Sub-optimal judicial guidance and conflicting regulatory objectives

Abstract

What matters most is not the law on corporate division, but the fashion in which court and the regulatory agencies implement law, in association with other set of rules which may have nothing to do with corporate division. Protection of creditors and minority shareholders is rather standard. What’s peculiar in China in this field is the strong contrast between the two types of corporations: close corporations and public corporations with their shares listed and traded in the domestic A-share market in China. In terms of the volume of transaction of corporate division as well as the volume of litigations, it is extremely high for the former and close to zero for the latter. For close corporations, judicial practice matters enormously. A hotly debated legal issue is relating to an assets-specific joint and several liability created by court with respect to certain restructuring transactions, which is based upon an analogy drawn by the court with the joint and several liability in the case of corporate division. The error rate and administrative costs of such a new form of liability are both too high, resulting in costly litigations, failing the intention of the court to protect creditors’ interests. For public corporations, the apparent absence of corporate division in the market is inevitable due to sub-optimal regulation of the stock market as well as state-owned enterprises (SOEs), which are the majority of firms in this market. To permit more corporate division of public corporations would necessarily interfere with the current regimes of initial public offerings (IPOs), subject to discretely approvals by the China Securities Regulatory Commission (CSRC). Meanwhile, the pricing for asset transfer in corporate division of a public corporation is likely to be pushed towards opposite directions by each of the two regulators: CSRC and the State-owned Assets Supervision and Administration Commission of the State Council (SASAC). Unless the IPO in the A-share market evolves to a more predictable and less costly exercise and the floor-price for asset transfer policed by SASSAC is modernized, corporate division would remain exceptionally rare in China’s domestic stock market.