How to (Almost) Snatch a Company: Aeso Holding’s Wild IPO

Chan, the 44-year-old, shaggy-haired chief executive officer of design company Aeso Holding Ltd., shouted from a doorway in a Hong Kong office tower, imploring investors not to vote out the company’s directors. Then he and his supporters tried to convene a rival meeting across the hallway. A scuffle broke out in the corridor, and police were called to the scene. Only the oncoming tropical storm sent everyone scurrying.

This was hardly the first melodrama of Chan’s life. He grew up in a gang-ridden housing project in an industrial stretch of Hong Kong and started earning money at the age of 11, carrying bags of clothes for his mother’s at-home garment business after his father died of cancer. But nothing had prepared him for this.

The trouble began a few months earlier, when he took his company public, selling a 49% stake to a financial backer to help pay listing costs. The initial public offering raised $5.2 million. Soon after, Chan says, he discovered that the financier had lined up investors to covertly purchase shares as part of a hostile takeover. The goal, Chan says, was to steal his stock ticker and turn Aeso into a shell company and then sell to someone eager to avoid the disclosures, waiting period, and other hassles of an IPO.

Known as a backdoor listing, it’s a practice the city’s securities regulator and stock exchange have been trying to stamp out, blaming it for a host of misconduct and market-manipulation problems. The authorities have pulled IPOs, tightened requirements, and, in July, unveiled rules making it harder to change shareholder control and reverse assets into a public company.

But two years ago, with the of a shell peaking at about HK$500 million ($64 million), tiny companies such as Chan’s were enticing targets, worth far more as shells than as going concerns. A cottage industry of backdoor listings formed. Financial advisers would do deals to take small companies public and then line up suitors, often Chinese firms that had trouble surmounting listing rules on the mainland, to buy controlling stakes once the shares traded. Small-cap stocks often soared on their debuts, aided in part by speculators assuming that secret arrangements already in place would render the companies more valuable as shells. In other instances, the founders were older or near retirement; whether happy about it or not, they usually took the payout and walked away.

Not Chan. Aeso, which specializes in outfitting building lobbies, movie theaters, and retail stores, was his company—his life’s achievement. He had built it from the ground up and had plans to expand. He was determined to fight. 

By his own admission, Chan knew nothing about the shell market or the regulator’s concerns in 2015, when a contact at Anglo Chinese Group, a corporate advisory firm, asked if he’d considered an IPO for his then-seven-year-old business. Anglo Chinese assistant director Daniel Kan had a proposition: Go public on Hong Kong’s small-cap exchange, known as the GEM, and he would find an investor to cover the costs, which can run into the millions of dollars. 

“I don’t have a background in finance,” says Chan, recalling those early days over a steak lunch at a restaurant at Hong Kong’s Pacific Place shopping mall. “I didn’t understand. I was trusting in the good faith of these people.” 

The investor was Wilson Liu Chang-kien, a boyish-looking former Morgan Stanley broker. When Chan first encountered him, Liu was running several investment and consulting firms, trading stocks and advising on corporate structures. Chan remembers his surprise on seeing Liu at their first meeting with disheveled hair and wearing a T-shirt.

Liu offered to invest HK$19.9 million for a 49% stake in Chan’s company. He said he was busy running his investment firms and wouldn’t interfere in day-to-day business, Chan says. To Chan, it seemed a no-brainer. 

This account of what happened next is based on interviews with people involved, documents submitted in several court proceedings, including the results of two investigations commissioned by Aeso, and correspondence between the company’s advisers and the securities regulator. It’s a wild story—part thriller, part comedy, and a lot of drama—with allegations of car bugging, thuggish intimidation, threats involving cats, deliveries of large quantities of McDonald’s hamburgers, and a pink-haired board member with an inflated resume. And it would take more than two years, until July 2019 when Hong Kong wold be rocked by anti-government protests, to learn the outcome. 

The case, as it wound through Hong Kong courts, resulted in two judges voicing concern about a “larger fraudulent scheme” and “sham transactions” after allegations emerged linking Liu and investors who bought shares in a pre-IPO placement. 

Liu says he did nothing wrong. “I have so much fire to rage and so much innocent to plead,” he said in a text message before stating that his current health, as well as media bias, prevented him from commenting further. He referred additional questions to a lawyer, Bond Ng, who said the credibility of the allegations made by witnesses was never challenged under cross-examination.

Yet the Aeso saga was so brazen it shocked even veteran dealmakers appalled by the unabashed tactics used to try to take over Chan’s company, according to a person who worked on several shell disputes, including Aeso’s, and asked not to be named, fearing retribution. The brokers believed that those playing the shell game needed to respect unwritten rules, pay the proper amount, and not use violence or threats, the person said.

The day of the IPO, in January 2017, Chan’s stake was diluted  to 38.3% and Liu’s to 36.8%. That’s because shares representing 25% of the company were sold to 137 investors for HK$40.6 million ahead of the listing. 

Chan’s first inkling that something was amiss came the same day. Liu and Anglo Chinese’s Kan joined him for a celebratory drink, then went off to a dinner organized by the two men and others involved in the placement. Chan wasn’t invited. 

Less than a week later, Liu made the first of two offers to buy Chan’s remaining shares for HK$100 million, according to a timeline of events submitted by Chan to the court. The document said that Kan was at the meetings where the offers were made and referred to the money raised from investors before the IPO as “Mr. Liu’s investment.” Liu denied in court papers filed by his side that the meetings or offers ever took place. 

Chan says he rejected the money and complained to Anglo Chinese about Kan, who resigned soon afterward. Kan is now being sued by his former employer. He didn’t respond to emails, and executives at Anglo Chinese declined to comment.

The pressure on Chan continued. Five shareholders demanded that Aeso hold a so-called requisition vote to replace several directors, including Chan. Under Aeso’s corporate rules, similar to those of other Hong Kong public companies, investors holding at least 10% of the stock can make such a request. Their letter was unusual, Chan says, as Aeso had only just gone public, and unhappy investors would normally seek a meeting with the board to discuss concerns before trying to replace its members. If shareholders and Liu were secretly working together, which was against stock-exchange rules, they might control a majority of the shares.

Another warning sign: The adviser representing the aggrieved investors, Warren Lee, nicknamed “Bad Boy” by the local media, was known for his creative use of listing rules to aggressively pursue deals. His involvement suggested to Chan that the shareholders, who on paper were nobodies, had someone with money behind them.

Lee has a different take: The shareholders were unhappy that the company reported losses so soon after the IPO and wanted to shake things up. “Nothing is more effective than a requisition, as the board has to take you seriously,” he says, brewing green tea in his Hong Kong office. Lee says the Aeso investors cold-called his office and that he helped prepare the paperwork for the vote.  

Meanwhile, Chan was being broadsided by legal challenges. Pre-IPO investor Liu turned the tables and portrayed himself as a victim, complaining to Hong Kong’s Securities and Futures Commission that Chan and Anglo Chinese—which was now helping Aeso examine what had happened at the IPO—had engaged in misconduct. They used unspecified “unlawful means” to try to force him to sign an agreement not to vote against Chan and other directors, he said in a court filing. 

Liu also sued Chan, Anglo Chinese, and others, alleging that the advisory firm’s director had threatened to report Liu to the regulator unless he agreed not to vote against Chan. Liu said he found a GPS tracking device in his car and got a death threat from an anonymous caller who knew how many cats he had, according to the lawsuit. Chan says the accusations against him and Anglo Chinese are nonsense.

The spat proved too much for Hong Kong’s exchange operator, which halted trading in Aeso’s shares in June 2017 after the two camps issued conflicting filings claiming to speak for the company.

Chan struggled to formulate a response. One of his lawyers quit after receiving numerous unsolicited cash-on-delivery McDonald’s orders at his office, Chan says. Another lawyer left after his picture appeared on leaflets that blanketed parts of Hong Kong calling Chan a “Big Evil Dog” and a “Heartless Crocodile.” “They said I was destroying the company, that I was a bad guy and didn’t pay salary to workers,” recalls Chan, who hired people to remove the flyers. 

Eventually Chan turned to Sherman Yan, managing partner at ONC Lawyers and a specialist in small-cap shareholder disputes. “He told me we had three approaches,” Chan recalls. First, cancel the shareholder vote designed to oust Chan’s team, then countersue Liu and others to slow them down, and, finally, file a petition to close Aeso and force everyone to the negotiating table.

Chan took the lawyer’s advice. He bought a full-page ad in the Hong Kong Economic Journal, one of the city’s largest papers, to declare he wasn’t giving up without a fight. Then he got his allies on the board to cancel the shareholders’ meeting. Friends of Chan say his decision to fight was the result of his upbringing. “He still believes there will be justice in the world,” says Edwin Chan, no relation, who’s known the Aeso founder for a decade. 

Yet that meeting went ahead anyway, with Chan reduced to shouting from the doorway as Liu's appointees ran the proceedings. All of Chan’s directors, though not Chan himself, were voted out, a decision made, he says, because he was a signatory on company bank accounts and was needed to run the business.  

Chan continued to push back, obtaining a court order to set aside the vote. Aiding him was an investigation, commissioned by Aeso, that found alleged links between the shareholders who called for the requisition vote and Liu. In August 2017, a judge described the attempt to remove the board as “a device in a larger fraudulent scheme and the shares placed to the placees were sham transactions.”

A second Aeso-commissioned analysis in early 2018 alleged additional work and personal ties among shareholders, including common directorships and Facebook friends. That report by JLA Asia, now part of accounting firm Ernst & Young, found that 17 of the 22 biggest investors used alias emails on their opening application forms, which were all processed within the same three-day period by the same account manager at Cinda International Securities, a unit of a Beijing-based, state-owned, asset management company and one of four brokerages assigned to handle the placement. Cinda, which has not been sued, didn’t answer emails. 

Another red flag discovered by JLA was that the of some share subscriptions exceeded investors’ stated personal assets. “The unusual features surrounding the allotment of shares to the 22 placees suggests that they were acting in concert,” and should the court decide Liu and these investors had worked together, it would likely breach stock-exchange rules, JLA said.

Chan’s team also claimed that the director with the pink hair, Zhang Qi, had exaggerated details of her work experience at Chinese banks in a biography published in the pre-IPO prospectus. Attempts to contact her were unsuccessful.

Armed with these details, Chan won other court rulings, forcing his opponents to negotiate or risk having Aeso be liquidated. 

But every victory had a cost. Unidentified men loitered on the street outside Aeso’s office, sometimes coming upstairs to glare through the glass door and, on occasion, trying to gain entry, according to Chan, who provided video and photographs to back his claim. Strangers visited Chan’s apartment building to take pictures of his car and ring the doorbell at night with unrequested deliveries, he said in court filings. 

“In these past few years, we haven’t felt very safe,” says Chan’s wife, Shirley, who started carrying a pocketknife in case someone tried to kidnap their children. She has hired bodyguards to follow her at a distance when she picks them up from school. Their front door now has a biometric lock.

Two-thirds of Aeso’s staff quit in April 2018 after receiving letters from Liu’s camp threatening legal action against them. The company’s accounts were frozen as bank managers questioned who controlled its assets, and clients went elsewhere, spooked by the negative news. Three men, one wearing a mask, also appeared at Anglo Chinese’s office and shouted at employees, Chan said. A police spokesman confirmed that officers were called to a disturbance there and that an arrest was made.

Though rare, violence in Hong Kong shareholder disputes has become more prevalent, says Chan’s lawyer Yan, who declined to speak about the specifics of the Aeso case. “This is a trend, especially in the case of GEM companies,” Yan says. “It may not be the case that people protesting are the genuine shareholders. More likely they represent someone else and have been given some proxy shares.”

He didn’t know it at the time, but Chan’s troubles mirrored broader problems with the city’s small-cap market. Days after Aeso’s trading debut, which saw the firm’s shares jump 281%, the regulator and exchange operator issued a joint statement warning IPO advisers to make sure GEM listings were done “in a fair and orderly manner.” Financial advisers and the companies they took public would be held responsible if they failed to ensure initial investors were independent, the statement said.

A month later, the regulator suspended trading in a tunnel-excavating subcontractor after shares rose 543% within hours of its debut. Several other IPOs were pulled, and in the summer of 2017 the exchange operator announced an overhaul of the GEM market’s rule book, raising minimum size requirements and changing the way shares are allocated in an IPO.

As a result, applications for GEM listings tumbled 44% in 2018, to 71 companies, in what was otherwise a record year for Hong Kong equity dealmaking. They’re down about another third in the first eight months of this year. The price of a traded shell company has fallen, too—though one is still worth about HK$200 million, according to a person knowledgeable about pricing. “The regulator scared away applicants,” says Alex Wong, a fund manager at Ample Capital in Hong Kong. He says shell-makers are now unwilling to front the time and money to take companies public. 

Adding to broker fears and emblematic of the challenge the regulator faces, says Wong, was the arrest in June of a former co-head of an IPO vetting team at the exchange. That followed complaints to the bourse that an insider was helping would-be shell targets through the IPO application process. The regulator is still trying to curb abuses by disallowing or suspending listings of small-cap companies where it sees no commercial rationale for going public and in cases where voting powers were likely rigged. 

As for Chan, his company is making a comeback. He managed to win back several clients and got a contract to outfit an IMAX theater in Hong Kong, a job for which he shows abundant enthusiasm while leading a tour of the site. In a deal brokered by the provisional liquidator, Liu agreed to sell his stake in Aeso, waive his shareholder voting rights, and have his director allies resign.

On July 31, as another Signal 8 storm blew into the city and Hong Kong braced for more anti-government protests, trading in Aeso shares resumed. They fell 30% that day before trading was halted as a result of bad weather. Chan, who could barely sleep the night before trading resumed, says the two-year ordeal has amounted to “a very expensive Ph.D. in law and finance.”

Civil unrest in Hong Kong and the ongoing trade war between the U.S. and China have continued to drag down not only Aeso’s shares but the Hang Seng Index. Yet Chan is steadfast in his desire to rebuild. “This is my character, to take up challenges,” he says. “Sometimes, when I am alone, I feel like this character just makes such trouble for me. I just know that I can’t give up.”

©2019 Bloomberg L.P.