Following the resignation of four directors announced yesterday, China New Borun (NYSE: BORN) private equity investors (Star Elite, Earnstar and TDR) are now racing to sell their holdings (see table below). On December 10th the 180 day lock-up agreement they signed expires, allowing them to sell up to 5,152,189 shares at any time.
Additionally, the expiration of the lock-up allows the 14,847,811 shares held by Chairman Jinmiao Wang’s mother Mrs. Shan Junqin to also be sold. Both Mrs. Shan’s and Star Elite’s share sales require disclosures to be filed upon any sale and are subject to volume restrictions.
However, Earnstar and TDR will be free to sell their combined holdings of 1,440,237 or 5.6% of the outstanding shares without restriction in the open market and with no filing requirements since they each hold under 5% and their Director appointees resigned last week according to BORN’s press release yesterday (available here). Two additional executive directors (the COO and Controller) also resigned while retaining their management roles, reducing the total number of directors from 9 to 5.
The remaining board now consists of two executive directors and three independent directors, meeting the minimum requirement for a majority independent board according to the NYSE.
According to Borun’s Shareholders Agreement (available here), the directors representing the private equity investors each have the right to serve until the next Annual General Meeting which would occur after the 2010 audited financials are filed on Form 20-F, most likely next March. These investors also each have the right to nominate at least one director to serve on Borun’s board for the next term. So BORN’s sudden, unexpected and unplanned announcement that Earnstar and TDR’s appointed directors resigned is a clear sign that these investors plan to imminently sell their shares.
I contacted Earnstar today and in fact, a representative, Mr. Li, told me the fund wants to sell and was interested whether I know any buyers. Additionally, Star Elite is likely also eager to sell the 3,711,952 or 14.4% of the outstanding shares they hold since they have more than 500% gain over the past two years. Together, all these shares constitute a huge overhang for BORN.
Private equity investors with huge gains cannot be blamed for wanting to sell and take their profits. However, the abrupt decision and manner in which they are choosing to sell is very revealing. Normally, a company will coordinate with its private equity investors to find suitable replacements for their Board appointees well in advance of their resignation. In fact, normally the private equity director appointees will serve a full term, even if their funds sell a portion of their share holdings.
The fact that these two directors resigned last week immediately following the allegations and questions I raised in my prior articles (available here, here and here) clearly indicates their lack of confidence in the company. Keep in mind that they have unrestricted access and insight into BORN’s business through their board seats that gives them a huge advantage in timing their exit from BORN compared to public shareholders.
The questions I raised in my prior articles, especially the 270 million RMB undisclosed debt and the fact BORN is conducting a secret upgrade of its antiquated wet production method, are enough to explain why anyone would want to sell this stock. I plan to publish additional details on BORN’s secret plant upgrade along with proof of how they have attempted to conceal the plant upgrade later this week.
BORN reports earnings on Tuesday. Analysts expect results to be seasonally weak and down year over year due to the dilution from the IPO. Although management has completely avoided responding to any of my questions, I hope that on Tuesday’s conference call they will finally be cornered and forced to admit the truth, unless of course they choose to only allow easy questions from the bankster analysts who don’t want to rock the boat while their firms compete for a lucrative piece of the widely anticipated dilutive secondary offering.
Disclosure: Author holds a short position in BORN