Shenzhen’s shield around Vanke should ward off hostile takeovers

Property giant China Vanke, the target of the most contentious takeover attempt in the country’s corporate history, has been declared a state-owned business directly controlled by the government of Shenzhen, elevating it to a status that could deter future raids.

Vanke was invited to a meeting with Shenzhen’s State-owned Assets Supervision and Administration Commission (SASAC) as a company under its supervision, according to a March 23 notice on its website.

The invitation sends a clear signal to the market that Vanke is now under the control of the local government.

As a state-owned enterprise, any future takeover attempt would be extra troublesome, or almost impossible, as the necessary approvals would have to go through SASAC.

“While the shareholder dispute hasn’t yet been resolved and the biggest shareholder remains a private company, this looks very much like a Chinese-style arrangement,” said Dong Dengxin, a finance professor at Wuhan University of Science and Technology.

The decision makes sense because it helps maintain the management stability of a national brand, he added, although it is “contrary to” the principle of developing a market-oriented economy.

Responding to enquiries from the South China Morning Post, Vanke said it has always been a mixed ownership enterprise – a combination of state and private ownership – and it doesn’t believe that will change in the future.

Vanke was the second Chinese company to become publicly traded in 1991, during the early years of China’s experimentation with modern free-market reforms. It is now the mainland’s second largest developer.

EXPLAINER: The Five Things to Know About the Battle of Vanke

The Shenzhen-based builder had been fending off Baoneng since late 2015, when Yao Zhenhua’s property and insurance conglomerate declared a 20 per cent stake accumulated through the open market and a plan to kick out the larger developer’s management team.

The 16-month takeover battle that ensued created ripples across corporate China, not least in the way that it drew regulators’ attention to the high-stakes games waged by wayward financiers and corporate raiders. Baoneng, which built its acquisitions war chest through the high-yielding financial products sold by its Foresea insurance unit, got its comeuppance when it was handed a reprimand and Yao was banned from selling insurance for a decade.

In defending its turf, Vanke’s management has been pooling the resources of other shareholders.

Shenzhen Metro, the state-owned operator of the city’s subway, became Vanke’s largest shareholder by voting rights this month, after a proxy agreement with the No. 3 shareholder China Evergrande, in a move to ward off Baoneng.

Still, Baoneng controls 25.4 per cent of Vanke, larger than Shenzhen Metro’s share, and shows no intention of letting Vanke go.

Vanke this week said it would refrain from appointing a fresh board of directors when the tenure of current members ends on March 27, dealing a fresh blow to Baoneng’s efforts to get its people elected.

“We do not have a time frame” for the board’s election, Vanke president Yu Liang said at a Hong Kong press conference after presenting the developer’s 2016 financial results. The company is working on a proposal to re-elect the board, and the process will start once that plan is finalised, he said.

The delay in the board re-election, again, exposes the corporate governance problems in the company, Dong said.

Vanke’s friendly alliance — Shenzhen Metro, Anbang and Vanke Management – already has more than 40 per cent of the voting rights in the company, JP Morgan analysts led by Ryan Li wrote in a note this month.

Shenzhen Metro is likely to send three representative to the board, while Baoneng will probably be stuck with a passive role.

With Yao’s legal disputes and resignation as chairman of Foresea Life, he will not be eligible to run for Vanke’s board. Even if Baoneng ends up sending a representative to the election, “it is highly unlikely they will be successful,” the JP Morgan analysts said.