INTERNET: Sina Pledges Change, But Then Disses Shareholders

Bottom line: The intensifying spat between Sina and a dissident shareholder is likely to ultimately cool down without any legal action, and could see the addition of 1-2 new independent directors to its board.

The battle for reform at Internet stalwart Sina (Nasdaq: SINA) has taken a somewhat nasty twist, with a dissident shareholder threatening legal or other action following a power play by longtime CEO Charles Chao to deprive minority shareholders of influencing the company through use of the ballot box. This particular move doesn’t come as a huge surprise, as it’s quite typical of Chinese CEOs like Chao to believe they know what’s best and do their utmost to ignore anyone who disagrees with their view.

That said, Chao did sound a slightly conciliatory note in this battle for reform, which is being led by a dissident minority shareholder called Aristeia Capital. I’ll go into that shortly, though first we should review this colorful battle and also what it might mean for Sina. The company’s share price has taken a bit of a beating these last few weeks and is now down around 8 percent amid all the brouhaha.

I don’t know if the stock will drop further on worries about a looming battle between Aristeia and Chao over Sina’s future direction. But it would certainly serve Chao right if that were to happen, since his tone was definitely somewhat arrogant and dismissive of minority shareholders. Again, this is quite par for the course for private Chinese companies, whose founders typically believe that stock markets are there to give them money and nothing more.

Let’s quickly review how we got to this place, and then the latest war of words between Sina and Aristeia. Put simply, Aristeia believed that Sina was grossly undervalued due to poor management, and mounted a campaign for a seat on the company’s board. That effort ultimately failed at the company’s annual shareholder meeting last week due to Chao’s control of about a third of Sina’s shares.

I did a bit of math based on the difficult-to-interpret results that Sina published, almost certainly with an aim of confusing the situation. My calculations showed that one of Aristeia’s candidates, Thomas Manning, actually got more approval votes from independent shareholders than Sina’s own candidate at the annual meeting. (English article) But after receiving support from Chao’s large shareholding, Sina’s own candidate comfortably won the election.

Tossing a Bone

Sina seemed to throw a bone to minority investors by saying it had formed a committee to consider additional independent candidates for its board, implying it might listen to Aristeia and others who want to reform the company. But then it added it was rolling out a new plan that would cheaply sell Chao special shares that would entitle him to well over 50 percent of Sina’s voting power.

Sina’s explained the move by saying it was designed to avoid such time-consuming and potentially destructive proxy battles in the future. The tone of that explanation was typically dismissive of minority shareholders, which isn’t that surprising. I personally tell people who want to buy any US-listed Chinese stocks that they shouldn’t expect any say in running of companies, and if they don’t like the founder’s style then to avoid such investments.

Aristeia wasn’t too thrilled about Chao’s latest plan to concentrate voting power into his own hands, calling the action “shocking” and saying it demonstrates “exactly the type of decision-making that initially concerned us and led to our recent proxy campaign.” More importantly, Aristeia said it is actively reviewing all options available to it, implying very strongly it could take some legal action. At the very least, this certainly shows that this battle is far from over.

At the end of the day, this display of shareholder defiance and resulting arrogance by a Chinese company chief is quite expected, and probably reflects cross-cultural differences more than anything. Big minority shareholders like Aristeia are used to having their voices heard, especially in cases like this where a company like Sina is so undervalued.

Sina’s response, while somewhat arrogant, also has some conciliatory overtones, and Chao probably thinks he is being gracious by offering to consider additional independent directors outside his small coterie of the current five, which includes himself. I imagine that when Aristeia finally calms down, it will get an audience with the company, and perhaps we will see one or perhaps even two more independent directors ultimately added to its board.