PDF《Corporate Restructuring in China》

2 Another characteristic of Chinese listed firms is the prevalent ownership by large (controlling) shareholders. In many corporations worldwide, large shareholder plays an intriguing role (see La Porta, Lopez-de-Silanes, and Shleifer (1999) on

27 wealthy economies;

Faccio and Lang (2002) on western European countries, and Claessens et al. (2000) on East Asian countries). In those countries, large shareholders are known to have a strong financial incentive to monitor firm management. Their actions mitigate agency cost resulting from the separation of ownership and management, and therefore enhance firm value. However, a different agency conflict could arise. As large shareholders enjoy control power over designating and monitoring managers, they could become entrenched and pursue self-interest by expropriating minority shareholders (private benefit of control). Large shareholders in China, however, were not able to reap cash flow benefits from their efforts in maximizing firm value. As analyzed by La Porta et al. (1999), large shareholders have strong incentive to engage in value maximizing activities for the firm value. But this would not be the case in China, as the shares of large shareholders (state shares/legal person shares) could not be liquidated in the market. Rather, state/legal person shares have to be transferred via private negotiation, often based on asset value. Loosely speaking, shares of Chinese large shareholders were indefinitely locked up. As a result, large shareholders lose incentive to engage in value-maximizing investment activities, but take the opportunity to benefit themselves by expropriating minority shareholders. Operation of many listed firms in China is known to be plagued by serious related party transactions2 , with large shareholders tunneling corporate resources into their own pockets. Consequently, firm value decreases, investors lose their confidence in the stock market, and the overall market suffers. In the year of 2005, the China Securities Regulatory Commission (CSRC, 中国证监会) undertook a revolutionary strategy of share structure reform to dismantle the distinction

2 Most of listed companies in China are carve-outs from business of previous state-owned enterprises (the promoters). Many assets are left behind with the promoters. As a result, the close and on-going business relationship existing between the promoter and the listed company generates significant related-party transactions.

3 between tradable and non-tradable shares. It stipulated that all shares of listed firms shall be freely traded by the yearend of 2006. In effect, the new regulation has re-connected the important link between the wealth of large shareholders and firm value. In this article, I suggest that some firms respond to the reform on non-tradable shares (股权分置改革) by voluntarily engaging in transactions which streamline and consolidate the business operations of firms within the same business group. This paper exemplifies such cases of corporate restructuring and makes a detailed analysis of three important corporate restructuring transactions. All three corporate restructuring transactions resulted/ will result in the listing of a consolidated business group (整体上市). My analyses illustrate that those restructuring transactions, though initiated by large controlling shareholders, enhance firm value and benefit both large and minority shareholders at the same time. In some cases, the parent business group voluntarily infuses good assets into its listed subsidiary to be traded as consolidated business group. Such transaction enhances both the wealth of large shareholders and firm value, while at the same time greatly reduces the potential tunneling channel through related party transactions. The restructuring of Angan New Steel is a good case of corporate consolidation via asset infusion3 . In other cases, the business group conducts freeze-out transactions, in which the parent firm buys back the minority shares of subsidiary firm using a cash or stock offer. After the freeze-out, the subsidiary firm would be delisted from stock exchange, and would be dissolved and its assets absorbed by the parent. Consequently, the combined assets would be traded as a consolidated business group. ........