June 20, 2012 / 12:47 PM / 8 years ago

China's Hontex to refund IPO cash under landmark HK court deal

HONG KONG (Reuters) - Investors in a Chinese textile company that was accused by Hong Kong regulators of overstating earnings will now have the chance to sell their shares back to the company, under a landmark court settlement reached in the territory on Wednesday.

The case marks a breakthrough in the ability of Hong Kong’s market watchdog to act against offshore companies or investors who are unlikely to return to the city to face prosecution or a market tribunal.

Hontex International Holdings Company 0946.HK, based in China’s Fujian province, listed on Hong Kong’s stock exchange in December 2009.

Its shares were suspended three months later when the Securities and Futures Commission (SFC) accused the company of materially overstating its earnings in its initial public offering (IPO) prospectus.

In March 2010 the regulator got an injunction to freeze up to HK$997.4 million ($128.54 million) - the bulk of the IPO proceeds - held by Hontex and its subsidiaries, but investors were left hanging while the regulator battled to win the right to have their money returned.

The SFC faced a setback when a court ruled last year that a criminal or civil court first had to find a company or its executives culpable before it could seek independent remedial action in alleged cases of market abuse.

A later ruling by the city’s Court of Appeal in a separate case against U.S. hedge fund Tiger Asia Management, which was accused of insider dealing in Hong Kong stocks, overturned that decision and said the regulator could ask a court for investor refunds or other remedies.

SETTLEMENT DETAILS

Now, under an agreement reached between the SFC and Hontex at Hong Kong’s High Court, Hontex will repurchase shares held by minority shareholders at a price of HK$2.06 a share, the last price the shares traded at before it was suspended, as long as the deal gets investor approval.

If accepted, the company will buy back a total of HK$1.03 billion worth of shares from minority shareholders.

“Investors should be happy because this is a very reasonable price,” said Alexander Lee, a lawyer at Li & Partners, who was representing Hontex.

Mega Capital (Asia), the corporate finance house that sponsored Hontex’s listing, was hit with a record fine of HK$42 million ($5.41 million) in April and stripped of its corporate finance license for its role in the deal.

Reporting by Tian Chen in HONG KONG and Rachel Armstrong in SINGAPORE; Editing by Muralikumar Anantharaman

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