CDC seeks second amended complaint against exchangeables holder

By Jennifer Chiou

New York, Jan. 25 - CDC Corp. is awaiting a court decision on its plan to amend its complaint and bring forward a second amended complaint against Evolution Capital Management LLC and related companies, the last remaining non-affiliated holder of its 3.75% senior exchangeable convertible notes due 2011, according to a 6-K filing with the Securities and Exchange Commission.

In November, shareholders were looking to file a lawsuit against Evolution, stating that they believe Evolution's actions have harmed the company's business, according to a previous company news release.

As already reported, 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.

On Dec. 23, CDC sought to amend its complaint and is seeking recovery of over $295 million for compensatory damages, interest, attorneys' fees, litigation expenses and injunctive relief.

The second amended complaint also asserts new claims for misappropriation, unjust enrichment, breach of fiduciary duty and constructive trust, with CDC also seeking to add the following as new parties: Brian Yeh, Adrian Brindle, Gareth Phillips, Michael Lerch and Derek Sulger, each of whom is or was a director or officer of Evolution or Lunar Capital China Equity Partners I LP.

In the complaint, CDC specifically alleges that:

• Evolution and its representatives undertook a campaign to mark their notes at a premium and to sell and repurchase notes in a pre-arranged transaction at that same premium, at a time the market and independent third parties valued the notes at below par;

• Sulger, through Lunar, knowingly participated in a rigged "window-dressing" sale and repurchase transaction with Evolution and its representatives;

• Evolution, aided by Sulger through the transaction, endeavored to influence the market by encouraging other holders to also mark their notes at a premium and to prevent the dissemination of information that accurately valued the notes at below par;

• Evolution's and Sulger's actions in this regard perpetrated a fraud on the market and further impeded the company's efforts to complete a qualified IPO; and

• Evolution and its representatives continued to mark their notes at a premium in order to receive a performance fee equal to the 20% of the appreciation of the aggregate net asset value of the fund on the date of payment.

The 6-K stated that the court has not yet decided on the company's motion and discovery is continuing.

In other news, on Jan. 6, Ross Systems, Inc., a subsidiary of CDC, filed motions in the Franklin County Circuit Court of the State of Alabama in connection with the adverse verdict returned by a jury on Dec. 3 in litigation between Ross and Sunshine Mills, Inc.

The suit was initiated in April 2008.

According to the SEC filing, Ross' motions included a renewed motion for judgment as a matter of law, challenging the satisfaction of certain elements of plaintiff's case at trial as well as a motion to stay execution of the judgment pending resolution of the post-trial motions. Arguments on the motions are set for Feb. 23.

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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