News
Hong Kong Airlines caught in HNA faction dispute
April 18th 2019
Hong Kong Airlines says its chairman remains Hou Wei and not a shareholder who attempted a board coup in coordination with a murky third-party investor. The shareholder is the same individual reluctant to sell his stake in HK Express. Read More »
A possible boardroom coup, press release turf war, and appearance of lawyers and strongmen at the headquarters of Hong Kong Airlines (HKA) may be explained by what group is represented in a faraway location: 27 Hospital Road in the Cayman Islands.
That is the registered address of Frontier Investment Partner, the little-known company that in 2017 received HNA’s 34% shareholding in Hong Kong Airlines. The investor has been quiet since the transaction but backed former HKA director and current shareholder Zhong Guosong, who holds 27%. Combined they had a majority shareholding in HKA, and on 16 April during an extraordinary general meeting elected Zhong as HKA’s new chairman with immediate effect.
But previous chairman Hou Wei claimed to still be in charge, according to an internal memo. A source told the South China Morning Post that Frontier had been sold and no longer supported Zhong, causing him to lose a majority vote. Zhong's representative refuted this, saying: "HNA Group represenatives have...illegal falsify documents regarding HKA's ownership structure." The representative affirmed: "The EGM was conducted legitimately following the proper legal procedures and was supported by multiple legal opinions."
Statements on behalf of Zhong say the board changes were “steps taken to secure the financial future of HKA” amid what the statements say are possible corruption. While the concerns may be likely, there are questions if the intent is genuine or only a purported interest so Zhong can gain leverage, similar to his opposing the HK Express sale. One source familiar with HNA expected Zhong to have little interest in day-to-day management of HKA, and that Hou would retain a significant role in restructuring HKA.
HKA has not changed the management profile on its website. Hong Kong authorities are seeking clarity on board changes and requested the internal matter not affect safety and operation.
The uncertain board composition and lack of shareholder identity is partially possible since Hong Kong does not have typical local ownership and control regulations for its airlines. Instead, airlines are required to have their principal place of business (PPB) be in Hong Kong. At least 63% of HKA's shareholding is with two non-Hong Kong companies. Share placement in minimial-disclosure jurisdictions enables obscuritiy.
The tussle between Zhong and HNA over the Cayman Islands Frontier investor, coupled with accusations of HNA's deciding role in related party transactions, seems to question if HKA has its PPB in Hong Kong.
Zhong hired a public relations firm to issue statements proclaiming him the chairman. These statements are independent of HKA official communication. Zhong on 17 April appeared at HKA headquarters with a group of individuals comprising lawyers and unidentified individuals, but possibly private security guards. They apparently wanted to oversee HKA’s C-suite offices.
The statements say they are issued on behalf of HKA’s majority shareholders, comprising Zhong and Frontier. Frontier received the shareholding for an undisclosed sum in a transaction meant to end HNA’s funding of HKA and reduce any conflicts of interest between HKA and HNA’s mainland-based airlines by removing HNA as the majority shareholder.
The identity of Frontier is unclear. The registered address is used by companies in a variety of industries, but has been used by two HNA affiliates: HNA Technology and a company used to facilitate the merger between leasing companies Avolon and Bohai, owned by HNA. There was little doubt Frontier was still linked to central HNA, but it is unclear which HNA faction has control over Frontier.
HKA’s weakening expansion strategy has been exacerbated by the July 2018 death of HNA co-founder Wang Jian that opened the group to faction disputes as different cohorts sought power in the leadership vacuum. This occurred as the group was restructuring due to financial pressure.
While Zhong was on the HKA board from 2015-2018, his other position is of high relevance. Zhong is the HK Express (HKE) shareholder that does not want to sell his stake to Cathay Pacific, which announced plans to acquire the low-cost airline.
Zhong holds a stake in HKE on behalf of one part of HNA. Zhong gave local media interviews in which he said Beijing did not like the idea of another Hong Kong airline being absorbed by UK-linked Cathay Pacific. This suggested Zhong was withholding his stake due to complex reasons.
But one source said Zhong simply wanted a better deal for his HKE stake. Cathay disclosed it would spend US$628m for HKE, including debt repayment. Industry participants reckon Cathay is receiving a bargain.
There were suggestions HNA may be able to pressure Zhong to sell his stake. It is unclear how Zhong’s HKA board coup attempt may be related to his holding in HKE.
