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Over the past 18 months, shares of Shenzhen-based real estate developer Nam Tai Property (NYSE:NTP) or “Nam Tai” have experienced a wild ride after a successful activist investor campaign appeared to have freed the company from the clutches of much larger peer Kaisa Group.
After rallying by more than 600% at its peak in June 2021, the downturn in the Chinese real estate market started to impact the stock price in the second half of last year.
Things got worse after Deutsche Bank AG (DB) foreclosed on ailing Kaisa Group’s 23.9% stake in the company in December.
In January, shares took another hit after the company alleged its former CEO, Jiabiao Wang, having “obstructed an orderly handover of business assets in mainland China“.
The issue required the new board of directors to secure up to $40 million in emergency financing from its second- and third-largest shareholders at that time, activist investor IsZo Capital Management or “IsZo” (16.8%) and IAT Insurance Group or “IAT” (14.7%), a company controlled by billionaire Peter Kellogg, also a long-term shareholder (3.63%) and non-executive director of Nam Tai.
In April, activist investor Oasis Management acquired approximately 20% of the company’s shares from Deutsche Bank AG and stated to be in “active dialogue with all parties for a mutually beneficial resolution“.
In May, the company disclosed the termination of its interim CFO and provided a discouraging litigation update (emphasis added by author):
West Ridge Litigation
As previously disclosed, in March 2021, the BVI Court found that a prior private placement conducted in October 2020 (the “2020 PIPE”) conducted by the Company was void. Related to this litigation, the Company, under the prior management team and Board, entered into a settlement and indemnity agreement (the “Indemnity Agreement”) with West Ridge Investment Company Limited (“West Ridge”), a subsidiary of Haitong International Securities Co Ltd, providing for, among other things, the return of funds of approximately USD $24 million representing the purchase price paid by West Ridge in the 2020 PIPE if the 2020 PIPE was declared invalid.
On May 17, 2021, West Ridge sought return of such funds in the BVI Court. The Company filed a defense and counterclaim on February 25, 2022 alleging amongst other things that the prior Board of the Company and West Ridge conspired to effect the 2020 PIPE to give Kaisa effective control of the Company. On April 7, 2022, the BVI Court delivered a judgment in favor of West Ridge and concluded that the terms of the Indemnity Agreement stand to be enforced subject to any issues as to quantum. Following this judgment, the Company has made an application for a stay to the BVI Court, which is listed to be heard on June 8, 2022. If the stay is denied, the Company will evaluate its options with regards to other legal options as to the judgment and the amount. After such evaluation, one possibility may be that the Company will be required to pay the judgment in the near term.
Greater Sail Litigation
Remember, Greater Sail or “GSL” is a subsidiary of Kaisa Group which represented the lead investor in the $170 million October 2020 private placement (“the 2020 PIPE”).
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Separately, on December 27, 2021, GSL filed a lawsuit in the PRC against the Company, Nam Tai Group Limited (“NTG”), Nam Tai Investment (Shenzhen) Co Ltd (“NTI”), and Zastron Electronic (Shenzhen) Co. Ltd. (“Zastron”), all of which are the Company’s wholly owned subsidiaries, alleging that it owns (i) equity held by NTG in NTI representing a USD $45 million capital contribution, and (ii) equity held by NTI in Zastron representing a RMB 50 million capital contribution. In December 2021, the Shenzhen Intermediate Court froze certain of NTG’s and NTI’s shares related to certain capital contributions as described in the preceding sentence.
NTP was served on February 8, 2022 and filed an objection to the court’s jurisdiction, on which the court has not yet rendered a decision.
As previously disclosed in the Company’s Form 20-F for the year ended December 31, 2020, on March 12, 2021, the Company received a notice from GSL related to the Purchase Agreement for the 2020 PIPE (as defined below), under which the Company issued and sold 16,051,219 of its common shares to GSL for USD $146.9 million. In this notice, GSL sought an order requiring the Company to repay such consideration from the 2020 PIPE. The arbitrator granted GSL an interim preservation order over certain of the Company’s funds in connection with this arbitration. The arbitration is ongoing.
Please note that the vast majority of the PIPE proceeds have been invested in a Greensill-linked supply chain fund managed by Credit Suisse which was terminated in March 2021. According to Credit Suisse, remaining investors trapped in the funds are “unlikely to recoup their losses for at least another five years, if at all“.
Wang Jiabiao Litigation
Wang Jiabiao, the Company’s former Chief Executive Officer, filed a claim in the PRC, dated February 26, 2022, challenging the resolutions removing him from positions at the Company and its on-shore subsidiaries (the “Wang Litigation”). Although the Company does not believe his claims have legal merit, the lawsuit is among Wang Jiabiao’s principal efforts in obstructing the change of control of the Company’s on-shore subsidiaries.“
In its respective SEC-filing, Nam Tai has warned investors that this new litigation could result in a further delay to the company’s efforts of gaining on-shore access and control.
Other Proceedings
China Nuclear Industry 22nd Construction Co., Ltd. filed a claim in the PRC against NTI in the amount of approximately RMB 211 million. The Company does not currently have any additional details on this proceeding.
As of the date of the filing, the company had $12.2 million in available liquidity and potential access to another $10 million as part of the January emergency financing subject to lender consent:
This amount is not sufficient to pay the full amount of the liability under the West Ridge litigation previously described if it were to become due now. Because management and Board members of the Company lack access to the Company’s bank accounts and other liquid assets in the PRC, the Company is assessing its options if it is required to satisfy a judgment in the West Ridge litigation, including, among other things, trying to access funds located in certain accounts that the Company currently cannot access, conducting equity or debt financings, or seeking court or administrative protection against payment of the judgment.
On May 23, the NYSE halted trading in the company’s common shares due to “regulatory concerns about the Company’s lack of direct control over the Company’s chops“. Even worse, while the trading halt remains in place, Nam Tai’s stock can neither be traded on another exchange nor in the OTC markets.
Two weeks ago, the High Court of Justice in the British Virgin Islands entered judgement in favor of West Ridge in the amount of USD $23.8 million but granted Nam Tai the permission to appeal:
The BVI Court held that interest, damages and costs and whether West Ridge shall be entitled to a tracing remedy in addition to the USD $23.8 million judgment will be determined at a hearing to be held not before September 15, 2022. In addition, the BVI Court granted the Company permission to appeal the April 7th Order to the Eastern Caribbean Court of Appeal and granted the Company a stay of the April 7th Order. This ruling prevents West Ridge from seeking to enforce its judgment against the Company pending the appeal of this case except for certain real estate in Hong Kong and monies held in an account with Credit Suisse, both held by Hong Kong subsidiaries of the Company.
Bottom Line:
What a mess. Even in the unlikely case the company’s overseas shareholders somehow manage to take control of Nam Tai and its Chinese mainland assets, they would still have to deal with $170 million in PIPE repayment claims and other legal proceedings.
Moreover, Nam Tai apparently used almost $20 million of the up to $40 million January emergency financing within just four months. At this pace, the company will require additional funds towards the end of Q3.
Given the complex issues involved here, it is difficult to envision a near-term, amicable solution so investors better prepare for the NYSE trading halt not being lifted anytime soon.
The sad story of Nam Tai very much highlights the risk for overseas investors looking to gain control of assets in China’s troubled real estate market.
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