Focus on capital obligations of major bank shareholders

By Wu Jiejiang, Jingtian & Gongcheng
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The China Banking Regulatory Commission (CBRC) issued the Interim Measures for the Administration of the Equity of Commercial Banks (the Measures) on 5 January 2018 to regulate the acts of the major shareholders of commercial banks, protect the legitimate rights and interests of commercial banks, depositors and other customers, safeguard the legitimate interests of shareholders, and promote the sustainable and healthy development of commercial banks. The measures took effect on the date of its issuance.

吴杰江 WU JIEJIANG 竞天公诚律师事务所 合伙人 Partner Jingtian & Gongcheng
吴杰江
WU JIEJIANG
竞天公诚律师事务所
合伙人
Partner
Jingtian & Gongcheng

The measures highlight regulation on major shareholders to curb their abuse of rights, the hollowing out of banks, etc. Major shareholders of a commercial bank refer to those that hold or control at least 5% of the shares or voting rights in a commercial bank, or hold less than 5% of such bank’s total capital or total shares but exert material influence on the operations and management of the commercial bank.

The measures’ regulation of major shareholders of commercial banks includes one aggravating obligation on shareholders – major shareholders undertake a capital supplementation obligation, requiring them to undertake in writing to supplement the capital of the commercial bank when necessary and to annually report on their capital supplementation capacity to the CBRC or its agency via the commercial bank.

The commercial bank must include the aforementioned content into its articles of association, with the content constituting a written contract between the commercial bank and the major shareholders. In accordance and when applicable, major shareholders are under obligation to supplement the commercial bank’s capital upon the request of competent authorities or the commercial bank. The regulatory requirement of capital supplementation obligation of major shareholders of commercial banks in the measures is not the first time that it has been stated, but rather, based on previous documents, it reiterates and emphasizes that major shareholders are required to give a long-term capital supplementation commitment when they acquire equity interest in a commercial bank.

The measures also specify that existing major shareholders are required to annually report on their capital supplementation capacity to the CBRC or its agency. This requirement sets out a supplementary provision on the capital supplementation obligation of existing major shareholders of existing commercial banks, and gives further implementation guidance.

The capital supplementation obligation borne by the major shareholders of commercial banks exceeds the scope of the limited liability of shareholders under the Company Law, but is also quite different from the more stringent disregard of corporate personality by “piercing the corporate veil”.

The main differences are:

First, the conditions for the application and their boundaries are different. The capital supplementation obligation is such that when the bank’s capital fails to satisfy regulatory requirements, the major shareholders must undertake the obligation to supplement the capital of the commercial bank through such means as increasing its core capital, etc. The scope of this obligation is limited to satisfying the relevant regulatory indicators. In contrast, the disregard of corporate personality applies in instances of abuse of the corporate personality of a company, with the precondition for its application being improper control of the company, mixing of property, mixing of business, or mixing of organizational structure by the shareholders. The scope of liability is relatively uncertain, being related to the amount claimed by the creditors.

Second, the application mechanisms are different. The capital supplementation obligation is implemented by administrative orders or compulsory measures taken by regulatory authority, or by the claims made by commercial banks according to its articles of association. The disregard of corporate personality, in contrast, is usually applicable in civil proceedings. According to the provisions on “disputes for compensation involving shareholders’ abuse of the company’s independent legal personality or abuse of limited liability of shareholders”, of the Regulations on Causes of Action for Civil Cases, where a creditor would claim the disregard of corporate personality, it must institute a civil action in a People’s Court citing the above-mentioned provisions.

Third, the application objectives are different. The purpose of the capital supplementation obligation is to ensure that the commercial bank is in compliance with the regulatory indicators and requirements so that it can operate its business normally to maintain financial security and stability. In contrast, the doctrine of disregarding the corporate personality is mostly used by the creditors of commercial banks to preserve their creditors’ right.

Fourth, the reasons for creating the two mechanisms are different. The capital supplementation obligation is to prevent moral hazard. The disregard of corporate personality, on the other hand, is a post-relief measure used when a shareholder has abused its limited liability.

Finally, the natures of the obligations/liabilities are different. The capital supplementation obligation is a statutory obligation. Regardless of whether there was subjective fault or not, it arises because the particularity that the extent of financial industry risk is broad, and it does not constitute an exception to the doctrine of limited liability. The disregard of corporate personality is liability for fault, namely, the shareholder is liable for the fault of abusing corporate personality, which is related to the acts of the shareholder, and it constitutes an exception to the doctrine of limited liability.

The stringent obligation doctrine arose from innovation in financial regulatory practice, and its basis is pragmatism, not pre-tested legal concepts and theory. The considerations and basis of the practical functions of the stringent obligation doctrine lie in the following two aspects:

(1) Compared with regulators, major shareholders of a commercial bank can utilize their position as shareholders, facing contingent capital supplementation pressures, actively understand and evaluate the appropriateness of business activities of the commercial bank and its risk prevention mechanism, and implement necessary intervention mechanisms of corporate governance to avoid losses and ensure control of risk;

(2) It can provide a time buffer. Before risk exposure to the depositors of the commercial bank arises, the regulator has the chance to require major shareholders of the commercial bank to fulfil their capital supplementation obligation to mitigate such risk.

The stringent obligation doctrine, as an active preventive measure, nips potential risks in the bud and is much better at protecting the interests of public creditors, such as the depositors of a commercial bank, than the post-relief measure by disregarding corporate personality. It can also more effectively guard against financial risk.

Wu Jiejiang is a partner at Jingtian & Gongcheng

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