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Hong Kong Airlines in strategic suspension as court continues injunction
April 26th 2019
Warring faction leader Zhong Guosong worries management will have fire sale of assets, including Hong Kong Air Cargo. Read More »
Hong Kong’s High Court on 25 April extended injunctions against Hong Kong Airlines (HKA). It will be at least two weeks before a substantive hearing will be held to determine who are HKA’s lawful controlling shareholders amidst a faction war within mainland-based HNA. The ongoing uncertainty effectively makes HKA the loser for now.
The injunctions are against certain HKA shareholders and management. The airline stresses it continues to fly and passengers are unaffected. But the inability of management to make certain business decisions for at least a few more weeks leaves HKA in strategic suspension. The head office environment is described by a source to be tense at the executive level, but at the manager level it is relaxing, with staff often leaving early.
HKA has needed restructuring. Urgency and complexity were added recently by Cathay Pacific’s planned acquisition of HKA’s LCC sister, HK Express (HKE). HKA and HKE had limited cooperation but also did not overtly compete with each other. The acquisition would turn HKE into a full competitor.
None of the concerned individuals were present at the day-long hearing. Their barristers agreed to wider protection for HKA under the new injunction, modifying a clause about preventing “substantial” changes to instead say “material”. They also agreed management could not be “diminishing” the value of any part of HKA.
The nuances came as counsel for HKA shareholder and contested chairman, Zhong Guosong, inferred HKA’s current management might conduct a fire sale of assets, including HKA’s freight subsidiary Hong Kong Air Cargo. The suggestion is current management wants to earn cash and/or gain control of assets in the event Zhong is later identified as the lawful chairman.
But it is unclear how many assets HKA possesses. Most of HKA’s fleet is leased and its new training centre has a HK$1 billion (US$127 million) loan from the mainland’s Industrial Bank, according to a regulatory filing.
Industry observers reckon the larger impact from this shareholder dispute is that almost no company will want to commence new financial proceedings with HKA. There will be caution for other HNA companies, too.
The crux of the matter – to be determined at the next hearing – is if an approximately 34% effective stake in HKA is held by Frontier Investment Partner or Grand City Investment Capital. Zhong aligned himself with Frontier. They jointly had a controlling stake in HKA, and on 16 April convened an extraordinary general meeting in which Zhong became chairman. The parties dispute if the EGM that appointed Zhong was lawfully held. It was also heard Grand City appeared at the EGM with a power of attorney letter that was unsigned.
Frontier’s stake was sold on 11 April to Grand City, according to a transaction document that was widely leaked. Frontier disputes the sale, telling the court that the sole signature on the document is from director Zhang Ziyan, who resigned in July 2018 and thus no longer authorised to sell shares. Grand City counsel rebutted; “there is no evidence Ms Zhang resigned”. Zhang was not present.
Grand City appears to be a shell company, having been incorporated in Hong Kong on 18 February 2019 with a sole directorship (an individual in Guangdong) and Hong Kong-based body corporate. Its capital structure consisted of one share valued at HK$1.00 but the 11 April transaction shows Grand City paid $547 million (US$69.7) for the 34% stake in HKA. That values HKA at only US$205 million.
On 10 April, the day before Grand City ostensibly acquired HKA shares from Frontier, Grand City switched its company secretary and body corporate, according to regulatory filings.
Frontier further disputed the share transaction’s authenticity, saying it had not received any payment from Grand City.
In court it was also suggested Frontier never paid for the HKA shares, enabling HNA to find a new buyer. Frontier acquired an interest in HKA when HNA’s Hong Kong company transferred its stake in HKA to Cayman Islands-registered Frontier in July 2017, according to a regulatory announcement that had no mention of payment or other consideration. The court heard the transaction was valued at HK$2.5 billion, substantially higher than the price Frontier obstensibly sold shares to Grand City.
If there was a dispute concerning Frontier’s non-payment that resulted in shares being sold to Grand City, it is curious this occurred more than 1.5 years after the initial share transfer from HNA to Frontier but mere days before Zhong consolidated influence to gain a controlling position in HKA. It is unclear how Frontier could sell shares it had not paid for.
The barrister for Grand City smirked as she requested the proceedings be conducted in camera, which Judge Blair rejected. “The principle of open justice must prevail,” he said.
Amid accusations there was document meddling, Blair wanted parties to undertake that “We won’t tamper them…we won’t destroy them”.
Blair also asked the parties to undertake they would keep their ownership dispute out of HKA’s day-to-day operation to ensure safe and reliable transport for the public. The barrister for Grand City initially would not agree to this but later relented.
The barristers often seemed bemused with each other at the nature of HNA’s ownership complexity involving shell companies, corporations in minimal disclosure territories, unknown identities, uncertainty of when directors were appointed or resigned, and questionable document authenticity. The only party so far apparently benefitting from proceedings are the legal teams accumulating fees.
Yet Judge Blair sought to bring the matter from Hong Kong’s chummy legal community to the real world of public and employee implications.
Grand City’s barrister initially requested 21 days to file evidence showing the authenticity of its transaction with Frontier. “21 days is relatively long,” Judge Blair remarked. “21 days gives a particular message.” When the barrister shortened her request to 14 days, Judge Blair said: “It will give a better message that time is of the essence.”
The parties disputed who should cover damages. Judge Blair reminded them it was better to “avoid damages”. Under Zhong’s direction, damages were to be paid by HKA. HKA’s representative and the judge agreed HKA should be a neutral party and not pay damages. This appeared to send a message that Zhong and other parties could not instigate disputes and have HKA pay.
It is still unclear why Zhong chose this period to attempt a boardroom coup. Ostensibly it was to stop what he claimed was financial misconduct and possible embezzlement, but it is unclear why this became a concern only recently.
An undeniable event is Cathay last month proposing to acquire HKE, which Zhong also holds a stake in. At the time, Zhong said he would not sell his stake. Observers reckon Zhong simply wants a sweetener or more money, and not to be involved in the management of either airline. Zhong’s public relations consultants attended the hearing but would not comment on his intent at HKA or current status of his HKE shareholding.
Zhong’s ownership in HKA is held through his company Hong Kong Airlines Consultation Service. HNA in December 2018 sued the company for HK$854m (US$109m) relating to 2010 debt. At the time, HKA sought to distance itself from Zhong’s company. “This lawsuit is not related to Hong Kong Airlines…Hong Kong Airlines does not own Hong Kong Airlines Consultation Service,” HKA told the South China Morning Post. But the relationship is unclear since Zhong’s company was registered at HKA headquarters and used the same contact e-mail address that HKA has used for other regulatory proceedings.
Hong Kong’s regulatory body, Air Transport Licensing Authority (ATLA), had demanded an explanation of HKA’s shareholding, but ATLA has since deferred to the court proceedings.
