Court Battle Reveals SOHO Strategy for Acquiring Bund Project

Since going to court in Shanghai, the lawsuit filed by Chinese developer Fosun, against its Beijing-based competitor SOHO China, has revealed the approach by which SOHO has been able to buy into the controversial Bund Financial Centre project in Shanghai.

On Dec 29, 2011, SOHO China announced that it was going to buy half of the Bund Financial Centre project for RMB 4 billion yuan from Zendai Group and then-cash-strapped Greentown China. The move triggered strong opposition from Fosun, which holds the 50 percent of the project.

Fosun, which had established right of first refusal on further sales in shares in the project company, has since taken legal action to attempt to enforce these rights and maintain control over the project.

SOHO, however, maintains that Fosun’s purchase rights were confined to the project-level company, and that this did not preclude SOHO from indirectly buying into the project through higher level companies belonging to Greentown and Zendai which owned rights to the project level company which was shared with Fosun.

When the case was brought before the Shanghai No. 1 Intermediate People’s Court on November 29th, there were reportedly heated exchanges between Fosun President Guo Guangchang and SOHO President Pan Shiyi, which required intervention by the judge. As of now, there has still been no verdict in the case.

The case also brought forward more details regarding share transfers in the project.

When the site was successfully bid for by Zendai in February of 2010 with a record 9.22 billion yuan bid, the purchase was required to be paid off within eight months. However, as Guo explained during the trial, “Due to the shortage of capital, Zendai asked me for help with its financing.”

As it was already a shareholder in Zendai, Fosun was comfortable becoming a minority shareholder in the Bund Financial Centre project, by agreeing to pay 60 percent of the loan, which was about 2.7 billion yuan. In return for paying off the loan, Fosun became a 30 percent shareholder in the project.

Later, in September, 2010, purchased an additional 20 percent of the project from Zendai, making it the largest shareholder.

In 2011, when Zendai wanted to raise cash by selling off its remaining shares in the project, Zendai sent Fosun an enquiry about selling the stake for a price of 4.25 billion yuan. However, according to Guo’s testimony, Fosun requested further negotiations, only to find out that SOHO purchased the shares for 4 billion yuan two days later.

According to testimony before the court, when Guo heard that Zendai would sell its stake to SOHO, he met Pan to negotiate. However, when those negotiations were unsuccessful, Fosun decided to lean on its preemptive rights.

In court, Fosun stated that its contract with Zendai prevented one party from transferring the shares without approval of the other party. But SOHO says that the contract doesn’t cover transfers of shares in parent companies.

However,  Fosun maintains that SOHO convinced the two shareholders to divest from their assets, which is illegal. Guo called Pan “sharp”, “tough” and “sophisticated,” but he said he would never do things in the way Pan did.