Walter Hutchens’ Blog

The CSRC has posted for public comment a remarkable draft regulation that will require listed companies to obtain the approval of listed shareholders as a class for certain significant corporate actions. The draft reg requires approval of more than half of all public shares (shehui gongzhong gu) represented at a shareholders’ general meeting for approval of secondary share offerings, issuance of convertible bonds, overseas listings of subsidiaries and some other material changes. The reg also encourages firms to allow internet voting by public shareholders.

Often I find myself arguing that some reform initiative is only marginal and will likely have little real impact. But a quick glance at this draft reg knocks me off that stance. Because most shares of most listed firms remain unlisted, trampling of the interests of public shareholders has been a common complaint. If adopted, this kind of class voting regulation could be revolutionary with regard to some of those problems.

Query: even if class voting of public shareholders is a great idea, if this reg is adopted, is the CSRC amending the Company Law?

The proposed reg also seeks to strengthen the role of independent directors, requires firms to put their dividend policy in their articles of association and to reduce dividends payable to controlling shareholders if they’ve used corporate funds in a manner inconsistent with what had been disclosed.

Comments are requested by Oct. 15.

Dow Jones has a story on the draft reg available to subscribers through their website here. It is good for Dow Jones to cover this. However, they write, “The draft rule would require that for major plans, such as fund raising or major asset restructuring, the plans would have to be passed at shareholders meetings with more than 50% of the votes of tradeable shareholders attending the meeting, according to the China Securities Regulatory Commission’s announcement posted on its web site late Sunday.”

Actually, it appears to me the draft reg requires not that 50% of public shares attend the meeting but that 50% of the public shares attending the meeting approve certain actions. The difference is critical because in the typical PRC listed firm you’d have say 66 non-tradeable shares voting and 33 tradeable shares that could vote. If the draft reg only requires that half of the public shares attend, they still could always lose (even if 100% of the public shares are represented at the meeting) because they are still voting against the 66 non-tradeable shares. If on the other hand the public shares vote as a class on certain items, then they have a real veto power over the majority unlisted shares. So I think Dow Jones got this wrong, or at least wrote it in a way that could be misleading. I think I’ll drop them a note about it.