China Evergrande is seeking to recover $6 billion in dividends from Xu Jiayin and others. Can it recover the money?
2024-08-06
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Whether Evergrande can recover the $6 billion in dividends and remuneration paid to Xu Jiayin and others depends on the labor contract between the two parties at the time and the relevant provisions of the equity incentive agreement or plan.
Text | "Caijing" reporter Zhang Jianfeng
Editor | Yang Xiuhong
On August 5, the liquidationChina Evergrande(3333.HK) issued an announcement stating that the company seeks to recover dividends and remuneration totaling approximately US$6 billion (approximately RMB 42.89 billion) paid in each fiscal year from December 31, 2017 to December 31, 2020 from seven defendants, including executive director Xu Jiayin, former CEO Xia Haijun, former chief financial officer Pan Dayong, and Xu Jiayin's spouse or former spouse Ding Yumei."From a legal perspective, whether Evergrande can recover the dividends and remuneration it has paid depends on the relevant provisions of the labor contract between the two parties at the time and the related equity incentive agreement or plan." Li Guangyu, partner of Haotian Law Firm, told Caixin that the recovery of remuneration involving labor contracts is not complicated.Li Guangyu further stated that in addition, there is another possibility. If the above-mentioned defendants constitute an act of embezzlement of the enterprise, in this case, the nature of the company's recovery of dividends and salaries is actually a form of stolen property recovery, and Evergrande is the victim of a criminal case. However, this situation needs to be investigated by the public security organs, prosecuted by the procuratorate, and finally determined by the court.In the penalty announcement of the China Securities Regulatory Commission in May 2024, due to Evergrande Real Estate's financial fraud, fraudulent bond issuance, and failure to disclose relevant information in accordance with regulations, the China Securities Regulatory Commission gave Xu Jiayin a warning, imposed a fine of 47 million yuan, and took measures to ban him from the securities market for life; Pan Dayong was also punished for this. At the same time, Evergrande Real Estate, a subsidiary of China Evergrande, was ordered to make corrections, given a warning, and fined 4.175 billion yuan.According to the announcement of China Evergrande, as of the end of November 2023: the number of pending litigation cases with a target amount of more than 30 million yuan for the company's main subsidiary Evergrande Real Estate totaled 2,053, and the total amount involved in the pending litigation cases totaled approximately 490.1 billion yuan; Evergrande Real Estate involved a total of approximately 316.4 billion yuan in overdue debts that had not been repaid, and a total of approximately 205.5 billion yuan in overdue commercial bills.It is still unknown when China Evergrande's shares will resume trading. According to China Evergrande's announcement on August 5, the company's shares will continue to be suspended until further notice.Can the $6 billion be recovered?China Evergrande is seeking $6 billion from Xu Jiayin and seven other defendants due to a previous lawsuit.According to the announcement, on January 29, 2024, the High Court of Hong Kong, China issued a liquidation order for China Evergrande, and Edward Simon Middleton and Wong Wing Sze of Alvarez & Marsal Limited were appointed by the High Court as the joint and individual liquidators of China Evergrande (hereinafter referred to as the "liquidators").On March 22, the liquidator, in the name of China Evergrande, launched a lawsuit against three defendants in the High Court of Hong Kong, China. The three defendants were Xu Jiayin, Xia Haijun and Pan Darong. As the lawsuit progressed, Xu Jiayin's spouse or former spouse Ding Yumei and three entities related to Xu Jiayin and Ding Yumei were also included in the list of defendants.The liquidator obtained several injunctions on behalf of China Evergrande based on its claims in the lawsuit, restricting Xu Jiayin, Ding Yumei and Xia Haijun from disposing, selling or reducing the value of their global assets to the limits specified in the relevant regulations. On June 24, 2024, the injunctions were first issued in Hong Kong, China against Xu Jiayin and Xia Haijun, and Ding Yumei was later added to the list.It is worth noting that the writs and injunctions in Hong Kong related to the above-mentioned lawsuits were previously subject to a confidentiality order issued by the High Court of Hong Kong, China, which was lifted on August 2, 2024.China Evergrande said that the legal proceedings of the above-mentioned lawsuit are ongoing and there is uncertainty about the possibility of a successful claim and the amount the company may ultimately recover."For salaries, as long as there is a reasonable reason for payment and it is legal income, it can be voluntarily returned in principle. However, for salary income linked to the company's revenue and profits, if the income and profits are fictitious, then it is illegal income and can be recovered." Investment banker Hou Dawei told Caixin that for dividends, if the profits are fictitious, they are naturally regarded as illegal income.Hou Dawei further stated that if corporate executives or directors commit dereliction of duty or fraud, they can be held administratively accountable.According to the penalty announcement of the China Securities Regulatory Commission, Evergrande Real Estate committed financial fraud by prematurely recognizing revenue. In 2019, it falsely inflated its revenue by 213.989 billion yuan, accounting for 50.14% of the current operating income, and falsely inflated its profit by 40.722 billion yuan, accounting for 63.31% of the current total profit; in 2020, it falsely inflated its revenue by 350.157 billion yuan, accounting for 78.54% of the current operating income, and falsely inflated its profit by 51.289 billion yuan, accounting for 86.88% of the current total profit.China Evergrande’s announcement in September 2023 showed that Xu Jiayin had been taken compulsory measures in accordance with the law for suspected illegal and criminal activities.Wind data shows that from 2017 to 2020, China Evergrande's cash dividends were 16.8 billion yuan, 20.9 billion yuan, 9.3 billion yuan, and 2.4 billion yuan, respectively, totaling approximately 49.4 billion yuan.Caijing reported that according to the annual report of Evergrande, Xu Jiayin and Ding Yumei held about 77% of the company's shares, Xia Haijun held about 0.04%-0.68%, and Pan Darong held about 0.02%-0.06%. Based on this calculation, Xu Jiayin and Ding Yumei received about 38 billion yuan in cash dividends from the company during the same period.According to China Evergrande's annual report, from 2017 to 2020, as the then CEO of China Evergrande, Xia Haijun received a total of approximately 899 million yuan in fees, salaries, pension plan contributions, and employee stock purchase plans from the company, and Pan Dayong received a total of approximately 63.099 million yuan in the above-mentioned remuneration.China Evergrande's 2020 annual report shows that Xia Haijun, 57 years old at the time, was the group's vice chairman and president. He has over 32 years of experience in real estate development and corporate management and is fully responsible for the group's daily work, including finance, capital operation management, overseas affairs and public affairs management. He joined China Evergrande in June 2007.Pan Darong, the executive director and chief financial officer of China Evergrande in 2020, is fully responsible for the financial management of the group. He joined Evergrande in 2006 to be responsible for financial management, and served as deputy general manager of the financial center, executive deputy general manager, general manager of the financial center, and vice president of the group. He was appointed as the company's executive director and chief financial officer on August 30, 2016.The "Administrative Penalty Decision" issued by the China Securities Regulatory Commission on May 21, 2024 shows that due to false records in Evergrande Real Estate's annual report, fraudulent issuance of bonds, and failure to disclose relevant information as required, Pan Dayong, then financial director of China Evergrande Group, was given a warning and fined 9 million yuan, and was banned from the securities market for 10 years.The "Administrative Penalty Decision" shows that since it is impossible to contact Xia Haijun, the notice delivery procedure has been initiated and he will be dealt with separately in accordance with the law. Xia Haijun is a resident of the Hong Kong Special Administrative Region of China and a Canadian citizen.The stock has not yet resumed tradingChina Evergrande SubsidiariesEvergrande Auto(0708.HK) is not having a good time either.On August 5, Evergrande Auto issued an announcement that the relevant local people's court held a hearing on the bankruptcy reorganization of the relevant subsidiaries on August 2, and the relevant local people's court ruled that the relevant subsidiaries entered the bankruptcy reorganization procedure.According to the announcement, on July 25, individual creditors of Evergrande Auto's related subsidiaries (Evergrande New Energy Automobile (Guangdong) Co., Ltd. and Evergrande Intelligent Automobile (Guangdong) Co., Ltd.) applied to the relevant local people's courts for bankruptcy reorganization of the related subsidiaries. The company received a notice from the relevant court the next day. Evergrande Auto said that the above notice had a significant impact on the production and operation activities of the company and its related subsidiaries.In June, Evergrande Auto announced that the company's related subsidiaries received an "Administrative Decision" issued by the relevant local administrative department. Due to the breach of contract due to failure to build production bases and R&D centers and put them into production and complete the R&D of new energy vehicle models as scheduled, three of the related agreements were terminated. The related subsidiaries will return various rewards and subsidies totaling approximately 1.9 billion yuan.Evergrande Auto said that if the above decision is finally implemented, the company will face the risk of forced recovery of the relevant factory land and the use of the above-ground buildings and equipment to repay the rewards and subsidies, which will have a significant impact on the company's finances and operations. "The relevant company has planned to apply for administrative reconsideration to the relevant local municipal people's government."In the same month, an announcement from Evergrande Auto also showed that the company's subsidiary Evergrande New Energy Vehicle (Tianjin) Co., Ltd. (hereinafter referred to as "Tianjin Evergrande") received a "Notice" from relevant departments, ordering Tianjin Evergrande to stop the production and sales of new energy passenger vehicle products and make rectifications.The financial report shows that in the first half of 2023, Evergrande Auto's turnover was 155 million yuan. During the same period, China Evergrande's revenue was 128.2 billion yuan, of which the real estate development business revenue was 120.1 billion yuan.It is still unknown when China Evergrande’s shares will be able to resume trading.On January 29, 2024, the High Court of Hong Kong, China issued a liquidation order for China Evergrande. The company's shares were suspended from trading at 10:18 a.m. on the same day and continued to be suspended.It is worth noting that in May 2024, China Evergrande issued an announcement that the company and various liquidators, Evergrande Health and other potential sellers signed an agreement with a potential buyer. The potential sellers collectively held a total of 6.35 billion shares of Evergrande Auto, accounting for 58.5% of the shares.However, China Evergrande also issued an announcement in May saying, "Taking into account the company's debt level and the challenges faced by the group's business and operations, in the absence of significant reinvestment in the company, the liquidator has not yet found a restructuring plan that can enable the company to meet the resumption of trading guidelines and resume share trading."On July 26, China Evergrande received a letter from the Hong Kong Stock Exchange, clarifying the conditions for the company's resumption of trading, one of which included that the winding-up order against the company had been withdrawn or lifted and the appointment of any liquidator had been released.
