Private Equity Fund Receives Low Conversion On International Bonds

John Lomicky

Written by
— Updated on April 11, 2019

International Business ExpertThis 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.

Question(s) For Expert Witness

  • 1. Please briefly describe your familiarity with the Hong Kong Stock Exchange.
  • 2. 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?
  • 3. What impact would such an acquisition program have on the trading price of the defendant company’s shares?

Expert Witness Response E-130286

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. 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. 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. I have published two prior papers related to convertible bonds: one in the Review of Financial Studies, and one in the Journal of Financial Economics. I have also written an unpublished paper using data on the efficacy of discretionary short sale rules in the Hong Kong Stock Exchange.

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