Rules and Practice of Corporate Divisions in China: Sub-Optimal Judicial Practice and Conflicting Regulatory Objectives

Abstract

For China, in the field of corporate divisions, what matters most is not the rules, but the fashion in which courts and regulatory agencies implement those rules, in association with other set of rules which have little to do with corporate law. In terms of the volume of transactions of corporate division and the volume of creditor’s litigation, there is a strong contrast between close corporations and listed corporations in China, extremely high for the former and close to zero for the latter. In this paper, it is argued that such too high a rate of litigation for close corporations and too low a number of transactions for public corporations are the results of sub-optimal judicial practice and sub-optimal regulations. For close corporations, judicial practice matters enormously. A hotly debated legal issue is relating to what I called an “assets-specific joint and several liability rule” created by court with respect to certain restructuring transactions. The error rates and administrative costs of such a new form of liability are likely to be very high, which led to too many costly litigation and won’t help court achieve the goal of protecting creditors’ interests. For public corporations, there’s close to zero corporate division transaction in China. In this paper, I offer a novel explanation: the co-existence of sub-optimal regulation of the stock market by CSRC and the regulation of state-owned enterprises (SOEs) by SASAC. Given the long line of issuers waiting to receive approval of IPOs by CSRC, any corporate division transaction that is to result in a new IPO is likely to suffer a long waiting time for the approval by CSRC. Furthermore, the two regulators are likely to push for the price of the corporate division transaction in exactly the opposite directions due to their distinctive regulatory objectives: CSRC is to protect the interests of shareholders of public companies as a whole and the SASAC to maximize the price that SOEs can get in selling interests to non-state-affiliated entities. To illustrate the above point, this paper provided a close review of two cases: (1) the first and only one corporate division transaction that has ever been successful completed, and the (2) a failed attempt of corporate division by a listed company that seems the only other attempt of corporate division ever reported to the public, both in China’s domestic stock market. Unless both regulatory regimes are substantially reformed, corporate division would remain exceptionally rare in China’s domestic stock market, continuing to depress efficient transactions and to reduce social welfare.