Hanergy Tests Hong Kong’s Power to Protect Investors; At issue is SFC’s request for documents related to Hanergy’s Beijing-based parent company
WAYNE MA and JULIE STEINBERG
July 17, 2015 8:18 a.m. ET
HONG KONG—A standoff between a Chinese solar-equipment manufacturer and Hong Kong’s securities regulator is a major test of the watchdog’s ability to protect investors of Hong Kong-listed Chinese companies.
Hanergy Thin Film Power Group Ltd., whose shares have been suspended pending an investigation by Hong Kong’s Securities and Futures Commission, said Thursday it may challenge the watchdog in court. At issue is the SFC’s request for documents related to the annual financials of Hanergy’s Beijing-based parent company and private loans taken out by billionaire Li Hejun, who is chairman of both companies.Hanergy Thin Film says it can’t compel its parent, Hanergy Holding Group Ltd., or Mr. Li to provide the documents, even though Mr. Li is the majority shareholder of both entities. An SFC spokesman said the regulator doesn’t comment on individual cases.
“I think this will come down to a company that doesn’t want to cooperate so the SFC will have to flex some muscle” to get the documents, said Syren Johnstone, a law professor at the University of Hong Kong who teaches courses on securities law. Failure by the regulator to procure the documents would be of concern to investors, he said.
Hong Kong, a former British colony, is part of China but has a different, Western-style legal and financial system as well as free markets.
“If it turns out that the SFC is unable to make it work across the border, it sends a signal that all of those mainland companies that list on the exchange aren’t quite as subject to SFC supervision as we assumed,” Mr. Johnstone said. “It’s simply a problem of two jurisdictions and the other being very different than ours.”
There were 906 Chinese companies listed in Hong Kong as of June, up about 8% from a year earlier. The firms represent about 63% of the exchange’s total market capitalization.
Trading in Hanergy jumped after a service, known as the Shanghai-Hong Kong Stock Connect, made its debut in November that gave investors direct access to each other’s markets. Hanergy’s stock rose more than fourfold from then, before share prices plunged 47% in one day in May.
“With Stock Connect and enhanced focus on cross-border investor protection, it will be important for the SFC to take effective enforcement actions, in particular where the required evidence may need to be obtained through cooperation and coordination with mainland China regulators,” said Michael Cheng, research director for China and Hong Kong at the Asian Corporate Governance Association. “The SFC has power under the legislation to obtain documents that are relevant to their investigation, but what is ’relevant’ may often be a point for legal contention,” he added.
“This incident is likely to highlight the difficulties of policing PRC companies listed in Hong Kong and making them accountable,” said Mark Yeadon, head of litigation and dispute management for Asia at law firm Eversheds.
The focus of the probe into Hanergy Thin Film hasn’t been specified but regulators confirmed the investigation after Hanergy halted trading in its shares following the sudden price drop. The company had puzzled analysts by being been one of the best performers on the Hong Kong stock exchange this year, with the company’s market capitalization growing bigger than that of Sony Corp. and at one point making Mr. Li the richest man in China. However, the global market share of the company’s solar panels are almost zero, analysts say.
The regulator’s power to order trading halts isn’t used often, but is done to protect investors in the public interest. In March 2010, the SFC suspended share trading in Hontex International Holdings Co. after alleging that the company provided misleading information during its initial public offering in 2009. The SFC subsequently ordered the clothing maker to buy back its shares from minority shareholders.
It also isn’t the first time a company has declined to provide documents that were requested. In 2011, China High Precision Automation Group, a maker of industrial instruments, hid part of its documents from its auditor to protect “state secrets,” according to company statements.
That made KPMG, the company’s auditor, unable to confirm the accuracy of the firm’s financial accounts. The stock was suspended from trading for more than nine months before the Hong Kong exchange gave it the green light to resume. But just three weeks later in 2012, the SFC ordered trading in the company’s stock be stopped again. The stock hasn’t resumed trading since.