22 April 2018
Vanke has announced a plan to issue new shares to Shenzhen Metro Group under an acquisition deal, but key shareholder China Resources isn't happy. Photo: Reuters
Vanke has announced a plan to issue new shares to Shenzhen Metro Group under an acquisition deal, but key shareholder China Resources isn't happy. Photo: Reuters

Vanke-Shenzhen Metro deal faces hurdle from China Resources

China Vanke has announced a plan to issue new shares to Shenzhen Metro Group as part of an acquisition deal for the latter’s assets.

The property developer said the share issue plan has been approved by its board.

But its second-largest shareholder, China Resources (Holdings), has raised questions over the deal, arguing that the vote by Vanke’s board failed to secure a two-thirds majority, or nod from eight of the 11 board members.

The deal was passed in a 7-to-3 vote after one director chose to abstain, a regulatory filing showed.

Vanke’s 11-member board is made up of three representatives from the management, three representatives from China Resources and five independent directors.

Zhang Liping, an independent director currently employed by Blackstone Group, stayed away from the vote due to concerns about potential conflict of interest, as Blackstone and Vanke are in talks over a commercial property project.

Following the vote, Vanke and China Resources have outlined differences as to what would constitute a two-thirds board approval.

Vanke insists that Zhang should be excluded from the count. Hence, if 7 out of 10 board members support the share issuance plan, it would mean an approval rate of 70 percent, above the two-third majority requirement ratio of 66.7 percent, it says.

However, China Resources argued that Zhang should not be excluded from the count, which would mean 7 votes in favor of the proposal out of 11 board members, a figure that fails to satisfy the two-third majority requirement ratio.

Using this logic, China Resources has questioned the legality of the board resolution.

China’s Company Law is not very clear as to whether an absentee member should be excluded in the vote calculation at a board meeting.

Given the dispute, Vanke and China Resources are likely to seek legal recourse.

Vanke, China’s biggest home-builder, said last Friday that it will acquire a unit of Shenzhen Metro for 45.6 billion yuan by issuing 2.9 billion new shares, or 26 percent of its existing capital, at 15.88 yuan per share.

The deal will make the state-owned subway operator Vanke’s largest shareholder.

Shenzhen Metro will end up with 20.65 percent stake, while Baoneng Group — which is Vanke’s current top shareholder — and China Resources will see their stakes diluted to 19.27 percent and 12.1 percent respectively.

Vanke intends to use the deal to fend off a potential hostile takeover bid from Baoneng, which overtook China Resources as the company’s largest shareholder last year.

Vanke chairman Wang Shi is keen to retain management control of the company he founded.

The developer’s shares have been suspended on the Shenzhen bourse since December last year, but the company has failed to reach an agreement with its long-time supporter China Resources.

The Vanke-Shenzhen Metro deal will push China Resources to the third spot in terms of shareholding in Vanke, and make it a financial investor without big say in the company.

China Resources is unhappy about this as it has been supporting Vanke for many years and helped it grow into the country’s largest property developer.

However, Vanke has now decided to bring in a new top shareholder without obtaining consent from China Resources.

This is what has led the three directors from China Resources to vote against the Shenzhen Metro deal.

The planned issuance of 2.872 billion new shares to Shenzhen Metro will dilute the stakes of existing shareholders. Meanwhile, there are also complaints that the share issuance price — 15.88 yuan — represents a 35 percent discount to Vanke’s last trading price in the mainland prior to suspension.

In addition, China Resources is arguing that the assets being acquired from Shenzhen Metro could put Vanke under great risk given a property market bubble in Shenzhen.

Vanke has defended that the deal, saying it can avail of quality assets at Chinese subway stations at “reasonable” prices.

The developer is keen to copy the model of Hong Kong’s MTR Corp. (00066.HK), which has benefited from property projects at its rail stations.

But China Resources has thrown a spanner in the works, saying that it plans to oppose the share issuance proposal at an upcoming shareholders’ meeting.

As the two sides stick to their positions, the saga looks set to play out for a while.

Meanwhile, we can only speculate as to which side Baoneng, the barbarian at the gate, will take.

This article appeared in the Hong Kong Economic Journal on June 20.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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