Elliott Advisors pursues HK's Bank of East Asia

Hong Kong's Bank of East Asia raised capital from a big shareholder to entrench its founding family rather than serve its other investors, a court heard on Tuesday, as Elliott Advisors pursued the bank for more information about the decision.

Counsel for the US hedge fund argued that the HK$6.6bn ($849m) injection was "part of a pattern of behaviour" by the bank, whose board had not fully considered other capital-raising avenues such as a rights issue - a move that would not have diluted existing shareholders as the placement to Japan's Sumitomo Mitsui Bank did.

The case is the first high-profile action in the city by the aggressive hedge fund, and is being closely watched for its potential to shake the family control of one of Hong Kong's most established dynasties.

David Li, BEA's chairman and chief executive, is the third generation to run the institution that his family founded. Brian and Adrian, his sons, are joint deputy chief executives of the bank. Other family members include former high-ranking politicians, a former chief justice and the late Ronald Li, known as the "godfather" of the stock exchange.

The bank is Hong Kong's biggest independent institution with a market capitalisation of $11bn. Most of the territory's other banks have been taken over by larger groups interested in their Hong Kong dollar deposits, but the holdings of SMBC and Spain's Caixabank have made this difficult at BEA.

"This is the fifth occasion the bank has placed shares with these two strategic investors and the number of shares is considerable," said Charles Sussex, a lawyer for the hedge fund in Tuesday's pre-action hearing. "They represent a bulwark for the Li management against the ravages of hostile takeovers and hostile shareholders."

BEA argued the capital raising was part of a prudent approach by the bank to shore up its capital buffers ahead of the full implementation of global Basel III banking regulations.

Share placements are more common in Hong Kong than rights issues. About 80 per cent of capital raising by listed groups in the past four years has been done that way, argued Jat Sew-tong, a lawyer for BEA, citing a Goldman Sachs presentation.

The share sale to SMBC, agreed in September and finalised in March, involved shares worth 9.5 per cent before dilution and made SMBC the bank's largest shareholder with 17.4 per cent, ahead of Caixabank's 17.2 per cent. Both have one board seat and Caixabank has undertaken to support the board in nearly all cases. The Li family, which holds less than 7 per cent of the stock, has seven seats.

Activist investors have often found it difficult to influence Asian companies, facing complex webs of family-controlled companies, boards unprepared to engage and local shareholders often uninterested in striving for better performance.

Elliott has a mixed record in Asia. Last year it pushed Singaporean developer CapitaLand to raise a buyout offer to minority investors in a listed unit, but it then failed last summer to get OCBC, the Singapore bank, to boost its $5bn offer for Wing Hang, a rival to BEA.

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