A look at listed company restructurings that failed in the first half of 2015

According to data announced at the 2015 working meeting of the China Securities Regulatory Commission (CSRC) Listed Company Acquisition and Restructuring Review Committee, 12 of the 53 restructuring plans reviewed were not approved between 30 December 2014 and 25 June. Further study of the cases that did not pass is required to guard against and resolve legal issues that may be encountered during failed restructurings.

Potential issues

Lack of compliance. The committee rejected Guangdong Weihua Corporation’s restructuring plan in January. The Committee’s review opinion was that certain assets the plan called to purchase had not undergone two procedures – the Ministry of Environmental Protection’s review of environmental protection facilities and the Ministry of Industry and Information Technology’s approval for rare earth industry access.

The plan thus did not comply with article 11 of the Measures for the Administration of Material Asset Restructurings of Listed Companies, i.e. they were not in compliance with state industry policies or with laws and administrative regulations on, e.g., environmental protection, land management or prevention of monopolies.

Relevant state industrial law generally are preconditions and compulsory requirements for restructuring plan approval. A plan that does not satisfy these requirements thus has a significant risk of failure.

Lack of transparency in disclosure. The parties to a listed company restructuring will often opt, in their disclosure or provision of information, to not disclose information or otherwise falsely disclose certain information notwithstanding where the measures require that parties warrant that all information provided or disclosed be true, accurate and complete. This is done for a variety of factors, including the major shareholder’s consideration of its own interests.

CSRC consistently has set strict disclosure requirements for restructurings of listed companies. Insufficient or non-transparent disclosure may result in the restructuring plan not being approved. An important factor in the failure of approval for the restructurings of Beijing Leadman Biochemistry, Henan Tongda Cable and Tianjin Guangyu Development was insufficient or nontransparent disclosure.

Lack of continued profitability or an effective corporate governance structure. Articles 11 and 43 of the measures set out specific provisions in respect to restructuring plans enhancing the continued operating capacity and profitability of listed companies and maintaining the companies’ independence.

A going concern of any restructuring plan is that it should be conducive to enhancing the quality of the assets of a listed company, improving its financial position and strengthening its existence; it should also be conducive to reducing the listed company’s connected transactions and strengthening its independence. This serves not only as protection for the assets and independence of the listed company, but also as protection of the rights and interests of investors and the majority of shareholders.

The main reason that the restructuring plans of Anhui Fengyuan Pharmaceutical, Guangdong Qunxing Toys, Zhejiang WHWH Industry, Beijing Leadman Biochemistry, Beijing Ultrapower Software and Top Resource Conservation Engineering failed to pass review is that they spelled relatively large uncertainty for the listed companies’ future profitability and would have affected their corporate governance structures.

Solutions

Whether a listed company’s restructuring plan is compliant often is seen as the crux for the plan’s success. It is thus imperative to have a full understanding of state industrial law and policy when planning a restructuring – particularly the administrative laws and regulations on environmental protection and monopoly prevention. It is necessary to carry out a comprehensive projection and review of how a plan may pose a risk of violating the law so as to be on guard against risks and eliminate them to the greatest extent possible.

Information is disclosed primarily to create a fair playing field for all parties and to prevent improper gains through insider trading. Accordingly, disclosure must be fair, timely and compliant.

When planning a restructuring, disclosure needs to focus on whether there will be a change in actual controller, whether the information will expose the company to legal risks and the impact that the information might have on the company’s independence.

Provided that the disclosed data is accurate, attention needs to be paid to how completely the data is presented, so as to avoid any unnecessary risks.

In stressing listed companies’ profitability and corporate governance structures, the restructuring review committee aims to enhance restructurings and the growth potential of listed companies. The plan should be conducive to strengthening a listed company’s continued profitability.

First, the plan must strive to enhance the company’s competitiveness as well as profitability. It must also reduce any uncertainties which may harm its profitability. Second, the plan must provide sufficient and reasonable rationale for how to strengthen the company’s continued profitability, so as to avoid any unnecessary misunderstandings.

Restructuring planners need to avoid connected transactions to the greatest extent possible so as to maintain a sound and effective corporate governance structure. They must also ensure the position and function of the board of directors, supervisory board and shareholders’ general meeting in the company’s governance so as to maintain the listed company’s independence from its actual controller and connected parties in terms of business, assets or related matters.

Legal issues encountered during the restructuring of a listed company will significantly impact whether the restructuring plan will succeed. Attention must particularly be focused on legal issues encountered in failed restructurings.

Those who are planning restructurings should take care to review examples of prior cases where restructuring plans did not obtain approval, taking note of how the companies resolved their issues. Getting the bigger picture allows planners to take preventative measures and make any revisions to the restructuring plan necessary, so that the restructuring plan can in the end gain the approval of the committee.