CDC holders get preliminary injunction under 3.75% exchangeable notes

By Susanna Moon

Chicago, Nov. 11 - CDC Corp. holders of its 3.75% senior exchangeable convertible notes due 2011 said the Supreme Court of New York granted their motion for a preliminary injunction against the company.

E1 Fund Ltd., Evolution CDC SPV Ltd. and Evolution Master Fund Ltd. have filed a lawsuit against CDC to try to collect more than $50 million under the notes.

As a result of the ruling, CDC is enjoined from unilaterally nullifying the covenants in the parties' note purchase agreement while the litigation is pending and from repudiating affirmative and negative covenants, according to an Evolution press release.

The court said that "CDC's alleged unilateral termination of the negative covenants and threatened breach of its affirmative obligations subverts the purpose of those negative and affirmative covenants and rights that Evolution specifically bargained for in order to protect its investment in CDC" and that "Evolution has demonstrated that it is likely to succeed on the merits of its claims insofar as both amendments appear to violate express provisions of the NPA and the notes," the release said.

CDC said on Sept. 1 the last remaining non-affiliated holder of its 3.75% exchangeables sought to restrict the company from issuing dividends to its shareholders.

The company served an opposition to the motion for preliminary injunction asserted by the convertibles holder, Evolution Capital Management LLC. Evolution's motion also seeks to enforce, and determine the applicability of, some negative covenants in the convertibles.

The latest motion is in addition to Evolution's earlier claims against CDC alleging default and seeking repayment of the convertibles.

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 about $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 filed a lawsuit against Evolution alleging breach of non-disclosure agreements, breach of the note purchase agreement relating to convertibles, breach of the convertibles and tortious interference with business relations. The company is seeking a recovery in excess of $295 million.

In April, Evolution's motion for summary judgment in lieu of complaint was denied.

Both matters are in discovery in the Supreme Court of the State of New York.

Based on discovery so far, the company 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 interfering with CDC's management and operations and by actively pursuing other opportunities that were detrimental to CDC and its shareholders and that were inconsistent with its obligations as a noteholder."

CDC chief executive officer Peter Yip said that the company will "vigorously pursue" its rights and expects to "prevail" when the court hears arguments on the latest motion on Sept. 8.

"We believe we have enough liquidity to meet any obligations we may have under the notes," Yip said in the release. "We will also continue to attempt to negotiate a fair and amicable solution to this overhang, as CDC Corporation has already successfully negotiated repurchases with all the 11 sophisticated noteholders including a partial settlement with Evolution."

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

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