A group of hedge funds seeking to wind up Nasdaq-listed Sohu.com over its refusal to pay dividends despite a US$1.17 billion cash pile has received an initial rebuff, and a raised judicial eyebrow, from a Cayman court.
The funds sought a general discovery order, hoping to get a look at Sohu.com’s internal documents. On October 1 they were rebuffed. The Cayman court was not prepared to let them rummage through years of company records on the strength of what it considered a thinly supported case.
Maso Capital, Blackwell Partners and Star V Partners in July filed a petition to wind up the Chinese internet giant led by founder and chief executive Charles Zhang not because it is insolvent (it has a substantial media and online gaming business), but because it is stubbornly sitting on a pile of cash.
The shareholders claim that the board’s failure to give proper consideration to paying dividends amounts to mismanagement and oppressive conduct, serious enough for a court to order its liquidation on “just and equitable” grounds.
Mr Justice David Doyle noted “there is not much meat on the bones’’ of the 16-page petition brought by the shareholders, who hold 3.37% of Sohu.com. The company, which has yet to file a defence, accused the funds of fishing for documents to flesh out their case.
Doyle refused the request for general discovery, but Sohu.com is not entirely off the hook. It must still produce documents central to the board’s decisions on dividends, and the funds can come back for more targeted disclosure.
The judge also warned the company against cherry-picking documents that support its case. The company must, according to the court, now produce evidence of the “machinations and determinations” of its directors over dividends.
Whether there is much of a paper trail is another matter. Did the board genuinely consider paying shareholders, or simply go along with founder Charles Zhang’s preference to keep the money in the company?
It is a familiar question at founder-dominated Chinese companies, where the distinction between a board decision and the wishes of the man in charge can sometimes be difficult to discern.
Sohu has not, at least so far, sought to strike out the winding-up petition altogether. That may be a tactical choice. Arguing that the shareholders have no case is one thing, but demonstrating that the board properly considered whether to pay dividends is another. The latter risks opening up precisely the questions about its internal decision-making that the funds are keen to explore.
For now, Sohu has won the opening exchange. But the board is still in play.