Cloud Over Carlyle's China Venture

It's not unknown for China to detain business players for lengthy periods of time without formal charges and with scant information from authorities. When brushing up against such cases, U.S. private equity firms can find themselves snagged in a swirl of speculation that casts a shadow over a business deal. A Chinese joint venture of the Carlyle Group is resorting to legal action in China to counter what it says are some of the false claims surrounding such a detainment that have affected it.

In one of the more unusual private equity stories out of China this year, chemical maker Jiangsu Sinorgchem Technology, minority-owned by Carlyle, is suing one of its board members, after he contributed to Chinese media reports that a key business player involved in the company’s acquisition of major assets has been detained for over half a year by authorities on suspicion of possible problems, including use of a false identity. The case has been accepted in Chinese court, the joint venture told Forbes.

In one of its two investments in 2008, Carlyle paid $87 million for a 40% stake in Jiangsu Sinorgchem, China’s biggest maker of a chemical used to make rubber products, particularly car tires. That year, Jiangsu Sinorgchem acquired operating assets, as well as the company's Web site URL, from a company called Shanghai Sinorgchem, whose chairwoman is Liu Jing.

In May, the local press reported that Liu Jing had been in custody since November. She is reportedly suspected of using fake identification documents and misrepresenting her background and education.

“The reported investigations on Liu Jing by the P.R.C. authorities are still ongoing and no decision has already been made so far as we know,” Jiangsu Sinorgchem said in a statement, given by its public relations manager Edelman on Friday to Forbes. The joint venture has “never received any kind of notice or request from any P.R.C. government authority about the investigations on Liu," it said.

A board member and one of nine shareholders of Jiangsu Sinorgchem, Wang Nongyue, claimed in a May 19 report by the Guangzhou-based 21^st Century Business Herald that Nanjing authorities had detained Liu Jing. A feature the next day in a Zhejiang business magazine, Zhe Shang, cited the older brother of 39-year-old Liu Jing, whose real name is said to be Jin Yueyi, as saying she’d been detained by Nanjing police when she arrived at Shanghai’s Pudong airport.

Carlyle “completed detailed and customary due diligence for the transaction and verified share ownership and other information from relevant government records and public information in accordance with P.R.C. laws,” Jiangsu Sinorgchem told Forbes. “All of the investment decisions are based on public information which is verifiable, as well as information provided by various shareholders that is represented to be accurate and complete.”

Liu Jing is not a shareholder of the joint venture and has played no role in its management, the company said.

Matters escalated after Wang Nongyue alleged to the 21^st Century Business Herald that Liu had carried out improper financial activities at Shanghai Sinorgchem, presenting 21 pieces of what, he claimed, was documentary evidence of such impropriety.

The joint venture has filed a lawsuit against Wang for providing “false and misleading data” and having “violated his responsibilities and duty of loyalty as a director of the joint venture and as a party to the transaction with Carlyle,” said the company, which added that the case has been accepted in Chinese court. Wang Nongyue could not immediately be reached for comment.

The local press has also reported that Liu Jing’s identity first came into question over the course of a three-year legal case, in which U.S.-based Flexsys filed an intellectual property rights lawsuit against Sinorgchem (which sold assets to the joint venture), a case that Flexsys eventually lost in U.S. court in 2008. Jiangsu Sinorgchem called those reports “speculative.”

On Friday, Carlyle declined to add further comment to Jiangsu Sinorgchem’s statements to Forbes. Last week, Carlyle announced that it had raised $1.0 billion within 14 months for its fourth Asia growth capital fund. Jiangsu Sinorgchem is the first investment of the private equity firm’s third Asia buyout fund, Carlyle Asia Partners III.

Jiangsu Sinorgchem has "achieved rapid growth through technological innovation," the Carlyle's 2008 annual report reads. "Demand for its products is driven primarily by the rapid growth of car ownership in China."

Meanwhile, as suppliers, customers and investors watch to see how the Carlyle joint venture weathers the legal battle, Bain Capital is testing what overhang the arrest of a once-key business player will have on its investment in electronics retailer Gome.

In June, Bain Capital helped electronics retail giant Gome to raise $418 million by buying convertible bonds and new shares. Gome’s former chairman, and current major shareholder, Huang Guangyu, once China’s richest person, was detained by Chinese authorities in November and reportedly is currently under investigation for alleged corruption without being formally charged.

Source from Forbes