The public boardroom battle at Yingde Gases (YINGY) now playing out is a high-profile and unusual example of a battle for corporate control in China. But such conflicts, while hardly common, demonstrate how once-docile minority shareholders are starting to flex their muscles.
Yingde, just like China Vanke HK:2202, the country's largest property developer, has no dominant shareholder. That has left both companies open to external pressure and even hostile takeover bids from outside investors.
The property developer and insurer Baoneng Group last year launched a hostile takeover bid for China Vanke -- another highly unusual situation in China. Baoneng has spent more than 40 billion yuan ($5.8 billion) on a 25% stake in Vanke, which has had its shares suspended, possibly until this July.
At Yingde, two factions of shareholders have divided into separate groups, each attempting to force out the other. The conflict has opened the door to minority holders such as the Hong Kong-based hedge fund Oasis, as the Financial Times explains, which is seeking a board seat despite only owning 4.5% of the company's shares.
Yingde, which is also listed in Hong Kong under the ticker HK:2168, is China's largest producer of industrial gases such as oxygen, nitrogen and argon. It supplies the iron & steel, chemicals, electronics and energy industries.
In early November, a majority vote of the company's board removed its founders, Chairman and CEO Sun Zhongguo and Chief Operating Officer Trevor Strutt, from their positions, in absentia. It then put Zhao Xiangti in charge as chairman. Sun and Strutt have since been fighting to regain their place.
In January, Allentown, Pa.-based Air Products & Chemicals (APD) lodged a bid at HK$5.50 per share, a 41% premium to the shares at the time. That valued Yingde at $1.3 billion. Shares in the company were trading at HK$2.87 at the time. They rose as high as HK$5.38, and have now settled at HK$5.33 for an 86% gain.
Air Products indicated it might raise the price to HK$6 after due diligence. Yingde agreed to let Air Products pore over its books, provided that the U.S. company agreed to a "standstill agreement" that would see it cease to buy its target's shares.
But Air Products said Yingde did not in fact allow it to conduct any due diligence, so the standstill is moot. Yingde has now hired Morgan Stanley to advise it on the bid and "strategic alternatives." It also says it has opened a "data room" to Air Products, no longer requiring the standstill.
Yingde is due to hold two extraordinary general meetings on March 8 to decide who is in fact in charge of the company, one vote looking to remove Sun and Strutt from the board altogether, and the other voting on removing Zhao and four other directors. Sun and Strutt own about 29% of the company, combined, while Zhao owns 12.3% of shares.
The corporate governance activist company ISS has recommended voting in favor of both motions, to create a truly independent board. Quite what happens in early March remains to be seen. But with Hong Kong's beleaguered minority shareholders often victim of unfair or underhand corporate tactics in the past, plenty of eyes will be watching.