The sudden change of investors in solar-cell maker E-Ton Solar Tech Co’s private placement was certainly the most riveting local business news last week and far more interesting than the earnings results released by several electronics heavyweights.
However, despite the drama, the issue has not only raised the question of whether the involved parties, E-Ton and Hon Hai Precision Industry Co, can regain investor confidence in their management integrity and corporate governance, it also puts the stock exchange regulator’s credibility to the test, as far as the general health of financial markets and the government’s supervisory mechanism are concerned.
It all started with Hon Hai’s stock exchange announcement on Tuesday night that it planned to spend NT$4.04 billion (US$139.3 million) to buy 202 million shares, or a 37 percent stake, in E-Ton through investment arms and subsidiaries, confirming recent market speculation that billionaire Terry Gou’s (郭台銘) Hon Hai was interested in expanding its business scope into green energy.
However, E-Ton remained tight-lipped about the identity of the potential share buyer on Tuesday night and throughout Wednesday. The company posted an exchange filing saying only that it planned to sell the shares for NT$20 apiece in a private placement.
Then, just as investors reacted positively to the possibility of a deal — E-Ton could improve its financial structure and expansion potential and Hon Hai would be entering into the solar energy industry via mergers and acquisitions — on Thursday morning, minutes after the opening of the local stock market, Hon Hai issued an exchange filing to call off the share purchase, citing disagreements that arose during negotiations with E-Ton.
Then, when it appeared that the story was over, E-Ton unexpectedly announced after the closure of the stock market on Thursday that it had reached an agreement with contract laptop maker Inventec Corp to sell 230 million shares, or a 48 percent stake, for NT$5.06 billion.
In a twist, it took E-Ton less than five hours to find another investor and it secured NT$1.02 billion more in capital than the initial deal with Hon Hai.
The sudden change of buyers triggered a quarrel between E-Ton and Hon Hai regarding credibility issues. Feeling that it had been cheated by E-Ton, Hon Hai made the details of its negotiation with E-Ton public and threatened to seek legal action against the solar-cell maker. In response, E-Ton maintained its innocence and reminded Hon Hai that the content of negotiation could not be disclosed because the two parties had signed a confidentiality agreement.
Hon Hai can afford to take a hit from any potential damage that results from the fallout, since the proposed investment in E-Ton would have accounted for a very tiny share of Hon Hai’s massive cash holdings of about NT$223 billion as of the end of September. However, investors, especially those who bought E-Ton shares, have hardly been unaffected by the sudden change of buyer, as E-Ton shares rose limit-up on Wednesday and droped limit-down on Thursday.
Moreover, the incident will have negative implications for local financial markets if the stock exchange regulator fails to take action. If the regulator simply shrugs off public complaints about stock losses, listed companies would have even more reason to behave irresponsibly and disregard improper public disclosure of confidential information.
While Hon Hai might think it has been fooled by E-Ton, investors have felt cheated by the entire ordeal and some even suspect E-Ton of insider trading.
The regulator said it was considering a fine for Hon Hai because of the company’s delayed disclosure of critical information to investors. While this is a start, the regulator needs to demonstrate its resolve to deal with those who are violating regulations on insider trading.
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