HK$3.96 million investment turns into sub-HK$1 shares as minority shareholder sues Evergrande Property over ‘financial independence’ claim

Cheung Wing-chi (transliteration) subscribed for 450,000 new Evergrande Property shares in December 2020 at HK$8.80 each, paying HK$3.96 million. Three years later, the shares had at one point fallen below HK$1. On September 16, she filed a claim in the High Court (case no. HCA1611/2026) seeking about HK$3.559 million from Evergrande Property, alleging that a statement in its prospectus — that “the company is financially independent and is not controlled or influenced by the relevant companies” — was false.

The basis of the claim is straightforward. Evergrande Property listed between November and December 2020, raising HK$14.3 billion. Its prospectus said 65 per cent of the proceeds would be used for strategic acquisitions and investments, while 15 per cent would go towards developing value-added services. In July the following year, the company issued a positive profit alert, forecasting a 70 per cent increase in profit attributable to shareholders for the first half. Six months later, the picture changed sharply. In March 2022, Evergrande Property said it had “discovered” during an audit that six subsidiaries, including Kingboard Property, had pledged deposits totalling about Rmb13.4 billion (approximately HK$14.6 billion at current exchange rates) as security for third parties between September and December 2021, triggering enforcement action. The sum represented 94 per cent of the group’s IPO proceeds. Trading in the shares was immediately suspended for 16 months, and they fell below HK$1 after resuming trading in 2023. An independent investigation later found that the pledged funds had passed through multiple transfers before ultimately flowing back to China Evergrande Group for general operations or debt repayment — around the time Evergrande Property was listed. The plaintiff’s case is that it was no coincidence that more than 90 per cent of the cash on the books of a company described in its prospectus as “financially independent” had been quietly used to guarantee its parent’s obligations barely a year after listing; rather, it was allegedly part of a plan arranged at the time of the IPO.

The statement that the company was “financially independent and not influenced by the relevant companies” is not unique to Evergrande Property. It is near-standard wording used by mainland private companies spinning off businesses for listing in Hong Kong, intended to reassure investors that even if the parent encounters difficulties, the “clean” subsidiary will not be dragged down with it. What makes the Evergrande Property case distinctive is that its parent, China Evergrande, was ordered to be wound up by the Hong Kong High Court in January 2024 with debts exceeding Rmb2.5 trillion (about HK$2.73 trillion). Against that outcome, the familiar prospectus wording appears particularly ironic. Evergrande Property itself has not been ordered to be wound up. Its annual report last year showed full-year revenue of Rmb13.7 billion (about HK$14.9 billion), and the company remains in normal operation, making monthly disclosures to Hong Kong Exchanges and Clearing (HKEX). That is also why the plaintiff was able to sue the company directly without first seeking the court’s permission to continue the proceedings.

The writ names only Evergrande Property Group Limited as the defendant. Under Section 40 of Hong Kong’s Companies Ordinance, where a prospectus contains a misrepresentation, civil liability for compensation rests with “the directors at the time”, “promoters” and those who authorised the issue of the prospectus. In other words, the legislation was originally designed to target individuals rather than the company itself. Evergrande Property’s board at the time of its 2020 listing included China Evergrande founder Hui Ka-yan, who was sentenced to life imprisonment on the mainland this year for offences including fraudulently raising funds and bribery involving units, with his personal assets confiscated. From a shareholder’s perspective, pursuing a listed company that had already lost 90 per cent of its IPO proceeds through guarantees for its parent would offer limited prospects of recovery. Yet the plaintiff has chosen not to sue individuals under Section 40, instead relying on common-law misrepresentation to pursue the company. Whether that route is viable will require the court to answer a preliminary question: was the prospectus statement about “financial independence” an actionable statement of fact, or merely industry boilerplate understood to be used in every spin-off listing?

In previous Hong Kong cases involving false prospectus statements, proceedings have generally been brought by the Securities and Futures Commission (SFC), rather than by retail investors themselves. In the 2012 Hontex International case, the SFC brought proceedings in the High Court under Section 213 of the Securities and Futures Ordinance, alleging that Hontex’s prospectus had seriously overstated its financial position. The court ultimately ordered Hontex to return nearly HK$1 billion in subscription money to public shareholders. The difference is that Hontex involved regulatory action brought on behalf of investors, while the Evergrande Property case has been filed directly by an investor. If Cheung Wing-chi’s claim proceeds, it would be a rare instance of an individual shareholder, rather than the SFC, testing whether the prospectus phrase “financial independence” can give rise to legal liability.

This publication has attempted to contact Evergrande Property and its legal representatives for comment on the claim, but had received no response by press time. The claim has been filed, and Evergrande Property must next file a notice of intention to defend within the specified period. Whether the company or its lawyers will directly address the allegation that the “financial independence” statement was false will be the first key juncture in the case.