Mega raises $2.98m from shareholders, further diluting minorities

Mega, the file storage and encryption firm founded by Kim Dotcom, has raised a further $2.98 million from shareholders, flooding its register with new stock and effectively giving its two biggest shareholders the ability to force a sale.

The Auckland-based company's two biggest shareholders now own more than three-quarters of Mega, passing the threshold needed to trigger a mandatory sale by all investors if they agree to a cash or non-cash offer through Mega's drag-along rights. Those rights were introduced when the company's constitution was updated in July, which also added specific provisions for listing Mega.

The company sold some 42.6 million shares at 7 cents apiece in a 50 for one rights issue on October 29, according to documents filed to the Companies Office. Of Mega's 18 shareholders, 11 took up a portion of the offer. Beijing-based Li Zhi Min, who bought a cornerstone stake in Mega from Shen Zhao Wu in July, and Auckland-based Yang Jianhong, who joined the share register on August 6, put up about $2.2 million of the new equity.

Li bought 20.6 million shares for $1.45 million, giving him about 48.4% of the company, while Yang subscribed to 11.4 million shares for $799,000, and taking his stake to about 26.8%.

"Mega is continuing its high growth path, but no special news at this stage," chairman Stephen Hall said in an email.

The transactions expanded the shares on issue by about 45 times and value Mega at $3.04 million at the 7 cents price. The company raised $7.5 million in August at $13.14 a share, of which Li stumped up $4 million and Yang $3 million, giving the pair 67%. At the same time the company issued 279,156 shares at $1.79 in an offer it described as a "2:1 rights issue".

Earlier this year Mr Dotcom told Slashdot users in a Q&A session that he's no longer involved in the company in a management or shareholding capacity after it "suffered from a hostile takeover by a Chinese investor who is wanted in China for fraud" through the use of "a number of straw-men and businesses to accumulate more and more Mega shares." He later claimed Bill Liu, who's also known as William Yan, controls Mega through numerous associates.

Yan's assets were frozen as part of a joint New Zealand and Chinese police investigation into an alleged money laundering ring, including the 16% Mega stake held via TEY Trustee. That's since been diluted to just 0.05%.

Mega later denied the accusation it had been subject to a hostile takeover, saying more than 75% of shareholders supported recent equity issues.

The company's ownership and boardroom has undergone a shuffle since Shen, a donor to the National Party via his Contue Jinwan Enterprise Group, sold in July and resigned as a director, followed closely by Australia-based Brian Clarkson. Auckland lawyer Jesse Nguy, whose firm Jesse & Associates held Yan's Mega shares before they were frozen, and investor John Sorensen, have since joined the board, which is rounded out by former chief executive Hall, who is currently Mega's chief compliance officer.

Consul Investments, a unit of an Auckland-based private equity and investment banking group, is now Mega's third biggest shareholder with 8.6% after buying 3.7 million shares for $258,000, followed by Dotcom's estranged wife Mona, who participated in the rights issue via Coatesville Trustee Services, buying 3.25 million shares for $228,000, and increasing her stake to 7.6% from 6.8%.

In May, the Auckland-based company aborted plans to list on the NZX via shell company TRS Investments after a series of delays in gaining approvals.

Mega was launched by Dotcom in 2013 to replace his Megaupload empire, which was frozen after his high profile arrest in Auckland at the behest of the US federal government in early 2012. He stepped back from the firm to fight his extradition and bankroll the failed election campaign for the Internet Party, and has recently said he plans to launch a new non-profit, open source, free, unlimited and encrypted cloud storage service once his non-compete clause with Mega ends at the end of the year.

(BusinessDesk)