due to the outbreak of COVID-19, more than 80 companies listed in A-share market have bought back their shares from 1 January 2020 to date, and 80% of these repurchases are for equity incentives.
Article 142.2 of the Company Law, revised in 2018, provides that if shares are bought back – for employee stock ownership plans or equity incentives, for converting the convertible corporate bonds issued by the listed company into the company’s shares, and for maintaining the corporate value of the company and shareholders’ interests – a resolution may be made at board meeting level, with a quorum of no less than two-thirds of the directors, as per the articles of association or authorization of the shareholders’ general meeting. This share repurchase mechanism, which is based on the idea of “giving priority to efficiency”, is referred to by the author as the authorised resolution mechanism.
Two new circumstances to which the authorised resolution mechanism may apply.
Among the three circumstances to which the authorised resolution mechanism applies, “repurchase of shares for employee stock ownership plan or equity incentives” is consistent with the purpose of rewarding staff members with shares, as provided in the previous version of the Company Law. “Using the repurchased shares for converting the convertible corporate bonds issued by the listed company into shares” and “maintaining the value of the company and shareholders’ interests” were added in the 2018 revision.
(1) Using the repurchased share for converting the convertible corporate bonds issued by the listed company into shares. In previous practice, holders of convertible bonds could claim conversion into shares to the listed company as per relevant agreement. If the listed company was unable to provide the shares, it could resort to additional issuance of new shares. Therefore, article 16.3 of the Securities Law, before its revision in December 2019, provided that listed companies shall issue convertible corporate bonds in compliance with both the conditions for issuance of corporate bonds and the conditions for issuing new shares.
This provision of the Securities Law ignores the fundamental properties of convertible corporate bonds and holds down its value as a debt financing instrument of listed companies in the capital market. Article 142 of the Company Law adds a legitimate circumstance of share repurchase, namely, “using the repurchased share for converting the convertible corporate bonds issued by the listed company into shares”, to lift the obstacle in listed companies’ issuance of convertible corporate bonds.
In addition, article 15.3 of the Securities Law, revised in December 2019, includes: “… except that the listed company repurchases its shares and uses them for converting corporate bonds as per the measures on raising corporate bonds.” This proviso remarkably enhances the competitiveness of convertible corporate bonds as a financing instrument in the capital market.
(2) Maintaining corporate value of the listed company and shareholders’ interests. In the author’s opinion, the Company Law establishes the following rules of value judgement by including “maintaining corporate value and shareholders’ interests” as a limitation for share repurchase: (1) although the board of directors makes the resolution on share repurchases with consideration to multiple factors, its primary consideration should be corporate value. In other words, corporate value ranks at the top in the hierarchy of considerations for decision-making; and (2) when a resolution on share repurchase is made, no other factors (e.g., interests of the board and its members) should be placed above corporate value and shareholders’ interests.
Procedures of the authorised resolution mechanism for share repurchase.
(1) Rules of resolution. If the authorised resolution mechanism is adopted, the resolution of the board meeting requires a quorum of no less than two-thirds of directors in accordance with the Implementation Rules on Share Repurchase by Listed Companies. If the repurchased shares are to be sold later, such sale should also be subject to the resolution of the board.
It is worth noting that the implementation rules merely specify the number of directors who attend the board meeting, rather than the number of directors who vote for the repurchase. In this regard, the author suggests that article 111.1 of the Company Law should apply, namely, the resolution on share repurchase should be passed upon the consent of one-half of the board.
(2) Filing procedures. Article 23.1 of the Measures on Administration of Listed Companies’ Buying Back the Shares Held by the Public (Trial), implemented from 2005, provides that: “If the CSRC [China Securities Regulatory Commission] does not raise any objection within 10 working days of acceptance of the filing materials for share repurchase, the listed company may implement its repurchase plan.”
Even though the context indicates that the measures are only applicable to share repurchase for reduction of registered capital, the author believes that the measures are higher than the implementation rules, and the above-mentioned filing procedures provided in the measures should be applicable to all circumstances of share repurchase through the authorised resolution mechanism, unless any normative document explicitly specifies otherwise.
In addition, the author reminds listed companies that although the revised rules on share repurchase loosen the excessive restrictions on share repurchase of listed companies, they increase the risk of compliance for insider trading and market manipulation that confronts listed companies and their boards at the time of share repurchase. The listed companies and their boards are advised to handle this risk with discretion.
Chen Yu is a trainee lawyer at Grandway Law Offices
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