China Hospitals Inc.

November 24, 2019

So, this is, uh, ONE. HELL. OF. A. FACT. PATTERN.

Back in 2014, Classroom Investments Inc., a wholly-owned subsidiary of Ontario Teachers’ Pension Plan Board (!), entered into a share purchase and subscription agreement and shareholder’s agreement with Frank Hu, the founder, director and majority shareholder of an entity called China Hospitals. Pursuant to the agreement, Classroom Investments Inc. would acquire 20% of China Hospitals in exchange for $175mm.

We know what you must be thinking: what crazy earth-bending technology must China Hospitals have possessed such that Classroom Investments Inc. felt compelled to make such an investment — an investment imputing a valuation of ~$875mm on China Hospitals? Was the cure for cancer uncovered by China Hospitals?!? Did that solve male pattern baldness?!??

Spoiler alert: nope. Actually, the proceeds were supposed to be used to roll-up four hospitals — Puyang Oilfield General Hospital, Qingfeng People’s Hospital, Anqiu People’s Hospital and Shouguang People’s Hospital (in addition to general corporate purposes). Pursuant to the understanding, China Hospitals was to IPO within 30 months.

Of course, even that surprising goal wasn’t achieved. Why? Because Frank Hu apparently fat-fingered the funds to a different bank account under his control. Okay, okay…more like sticky-fingered. But that wasn’t all: Hu engaged in a string of shady transactions that “effectively stripped Classroom of its bargained-for economic interest in China Hospitals….” Said another way, Mr. Hu did basically none of what he was supposed to; he simply absconded with the money.

In 2015, Classroom took the matter to the Hong Kong International Arbitration Centre, and the arbitration tribunal issued a “final award” holding China Hospitals and Mr. Hu jointly and severally liable “in the amount of $231,805,125.09, comprising the sum of (a) Classroom’s original investment of $175,000,000, (b) interest accrued from January 29, 2014 to June 15, 2018 in the amount of $45,969,863.01 as well as post-award interest at a rate of 8% from June 15, 2018 until complete payment, and (c) costs in the amount of $10,835,262.08 (collectively, the “Arbitration Award”).” Any guesses as to whether Classroom got paid? Spoiler alert: of course not. This left Classroom apoplectic.

Classroom next petitioned the Grand Court of the Cayman Islands to prevent the dissipation of China Hospitals’ assets. The Grand Court appointed a liquidator and the liquidator has been winding down the business since. The liquidators, however, would like to get access to a Bank of America account that is believed to hold — or, at least, held as of March 30, 2016 — over $202mm in cash. Given all of the accusations of malfeasance here, Classroom is obviously of the view that the $202mm constitutes its money. To hinder anyone from doing anything with those proceeds — to the extent they exist (🤔) the liquidators filed a Chapter 15 in the Southern District of New York. Per The Wall Street Journal:

During a hastily scheduled hearing Monday, lawyers for the liquidators asked Judge Shelley Chapman to allow them to use the U.S. proceeding to seek more information about an American bank account potentially holding more than $200 million and to bar anyone from removing funds from the account.

The judge granted those requests and scheduled another hearing in the chapter 15 case for Dec. 16.

Who wants to bet that the money is still there? 😬

*****

The greatest question this ridiculousness leaves us with is this: what the bloody f*ck was the Ontario Teachers’ Pension Plan Board doing investing in this particular man for this particular purpose? The OTPP is an organization responsible for administering the defined-benefit pensions for school teachers in Ontario. School teachers, people. What kind of return were they expecting on a $175mm investment on a Chinese hospital roll-up that was supposed to, in short order, IPO? And why? Who got fired for this nonsense?

The investment is not, as it turns out, terribly out of form. The OTPP owns and manages a portfolio of Canadian and international assets including real estate, infrastructure (airports, railways), national lotteries (in the UK and Ireland), a Spanish funeral provider, and a minority interest in the New York Yankees’ regional sports network (YES). So, yeah, sure, in the ever-present need for large-yield-wielding assets, why not invest in a shady-a$$ Chinese hospital rollup?!? 👍

When a downturn eventually does occur, we’re likely to see a number of private equity deals by pension funds go sideways (callback to iPic Entertainment Inc., now owned by the Teachers’ Retirement System of Alabama and the Employees’ Retirement System of Alabama). It’s going to be fun to see, with the benefit of hindsight, the quality of due diligence!

Or lack thereof.

• Jurisdiction: S.D. of New York (Judge Chapman)

• Professionals:

  • Legal: Kirkland & Ellis LLP (Christopher Marcus, Lauren Friedman, W. Benjamin Winger)

  • Claims Agent: Omni Management