CDC: Shareholder group may sue exchangeables holder blocking dividends

By Angela McDaniels

Tacoma, Wash., Nov. 17 - CDC Corp. said that some of its shareholders are considering filing a lawsuit against Evolution Capital Management LLC, the last remaining non-affiliated holder of its 3.75% senior exchangeable convertible notes due 2011.

The shareholders believe Evolution's actions have harmed the company's business, according to a company news release.

Evolution and CDC have been fighting a protracted legal battle about a put option that CDC said is no longer exercisable. Evolution believes this is a default and is seeking the repayment of its convertibles plus damages.

On Nov. 10, the Supreme Court of New York granted Evolution's motion for a preliminary injunction against the company. As a result, CDC is blocked from issuing dividends to its shareholders and cannot unilaterally nullify the covenants in the note purchase agreement or repudiate certain affirmative and negative covenants.

The company plans to oppose the injunction and is considering amending its complaint to add additional claims and defendants.

CDC said it believes that Evolution has taken "substantial steps to harm the company and its prospects by among other things, interfering with CDC's management and operations and by actively pursuing other opportunities that were detrimental to CDC and its shareholders and that the company believes were inconsistent with its obligations as an unsecured noteholder."

"As our non-GAAP cash and cash equivalents were $107.0 million as of the end of the second quarter of 2010, we believe we have enough liquidity to meet any obligations we may have under the notes," CDC chief executive officer Peter Yip said in the release. "We will continue our efforts to have a good-faith, open dialogue with Evolution on the topic of settling our respective claims against each other."

As previously reported, CDC and CDC Delaware Corp. - the holder of $124,775,000 principal amount of notes - amended the notes on Nov. 11, 2009 to change the definition of qualified initial public offering to provide that CDC Software Corp., CDC Games or any of their respective subsidiaries can consummate a qualified IPO and to reduce the amount of proceeds needed to achieve a qualified IPO to $40 million from $100 million.

As a result of the change, the company believes the put option previously granted to noteholders is no longer exercisable. CDC said the put option would have required it to pay approximately $54.1 million no later than Dec. 16, 2009, which includes the principal amount of notes held by Evolution plus accrued interest at the rate of 12½% retroactive to the issue date of Nov. 13, 2006.

CDC is a Hong Kong and Atlanta-based enterprise software and new media company.

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