An analysis of the adjustment of shareholders' equity in the reorganization of listed companies.

Abstract: The reorganization system of listed companies, also known as the rebirth system of listed companies, refers to the legal system of listed companies that may or have occurred bankruptcy but have the hope of rebuilding, which are negotiated or forced by the parties to adopt the reorganization plan in accordance with the law to adjust their interests in order to save the enterprise, avoid bankruptcy and obtain rebirth. China's new enterprise bankruptcy law has introduced the reorganization system, so far nearly 20 listed companies have used the reorganization procedure to resume operations. In the process of reorganization of listed companies, the protection of shareholders' rights and interests is an important theoretical and practical issue. Therefore, this paper intends to make a brief analysis of the necessity of the adjustment of shareholders' rights and interests, how to adjust the shareholders' rights and interests and the problems in the adjustment.

Key words: listed company; reorganization; adjustment of shareholders' equity

The necessity of adjusting shareholders' equity in the reorganization of listed companies in 1..

(I) from the connotation of shareholders' equity adjustment.

The reorganization of listed companies is carried out when the assets are not sufficient to pay off the debts, and in the reorganization procedure, the adjustment of creditor's rights and the reorganization of equity are essential. Among them, the equity reorganization plan is the core of the reorganization procedure and the key to the success of the reorganization. Equity restructuring requires a reorganization plan to adjust the rights and interests of contributors, and a reorganization plan that lacks the content of the adjustment of the rights and interests of contributors is incomplete.

"The adjustment of shareholders' rights and interests, that is, the adjustment of investors' rights and interests, refers to the restructuring measures to adjust the equity structure of the reorganized enterprise, introduce new shareholders, reduce the shareholding ratio of the original shareholders or increase the investment of shareholders, so as to change the investment composition of the enterprise, optimize the governance structure of the enterprise, and make the enterprise reborn."^[1]

Thus, shareholders' equity is consistent with the trend of the company's overall development, with both prosperity and loss. The adjustment of shareholders' equity is to adjust the equity structure of the reorganization company, so as to change the company's investment structure, optimize the company's governance structure, so that the company can avoid bankruptcy and be reborn.

(II) from the legal status of shareholders of listed companies in the reorganization of the company.

Listed companies are restructured because they face bankruptcy, are in economic trouble and are unable to pay their debts. Therefore, the listed company is in the position of the debtor in the reorganization. The legal status of shareholders of listed companies in the reorganization can be seen from both internal and external aspects:

1. From an internal point of view, shareholders are the subjects who invest in the company or hold a certain share of the company's capital for other legal reasons, and enjoy the rights of shareholders.^[2]Therefore, shareholders, as investors of listed companies, enjoy the legal status of the main body of reorganization. Unless otherwise agreed by shareholders, shareholders can exercise the right to apply for reorganization, the voting rights of reorganization plan, the right to supervise the implementation of reorganization plan, the right to know and other rights according to their shares, and bear the legal risk of bankruptcy encountered by the failure of reorganization of listed companies.

2. From an external point of view, because the listed company is in the position of the debtor in the reorganization, the shareholders of the listed company, also known as the shareholders of the debtor, as the investors of the listed company, bear the risks and losses faced by the listed company as a result of the bankruptcy reorganization proceedings within the scope of capital contribution. However, at the same time, China's new Bankruptcy Law also stipulates the legal status of shareholders as subjects participating in bankruptcy reorganization, and clearly stipulates in Article 85: "If the draft reorganization plan involves the adjustment of the rights and interests of investors, a group of investors shall be set up to vote on the matter."

It can be seen that when a listed company is in bankruptcy reorganization, shareholders still enjoy certain rights and interests in the reorganization proceedings, and these rights and interests of shareholders have a positive effect on the reorganization of the company and the realization of the goal of "enterprise rescue", so it is necessary to adjust the shareholders' rights and interests in the reorganization of listed companies.

The principle and method of adjustment of shareholders' equity in the reorganization of listed companies in 2..

The principle of adjustment of shareholders' equity in (I) reorganization.

1, the principle of limitation of shareholders' rights and interests. Although shareholders still retain certain rights and interests in reorganization, the restriction of shareholders' rights and interests under the normal operation of the company has become a common practice of bankruptcy law in various countries. For shareholders, their right to distribute dividends and the right to manage the company, if the company is in financial distress, will further exacerbate the company's capital flows and the interests of multiple stakeholders, and is not conducive to building other stakeholders confidence in the smooth progress of the reorganization plan. Therefore, the principle of limitation of shareholders' rights and interests needs to be stipulated.

The principle of fair treatment. The principle of fair treatment means that if a contributor opposes a reorganization plan, the reorganization plan will ensure that these objecting groups are treated fairly, I .e., for the contributor group, that is, for shareholders of the same nature, the criteria for equity adjustment should be the same and cannot be treated differently.

The manner in which shareholders' equity is adjusted in (II) reorganization proceedings.

From the current practice of the reorganization of listed companies, listed companies entering the reorganization process have different approaches to the adjustment of shareholders' equity. Among them, the methods involved in the adjustment of shareholders' equity are summarized as follows:

1. Equity transfer

The transfer of shares refers to the transfer of shares to others by the shareholders of the company in accordance with the law, so that others become shareholders of the company.civil juristic acts. Equity transfer is a common scheme in the reorganization procedure of listed companies, the core of which is the transfer of equity and the conversion of corporate control. In reorganization proceedings, the transfer of shares is a draft reorganization plan formulated by the administrator or the debtor and submitted to the creditors' meeting for voting. When the creditors' meeting is adopted or the creditors' meeting is not adopted but the reorganization plan is approved by the court, it shall be implemented in accordance with the equity transfer plan in the reorganization plan.

How can the transferee of the equity transfer pay the consideration to acquire the equity of the restructured company? Generally speaking, a fair and reasonable valuation of the shareholders' rights and interests of the restructured company is made through an intermediary appraisal agency recognized by the court, and the parties involved in the equity restructuring negotiate and negotiate based on this appraisal result. At this time, if the result of the evaluation is that the shareholders' equity has been completely negative, since the equity investment will be completely wiped out in the case of bankruptcy and liquidation, the original shareholders will generally not have unrealistic unreasonable equity requirements for the consideration of rational commercial subjects; and new equity investors will generally make certain concessions in order to obtain the consent of the original shareholders to the equity restructuring arrangement. If the result of the assessment is that shareholders' equity remains positive, the new shareholders will generally also increase their share of equity under the new equity arrangement appropriately at a discount to the existing shares of the original shareholders. Especially for the original shareholders, in the face of the reduction or complete loss of their equity to get a certain value-added, which is already the best result under the bankruptcy proceedings, therefore, there will generally be self-knowledge, will not overcharge, which is considered to be a natural and natural arrangement.^[3]

(2) Reduction of capital

Capital reduction, referred to as capital reduction, refers to the act of reducing the registered capital of a company in accordance with the law. In the reorganization procedure, the listed company will reduce the capital as a reorganization measure, which can make the third party acquire the reorganization company, and then make the reorganization company quickly and effectively obtain the reconstruction.

The main common ways to reduce capital are share buybacks, cancellation of shares, reduction of par value and reduction of the amount of shares. Among them, share repurchase refers to the company in accordance with the law from the company's shareholders to buy their own shares. Only Article 143 of China's Company Law stipulates that a company may not acquire shares of the Company, but it also provides for a number of exceptions, in which the reduction of registered capital is one of the legal reasons for the repurchase of shares. It can be seen that it is feasible in our law to reduce capital by means of share repurchase. The cancellation of shares is regulated by South Korea law. For the reduction of face value and the reduction of the amount of shares of these two ways, China has successfully implemented the relevant cases.

3. Directional issuance of new shares

Targeted issuance of new shares, also known as targeted issuance, refers to the behavior of listed companies issuing new shares to a small number of specific objects through non-public direct negotiation. From the perspective of financing of listed companies, directional issuance of new shares is a way of raising capital; from the perspective of corporate control, the issuance of new shares leads to the dilution of the original shares. If it is not for the directional issuance of the original shareholders, the proportion of the shares of the original shareholders in the company will decline, and a large number of new shares will be directed to specific purchasers, the acquirer can control the company and achieve the purpose of the acquisition by virtue of the relative majority of the new shares in the listed company. Therefore, this private placement of new shares has become an effective way to acquire listed companies.

For listed companies in restructuring, the targeted issuance of new shares is the main means to achieve low-cost financing and equity changes. A reorganization plan often contains a change in equity, in which creditors acquire shares in the debtor's company and at the same time extend, forgive or inject assets into it. There are two main ways for creditors to acquire the shares of the debtor's company: first, the disposition of shares, I .e. the transfer of equity by the debtor company to the creditor compensation, and second, the issuance of new shares, I .e. the targeted issuance of new shares by the debtor company to the creditor.^[4]

The listed company in the reorganization adopts the way of issuing new shares to solve the financing problem, which can not only avoid the expenses related to registration, but also introduce the restructuring party in a targeted way, making the restructuring plan easier to realize.

Problems in the adjustment of shareholders' rights and interests in the reorganization of listed companies in 3..

How (I) Restrict Shareholders' Equity

When adjusting shareholders' rights and interests in reorganization proceedings, in order to prevent the problem of capital flow of the company as a debtor from further aggravating, the interests of various stakeholders are damaged, and certain restrictions on shareholders' rights and interests are required. But how can restrictions protect the interests of shareholders while safeguarding the interests of the company and its multiple stakeholders?

It has become a common rule of national legislation to restrict the control of shareholders in the normal operation of the company in the reorganization procedure. Through judicial practice, the United States courts have established the criteria for limiting shareholder control: first, the "insolvency" standard, I .e., if the company is insolvent, the shareholders have no control. The second is the "obvious abuse" standard. In the case of a company's solvency, the key to limiting shareholder control is whether the exercise of such rights constitutes a "clear abuse". China's enterprise bankruptcy law clearly stipulates that the debtor can manage its own property and business affairs in the reorganization process. In other words, as the debtor who continues to operate property and business affairs, it enjoys the responsibility of the administrator, which represents not only the debtor's own interests, but also the interests of the investors and creditors, as well as the position of the State or the interests of society.^[5]The highest authority of the debtor at this time is not the general meeting of shareholders, and the right of shareholders to manage the company should be restricted, primarily by the veto of the validity of the resolution of the general meeting of shareholders, and by the restriction of the right to distribute the proceeds of shareholders. Of course, this restriction should be fair and reasonable, only in this way can we make the listed companies in trouble get reborn faster.

(II) how new shares are issued when shareholders' equity is adjusted.

The purpose of the reorganization of listed companies is to solve their financial difficulties and resume normal business activities. One of the ways to adjust shareholders' equity in reorganization proceedings is to issue new shares, which is also the main way for listed companies to obtain financing in reorganization proceedings. Whether the debtor can obtain new financing in the reorganization process is often related to the success or failure of the reorganization plan.

As the listed company under reorganization does not have the sustainable profitability required by law, the financial situation is good, the size of net assets and other conditions for the issuance of new shares. Therefore, in order to ensure the smooth restructuring of listed companies, the law must open up refinancing channels for them, make special provisions on the issuance of new shares, and relax the conditions. Japan, for example, amended the conditions for the issuance of securities under the Commercial Code in the Corporate Reformation Act to enable companies to issue stocks or bonds in a reorganization to ensure the success of the reorganization. Therefore, the relevant laws of our country should also make special provisions on the issuance of new shares in the reorganization of listed companies, so as to ensure the smooth reorganization of listed companies.

(III) who is responsible for information disclosure

The information disclosure system is an important system established by the securities law, which is the concrete implementation of the principle of openness required by the securities law, and is also the legal obligation of listed companies. After a listed company enters the reorganization process, its basic requirement is the full disclosure of information, which is particularly important for protecting the interests of creditors and shareholders whose rights and interests are adjusted.

China's new Bankruptcy Law only provides for the materials to be submitted to the court when filing an application for bankruptcy in Article 8, and does not specify who should be responsible for the obligation of information disclosure. Different scholars have different opinions on who is responsible for the obligation of information disclosure, but in general, the opinion of Supreme People's Court Judge Zhao Ke is worth learning. He believes that for listed companies entering the reorganization process, information disclosure should be made by different subjects at different stages of the reorganization process in accordance with the principle of "who is responsible, who discloses":(1) the reorganization application stage. Where a listed company or creditor applies for reorganization, the board of directors of the listed company shall be responsible for information disclosure. (2) Reorganization application acceptance stage. If a listed company or a bondowner applies for reorganization, and the people's court decides to accept it, the board of directors of the listed company shall be responsible for disclosure; after the people's court accepts the bankruptcy application of the listed company, before the bankruptcy is declared, the listed company or its capital contribution accounts for more than 1/10 of the registered capital of the listed company applies to the people's court for reorganization, and if the court decides to accept it, the administrator shall be responsible for information disclosure. (3) during the reorganisation period. If a manager is adopted to manage property and business affairs, the manager shall be responsible for disclosure; if a listed company manages property and business affairs on its own, the board of directors of the listed company shall be responsible for information disclosure. (4) The implementation phase of the reorganization plan. Since the reorganization plan is implemented by the listed company, the confidence disclosure obligation during this period is borne by the board of directors of the listed company.^[6]

To sum up, it is necessary to adjust the shareholders' rights and interests in the reorganization of listed companies, and to take a favorable way to solve the existing problems. This not only protects the interests of creditors, shareholders and various stakeholders, but also makes the reorganization of listed companies successful, so that the company to avoid bankruptcy, rebirth.

This article won the third prize of Jinan lawyer's business paper selection in 2011

Comments:

[1] Xi Xiaoming, Editor-in-Chief: Guidance on Civil and Commercial Trials, People's Court Press, 2009, p. 112.

[2] Zhao Xudong, Editor-in-Chief: Company Law, Higher Education Press, 2003, p. 272.

[3] Cui Jie, "On the Treatment of the Interests of the Original Shareholders in the Corporate Reorganization Procedure", in Legal Online.

[4] Zhao Xudong, Company Law Review, People's Court Press, 2005.

[5] Li Shuguang and Song Xiaoming, eds., "Guidelines for the Design and Operation of the the People's Republic of China Enterprise Bankruptcy Law System (I)", People's Court Press, 2006 edition, p. 633.

[6] Xi Xiaoming, Editor-in-Chief: Guidance on Civil and Commercial Trials, People's Court Press, 2009, p. 125.

References:

[1] Xi Xiaoming, Editor-in-Chief: Guidance on Civil and Commercial Trials, People's Court Press, 2009.

[2] Zhao Xudong, Editor-in-Chief, Company Law, Higher Education Press, 2003.

[3] Cui Jie, "On the Treatment of the Interests of the Original Shareholders in the Corporate Reorganization Procedure", in Legal Online.

[4] Zhao Xudong, Company Law Review, People's Court Press, 2005.

[5] Li Shuguang and Song Xiaoming, eds., "(I) on the Design and Operation of the Bankruptcy Law System for the People's Republic of China Enterprises", People's Court Press, 2006.

[6] Wang Weiguo, Bankruptcy Law, People's Court Press, 1999.

[7] Qi Bin, Legal Regulation of Information Disclosure in the Securities Market, Law Press, 2000.