Bargaining for Compensation in the Shadow of Regulatory Giving: The Case of Stock Trading Rights Reform in China

Abstract

This article conducts a legal and economic analysis of the Chinese split share structure reform. Split share structure is a unique Chinese market phenomenon where shares were classified into different types with only certain types allowed to trade on the stock exchange. Recently, the Chinese regulatory authorities have initiated this reform which essentially requires the non-tradable shareholders to bargain with and pay compensation to the tradable shareholders for the right to trade. Under the legal analysis, we show that traditional approaches in private and public law fail to provide a valid legal or doctrinal basis for requiring non-tradable shareholders to compensate tradable shareholders for the right to trade. Even the more developed US regulatory takings jurisprudence would not provide the tradable shareholders with a right to compensation for the loss they suffered from the trading of non-tradable shares. This is where we turn to the new givings jurisprudence recently developed in the US. Mirroring takings jurisprudence that focuses on identifying which diminution/deprivation of property caused by the government must be compensated, givings jurisprudence seeks to determine under what circumstances do the beneficiaries of government actions must be charged for the benefit received. We argue for its merits and application to our Chinese scenario to provide a legal basis for reform. We then utilize economic analysis to evaluate the Chinese implemented reform. This helps us in identifying the significant reform risks and enables us to propose some recommendations. More importantly, we are able to discern invaluable practical lessons and useful pointers from the Chinese implemented reform that are highly relevant in the future developments and applications of the givings jurisprudence.