PDF《Corporate Restructuring in China》

Corporate Restructuring in China Cases of Listing as Consolidated Business Group Re-Jin Guo Department of Finance College of Business Administration University of Illinois Chicago, IL

60607 and Visiting Financial Economist Research Center Shanghai Stock Exchange South Pudong Road Shanghai, P.

R.China August

2006 Abstract Recent regulatory changes in China have significantly increased the sensitivity of wealth of controlling shareholders to the market value of the firm. As a result, some controlling shareholders voluntarily engage in transactions which streamline and consolidate the business operations of firms within the same business group. This study 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. 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 within the framework of deal structure, market infrastructure, as well as the present regulation. Recommendations on changes of the marker regulation are made accordingly. I would like to thank Ruyin Hu, Chun Chang, Fenghua Wang, Xiang Jian, Donghui Shi, Wen- Wei Zhou, Wen-Ying Lu, Huai-Zhong Yuan, and seminar participants at the Shanghai Stock Exchange for helpful comments and suggestions. All errors remain mine. Please contact Re-Jin Guo, Department of Finance, School of Business Administration, University of Illinois.

1 I. Introduction Dated from the reopening of Shanghai Stock Exchange for trading in late 1990, the regulatory agency in China has stipulated that firm shares traded in local market be composed of multiple classes (股权分置). Various governmental institutions jointly issued the Regulated Comments on Stock Corporation (股份公司规范意见) in May, 1992. This policy on multiple share classes is further reinforced in

1994 by various official documents stating, The government needs to ensure a dominant and controlling ownership in corporations operating in specific, important, and influential industries for the domestic economy (through state shares/legal person shares) ;

… dominant and controlling ownership refers to a stock holdings of more than 50% …… . Multiple share classes in China consist of (1) state shares (2) legal person shares, and (3) common A shares1 . State shares are share holdings by the central government, local government, or government-owned enterprises. Legal person shares are ownership by business agencies, and enterprises of local governments that helped in starting up the public companies (Sun and Tong, 2003). These three multiple classes of stocks, distinctly different from stock classes in the other countries, carry the same cash flow and voting rights per share. It is the method of exchange/transfer which distinguishes the three classes of stocks: A-shares are floated in the stock market and traded among investors;

while state and legal person shares are not publicly-traded and can only be held by corporate and legal-entity institutions. As a result, the state and RIS shares are fairly illiquid (Chen and Xiong, 2001), and the free float (freely tradable shares available to the investors) is extremely low in Chinese market. It is estimated that the free float ratio was 33.2% in

2001 in China, compared to 86.4% and 77.5% in developed and other emerging markets (Gao, 2002).

1 In addition to A shares, which are traded among domestic investors, there are B shares trading in China for foreign investors. There are also H, N, L, and S shares, available for investors in global markets and listed in Hong Kong, New York, London, and Singapore, respectively.