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Tencent Music says it will “vigorously” contest fraud allegations by early investor

By | Published on Tuesday 11 December 2018

Tencent

Tencent Music has said that it intends to “vigorously” contest allegations of fraud made against its co-President by an early investor in the company that morphed into the leading Chinese streaming business. However, it admits that the dispute – which has come to a head just as the firm gets ready to list on the New York Stock Exchange – could have “a material adverse effect on our reputation, capital structure, business and financial condition”.

The music division of Chinese web giant Tencent issued a statement to the US Securities & Exchange Commission yesterday after several days of media reports about the dispute between investor Hanwei Guo and Tencent Music co-President Guomin Xie.

Guo was an early investor in Ocean Music – which also operated as the China Music Corporation – in the early years of this decade, as various companies and entrepreneurs attempted to capitalise on opportunities that were emerging at the time to create legitimate digital music services for the Chinese market.

CMC subsequently merged in 2016 with Tencent’s music division, which is now the biggest player in the Chinese streaming market, principally through its QQ Music service. That division, which also has other digital, distribution and label operations, is being spun off as a separate business via the imminent IPO on the New York Stock Exchange.

Prior to all that, Guo sold his stake in CMC back to Xie. In new legal filings in both China and the US, Guo argues that he only divested his stake in CMC because of information Xie provided that suggested the company was failing. Moreover, Guo alleges, he was put under considerable pressure by Xie at the time to sell out of the business.

The legal filings then say that new information Guo only received this year have shown that Xie deliberately misrepresented the position and future potential of CMC back in 2013 in order to force the share sale. Therefore, it argues, the deal via which Guo sold back his CMC equity was achieved through misrepresentation and duress on Xie’s part.

A legal rep for Guo said in a statement last week: “We believe a review of the circumstances and facts surrounding this matter clearly show that Mr Xie, who is now Tencent Music’s co-President, used unlawful intimidation tactics and threats to defraud a respected, honourable investor. It is unfortunate that Mr Xie and other respondents have not righted this wrong prior to Tencent Music’s 12 Dec initial public offering in the United States, where shareholders and regulators hold companies and their officers to high standards of conduct”.

Guo’s legal action in China, via an entity called the China International Economic & Trade Arbitration Commission, is seeking the return of some of his equity stake in what is now Tencent Music as well as compensation for his economic loss. The legal filing in the US courts is seeking information from the various banks involved in the Tencent Music IPO.

Responding to all that, Tencent Music said in its SEC statement yesterday “both we and Mr Xie intend to contest [Guo’s] claims vigorously”. However, companies listing on a US stock exchange are required to be candid and blunt about any risks to the business, and as a result Tencent added: “There can be no assurance that we will be able to prevail in the arbitration or that we will be able to settle the dispute on terms favourable to us”.

It then went on: “If the claims alleged by the claimant are successful, we are currently unable to estimate the possible loss or range of loss, if any, associated with the resolution of the arbitration. Any adverse outcome of the arbitration could have a material adverse effect on our reputation, capital structure (including potential dilution to our shareholders), business and financial condition”.

Dealing with the legal process in China will also require “significant resources” and could “divert management’s attention”, the statement went on, plus “we cannot guarantee that additional legal actions relating to the subject matters in the arbitration would not be threatened or brought against us or our directors and officers in the future”.



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