[HONG KONG] For decades, Kelly Zong had been known as the only child to her late billionaire father, the founder of beverage empire Hangzhou Wahaha Group. His effort to groom her as a successor was hailed as a model for Chinese entrepreneurs during the one-child policy era.
But Kelly is now grappling with two overlapping legal challenges stemming from unresolved matters left behind by her father, cases that could set a legal precedent for wealth succession in China and cast a shadow over the reputation of one of the country’s most iconic beverage empires.
In a Hong Kong court this month, Kelly was asked to help set up three trusts worth US$2.1 billion for people who identify as her “half brothers and sister” following what they say were her father’s directives. The case has raised eyebrows and lit up on Chinese social media.
Separately, the 43-year-old heiress is being sued by some former Wahaha employees seeking to void a 2018 share buyback, according to sources familiar with the case, who requested not to be named because it cannot be accessed by the public. The employees argue that the repurchase price was unfairly low, the sources said. The lawsuit has been reported by local media, including Caixin.
Wahaha’s labour union said the share repurchase move was approved by staff representatives and was lawful, according to a September statement it posted on social media platform Weibo.
The cases have once again thrust Wahaha’s leadership and its ownership structure into the spotlight, reminiscent of the corporate power struggle following the death of founder Zong Qinghou. The disputes also threaten to derail Kelly’s long-standing efforts to take all or part of Wahaha public, following previous failed attempts.
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Wahaha’s affairs are also a government concern, as a Chinese state-owned firm has a 46 per cent stake and the company is a flagship enterprise for Hangzhou, where it is headquartered. Kelly owns 29.4 per cent, while the group’s staff union holds 24.6 per cent, according to Qichacha.
“Chinese family business founders need to take careful note of the Wahaha case,” said Marleen Dieleman, family business professor at IMD based in Singapore. “Especially when founders have smaller stakes, succession can quickly spiral into a battle for control.”
Since Kelly took over as chairwoman in August last year, some of Wahaha’s existing production facilities have been shut down, leading to layoffs as part of business restructuring, the sources said.
Kelly has been accused of trying to transfer a series of Wahaha’s trademarks and some production of its water business to external entities, according to a March letter seen by Bloomberg News that was addressed to both state-owned and individual shareholders of the company’s water business unit.
Wahaha said in a statement in February that its trademark transfers were lawful and it did not harm the company’s operation or assets. The move awaited approval from the country’s intellectual property watchdog, it added at the time. Representatives for Kelly and Wahaha did not provide comments on multiple queries for this story.
Hong Kong case
The Zong family has a family fortune of at least US$3.3 billion, according to the Bloomberg Billionaires Index.
The Hong Kong court case offers a rare glimpse into the family feud within the closely held group, which reported around 70 billion yuan (S$12.5 billion) in revenue last year, according to local media.
The three plaintiffs, Jacky, Jessie and Jerry Zong, filed the lawsuit in December against Kelly and Jian Hao Ventures, a British Virgin Islands vehicle controlling an HSBC Holdings bank account in Hong Kong. The suit sought to disclose the assets held in the account and to prevent Kelly from moving them.
One month before Qinghou passed away in February last year, he gave a ‘hand-written instruction’ to one of his subordinates, asking the source to “get ready to go to Hong Kong. Set up trusts at HSBC, US$700 million each”, according to statements from the attorney for the plaintiffs in court on Jul 11.
Shortly after, when they found out the account had a balance of around US$1.8 billion, the senior Zong said: “If the USD is not enough, covert yuan,” and told the source to “set up the two for Jacky and Jessie first”, the plaintiffs’ lawyer said at the hearing.
The plaintiffs’ lawyer said that Kelly had agreed on Feb 2 last year to follow an instruction from her father to set up the trusts funded with money from Jian Hao, which counted Qinghou as the sole director.
Paperwork for the three trusts remains stalled, with no final agreement in place. Kelly’s lawyer argued that the handwritten instructions were not addressed to her, and that it’s unclear where the funding to cover a US$300 million shortfall would come from.
“We agreed to set up the trusts from the start, but only on the condition that the trust assets would be clearly defined,” Kelly’s lawyer said.
The Hong Kong High Court will hand down a decision on Aug 1, according to its website.
The delay in setting up trusts has prompted the three half-siblings to also file a lawsuit in Hangzhou with similar demands.
“In business families, conflict can be severe as the stakes are high and conflict is both financial and emotional,” said Dieleman. BLOOMBERG
