If you vote no, and the vote goes in favor of management, you can request appraisal rights for your shares. The process is expensive and time consuming as you will need to hire outside counsel and go through the legal system which is rarely efficient. However, it is an alternative for shareholders that have strong beliefs about YONG's valuation and are willing to endure the time and expense of the legal system. The WSJ had an interesting article this week about the rise of shareholders seeking appraisal rights, and the pros and cons of this process.
There is the rub for Zhu. If he does an MBO, he loses control of the valuation which I think most folks agree he has suppressed. If he does not do a MBO, he has no way to unlock value for his personal account unless he issues a dividend which he seems reluctant to do based on his passed conduct, or starts paying himself a lot more than $250,000 a year. He may go the route of some other Chinese MBO's that had some mysteriously bad quarters before launching an IPO, or he may just roll the dice low ball an offer and hopes everyone is just tired of being a shareholder and no one seeks an appraisal which is an expensive and time consuming process.
Alternatively, he may just continue to run the company and not cash out for many years. He is only 51, and might be taking a very long term view on LIWA. I've done a lot of Chinese small cap investing, and the motives of insiders are usually pretty easy to determine. However, in this case it is pretty hard to determine where Zhu is headed with LIWA.
Actually, Lihua Interational Inc. the U.S. listed company, is a Delaware Co. Below is the information from the latest 10-K. The 10-K also has a diagram of the corporate structure. There is Lihua Inc. (U.S), Ally Profit (BVI) and Lihua Holdings (HK). For purpose of appraisal rights, Delaware Chancery would be the proper venue for appraisal rights, and Lihua International, Inc. would be the proper party from which to seek these rights. Like many companies that originated in China and listed in the U.S. a fairly complicated business structure, but appraisal rights would be available based on their Delaware incorporation.
LIHUA INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
I'm holding because if he LIWA does go the MBO route, which I believe it will, as a Delaware company, LIWA will need a favorable vote from the majority of non affiliated shareholders. As such, LIWA will at least need to offer a price equal to cash on the balance sheet to get the deal done. At the current rate of cash accumulation, this could easily be $7.50 to $8.00 by the time Zhu gets around to making an offer. This would also be a MBO ripe for appraisal rights. The WSJ had an interesting article yesterday about shareholders more actively pursuing appraisal rights. While not without risks, and likely a long time horizon, in one instance Delaware awarded shareholders $32.35 a share for a company sold for $5.83 a share. The article goes on to state: "The risk of a big payout prompts many companies to settle with the shareholders seeking appraisal. "Having to come back and pay 10 million shares three times the deal price isn't a very attractive option, especially for a company that's taken on debt in the deal," said Carl Sanchez of law firm Paul Hastings LLP.
Settlement amounts vary and are confidential, but lawyers and investors say double-digit per-share price bumps are common."
Yong is going down the same path as Dell. Dell offered a slightly higher buyout price and amended the voting requirements to require an actual yes on no vote as opposed to absentee shares be counted as a no vote. Despite legal objections, Delaware let the vote go forward and Dell won in the second round. Nevada is board friendly so I do not see Nevada standing in the way of a revote under the revised terms.
If you are against the new offer, as we say in Chicago, you will need to turn out the vote and vote early and often.
You have to be bold or crazy or both to short LIWA at this level. Unless you believe the cash is bogus, which seems a pretty remote possibility at this stage in the company's development, you expose yourself to share buybacks up to 100% of all outstanding shares. I know Zhu has been less than shareholder friendly to say the least, but most Chinese companies erroneously attacked by shorts do respond to the attack. There are plenty of Chinese small caps with minimal cash that are more attractive short opportunities. I'm in LIWA at $5, and intend to wait Zhu out even if that means a long wait. I abhor minority shareholder freeze outs, and figure even Zhu will want to cash out someday. When, who knows? However, some of that cash is mine and I intend to get it.
Short interest update came out yesterday. Short interest hardly moved. Either shorts really believe in their position, or they believe they will get a better chance to cover, like today for instance. You will see a lot of volatility before earnings, misinformation and price activity to induce panic. This is not a stock for those lacking a strong stomach.
Settlement Date Short InterestAvg
I would not be surprised if the special committee report has some minor discrepancies in accounting entries, some internal control recommendations, maybe a few disclosure issues. S&S and D&T were likely paid a lot of money to conduct this audit, and it is the nature of the audit process they will need to put something in the report to justify this fee. That said, I don't think there will be any major issues. PWC will incorporate any special committee recommendations in their audit report, and management will agree to adopt any recommendations.
The market should move past these issues and focus on NQ's earnings and future prospects. Below is the valuation for Candy Crush that came out this evening. If Candy Crush is worth $7 billion, I like NQ's chances for future share appreciation.
"Mobile-game maker King Digital Entertainment PLC will test investors' faith in its ability to produce more hits like its "Candy Crush Saga," after pricing its initial public offering Tuesday at a $7 billion valuation."
I suspect Zhu wants to take LIWA private, but he needs to wear down non inside shareholders until $6.50 or so looks good to those shareholders. LIWA is a Delaware company. Any MBO vote would likely by the "majority of the minority" model favored by Delaware Chancery. As YONG found out, this is a difficult standard to meet when your MBO offer is substantially below book value. In the case of LIWA, an offer in the $6.50 range would be below both book and cash. Consequently, if he is contemplating an MBO, it is in Zhu's interest to keep share price around $5 for a very long period of time (which he has successfully accomplished to date). The wildcard is, of course, outside shareholder's sentiment toward an offer in the $6.50 range. YONG misjudged shareholder sentiment, but they did not have majority insider control like Zhu. Many on the board have indicated $6.50 is unacceptable, but I also suspect a lot of shareholders now have a basis in the $5 range so this may be more palatable to that group.
No one can buy the company unless Zhu wants them to buy the company (see below). Also, you have very limited options enforcing minority shareholder rights against Zhu (see below). They have no plans to pay dividends anytime soon (also below). All of these items are from the 3/17/2014 annual report. There is no possibility of shareholder activism because Zhu and insiders have the votes to defeat any activism. Essentially, this is a private company masquerading as a public company. Someday Zhu may MBO LIWA, accept an acquisition or pay a dividend. This could happen tomorrow, five years from now or never. At this point, he seems happy to keep things status quo. Cash is great on the balance sheet, but shareholders will only see the cash when Zhu decides it is time. Below are the headings, full text is in the annual report.
1. One shareholder owns a large percentage of our outstanding stock and could significantly influence the outcome of our corporate matters.
2. Because our principal assets are located outside of the United States and with the exception of one director and one officer, the rest of our directors and officers reside outside of the United States, it may be difficult for you to enforce your rights based on the United States Federal securities laws against us and our officers and directors in the United States or to enforce judgments of United States courts against us or them in the PRC.
3. We have no current plans to pay any dividends and we plan to retain earnings, if any, for use in the development of the business.
I suspect PWC is waiting for the forensic audit to be completed. Although the general public, including many juries in accounting malpractice cases, believe a standard financial audit will detect fraud, auditors disclaim many fraud detection issues in their opinions. This is due to many hard lessons learned by the accounting profession that a well concealed management fraud will likely not be detected by a standard financial audit.
The special audit commissioned by NQ is forensic in nature and should be specifically targeted to address the fraud issues mentioned in the MW report. This is a more detailed review and consequently takes more time. Also, the report is independent so NQ can not call S&S and DT every week and ask is the audit is completed. This would compromise the independence of the auditors, and, of course, trigger an allegation by MW that NQ did not let the special auditors do their job by truncating the review period.
Bottom line, I'm pretty sure PW's risk management department is telling the audit partner to wait as long as possible to issue this year's report, hopefully after the special audit is completed. The last thing PW wants is to issue a clean audit opinion and then have the special report contradict this opinion. I should emphasize that I'm not suggesting the special audit will find anything wrong with NQ. The only folks who can answer that issue are the special auditors. However, from PW's perspective, they are better off reviewing this report if time allows before issuing the audit report.
Time for management to follow up on the quote below. If management thought the company was a good buy at $6.69, they should be salivating at the chance to buy shares at $5.38. Plenty of cash on the balance sheet. If you want to see shorts cover quickly, just announce a buy back commencing immediately and YONG will be back to $6 in no time and start to "maximize value".
"The Board of Directors and management team look forward to working closely together to explore all appropriate opportunities to maximize value for all of our stockholders."
I'm not a subscriber to Benzinga but this came across the wires on my TD account. Assuming this is true, even by the low standards of short hit pieces on Chinese companies, after the Nasdaq halt and subsequent compliance by YONG, preparation and approval of the proxy by the SEC and a real offer at $6.69, this hit piece seems a bit far fetched. The best thing YONG can do at this point is getting their F.S. together promptly, release earnings and schedule their conference call. Management has done enough damage to shareholders the past few quarters. Time to get down to business.
*BZ: Hearing Negative Piece from Prescience Point Out on Yongye (Benzinga)
Good point and a major consideration of mine in staying long today. My hope is Wu and partners take the high road, recognize the message from the vote, and get together and offer $7+ for the company. I would have been happy with $6.69 based on my entry point, but anticipated the stock would not get flushed too badly if the vote failed. At this point, the potential rewards still outweigh the risks I discussed, but I recognize those risks.
I'm familiar with the Chinese discount, but many investors only consider the possibility of "cooked books" when applying the discount (which I don't believe is the case with Yong). Many investors ignore or underestimate the legal risks of doing business in China. Both the VIE and JV structure present that risk not to mention wild cards like CTB's scenario. Yong is an attractive stock based on valuation and growth prospects, but the risks, atypical with most U.S. based stocks, should not be underestimated.That is the gist of my point.
Actually it is an appropriate day in view of the news. I'm assuming YU is not too happy about this result and is weighing his options. He can take the high road and offer more money if he wants to buy the company, or the low road as discussed in my previous memo. Or he can do nothing and just run the company. MS investment in Yong is a vote of confidence, but if YU decides to go rogue, they will be in the same boat as everyone else.
The CTB deal had all the big banks lined up for financing and a lot of the big arb hedgeys in the deal. They all got steamrolled when the deal went South with implicit PRC authority.
Yu can shift assets between companies to his benefit. If he is tight with PRC authorities, they will not intervene. Investors in YONG might want to take a look at CTB. A Chinese sub, majority owned by CTB, single handedly scuttled CTB acquisition by Apollo by locking CTB out of their own plant in China. PRC stood by while all this happened because the CTB's Chinese sub's CEO's was tight with local PRC authorities. Now CTB is negotiating with the sub's CEO to buyout their Chinese facility. A clear victory for the lawless crowd in China.
I'm long YONG so I'm hoping Yu continues to operate the business under Western legal norms. My only point is that he doesn't necessarily have to do so, and the PRC is still the wild west when it comes to legal remedies. Also, the SEC will have no interest in investigating this issue. It is fully disclosed in the annual financials.