It's the worst case scenario for an investor: You make a deal and your counterparty refuses to pay. Time to go to Court.
Terrible, of course, but a group of American investors are living a nightmare that takes that scenario one step farther. Despite having gone to Court and winning every judgement here in the States, they still can't get their money.
Somehow, it's stuck in China.
Until 2009 venture firms Gobi Partners (based in Shanghai) and Oak Investment Partners owned three quarters of a China-based company called Digital Media Group (DMG). It was an ad firm that sold space on TV screens in public transportation hubs all over the country.
That year the investors entered into acquisition talks with a similar (but larger) Chinese-owned ad firm called VisionChina that expressed interest in buying DMG.
There was a “strategic logic in putting the companies together,” Ren Riley, a general partner at Oak Investment Partners told Business Insider.
The investors had around 10 years of experience investing in China, and the talks went well. VisionChina's team, they said, were professional, as was Limin Li, the company's CEO. Neither Gobi nor Oak had any reason to expect anything strange.
So the parties figured out a deal. To buy DMG, VisionChina agreed to pay $100 million in cash and common stock up front and then to pay $30 million in cash and common stock each year for the next two years — $60 million total.
The deal was closed in November of 2009.
A year later, though, when it was time for VisionChina to make its first $30 million payment, they sent DMG's shareholders a lawsuit instead.
“This was a publicly traded company listed on the Nasdaq with real lawyers, real bankers, and real research," said Riley. "We had no reason to think this would occur... everything went well, negotiations went well, the deal went well.”
In its suit, VisionChina claimed that DMG provided misleading information about its finances during the 2009 acquisition process nullifying their deal.
The parties went to Court in NYC where Judge Charles E. Ramos dismissed VisionChina's claims. To that dismissal, the Judge added an order of attachment requiring VisionChina to make its first $30 million payment to DMG's shareholders.
That was November 2011, and DMG's shareholders say they still haven't gotten their money.
The problem is that VisionChina, a publicly traded company in the United States, has no assets in the United States. That means for DMG's shareholders to get paid, the money has to leave China. VisionChina is arguing that there's no way for them to do that.
So all DMG shareholders can do is win legal skirmish after legal skirmish — and that's what they've done. When the second $30 million payment deadline passed in November 2011, Judge Ramos granted a second order of attachment.
In August of 2012, the Court ordered VisionChina to deposit $60 million with the New York State Sheriff. When the company didn't, a Judge ordered VisionChina in contempt of Court. That was just a few months ago.
At that hearing, Ramos sounded off on his own skepticism about VisionChina's intentions, Law360 reports:
"The record is void of any activity done by your client to comply with this, other than the 3 or 4 million dollars that was outside the People's Republic of China," Judge Ramos told VisionChina's attorneys during the hearing in his downtown Manhattan courtroom, noting that some money the company held outside China has been moved to New York.
"This really is bad faith," he said, "You know the old joke, 'I may have been born at night but I wasn't born last night'?"
There have been suggested compromises. DMG shareholder attorney Thomas Kavaler tried to get his clients' money put in escrow at a bank with branches in China and the U.S. — VisionChina refused, he says. He says he suggested that a Chinese lawyer tend to the money in China — again, that was rebuffed.
“This is a circle; they won't pay; the court orders them to pay; they won't obey,” said Kavaler, a partner at Cahill Gordon & Reindel LLP.
And "they" can do this because it's incredibly hard to get a Chinese company's money out of the country and in the hands of foreign investors without the company's cooperation.
VisionChina argues that moving the money is up to China's State Administration of Foreign Exhange (SAFE), and that SAFE isn't having it. The Court's response to that argument has basically been... prove it.
So in the midst of the SEC's investigation into Chinese auditing firms, and the media hype around Chinese shorts, VisionChina's problem hasn't even been discussed.
“It’s important to us," said Riley. "We’re pursuing all our avenues and trying to do business the right way... If we’re going to do business in China our investors want us to fight for their capital. The damages are approaching $100 million and possibly higher. It’s our money.”
DMG shareholder losses aside, this is a story of value destruction all around. VisionChina's stock is down around 98% since it bought DMG (see the chart to your left). That prompted DMG's shareholders to create a website called SaveVisionChina.com, detailing the blow by blow of their legal action.
VisionChina's lawyer has yet to respond to multiple requests for comment.
“We are considering all of our options, including legal and diplomatic, and if VisionChina does not meet its legal obligations, we believe China will be sending a message that it is a hostile, risky and unfair place for investment by foreign-owned businesses,” Riley added.
On February 19th, Judge Ramos ordered VisionChina to deposit $60 million in a U.S. escrow account by March 15, 2013.
The question remains though, what if they don't?
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