A special committee for a Chinese manufacturer registered in Nevada filed for Chapter 11 on Aug. 19, seeking to halt its own CEO’s alleged interference with an internal investigation into accounting irregularities. Two of the four sitting board members of ShengdaTech filed for bankruptcy on Friday to safeguard the company’s assets, to restructure its business operations, and to allow a special committee to continue its ongoing investigation into the company’s financial affairs, according to an affidavit filed by company board member Sheldon Saidman.
ShengdaTech manufactures nano precipitated calcium carbonate (NPCC), which is used in various products across multiple manufacturing plants located in China to enhance their durability and efficiency.
At the time of its filings, ShengdaTech listed total assets of $295.4 million, versus total debt of $180.9 million.
The company reported revenue of $102.1 million and a net profit of $23.5 million in 2009. Its only material debt obligations resulted from two issues of notes in 2008 and 2010. In 2008, the company issued $155 million in 6% notes due 2018. In December 2010, Shengda issued notes totaling $130 million – all of which remain outstanding – with an interest rate of 6.5% and a maturity date of Dec. 15, 2015.
The 2010 offering was conditioned upon a certain amount of the 6% notes being repurchased by the company in order to cancel at least 75% of the original issuance of the 6% notes. About $67.2 million of the net proceeds of the 6.5% notes were used to repurchase a portion of the 6% notes, court records show. The Bank of New York Mellon served as the indenture trustee for the 6.5% notes, and also holds a $36.3 million claim as indenture trustee for the 6% notes.
But in March 2011, Shengda auditor KPMG notified the firm of serious discrepancies in its financial statements, prompting the creation of a special committee, comprised of the board’s audit committee members, to investigate the allegations. The committee hired law firm O’Melveny & Myers to conduct an independent investigation, and the firm in turn hired PricewaterhouseCoopers to provide forensic-accounting support. Among other things, O’Melveny and PwC visited banks holding Shengda’s accounts in China to verify the company’s cash accounts, but Shengda’s local managers allegedly obstructed their efforts. Nasdaq delisted the company on June 8 as the investigation continued.
On June 1, holders of the 6% notes became entitled to require Shengda to repurchase, in cash, any portion of their notes, plus interest. All of the eligible holders exercised their put right on $25.6 million in notes, but have yet to see any payments. As a result, the company was required to pay interest on the still-outstanding 6% notes on June 1, but has yet to do so.
On June 15, Shengda failed to pay about $4.4 million in interest on its 6.5% notes. The company currently owes more than $155 million under the 6.5% notes, “which it has no ability to pay,” according to Saidman.
In addition to its bankruptcy proceedings, the company is now facing numerous securities lawsuits. The O’Melveny investigation, which was later taken on by law firm Skadden, Arps, Slate, Meagher & Flom, “calls into serious question the accuracy of payments allegedly made to [ShengdaTech] by various customers or the sales allegedly made, transactions [ShengdaTech] is reported to have engaged in with related parties owned by [former president and CEO Xiangzhi Chen] which have not been supported, and suggests that sales are vastly overstated,” according to Saidman’s affidavit.
Chen holds more than 42.45% of the company’s outstanding shares, making him ShengdaTech’s largest shareholder. He is also accused of helping to deadlock the company’s board and of obstructing investigations into the company’s finances, according to court filings.
The special committee is seeking court approval to appoint a chief restructuring officer – Michael Kang, of Alvarez & Marsal – and to enjoin Chen from interfering with the committee’s investigation. Among other things, Chen has helped appoint a fifth board member, allegedly friendly to his own interests, who could potentially end the deadlock between the four current board members, “change the course of the ongoing investigation, and impede the efforts of the special committee to ensure a successful reorganization,” Saidman claims.
Shengda Tech has hired Greenberg Traurig as its legal counsel in the Chapter 11. A hearing date for the company to present its first-day motions to U.S. Bankruptcy Court Judge Bruce Beesley in Reno, Nev., had not yet been set as of press time. – John Bringardner
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