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Those Who Fail to Learn From History, Part 729,842: YOKU
This is from Stone Street Advisors
Another Chinese "advertising" company with U.S.-listed shares. Gee, where have we seen this movie before...
Remember
China MediaExpress Holdings? CCME? I've written at great, great
length about the firm and the many, many red flags present in its
regulatory filings going back to 2009, but one of the most telling, most
glaringly obvious signs of possible trouble was the corporate
structure, which I wrote about (among other places) here:
Compare this to YOKU's, from Page 5 (FIVE!!!!) of their F-1 ADR registration statement:
In
both cases, the PRC "operating" companies are controlled entirely by
corporate insiders (and their families). The only recourse the
holding-company (and thereby shareholders) has (have) over the operating
companies, their assets, and cash flows are spelled-out in "contractual
obligations," spelled-out in very-little detail on pages 5 and 6 of
Yoku's F-1 If corporate insiders and their families loot the bank
accounts of the PRC entities, U.S. shareholders will very-likely end up
with little, if anything, to show for their "investment."
The
filing does go into a bit more detail on these "contractual arrangments"
and the risks thereof, specifically, on pages 30/31 (emphasis mine):
Our
consolidated affiliated entities and their respective shareholders may
fail to take certain actions required for our business or follow our
instructions despite their contractual obligations to do so. If
they fail to perform their obligations under their respective agreements
with us, we may have to rely on legal remedies under PRC law, including
seeking specific performance or injunctive relief, which may not be effective.Under
the equity pledge agreements among 1Verge Internet and the respective
shareholders of 1Verge Information and Jiaheyi, these shareholders
pledged all of their equity interests in 1Verge Information and Jiaheyi
to 1Verge Internet. Our PRC counsel, TransAsia Lawyers, has advised us
that these pledges were duly created and effective given that such
pledges have already been duly registered with the relevant local branch
of the SAIC in accordance with the PRC Property Rights Law. As a
result, if any of 1Verge Information, Jiaheyi or any of their
respective shareholders breaches its obligations under the contractual
arrangements, we may be able to successfully enforce the pledges.All
of these contractual arrangements are governed by PRC law and provide
for the resolution of disputes through arbitration in the PRC.
Accordingly, these contracts would be interpreted in accordance with PRC
law and any disputes would be resolved in accordance with PRC legal
procedures. The legal environment in the PRC is not as developed as in
certain other jurisdictions, such as the United States. As a result,
uncertainties in the PRC legal system could limit our ability to enforce
these contractual arrangements, which may make it difficult to exert
effective control over our consolidated affiliated entities, and our
ability to conduct our business may be adversely affected. See “—Risks
Relating to Doing Business in China—Uncertainties with respect to the
PRC legal system could adversely affect us.”
While
this is largely boiler-plate language, you should ignore it at your
peril. You should notice that the 2nd bolded section (and the preceding
text) suggests that if the PRC opco shareholders (corporate insider
& family) decide to renege on their "contractual obligations," the
holdco (by way of an intermediate opco, still in PRC) can seize
controlling interest in the operating subsidiaries.**
The security pledges are designed to disincentivize the operating company shareholders from acting
against the best interests of the end-shareholders in the holdco (read:
you), but riddle me this: If the managers/owners of the opco loot its
bank accounts, what do they care if they lose their ownership interest
in whatever's left of it? I'm not an expert in Chinese corporate law,
but considering how easy its been over the years for white collar
criminals to perpetuate their frauds here in the U.S, how hard do you
think it'd be to do in China, with all the horrific control and audit
issues they have?
Surely there is a non-zero chance that YOKU is a
legit (or at least more-legit) company relative to CCME; I don't know
it well enough yet to say yea or nay with any certainty, but the fact
remains: if you insist on investing in co's with obvious red flags, be
prepared to lose your entire investment.
CAVEAT EMPTOR
**This is an oversimplification of what would actually happen in practice.
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It is symptomatic that the model of capitalism, that the USA has exported and promoted by the example of its own corporates, is this piece of shit cake dressed up as astute, modern, globalized capitalism, now staring at the West back in its face. "Those whom the Gods wish to destroy they first drive mad"...is the implacable logic that is hidden as the inexorable punishment in store for this seemingly smart sleight of hand, supposed to 'optimize tax payment and corporate freedom', type antics. As, in fact, as in current USA, it does precisely just the opposite : it promotes navel gazing; greedy, unprincipled, capitalistic, smart assed Ponzi shenanigans, devoid of all long term capital formation modeling on a balanced, free market oriented and rational basis.
We are totally sucked into the 'I want it all, I want it NOW', blinkered thinking, prevalent in the Oligarch syndrome. Happy hunting assholes!
Stocks in general are a ripoff.
Company owners are treated like crap unless they have enough shares to make waves.
Thats why i buy low pe stocks, mostly.
About the only time shareholders get an honest deal is when management and workers are scared of a buyout or department consolidations. Then they work their asses off for the current shareholder.
Isn't this exactly the same structure as Walt Disney Company => EuroDisney ?
I guess the only issue is this time americans are on the loosing end.
Another book read a decade ago [dont recall title or author] had the theme that throughout history, China imported astronomers, mathematicians, mercinaries and busnessmen , but invariably threw out all the barbarians. Lession to be learned in modern times is that Chinese are adapting to Western economics, but can easily reject these principles when it suits them or they return to xenophobia, leaving many in the lurch. With time it seems they will have most of the cards in the deck.
War will come WAY before China poses any REAL threat to the status quo.
Come on...you think the rich white people are going to let some fucking chinks take it all away? China is their bitch...
Do you know what war with China will be? Seize and control their assets...nullify all debts to them. What is "China" going to do??? They have no REAL navy, air force, their army is 500,000,000 peasants with sticks! They won't use nukes because they know about mutually assured destruction. You think Fukushima is bad? How about a crater every 10 square miles?
China is a useful idiot who may THINK they're free to choose...like Americans.
Anyone who wants to understand how crappy that boilerplate structure will be in practice should read "Mr China." A highly recommended read.
The Chinese are particularly bad about this sort of thing. But they learned the ropes from us. "Creative accounting", "Shell corporations", "Complex ownership structures". Our criminals invented that sh*t, and then painted over it with a veneer of respectability.
The Chinese of course, took it to the next level -- but what's funny is the number of funds in this country who are actually getting surprised (ie: 'shafted') by this b.s.
What comes around goes around. Anyone investing in markets is an idiot. There are no markets. Just mechanisms for legitimization of fraud. Ways to take money from the unconnected, and pass it to the connected.