NQ Mobile Management Now Able To Pledge Shares For Loans

NQ Mobile Inc (ADR) (NYSE:NQ) shares continued rising again, climbing nearly 6% in premarket trading after surging than 17% on Monday. Investors responded to Morgan Stanley (NYSE:MS) disclosing a more than 5% passive stake in the company. But underneath this news and the busyness of the holidays, something else has happened. A questionable change to the company’s bylaws has passed a shareholder vote.

NQ Mobile changes its bylaws

We spoke with corporate legal experts earlier this month about the changes NQ Mobile Inc (ADR) (NYSE:NQ) wanted to make to its bylaws. They now allow management to pledge their shares for personal loans—something which has gotten companies like Chesapeake Energy Corporation (NYSE:CHK) into hot water in the past.

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Some lawyers told ValueWalk that the change was no big deal, saying it was just basic housekeeping. Shareholders apparently weren’t worried either as they passed the amendment at the vote two days before Christmas. Other lawyers said this change was interesting because it goes in the opposite direction of what other companies are doing, which are changing their bylaws so that management can’t pledge their shares for personal loans.

NQ Mobile’s change may or may not turn out to be problematic for shareholders. It should be noted, however, that the Chinese company is not subject to a Securities and Exchange Commission rule which requires insiders to notify it when they pledge shares for a loan. As a result, shareholders might not have warning of this danger sign if it happens. Of course there’s no way we can know what NQ Mobile has in mind with this change, since it did not respond to our requests for a statement. Again, this could be merely a harmless change—or it might not be. Every investor should make their own judgment about what this change means.

NQ Mobile ignores Muddy Waters

Recently the short-selling firm Muddy Waters, which is responsible for initiating concerns about NQ Mobile Inc (ADR) (NYSE:NQ), called out the company again and even offered to pay for an independent audit of the company’s financial statements. He said it would clear up the questions about the company’s finances, although it would seem that as of now, Muddy Waters is nearly the only firm concerned about the company’s finances.

NQ Mobile also did not respond to requests for a response to Muddy Waters’ offer.

DISCLOSURE: I have no position in any of the companies mentioned.