Editor’s Note: The following story was first published in the evening on Feb. 21, and has been republished during normal business hours to reach a wider audience.
Kirkland & Ellis - as legal counsel to an ad hoc group, or AHG, of holders of China South City Holdings Ltd.’s offshore USD notes - has sent a letter to Hong Kong’s Securities and Futures Commission, calling for an investigation in connection with China South City’s alleged failure to disclose inside information, and possible breaches of the Securities and Futures Ordinance, or SFO, relating to disclosure of false or misleading information inducing transactions, said two sources close to the situation.
The letter states that the AHG has reason to believe the consent solicitation exercise commenced by China South City on
Dec. 4 in respect of its five offshore USD notes, involved material misrepresentations to the public (in potential breach of s. 277 and s. 298 of the SFO) and subsequent failures to disclose inside information to the public (in potential breach of s. 307B of Part XIVA of the SFO). The letter calls for urgent enquiry by stock market listing rules (SMLR) front-line regulators, the sources said.
The letter states in relation to the potential breach of s. 277 and s. 298 of the SFO, that China South City’s Dec. 20
announcement contained false or misleading information, and had the effect of misrepresenting to the market the company’s true financial and liquidity position and its solvency status. The letter asserts that the consent solicitation failed, but that the company’s announcement - stating that that it had obtained requisite consents for its 9% notes due July 2024, and that it had executed an amended and restated indenture with respect to the notes - induced trading in the company’s shares such that they rose around 5.36% against their closing price on the previous trading day, the sources said.
Kirkland & Ellis previously had sent a letter to China South City’s legal counsel, Linklaters, on Dec. 22, stating that the AHG disputes the
Dec. 20 announcement that it had secured requisite consents from holders of its 9% senior notes due July 2024 to implement amendments to the notes indenture,
as reported.
Details of the arguments set out in the Dec. 22 letter are
HERE.
In similar vein to the Dec. 22 letter, the advisor argues in the Feb. 20 letter to the SFC that the consent solicitation failed in its entirety, and that no amendment or restatement of the July 2024 notes as announced by the company was effected, nor did holders waive any of their rights, while the company is self-evidently cash flow insolvent, the sources said.
Regarding the potential breach of s. 307B of the SFO, the letter to the SFC states that China South City had failed to disclose the voting results of the consent solicitation for each tranche of the notes, which would have provided useful guidance to the public on whether any exercise on similar terms could secure the requisite levels of consent.
In its Dec. 20 announcement the company said it is actively engaging with holders to discuss debt management strategies including but not limited to further consent solicitation, schemes and exchange offers.
In its
Feb. 9 announcement - stating that it expected to fail in making a mandatory redemption payment on its $203 million 9% due October 2024 notes, which would lead to an event of default - the company again said it was considering options, including, but not limited to, consent solicitation, schemes and exchange offers.
The letter adds that such information on voting results is directly relevant to an assessment of the company’s true ability to manage its liabilities and its solvency, and if known to the market would likely materially affect the company’s share price.
If the company had disclosed the true position to the public on Dec. 20, the share price would likely not have risen by 5.36% but instead would have declined, the sources said the letter states.
The Feb. 20 letter notes that Kirkland’s letter to Linklaters on Dec. 22, 2023, outlining the same points articulated in its letter to the SFC, had not received a response from either the company or Linklaters. The company has also not undertaken any remedial action nor provided any updates to the public despite the seriousness of their wrongdoing, the sources said.
The AHG holds five tranches of offshore notes in aggregate principal amount of about $1.34 billion issued by China South City, including the 9% senior notes due July 2024.
Kirkland & Ellis and the SFC declined to comment.