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QuestionsCategory: Investor PsychologyManagement Quadrant – Related Party Transaction
Wilfred Yang asked 1 year ago

Hi
Interesting video. I am curious how the related party is able to exert influence over the operations given there is likely to be a board in the listed company. 
For the Chaoda example, how does the founder who only has 21% of the shares make Chaoda pay for an inflated price for fertiliser? Even if he’s the largest shareholder, decisions are still made collectively by the board.
For the Credit China example, the person involved is a non-executive director. Even though he holds 22.3% shares, he cannot be involved in the day to day ops as he’s a non-exec. How then does he influence the board to pay a price for Shanghai Jifu without any financial data to justify the acquisition price.
On the same example (Credit China), you mentioned in the video that the valuation of Shanghai Jifu was 2.4 billion dollars. So if the purchase price was just 856 rmb, it’s actually a heavy discount from the valuation.

Adrian Goh replied 1 year ago

Hi victor, along this same topic, if he owns 21% share and takes action against the interest of this 21% isn’t he “saboing” himself?

Or is this a way of taking a small loss for a bigger gain?

Victor Chng replied 1 year ago

Hi Adrian,

I don;t quite understand your context in this case. Are you saying that the major shareholder sue his own company?

Wilfred Yang replied 1 year ago

I think he meant while the founder profited from the inflated price for the fertilizer, he also inadvertently hurt his investments because he holds 21% of Chaoda. Was it a case of the profits he made from selling the fertiliser outweighing the losses he would have suffered from the lower profits in Chaoda.

Adrian Goh replied 1 year ago

Yes Wilfred, that’s exactly what I meant. :)

Victor Chng replied 1 year ago

Hi Adrian & Wilfred,

Personally, It does not matter if his investment get hurt when the share price crash since he have transfer the cash out of the company through sales of fertiliser. As the major shareholder of the company, it is hard for him to cash out in shares since his amount is huge and may affect the market. Hence, that may be one of the reason, he did the fertiliser way.

Wilfred Yang replied 1 year ago

Thanks!

Victor Chng replied 1 year ago

Welcome :)

1 Answers
Victor Chng answered 1 year ago

Hi Wilfred,
 
As much as we want to put full trust on the listed company board, we still need to know that the people sitting on the board are being choose and paid by the shareholder of company. As much as, the person may be non-executive that does not handle daily operation but with his large shareholding, there is still influence in the way he make the call especially in Asian market where there are many grey area. 
 
In the case of Shanghai Jifu, the purchase price of RMB856 is only 35% stake in the company which work out to be RMB 2.4 billion purchase price. 

Victor Chng replied 1 year ago

Credit China Fintech later changed their name to Chong Sing Fintech and was suspended since July 2019 for Fraud.

https://www.caixinglobal.com/2020-06-22/chong-sing-reveals-scale-of-fraud-at-its-chinese-online-payments-unit-101570987.htmla