VisionChina goes after VC firms in US courts

The situation highlights the potential for discrepancies when the fundamentals of a deal do not play out as originally foreseen. It also showcases how Chinese-based companies listed in the US are having to play by the rules of the US legal system. With so many VC-backed companies listing on US exchanges, it is worthwhile for both sides to sit up and take notice.

Straightforward beginnings

The original deal seemed direct enough: a desire to gain a larger share of the subway media business in China, expanding VisionChina's then focus on advertisements in elevators, busses and only some subway stations and cities. According to a source, the reasons behind the deal were "a lot of synergy between the two companies, and a chance to eliminate the competition to win the concession of the Beijing subway." DMG had beat out Vision for the Shanghai subway deal in 2008. On the call announcing the deal, Scott Chen, then CFO of VisionChina had said that the deal "represents a unique opportunity to effectively rationalize industry competition and to realize significant common synergies. DMG was founded in 2002 and has a strong history in technology innovation, developing information systems for subways in China."

The terms of the deal were also relatively straightforward. Payments were to be made totaling $160 million, with $100 million paid up front (40% cash and 60% stock), and two payments of $30 million paid in cash installments thereafter.

Unfortunately, after the merger, VisionChina's stock price suffered in 2010, including a single-day drop of 37%. VisionChina tried to re-negotiate the terms of the anniversary payments, but were told no because the deal had already been done and the ink dry for nearly a year. On December 27 2010, with the first $30 million payment already overdue and the second coming up in less than a year, Vision China commenced a lawsuit based on the notion that DMG's former shareholders had acted fraudulently.

Just months before both groups began racking up extensive legal bills, CFO Chen resigned and VisionChina's founder and CEO, Li Limin, had nothing but praise for him - and for the acquisition. He publicly stated, "Mr. Chen has made significant contributions to VisionChina Media's financial management and investor relations. Additionally, he led our successful acquisition of Digital Media Group Limited in 2009 as well as the integration of the two companies. We are saddened by Mr. Chen's decision to resign... and wish him well in his future endeavors." Industry onlookers have said that it would be odd to publicly make such glowing remarks if indeed VisionChina was unhappy with the post-acquisition situation.

He said, she said

The original December 2010 complaint filed in New York Country Court states, "The Gobi-Oak Defendants accomplished their agreed-upon objective through false, deceptive, and misleading statements made to VisionChina during the negotiation of the acquisition by merger and VisionChina's due diligence." It further alleges that the VC groups effectively benefited "unjustly" and goes on to say that the groups "repeatedly misled VisionChina about historical and current performance and trends in DMG's business and financial performance, painting a false picture of a company that was achieving its business plan and would reach sustainable profitability in 2009." It describes VisionChina as having been "induced to acquire DMG at a grossly inflated price."

However, Chen said repeatedly in an affidavit to the court that he had not - up to the date of his departure in August 2010 - participated in any discussions "concerning any alleged fraud in DMG's unaudited financial statements."

The extent to which the court battle has become a blatant finger-pointing exercise is further complicated by the fact that VisionChina was backed by Milestone Capital, whose MD Yunli Lou is on the Board, and is also a former colleague of Tom Tsao of Gobi, one of the firms being sued.

In a motion to dismiss, the Defendants stated plainly, "This lawsuit is a transparent attempt by VisionChina to renege on payment for a strategic acquisition it vigorously pursued and entered into with full knowledge of all material information. VisionChina, a sophisticated company that dominates the Chinese digital advertising market, aggressively sought and acquired its competitor to obtain DMG's valuable share of the digital media market."

Whether indeed it is a "stall tactic" by VisionChina as one source called it, or whether the court finds former DMG shareholders at fault, it is an interesting look at how US-listed companies must comply with all US rules and how the courts will interpret fraud in cross-border corporate cases. It is generally thought that companies listed in the States are more well-regulated and compliant, legally and contractually. But if VisionChina sees an adverse ruling come its way, it will have to face the music in the States. But will enforcement of the second $30 million payment be possible? After all, the company is based in China, operates its business activities solely in China, and save one VC firm, its other investors are all domestic PRC groups.

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• Topics
• Greater China
• Venture
• Technology
• Media
• Gobi Partners