Private Equity Fund Receives Low Conversion On International Bonds

Case Overview

This case involves a plaintiff private equity fund that owned zero coupon bonds convertible into the common stock issued by an entertainment company. The private equity fund converted its bonds and received fewer shares of common stock on conversion than it believed it was entitled to under the applicable conversion formula. An expert in trading on the Hong Kong Stock Exchange was sought to discuss the plaintiff’s ability to purchase the several million additional shares it believes it should have received in a fairly short time frame following the conversion given the level of liquidity of entertainment company’s common stock. The expert was also asked to determine what impact such an acquisition program would have had on the trading price of entertainment company’s shares. If it had been negotiated on either on the Stock Exchange or through privately negotiated transactions.

Questions to the Economist expert and their responses

Please briefly describe your familiarity with the Hong Kong Stock Exchange.

I am familiar with the Hong Kong Stock Exchange. In an academic paper, I have studied the liquidity and prices of stocks that can and cannot be short sold in Hong Kong.

Given the level of liquidity of the defendant’s common stock, could you discuss the plaintiff’s ability to purchase additional additional shares in a fairly short time frame following the conversion?

The ability to purchase 40 million shares and its impact depend on the liquidity of the stock at that time. Judging from the recent transaction volume of the company in question, it looks like the acquisition program is difficult to execute in a short time frame without a big price impact.

What impact would such an acquisition program have on the trading price of the defendant company’s shares?

Of course, I will need to look at the liquidity and market conditions at the time of the incident before reaching a more concrete conclusion.

About the expert

This expert serves as an assistant professor of finance at a respected Chinese university. For seven years prior, he was an assistant professor of finance at the Hong Kong University of Science and Technology. He received his PhD in finance from Yale University and his BS in economics from the University of Pennsylvania. His research interests include mutual funds, hedge funds, short selling, and behavioral finance. His work has been published in the Journal of Finance, the Journal of Financial Economics, and the Review of Financial Studies.