|Battle Over a Chinese Company Turns Physical |
By MICHAEL J. DE LA MERCED
New York Times
April 19, 2012, 7:57 pm
It may be a tiny Chinese educational company worth a little over $200 million. But the ChinaCast Education Corporation has found itself embroiled in a battle worthy of a John Grisham novel.
Its ousted chief executive, Ron Chan, has been accused of aiding in the disappearance of ChinaCast’s chops — ornate corporate seals that are needed to approve everything from paychecks to contracts.
And this week, more than a dozen men claiming an association with Mr. Chan burst into the company’s Shanghai office twice, violently carting off several computers from the finance department, according to a United States regulatory filing late on Thursday.
“We remain in disbelief at the actions of former C.E.O. Ron Chan and his associate John X.Y. Jiang,” ChinaCast’s interim chief executive, Derek Feng, said in a statement on Thursday. Mr. Chan’s actions, he said, “are a threat not only to ChinaCast’s shareholders and employees, but also to every honest China-based company that wants to retain access to the foreign capital markets.”
Mr. Chan has denied the allegations, and in a telephone interview accused his former company’s board of ousting him in an effort to seize control.
The convoluted fight follows other recent messy cases involving Chinese companies that have flocked to American stock markets. In a number of instances — that of the Sino-Forest Corporation, most prominently — investors hoping to tap into China’s entrepreneurial growth have instead been forced to confront problems from unpredictable management to accusations of outright fraud.
Some companies have since restated earnings, stopped trading or simply closed up shop.
“What you have here are Western systems of corporate governance that don’t work with strong-willed Chinese C.E.O.’s,” said Paul Gillis, a professor at the Guanghua School of Management at Peking University.
Of the ChinaCast fight, he added, “This one’s uglier than most.”
ChinaCast’s battles with its former chief have raged for months. Mr. Chan had waged war with one of its Western directors, accusing him of insider trading and seeking to push him off the board. A bitter proxy fight ensued, including an apparent attempt to lock out representatives from a hastily scheduled midnight vote. In the end, Mr. Chan lost, and ChinaCast’s board was reorganized with a mostly new set of directors.
It is here that this tale becomes even stranger.
The company fired Mr. Chan in late March, accusing him of preventing its auditors at Deloitte from certifying the company’s books.
People briefed on the matter said that ChinaCast’s independent directors are concerned that their inability to file financial statements on time may cost the company its Nasdaq listing. Shares of the company have been halted on Nasdaq since March 30. Among the company’s largest shareholders are two American investors, Fir Tree Partners and Ned L. Sherwood.
The board also fired other executives suspected of being aligned with Mr. Chan shortly afterward, including the chief financial officer and the chief accounting officer.
ChinaCast then sued Mr. Chan in a Shanghai court, seeking the return of several chops. Vestiges of a business system dating back to imperial times, these chops are often intricately designed stamps used in lieu of signatures and are vital to core functions like signing legal documents.
“Chops are secured very carefully,” Professor Gillis said. “If you possess the chop, you have the legal right to contract for the company.”
Mr. Chan in turn issued an unusual letter to shareholders, declaring himself the victim of intimidation by Western investors seeking to wrest the company away from him. He denied holding any company property or interfering with Deloitte’s work.
ChinaCast also suspects Mr. Chan of being involved in Harmony, a rival education service provider located in the same Shanghai office building as his former employer, according to the people briefed on the matter.
The company disclosed in its regulatory filing that it was investigating the unauthorized transfer of ownership in several of its colleges to unknown people.
Then on Monday, as ChinaCast was preparing to pay out wages, several men burst into the Shanghai office, demanding the financial department’s computers. These people forcibly took the equipment and punched at least one of the company’s outside lawyers, according to a letter to employees from Mr. Feng.
On Tuesday, another group of men claiming to have Mr. Chan’s approval ordered an electrical blackout to stop the workday, according to the memo. ChinaCast called in the police to throw the people out.
For his part, Mr. Chan denies the current board’s accusations, arguing that he possesses no company property. He added that he had nothing personally to do with Harmony.
“People want to march into China and take over a company and expect things to go smoothly,” he said in a telephone interview this week. “Everybody is angry with them.”
Mr. Chan added that while he was currently doing nothing except playing golf and taking meetings, the fight was making him a pariah among China’s business community.
“I’m going to go bankrupt if I respond,” he said. “All I want to do is just nothing.”