(Featured Photo: Vanke’s Chairman Wang Shi, source: Vision China)
62.4 billion RMB(23.3% drop in stock price) is the current price tag shareholders took hit from the prolonged proxy battle of Vanke, China’s largest real estate company. Vanke has been trapped in the whirlwind of proxy fight since late 2015, initiated by a previously unknown conglomerate – Baoneng group, controlled by Yao Zhenhua, a Guangdong businessman who has been under the radar for long. It is not only the size of the takeover that allures mass media attention, but also the debate behind it – is Chinese capital market ready for a hostile takeover and an activist shareholder? Is SOE ethically allowed to align with a private businessman? Reviewing Vanke’s corporate history, however, it is not the first time such proxy battle has taken place. But what has gone wrong this time?
(Vanke’s shares have dropped significantly since it resumed trading on July 4th, source: Bloomberg)
Proxy Battle A Deja Vu for Wang Shi
The story of Vanke’s ownership battle went way back in the year of 1988. Wang Shi, founder and chairman of Vanke, had decided not to take up 40% of the company’s shares (post-public offering), under considerations that management control may not be beneficial for the company’s corporate governance. The company morphed into a joint-stock company at that year, when the public was able to subscribe to Vanke’s shares without a stock exchange, a bold innovation at the time. Wang’s decision led to Vanke’s unique ownership structure – there was a state ownership of 20%, foreign ownership of 26% and public ownership accounting for the rest. Despite the innovative offering structure, it planted a potential bomb for the series of events unfolded – no shareholder has ultimate control over the company while Wang Shi and his team has been the de facto decision maker of the company since.
(Back in 1994, Vanke’s unique ownership structure cost Wang Shi to potentially lost his de facto control, source: sina.com)
On March 30th of 1994, the “bomb” exploded , as Junan Securities (later merged into Guotai Junan Securities) launched a proxy battle against the company, together with several major shareholders of the company. Junan was then the underwriter of the company’s B-shares on the Shenzhen exchange, and had planned this move for long. If they succeeded, Wang and the management team will be casted out and the Junan consortium will be in charge. But Wang and team was no joke, they managed to find evidence of rat trading on the Junan front and also dissolved their consortium via an attractive share buyback scheme. The CSRC also stepped in to investigate wrongdoings of Junan, eventually resulting in the success of Wang preventing the “hostile takeover”.
Vanke’s marriage with China Resources – happily ever after…until now
Vanke remained in limbo of scattered ownership during the 1990s, since no one had owned more than 10% of the company’s shares. Vanke’s then largest shareholder – Shenzhen Development Group had pivoted to travel and technology as its main focus. Vanke was no longer their focus any more. The real dilemma for Vanke without a major shareholder was its inability to finance its high-leverage, capex-heavy real estate development business. Wang finally reached out to China Resources, as he claimed “China resources is the giant whale(that will help Vanke)”(“Road and Dream”, Wang Shi’s Autobiography, p.222). CEO of China Resources HK at that time, Ning Gaoning, later CEO of COFCO and now CEO of Sinochem, was a reform-minded and a rare westernized executive in China’s state-owned enterprise. He was appreciative of Wang’s leadership and capability, and the marriage finally took place in 2000, with CRC becoming their largest shareholder.
(Ning and Gao appreciated each other, the marriage was a smooth one back in the good old days)
The 15-year marriage was a smooth one – CRC rarely intervened and had been a passive major shareholder since; Wang and team continued to drive up the company’s value – within 15 years’ time, the company’s revenue has expanded by 46 times and net profit by 48 times. No one has ever questioned this alliance until the new proxy battle unfolded.
(Vanke has become a household brand, owing to Wang and his team’s leadership)
Baoneng’s takeover attempt since mid 2015
In 2015, the stock market frenzy affected almost every company in the market, including Vanke. Vanke’s stock price had already doubled since early 2014, but was still not rich in valuation by all means- the company is trading below 10 times P/E during the first half of 2015, a rare breed at the time of a incipient market bubble. This is when likes of Baoneng or Anbang came into play – small and medium insurance companies who have pivoted from liability-focused model to asset-based model, where yield-seeking behaviour has been illustrated by their public takeover attempts. Baoneng has already acquired control stake of a bunch of companies prior to Vanke, including CSG Holdings (000012-SZ), Jonjee High-tech (600872-CH). They shared a common trait: high ROE, low P/E and better-than-average dividend yield.
(Yao was a low-profile businessman, but his takeover attempts pushed him to the spotlight, source: SZnews.com)
Baoneng was relatively unknown to the public prior to 2015. Yao Zhenhua, the company’s founder, kept his profile low. He engaged in logistics business prior to his engagement in the real estate during the early 2000s, which obviously got him the first pot of gold. In 2012, Yao founded Qianhai Insurance company under the Baoneng Group. The group had more than 30 subsidiaries, covering industries in logistics, real estate, travel, e-commerce, finance and healthcare. Compared to Vanke, however, Yao’s franchise was negligible – total assets of Baoneng Group was less than 10% of Vanke. But they had something Vanke’s management did not have – lots of dry powder, and the potential to lever up via its insurance franchise and its tight relationship with the government.
Right after the stock market crash in late June, Baoneng initiated its takeover attacks. Within less than 10 days in early July, the company voraciously acquired 5% of the company’s outstanding shares, and then another 5% in late July. On August 26th, Baoneng has acquired 15.3% of the company’s outstanding shares, surpassing CRC as the largest shareholder. In December, the company bought another 5% of the company’s shares, making it by far the largest shareholder in the company.
Wang accused Yao “in lack of credibility” and the battle intensified
In December, an internal speech by Wang Shi was intentionally leaked. During his speech, Wang, already known as an outspoken businessman, bluntly stated that the management team disliked the current largest shareholder of the company(Baoneng). Wang commented that Yao was “in lack of credibility” and his investments was highly levered, thus was too risky for both the investors and Vanke’s brand name. In response to the public outcry after Wang’s initial comments, the Shenzhen stock exchange questioned Baoneng Group on its source of funding in December- Baoneng responded with a detailed breakup of its self-owned funds and those they raised through asset management products of the banks as well as brokerages’ margin financing, which is about 1:2 in proportion. The strategy worked well at least in December, the stock price was up 63% within that month, public shareholders were celebrating the rally hard.
(Wang is widely known for his outspoken personality, but this time his statement might have cost him a lot, source: sina.com)
On Dec. 18th, however, the management crashed the party by announcing a potential “essential restructuring” plan of the company. Wang later further commented that Baoneng and its affiliates were “barbarians” and the company will do whatever it takes to save the company’s core values and management team. CRC did not make any comments during this first round of skirmishes, as if nothing happened. It should be also noted that Anbang Insurance, another aggressive player in the acquisition space, also acquired 7% of the company’s outstanding shares, where it became the third largest shareholder of the company.
Wang reached out to Shenzhen Metro, CRC unhappy about it
On March 12th, Vanke made a public disclosure of announcing the alliance with its new partner Shenzhen Metro. Though the specifics of the deal was not disclosed at that time, it was rather obvious that Vanke will issue new shares to acquire Shenzhen Metro’s assets, whereas Shenzhen Metro will eventually emerge as the largest shareholder.
(Vanke found its new partner Shenzhen metro, unfortunately his old partner was very unhappy about it, source: toutiao.com)
But on March 17th, right after the shareholders’ meeting, CRC representative openly told the media that Vanke management “unilaterally” reached out to Shenzhen Metro without board discussion. Though CRC voted consent to the management’s plan to continue halt trading, they also made it clear in their statement that they might not consent to this “unilateral” decision. According to Vanke management, they have done more than enough communication with CRC, but was that more of a “notification”?
CRC voted against Vanke management for the first time in 15 years, Baoneng followed suite with more aggressive moves
On June 17th, three months after the announcement of the new alliance, Vanke released the plan of purchasing 100% of Qian Hai International, wholly-owned subsidiary of Shenzhen metro, at a price of 45.61 billion RMB by means of private placement. The private placement will effectively increase the outstanding shares by 26%, effectively diluting the ownership share of all players, making SZ metro the largest shareholder. While this may not be a classic “poison pill”, it is a de facto way of preventing Baoneng from seizing control of the company.
But aside from Baoneng, who will definitely prevent this from happening, CRC strongly opposed to this decision out of several key considerations – not only were their shares diluted and they became much less influential on the board, they have lost their face to a local SOE, whereas they were a central SOE directly owned by SASAC. CRC also cited that this deal (of acquiring SZ Metro’s real estate assets) is EPS dilutive, which does not fit the SASAC requirement of investment. On top of this, CRC sure detested Vanke’s “unilateral” moves, which basically left them out of the game.
Baoneng went on the offensive after three months of “peace” with the management, as they made the most extreme decision ever – filing a motion to fire all members of the board, including those of CRC. In its description, Baoneng made it clear that they had show much “patience” in the management, yet the management still showed “absolute disregard of fine corporate governance”. In the motion of firing Wang Shi, Baoneng even disclosed that Wang was in violation of shareholders’ interest by studying abroad in US and UK while still taking compensation from the company. This is a well-prepared statement but also evoked mass criticism on Baoneng’s “disregard” of management’s previous efforts as well as potential destruction to shareholders’ interest.
Board’s Voting Session approved the deal, but its legal validity was questioned
Then comes the voting – three out of 11 board members were from CRC and they all voted against the resolution. Other seven board members from Vanke management all voted for the resolution, but there was one independent board member who recused himself from voting – Zhang Liping, China Chairman of Blackstone Group. In reality, Zhang recused himself as he didn’t want to get involved, which the management explained that Blackstone was in deep talks with Vanke on several important projects. Zhang’s vote, one way or the other, will be considered to have “conflicts of interest”. In order to pass a resolution, one needs to gather two thirds of the board’s vote – if Vanke management only got 7 out of 11 votes, the management would have lost the voting; whereas if Zhang recused himself from voting, Vanke management would pass the vote (7 out of 10).
(Zhang tried not to get involved in this game of thrones, but unfortunately his absence became the focal point)
The legal validity of this voting was under wide scrutiny – first of all, whether the recused vote should be included in the vote count; second, whether Zhang was cleared to recuse himself out of the deal – from a deal perspective, Blackstone did not have dealings with SZ metro, in a strict legal perspective, Zhang cannot recuse himself from this vote, or the validity of his board seat may be in serious question.
What’s next for Vanke?
After the stock has slided more than 20% after it resumed trading, the ball was back in Baoneng’s court. Baoneng continued to buy recklessly, loading up to 25% of the company’s outstanding shares, whereas other investors had taken advantage to dump as much as they could. While Baoneng may still have some dry powder left, their high leverage could eventually cost them to lose the game. Another concern was that Baoneng was the largest shareholder despite its ownership share under 30%, subject to a one-year lockup according to mainland takeover rules that it currently declines to acknowledge.
CRC tried its best not to get involved in the early stage of the game, but it eventually stepped in rather awkwardly. It definitely wished to distance itself from Baoneng, responding to Shenzhen exchange that they were not parties in concert. Note that parties in concert cannot seize up to 30% of the company’s shares, otherwise their further acquisition would be consider a tender offer to the remaining shareholders. If Baoneng and CRC were really parties in concert, they have already surpassed the 30% mark by more than 10% now. But CRC is now trapped in a dilemma that it has to align with Baoneng in terms of its own interests. Since when has a SOE align with such a local private enterprise? Unprecedented.
Wang Shi and management may have got the much needed board approval, but their resolution also needs to be passed at the general shareholders’ meeting, which is surely not going to happen. As the clock is ticking for Wang, he was the one who started the vocal warfare in the media and should ultimately take responsibility. The real irony is his only ally Shenzhen metro and potentially Anbang had much less shares than their opponents CRC or Baoneng. Ultimately, a proxy fight depended on voting rights, where Wang Shi could borrow from nowhere.
The regulatory lesson
One positive note that could be taken from this proxy fight was that the regulatory was rather independent and remained its cool to abide by rules and not to bias against any side. However, not only were details of takeover rules being ignored by multiple parties, parties did not show any respect to the company law that articles of incorporation were not cited in any actions undertaken by the board or the shareholders. The law is here, but the legal practice remained far from mature.
Mass media also played an awkward role here – independent directors were allowed to leak confidential details on the media without any legal consequences. Numerous people had accused Baoneng of abusing the capital market, but wasn’t that what capital market was all about? If Wang could do whatever he wanted, why did he need any shareholders or board representation to constrain the management? So many questions remain unanswered as this prolonged proxy battle continues.