Guangzhou, China-based Sino Agro Food, an agriculture technology and organic food company that made waves in the seafood industry when it vowed to build the world’s largest indoor shrimp farm in 2014, has finalized a settlement with disgruntled shareholders who sued the company in March 2019, demanding a corporate governance overhaul.
The lead plaintiff, Heng Ren Partners, accused Sino Agro Food’s leadership of breaches of fiduciary duties, gross mismanagement including making misleading and false statements, and issuing new shares to pay debts without authorization – an action that Heng Run claims diluted shareholder ownership. Collectively, Sino Agro’s “gross mismanagement and unexplained abandonment of certain business lines are methodically stripping the company of its remaining real value to … shareholders,” according to the lawsuit.
On 13 October, U.S. District Court Judge Jesse Furman of the Southern District of New York approved the settlement, instituting a series of financial reforms of Sino Agro (which is registered in the U.S. in the state of Nevada) in his decision that will give Heng Ren Partners a more powerful voice in the company’s decision-making.
Specifically, the settlement gives Heng Ren Investments – a Boston, Massachusetts, U.S.A.-based investment firm specializing in Chinese stocks listed on U.S. stock exchanges – a board seat at Sino Agro Food and its key subsidiary, Tri-way Industries Ltd. Hen Ren will also join the companies' audit committees and have a seat on a new corporate governance committee, which will review related-party transactions at Sino Agro Food.
In the settlement, Heng Ren Investments also won the right to approve all future share issuances and the right to block the issuance of new shares to collateralize loans – a process that Sino Agro used repeatedly to obtain working capital. The company must also execute a long-promised share dividend distribution of 18.3 million shares of Tri-way Industries “as soon as practicable.”
Additionally, the settlement calls for Heng Ren to play a role in the search for a new chief financial officer for Sino Agro, and for the initiation of the sale of all preferred shares owned by Sino Agro Chairman, President, and CEO Lee Yip Kun (Solomon Lee). Lee has also agreed to transfer 175,000 shares of preferred stock to Heng Ren Silk Road Investments LLC, 75,000 shares to Heng Ren Investments LP, and one million shares to Apollo Asset Ltd. as reimbursement for the cost of the litigation.
"We invested in Sino Agro Food because we saw a significant opportunity for aquaculture in China," Heng Ren Investments Manager Peter Halesworth said in a press release. "Sino Agro Food's aquaculture farms were touted as potentially being among the most productive in the world. About a year ago, total shareholders' equity was reported at USD 712 million [EUR 601.7 million]. Today, Sino Agro Food's market value is USD 12 million [EUR 10.1 million]. We are eager to reverse the company's decline and unlock its potential value."
Apollo Asset Ltd., a Norwegian investment fund owned by Arne Fredly, was a minority party in the lawsuit.
"This welcome approval by the court is the result of our years of effort to correct problems that have hurt the company and its shareholders. Now is the time to follow through and accomplish the goal of investing – to generate returns," Fredly said.
The settlement was initially announced in June, but had to undergo a public notice and comment period. In his final decision, Furman said he hoped the terms of the settlement will remedy corporate governance issues at Sino Agro and help turn around the company’s financial outlook.
Even with the reforms, an inspection of its financial filings shows Sino Agro has an uphill battle to profitability. Since late 2018, the company has been in default of a USD 33.3 million (EUR 28.2 million) loan issued Euro China Capital AB. However, the lawsuit alleges the company’s leaders, including Lee, failed to disclose inside information on arrangements it made to issue common shares as security for several loans and trade finance facilities it entered into, and did not disclose increases of its authorized share capital and issuances of new common shares.
As a direct result of those actions, Sino Agro was delisted from the Oslo Stock Exchange’s Merkur Market in November 2019 due to “repeated and gross violations of the Merkur Market rules,” including failure to meet disclosure obligations. However, the company is still listed on the U.S. over-the-counter market.
According to the lawsuit, Sino Agro owns 36.6 percent of Tri-Way Industries, which in turn owns a subsidiary that has been reported as the sole owner of five recirculating aquaculture system (RAS) farms in China. However, an investigation by China’s State Administration for Industry and Commerce found that one of the farms and a seafood wholesale center purportedly owned by Tri-Way were actually controlled by individuals not affiliated with the company. Tri-Way has claimed to investors its five aquafarms are worth USD 310 million (EUR 262.1 million), but China’s SAIC found the total asset value of the company’s farms was actually USD 12.3 million (EUR 10.4 million).
In a 10-page document circulated by Sino Agro in November 2017, the company acknowledged a “constriction of funds” had limited its operational capabilities at its aquaculture facilities. It said it was conducting advanced research and development of culturation of high-quality, sashimi-grade whiteleg shrimp, as well as Chinese perch (Siniperca chuatsi), jade perch (Scortum barcoo), and pearl grouper (Epinephelus lanceloatus). However, production volumes and gross profit detailed by the company for production of these species is listed as estimations, rather than actual amounts. Sino Agro acknowledged two of its five aqua-farms had not yet been completed, and that much of its 9,000 MT of production – lower than its 12,000 MT forecast for 2018 – had been raised in traditional open dams rather than in its RAS facilities.
In a 2014 presentation announcing its “megafarm” project, Sino Agro said it would seek to grow 10,000 MT of shrimp within two years, 30,000 MT in three years, and 300,000 MT in 10 years, comprised of 40 percent Mexican white shrimp (Peneaus vannamei) and 50 percent LawZi freshwater prawn (Machrobrachium rosenbergii). In an update on the company’s operations published in the Global Aquaculture Alliance’s Advocate publication in 2016, Sino Agro Chief Scientific Officer Anthony Ostrowski, said the company was also seeking to develop commercial production of Asian cod (Oxyeleotris marmoratus) and freshwater eel (Anguilla marmorata). Ostrowski said the company planned to produce or have in production up to 10,000 MT of combined products by the end of 2017, and up to 70,000 MT by the end of 2020.
Sino Agro reported a loss of USD 12.1 million (EUR 11.01 million) for 2019, blaming the performance on an ongoing reorganization of company assets. The losses projected for 2019 are “mostly non-cash items, stemming from writing down biological assets and inventories as part of the new subsidiary lease and subcontracting arrangements,” said Sino Agro in a statement to investors.
The firm has said it’s in negotiation with global companies to develop aquaculture projects in India and Malaysia, and announced a high-profile project in Angola in 2018.
Photo courtesy of Sino Agro Foods