In the last week of May 2020, Chinese media has reported on complications in Qihoo 360’s massive private placement. Both Toutiao.com and a Baidu blog platform (Baijiahao) are raising concerns over the finalization of the IPO over the Maso Capital lawsuit in the Cayman Islands.
“On March 7, 2020, Qihoo 360, China's largest Internet and mobile security service provider, announced that the company's private equity issuance plan of approximately US $ 1.5 billion has been approved by Chinese regulators and is about to start financing. This is also the first follow-up financing after Qihoo 360 returned to China's A-share listing in 2018.”, Baidu writes.
“But at the same time, the lawsuit between Qihoo 360 and hedge fund Maso Capital continues. According to reports, the lawsuit originated from the privatization of Qihoo 360's equity on the New York Stock Exchange, and the amount of the lawsuit involved may reach 92 million US dollars. The prolonged litigation has undoubtedly made Qihoo 360's latest round of financing plans a bit hazy. In order to consolidate investor confidence, Qihoo 360 should resolve legal proceedings with Maso Capital as soon as possible to eliminate doubts and pave the way for financing.” (*Google Translated).
Essentially, this is regarding an ongoing case in the Cayman Islands over the real valuation of the share as of the 2016 privatization from the NYSE. We have written about the case before in this blog. Maso Capital and others (represented in a US class action) claim the company undervalued its own share to accumulate revenue. Indeed, the share value soared inexplicably when the company went public in Shanghai shortly after.
What Toutiao and others are saying is quite clear – a $92M lawsuit can foil a $1.5B private placement. Many find it odd that a settlement has yet to be reached through mediation in this case.
The Toutiao article is also questioning whether investor confidence will remain high if the case isn’t resolved; “Qihoo 360 Technology should resolve the lawsuit with Maso Capital as soon as possible before this market full of growth opportunities and huge private equity investment plan is launched. Along with its well-known investment organization Sequoia Capital China and many securities brokers, including Huatai Securities, Haitong Securities, Guosen Securities, Everbright Securities, Huachuang Securities and Dongxing Securities, all face pressure from the capital market. Because if the haze of legal disputes continues to linger and has not been properly resolved, it will be difficult for the above institutions to find experienced investors for this large-scale private equity financing.” (*Google Translated).
COVID-19 may have delayed the conclusion of this case, but the hearings planned for early 2020 will surely be rescheduled soon. How long will the case go on? We’re following closely.
Reports have been circulating that Qihoo 360 is offering some of its employees a so-called ‘layoff exemption pass’ for the Chinese New Year.
CEO Zhou Hongyi posted a picture of the ‘pass’ to WeChat on January 8th. As stated on the pass, it is valid until December 31st 2020. Hongyi later said that the gift was of a humorous nature, and that the company was not in fact planning any layoffs. However, many are wondering if there’s more to the story.
With the next hearing for the Cayman Islands trial set for Q1 of 2020, a new judge stepping in to replace Ingrid Mangatal, and some negative articles in the Chinese media, many employees are concerned.
On WeChat, employees complained about the pass being valid only for 1 year, which they deemed too short. But in fact, Sina Tech explains that, from a legal perspective, the coupon will not be of much practical use. If a large company really wants to lay off employees, they’ll give them the boot with or without the coupon.
So, we are once again waiting for more developments in this saga. The next hearing in this court case will clear many of the questions surrounding Qihoo 360’s future; are investors pulling out? Has the share price been affected? And – as is clearly paramount to Qihoo’s employees – will there be mass layoffs? If so, it’s unlikely that this gift will do much good to its holder.
Asia Times reports that the next court hearing for the Maso Capital vs. Qihoo 360 lawsuit in the Cayman Islands will take place in the first quarter of 2020.
“Maso Capital’s lawsuit against Qihoo 360 is once again in the spotlight – a hearing in a Cayman Islands court is likely to transpire in early 2020 according to recently revealed documents. A settlement is still widely regarded as the likeliest conclusion, given that extended time in court would require more discovery than security companies like Qihoo 360 prefer”, reads the article.
Are lawyers to blame? The article seems to suggest exactly that; “No progress on a settlement has been forthcoming, and so for both sides, lawyers seem to be the only source of money changing hands.” While lawyers are the clear winners in this situation so far, there are also clear losers; Qihoo 360 and its investors. The long and embarrassing discovery process which risks IP exposure and the reputational damages are hitting Qihoo 360 hard.
The same applies to Qihoo’s investors; “Investors want to be made whole quickly and avoid paying enormous legal bills to lawyers who must struggle to enforce poorly conceived cross-border legal structures. … When a company like Qihoo 360 decides that avoidance of mediation and clouding of the discovery process is preferable, it’s the investors who invariably lose.”
And what of the trial? Grand Court Justice Ingrid Mangatal, who presides over the case, left her spot on the judicial bench at the end of October.
A Judicial and Legal Services Commission spokesperson told the Cayman Compass the judge “made a personal decision to demit office as a Grand Court judge at this time in order to pursue other career opportunities”.
“Last year, Mangatal was fined $600 and had her driving licence suspended for a year after pleading guilty to driving under the influence of alcohol and careless driving following an incident in Sept. 2017.
She had crashed her car into a concrete barrier along West Bay Road and told police she could not remember anything about the incident.
Following her sentencing, Mangatal was allowed to remain on the bench.”
2020 is just around the corner. More will be revealed soon.
There’s been a lot of media coverage of the Qihoo 360/Maso Capital lawsuit in the Cayman Islands recently. Forbes, SCMP, Asia Times, The Diplomat and others have all written about the high-profile court case, citing the judge’s ire with Qihoo over the destruction of evidence, lack of cooperation with investigators and claims about Zhou Hongyi’s not owning a mobile phone or computer.
With the next court hearing scheduled for Q1 of 2020, not a lot of time remains for both parties to resolve their conflict with mediation. If no advances are made on this front, both litigants will head towards a ‘winner takes all’ doomsday scenario. Experts do not expect things to go well for Qihoo after such precedents as Shanda Games; Shanda was forced to pay Maso Capital millions of dollars just last year.
Many questions remain open at this point; which way is this case going? Are Maso and Qihoo in talks to reach a mutually acceptable solution? If Qihoo decides to go continue to litigate, how will its share price be affected?
One article by popular markets news site equities.com claims Qihoo’s share price suffered greatly in the past year, falling almost 7%. For the sake of comparison, in July 2019 The Netflix Inc share price collapsed 12% following a lawsuit by Rosen Law Firm and The Schall Law Firm.
We will probably find out which way this goes soon. If Qihoo and Maso don’t get in a room soon, we’ll hear updates from the courtroom.
Qihoo 360 is an internet security company. They make anti-viruses, and they make them well. Qihoo has until recently been a B2C company, selling products like anti-virus software, mobile devices, etc. to end consumers. But in recent years, Qihoo is starting to capitalize on its government potential.
On Qihoo’s website it specifically says that “360 company is the largest provider of Internet and mobile security products in China. Founded in 2005, the company is the pioneer of free Internet security. It launched 360 Total Security, 360 Mobile Security, 360 Security browsers and other national security products, as well as 360 enterprise security browsers for government and enterprise users.”
Back in 2016, China Daily reported that Qihoo is getting into the government market with a new phone featuring data protection: “The move is part of the Beijing-based group's broad efforts to tap into the government internet security market, as a rising concern over national security prompts governments and State-enterprises to embrace domestic IT products,” said the article.
When the media started reporting a falling out between best friends and business partners Zhou Hongyi and Qi Xiangdong, some people weren’t buying it. Many claimed that Qihoo 360 has, in fact, been strategically divided into 2; the B2C part, which is still headed by Zhou Hongyi, and the B2G part which is now headed by Qi Xiangdong. As stated, while some articles claim Zhou and Qi “changed from family to opponents”, others think this is just a ruse meant to formally separate the commercial and government worlds.
Qi’s entity, Qi Anxin, was registered and established back in 2014, mainly providing corporate security products for enterprises such as the government and large central enterprises. With this sector growing rapidly, it makes sense to separate the two. Governments like to receive services from smaller, more confidential companies who understand the need for secrecy and confidentiality. Tech giant Qihoo 360 cannot serve governments well while also employing thousands of people.
Many, including Daniel Ren for SCMP, think the NYSE delisting and SSE relisting could also be explained by Qihoo’s desire to get state cybersecurity contracts.
“We want to become not only the largest Chinese company dealing with internet security, but also the largest domestic company in the security field,” Qihoo founder and chief executive Zhou Hongyi told reporters in 2017. Perhaps Zhou and Qi had information that Beijing will ease rules on overseas-listed Chinese technology companies returning to Shanghai.
It is unclear if Qi and Zhou really did have a falling out, but what is sure is that these two savvy businessmen and tech entrepreneurs know what they’re doing. Raking in billions in profits from a successful listing while also enjoying newfound access to PRC government contracts sounds just like something these two could come up with.
The lawsuit against Qihoo 360 in the Cayman Islands has been making headlines in recent weeks. As the next trial date approaches (court documents reveal that the next hearing will take place in early 2020), more and more journalists are writing about this case.
We’ve been covering the Maso Capital vs. Qihoo 360 case extensively in this blog. Legal experts believe the Chinese Loophole is the most important current issue in China-US relations after the trade war. While president Trump has been known to attract much media attention, more and more publications are picking up on this important issue – companies like Qihoo 360 are listing in the US, forcing minority investors to go private at a lowball valuation and relisting in China, where they both make huge profits and feel more at home.
Zhou Hongyi has made $12billion for himself with this scheme in 2018. But the Maso Capital case in the Cayman Islands could set a precedent for the industry. It’s unsurprising, then, that all eyes are on Hongyi and Qihoo to see how this one ends.
In late August, Zerohedge was the first to write about the case;
“Qihoo 360 has been embroiled in a lengthy court case in the Cayman Islands, and though it has not faced a monetary judgment yet, it has been painted in a negative light over issues such as discovery noncompliance and a lack of transparency. Moreover, the longer Qihoo journeys down this path, the likelier it is that it may be forced to reveal proprietary secrets or encounter some issues it would rather keep private made public.”
Then Lin Nguyen wrote about the story for Asia Times and South China Morning Post (SCMP) a few days later;
“Chinese companies seeking US listings, akin to Qihoo 360, are commonly incorporated in the Cayman Islands because of its flexible laws that allow controlling shareholders and founders to vote on and pass delisting proposals – a controversial policy at best. After delisting in 2016, Qihoo 360 returned to public markets two years later, listing in Shanghai at a valuation of $62 billion. However, considering the absence of real value added in the time between events, the drastic revaluation is suspect at best.”
In all cases, journalists quoted experts cautioning for mediation.
In early September, Seekingalpha was the latest to write about the trial, this time with parts of the public Cayman Islands court documents. The article focused on some outrageous evidence and testimonies that came out of the case, such as that Qihoo employees were ordered to delete company documents on WeChat to fight the discovery process and that Hongyi has not owned an electronic device since 2006. As the images we’ve attached here show, this is a false claim.
“The company’s inconsistent responses to requests, namely in terms of providing budgeting documentation, highlights either a worrying negligence or a willful effort to conceal material information from the discovery process.”
“For a company that is considered one of the largest cybersecurity providers in the world, it stands to reason that company leadership, especially its leader, would not only be familiar with technology, but also a regular user. Qihoo 360’s contention that its CEO has never had a company issued computer or mobile device and has not used a computer since setting up the company in 2006 due to “eye issues,” was categorically disproven in his own autobiography and photographic evidence of a monitor and keyboard in office.”
It's great to see media coverage for this case. How both parties will respond to this new wave of reporting is yet to be seen. Coming up to the 2020 trial dates, pressure amounts on the litigants to mediate rather than be dragged through the litigation process.
The bustling Chinese tech industry is already one of the largest and most influential in the world and growing by the day. This is just another aspect of the immense influence China has on our modern, global world as an economic and political power. But China’s tech industry could not stand without the vision and wisdom of a handful of entrepreneurs who have shaped the sector in the Middle Kingdom.
One such examples is Zhou Hongyi, the founder and chairman of Qihoo 360; a giant tech security company. Zhou was born in Huanggang, a city in the Hubei province of China, before his family moved to Zhengzhou in the Henan province, where Zhou spent most of his childhood. He received his Bachelor’s degree in Computer Software in 1992 and went on to earn a Master’s degree in System Engineering in 1995 from Xi'an Jiaotong University, China.
Hongyi has been a prominent figure in the Chinese tech industry since he founded 3721 in 1998, but his breakthrough and positioning as one of China’s most influential tech figures came with the foundation of Qihoo 360 in 2006. This positioned Hongyi as the 45th richest man in China and the 135th in 2018 according to Forbes, with an estimated net worth of $4.7 billion.
Before founding Qihoo 360 in 2006, and after selling 3721 to Yahoo! for $120 million, he became CEO of Yahoo China in 2004. At the same time, Hongyi was funding companies as an angel investor and funded a number of successful startups.
Hongyi is an interesting figure to say the least. In China, he is perceived as a role model for success, especially being “self-made”, and many young entrepreneurs look up to him for mentoring and inspiration. Hongyi has been lauded with numerous awards and accolades throughout his prolific career, including: “New Economic Figure in the Next 10 Years” by CEO magazine & CIO magazine in 2010, “2014 China Internet Person of the Year“ in 2015 and “2017 Top Ten Economic Person of the Year“ in 2018.
This success is mainly owed to Zhou’s resourcefulness and adaptability, which allows his exceptional horizontal management style. Hongyi is known to listen to his subordinates and give them an equal opportunity regardless of their position in the company, a strategy which is a source of innovation and growth in the company. Hongyi once stated: “My biggest strength is that I listen. I'll change right away if I realize I was wrong. Even a junior employee can overturn my decision. I am impatient and can be too harsh on employees, but many of them have been willing to stay with me for more than ten years. Maybe it's because they think they've learned something from me “. Many believe this is the main drive behind Qihoo’s success.
Qihoo’s standing as a leading company in the Chinese tech industry does not mean it has not been a bumpy road at times. Some controversies it has been involved in have had the potential to tarnish both the company’s and Zhou’s impeccable reputation. In this sense, the company has engaged in legal cases with other Chinese tech giants over the years such as Baidu, Tencent and Yahoo China, which also show Hongyi’s assertive character. With that said, the question remains, of much more successful could Qhioo be if it would not have got involved in these cases?
At the moment, Qihoo has an ongoing litigation against a Hong Kong-based hedge fund taking place in the Cayman Islands.
Qihoo 360’s move from the New York Stock Exchange into the Shanghai Stock Exchange in February 2018 was made possible following its merger with New Summit Limited. It also saw the company’s assets skyrocket, strengthening its position as one of the heavyweight members of the Chinese high-tech industry.
With that in mind, Qihoo’s merger has not been exempt from noise and controversy; the deal with New Summit Limited required the liquidation of the assets of several investors, which led to a gigantic legal dispute. The case, which is currently being reviewed in the Cayman Islands’ Grand Court, started in August 2016 and has neither led to a resolution nor a conciliation between the parts as of the writing of these lines. The process started after the company offered the group of investors to buy out their participation in the company at a rate of US 51.33 per share on July 22, which was refused by the counterpart (from now on addressed as the “Dissenters”).
Following the Dissenters’ refusal, Qihoo, according to the financial laws of the Cayman Islands, asked the court to determine the fair price of the shares. As a result, the court ordered Qihoo (from now on addressed as “The Company”) to open a data room accessible to all parties’ consultants and experts in order to determine the fair value of the shares. Nonetheless, in July 2017, the Dissenters filed a petition for “Summon” and the appointment of a joint forensic expert. This petition to compel The Company to share specific documents and financial information was granted by the judge, who framed Qihoo’s approach to the discovery process as somewhat ‘careless and cavalier’, granting the summon and appointing an independent forensic expert. The Company appealed the ruling in October 2017, but their petition was overruled, and they were ordered to pay 80% of the costs of the summon by the judge.
One of the most tense stages in the process came in December 2018, when the court addressed a petition by the Dissenters, who asked for the termination of the forensic audit and that The Company would not be able to rely on any factual evidence at the trial of these proceedings, in light of several malpractices. These included the alleged destruction of data, perjure regarding the health of Zhou among other accusations. Despite the harsh character of the accusations, the court dismissed the petition, stating that the Company has cooperated with the audit and that there is no evidence that the destruction of material was relevant to the case.
Judging from the first steps taken in the case, it seemed as though the balance was turning towards the Dissenters side. The acceptance of the “Summons” petition, which is considered an invasive move by a judge, and the latter’s critical arguments against the company in the ruling, attest to that. Still, the court’s rejection of the Dissenters petition in December 2018 and the judge’s compelling argument stating that The Company is indeed cooperating with the audit, points to a balance in the scale. Indeed, at this point, it is impossible to forecast whether the case will favor Qihoo or the Dissenters. However, it is clear that the longer the case takes, the more investors would feel uncertain and uncomfortable about Qihoo’s future.
Besides the significant ongoing case over Qihoo’s private acquisition prior to its listing on the Shanghai Stock Exchange, taking place in the Cayman Islands, the company has a long history of legal disputes and confrontations. Most of these disputes involved other Chinese tech giant companies such as Baidu, the Chinese branch of Yahoo, Tencent and others. Over the next few posts, we will attempt to explain the most relevant legal processes that Qihoo has been involved in and more importantly, we will discuss the possible reasons that have led the company to involve itself in such notable court cases.
Qihoo has a rather poor record in court when involving itself in a dispute with other Chinese tech giants; one of the most significant examples of this was the longstanding dispute between Qihoo and Tencent. The latter is a Chinese multinational investment conglomerate with more than 58,000 employees worldwide, whose subsidiaries provide a wide array of internet-related services and products. In fact, Tencent is the 15th largest public company in China with 47.2 billion USD in revenue in 2018.
The dispute between the two companies lasted several years, being at the spotlight of Chinese tech-related news outlets and commentators for a long time. It all started in 2010 with the famous dispute titled “3Q war”, where both companies accused each other of foul play and of using their respective software to block users from accessing the competition’s software. Following a heated trial, the court ruled in favor of Tencent for unfair competition, compelling Qihoo to pay the equivalent of $800,000 USD at the time. Afterwards, Qihoo appealed to the Supreme People’s Court, which rejected the appeal in 2014, widening the company’s black record regarding appeals amid its legal disputes in China.
When considering the company’s long record of legal disputes, with rather dubious results as (illustrated by the sound verdict of both courts in the Tencent case), it becomes clear that Qihoo’s time and resources are better spent in discreet litigation, rather than full-blown trials. While Qihoo's founder and CEO Zhou Hongyi is known to be a combative figure and someone who stands his ground, it is hard to imagine why a company that has so much to offer products-wise, would risk its assets and reputation in such embroils rather than resolving them quietly?
In the age of nonstop globalization, every sector in the world’s economy is influenced by the erosion of borders. The financial sector is no exception; financial markets, now more than ever, are flooded with endless possibilities to invest and explore foreign markets with the click of a mouse or the tap of a finger. In this sense, the historic hegemony of stock exchanges has played a fundamental role in the fluidity of assets across borders.
Stock exchanges are still the main vehicle for companies seeking to position themselves in the international arena, especially by going public in one of the main financial centers. In order to tap into corporate capital, many companies seek to be listed in the New York Stock Exchange, and Chinese companies are no exception. In recent years, China has become the second-largest economy after the US, its financial markets, such as the Shanghai Stock Exchange, expanding rapidly. Still, Chinese companies aim for the New York Stock Exchange in order to make the big leap forward in their search for international recognition.
The presence of Chinese-based companies in US markets holds tremendous benefits for the global economy as a whole, but it has not been devoid of controversy. Many Chinese companies are utilizing a legal loophole (appropriately titled “The Chinese Loophole”) to maximize their profits at the expanse of minority investors, mostly in the US. Most of the companies that have exploited this loophole have followed the same strategy; after reaching into US capital through a public listing, the company's management backtracks and takes the company private at a significantly cheaper valuation. That same management then relists the same company back in China, at a much higher valuation, leaving executives with a big windfall and subsequently leaving average retail investors with the biggest losses.
Chinese companies can do this because, being foreign, they do not need to comply with corporate governance practices. The differences in the controlling share structure of foreign companies (as opposed to domestic ones) add another layer of complexity to the situation. These two factors combined allow founders and their majority co-investors to retain voting control, leaving minority investors without any leverage when it comes to the future of the company they are invested in and prone to being forced to take low-ball buyout offers.
This practice has been so lucrative for Chinese companies that dozens of Chinese-based companies have engaged in it over the last seven years, multiplying their value substantially when relisting back home. For instance, Wuxi PharmaTech was taken private in 2015 at a valuation of $3.3 billion and was later relisted in China for an astonishing valuation of $21.6 billion, a whopping 655% increase in valuation. While this practice might not be illegal within the US legal system per se, it has the potential to severely tarnish the reputation of Chinese companies in the US as well as in other western markets. Moreover, it could scare away potential investors who fear such companies are high-risk investments and slow the rapid growth and penetration of companies.
There is also a legal threat; if investors feel that they have been robbed of the real valuation of their shares by losing to the majority investors in a vote, they could (and in reality, they do) turn to the court and seek damages. Many companies, such as Qihoo 360, are already being sued for hundreds of millions of dollars for “scamming” investors. When a company goes private at $X and relists shortly after at 500*$X without adding assets, products, tech or properties (and sometimes even losing assets as companies are restructured), investors have strong legal basis for compensation lawsuits.