disclosed various details discussed at Vanke board meetings, which some describe as breaking insider information rules.

Deng said that Chinese securities regulations insist that, “independent directors should be independent of managements and major shareholders, and express their opinion by way of vote”.

He added that independent directors are not allowed to disclose board meeting negotiation details and make judgmental comments. Vanke should have stopped him, but it didn’t, he said.

By way of explanation of its stance, Zhu Xu, secretary to the board at Vanke, told the Post at its latest results briefing that the company respects the “freedom of speech” of independent directors.

Vanke, however, isn’t the only party guilty of exposing China’s corporate governance frailties throughout the takeover saga.

China Evergrande Group, which emerged as its third largest shareholder in August, first denied a report on financial website Caixin that it had been buying Vanke stock.

The response was made through an in-house public relations spokesman during trading hours on August 4, which was widely quoted at the time by mainland and Hong Kong media.

It was later found, in fact the company was accumulating shares in Vanke at the time, most likely exactly around the time of its first statement.

The Hong Kong-listed Guangdong developer, owned by billionaire Hui Ka-yan, then confirmed its purchase, through a statement, after trading closed.

“That incorrect response misled the market and investors could take legal action to claim damages,” said Tam, urging the Securities and Futures Commission (SFC) and Hong Kong Exchanges (HKEX) to also investigate the case.

In an emailed reply to the Post, an HKEX spokesperson said under listing rules, if any listed company provides information to the market which is later discovered to be incorrect, it should immediately seek legal advice and consider releasing a clarification announcement.

The SFC has said no such comment was made in this case.

In another example of possible violation of trading rules, it was claimed that Vanke leaked information to Caixin on Evergrande’s share purchases in an attempt to push up the share price, and hopefully deter the company from buying more stock.

But experts suggest there have been numerous other violations along the way.

“There is still a gap that can be measured in decades, between China’s corporate governance and those of advanced countries.” said Peking University’s Deng.

“In China, company managements can tell lies without cost, and show no respect to the law or to minority shareholders. Many companies are still ruled by the voice of one man alone.”

The regulators, he says, in this case have quite simply failed to implement the regulations over major listed companies, making them largely irrelevant and ineffectual.

The high-profile battle for Vanke is already destined to become a classic Chinese corporate takeover case study because of its twists and turns – but sadly, it is also likely to be remembered in raising countless questions and doubts over the country’s current levels of corporate regulation.

Deng says the various exposures come at a pivotal time for the Chinese markets, as they desperately need more acquisitions and restructurings to allow good companies to achieve their real value, and create a more thriving trading environment.

He adds some of the issues raised so far are highly damaging, and now fears more Chinese companies will consider dispersed shareholder structures such as Vanke’s are just too unwieldy, leading many to favour more internal shareholding and increased management ownership.