“There will be unwanted changes for Gome if Mr Huang's proposal doesn't win the vote, and we will take legally appropriate actions to protect the founding shareholder's interest,” Zou Xiaochun, Gome Holding's corporate lawyer, told FinanceAsia in an interview last week.
That threat looks set to become a reality after shareholders rejected Gome founder Huang Guangyu's bid to oust the company's current chairman Chen Xiao at a general meeting yesterday afternoon.
At a quick glimpse, the battle over Hong Kong-listed Gome Electrical Appliances is merely another fight for control of a company. However, the friction has uncovered the tip of the China capitalism iceberg when it comes to how the country’s once-highly-praised entrepreneurs fight to ensure their wealth and authority -- in this case, from behind bars.
In a previous intervention, also from his prison cell, Huang managed to remove three directors from the Gome board. And, in early August, Huang sent a letter to the company demanding a special shareholders' meeting for a vote on his proposal to remove Chen and appoint his younger sister, Huang Yanhong, and his lawyer representative, Zou, to take a seat on the board.
With a narrow majority of 52% of the votes, Chen, who took over as chairman after Huang was arrested in November 2008, will remain at his post. But Huang won his bid to block the Hong Kong-listed firm from issuing new equity that would dilute his position as its biggest shareholder. Huang , who is known as Wong Kwong Yu in Hong Kong, and his wife Du Juan own more than 30% of the retailer.
“While we are disappointed [with] the vote on our other proposals, the vote was close and we believe strongly in the long-term potential of Gome, and intend to remain active and involved shareholders,” Huang and Du said in a statement issued late last night.
"We remain resolute in our belief that without the contributions of the founding shareholders, the company has strayed from the path of profitable growth, resulting in deteriorating core competency and [in the company] losing its industrial leadership,” the statement read.
Gome has been trying to estrange itself from Huang since the former chairman's arrest and his subsequent conviction in May to 14 years in jail for insider trading and bribery. Chen has re-organised the company and closed down unprofitable shops. And he invited Bain Capital, a US private equity firm, to shore up Gome's finances and reputation. Bain paid HK$3.6 billion ($463 million) for an approximate 10% stake in Gome last June in a transaction that made the private equity firm the second largest shareholder after Huang. The deal also won the firm the right to appoint three non-executive directors.
The involvement by a foreign investor has stirred nationalist sentiment and many Chinese people question whether the country’s famous national brand should end up in the hands of foreigners.
Those who vote for current chairman Chen think his measures have successfully lifted Gome's margins and restored the company's share price. By closing unprofitable outlets, Gome's net profit rose 66% in the first half of this year, on the back of a 22% increase in revenues.
To Huang's admirers, no one captured China's boisterous embrace of modern consumption as well as he did. He predicted the Chinese middle-class's growing appetite for televisions, washing machines and refrigerators, as he transformed a shabby street stall in Beijing into a nationwide network of more than 1,300 stores.
Huang was detained in 2008 during a police investigation into allegations of stockmarket manipulation. The investigation gradually grew wider and caught in its net a string of top business and government leaders, including the former mayor of Shenzhen, Xu Zongheng, and a former deputy minister of public security, who were both charged with bribery in connection with the case.
China is a highly regulated market and corruption pervades in many government entities. It is very hard to do any business without buying favours from local government officials, said a Guangdong-based businessman.
Huang originally scheduled the shareholders' meeting for August 4, but Chen rescheduled the vote for yesterday, around a month after the company released its strong first-half financial report in late August. Gome's share price rallied 9.3% the day after those results and yesterday added 4.6% to close at HK$2.49.
Over the past two months, Gome's founding shareholder and the company's current management have both been issuing statements and open letters, fighting fiercely for the attention of shareholders and the media.
Huang, speaking from his cell via a recent open letter to both shareholders and the media, called for Chen's ousting due to his "failure to provide proper leadership to Gome”. Huang maintains that under Chen's leadership the retailer has lost market share to rival Suning.
Fighting back, the management issued a statement asking shareholders to stand by them in yesterday's ballot. Investors had a "stark choice" to make between "a modern, shareholder value-driven business" and "a single large shareholder approach that will always risk putting the interests of the largest shareholder ahead of those of all other shareholders”, the company said.
No doubt the battle will continue.
