The Restructuring of Listed Company Officially Enters a New Chapter: Review on the “Minutes of the Discussion Meeting on Effectively Adjudicating ListedCo. Bankruptcy Restructuring Cases”
Introduction
On 31 December 2024, the Supreme People’s Court, in collaboration with the China Securities Regulatory Commission (hereinafter referred to as “CSRC”), released the “Minutes of the Discussion Meeting on Effectively Adjudicating Listed Company Bankruptcy Restructuring Cases” (hereinafter referred to as the “Minutes”), while the CSRC concurrently drafted the “Administrative Guidance No. 11 - Listed Company Bankruptcy Restructuring Related Matters (Draft for Comments)” (hereinafter referred to as the “Administrative Guidance (Draft for Comments)”), and broadly sought public input. With the release of the Minutes, the 2012 version of “Minutes of the Discussion Meeting on Adjudicating Listed Company Bankruptcy Restructuring Cases” issued by the Supreme People’s Court (hereinafter referred to as the “2012 Minutes”) are hereby superseded. This marks the beginning of a new phase in the judicial practice of listed company restructuring in China, which aims to genuinely mitigate the risks of listed companies through the restructuring system and to elevate the quality of listed companies.
In light of this development, this article will provide a systematic summary of the key points within the Minutes and endeavour to analyse the potential new impacts that these regulations may have on the judicial practice of listed company restructuring.
New Changes
The full text of the Minutes is organised into nine sections, encompassing principles of listed company restructuring trials, case jurisdiction, application and review, information confidentiality and disclosure, formulation and voting on the restructuring plan draft, execution of the restructuring plan, judicial trial and securities regulatory cooperation, out-of-court restructuring and related party bankruptcy, and restructuring of delisted companies, totalling 29 articles.
Compared to the 2012 Minutes, the Minutes have introduced clear numbering for the content of the articles. The structural arrangement has been designed to address key issues involved in the restructuring of listed companies, systematically responding to new phenomena and challenges in the practice of listed companies in recent years. It has, to some extent, resolved longstanding issues such as the insufficiency of legislative norms, lack of regulatory rules, and misuse of the system in the restructuring of listed companies. Specifically, the changes in the provisions of the Minutes are as follows:
1. Principles of Trial: The Minutes have incorporated a new principle aimed at fostering the healthy development of the capital market. This is based on the effective integration of judicial rule application with the realisation of securities regulatory objectives, underscoring the significance of the function of listed company restructuring for the order and healthy development of the capital market. Concurrently, the principle of rescuing distressed enterprises has been revised to a principle of enhancing the quality and efficiency of restructuring. This demands the full utilisation of the rescue function of the restructuring system to genuinely improve the quality of listed companies and bolster their sustainable operational capabilities through the restructuring process
2. Jurisdiction of Restructuring Cases: The Minutes now mandate that when applicants submit restructuring applications for listed companies to the People’s Court, the companies must have had their principal place of business within the court’s jurisdiction for a continuous period exceeding one year. This provision is designed to curb the recent practice where some listed companies have hastily changed their jurisdiction to evade the lack of restructuring support from their original local governments or courts.
3. Application and Review Mechanism: The Minutes offer several refinements regarding the application and review process. Firstly, it is now explicitly required that the People’s Court seek and consider input from the local securities regulatory bureau on matters concerning securities regulatory issues during any hearings. Secondly, the Minutes establish a more detailed collaborative framework among the provincial government, the CSRC, and the Supreme People’s Court. This includes specifying the precise timing and documentation required for the provincial government to inform the CSRC about the restructuring status of listed companies. Regarding the restructuring value of listed companies, the CSRC is tasked with providing opinions to both the provincial government and the Supreme People’s Court, identifying instances where listed companies may not be viable candidates for restructuring. The Supreme People’s Court is then responsible for scrutinising the reasons for restructuring, its potential value, and the legality of the proposed restructuring plan. Lastly, for issues such as the improper use of listed company funds by controlling shareholders and the provision of unauthorised guarantees, matters that are considered critical for restructuring approval, it is now clearly mandated that these issues must be resolved prior to the commencement of the restructuring process.
4. Information Confidentiality and Disclosure: The Minutes now incorporate the self-regulatory guidelines from the Shanghai and Shenzhen Stock Exchanges, providing clearer directives on the prevention of insider trading and the specifics of information disclosure obligations. There is a heightened focus on the duties of the administrator, with explicit mention of the penalties that may be applied for non-compliance. Additionally, the Minutes demand that all documentation pertaining to restructuring submitted to the CSRC must align with publicly disclosed information, with any discrepancies requiring detailed explanation. This measure is primarily aimed at preventing any material discrepancies between the restructuring plans communicated to the CSRC and the applications filed with the Supreme People’s Court.
5. Formulation and Voting on the Restructuring Plan: The Minutes dictate that the draft restructuring plan must be comprehensive, unambiguous, and actionable, with business plans avoiding any unjustified inflation of profit forecasts. The plan’s use of capital public funds for share increases, the qualifications and subscription prices of restructuring investors, and the lock-up periods must adhere to CSRC regulations. In line with the Administrative Guidance (Draft for Comments) from the CSRC, the share increase ratio funded by capital public funds should not surpass a 10-to-15 ratio, and the subscription price for restructuring investors must not fall below 50% of the market price, based on the average transaction prices over the twenty, sixty, or one hundred and twenty days prior to the signing of the investment agreement. The capital public funds should be calculated based on the most recent audited financial statements, including the annual report, semi-annual report, and quarterly report, prior to restructuring. Regarding debt repayment, the plan must not utilise clearly unmarketable or unrecoverable assets to settle company debts, and it should justify the fairness of any stock-for-debt pricing. If a trust plan is employed for debt repayment, the scope of the trust assets, the trustee’s responsibilities, and the trust’s duration must be explicitly defined. Furthermore, when it comes to the introduction of restructuring investors, there are stringent disclosure requirements regarding their credit status, including the conditions, prices, and quantities of shares they subscribe to. The Minutes also outline provisions for the management of convertible bonds, the responsibilities of financial advisors, and the diligence expected of administrators and other intermediaries.
6. Execution of the Restructuring Plan: The Minutes now articulate that the restructuring plan is legally binding on all stakeholders, including the debtor, creditors, investors, and contributors. Any publicly stated commitments within the plan cannot be altered without following the prescribed legal procedures. The Minutes also outline the general principles for the supervision of the plan’s execution, the ramifications of non-compliance, and the criteria for determining its successful completion.
7. Judicial and Securities Regulatory Cooperation: The Minutes establish a framework for reciprocal cooperation between securities regulatory bodies and judicial authorities. Specifically, if securities regulators uncover significant legal violations during the restructuring process that could potentially harm the interests of creditors and smaller investors, they are empowered to communicate these findings to the People’s Court. The Court, in turn, has the discretion to initiate a consultative process if it deems it necessary. Conversely, if the People’s Court identifies illegal or irregular activities related to securities markets involving management personnel, financial advisors, or restructuring investors in the context of a listed company’s restructuring, or if there is a discrepancy between the submitted materials and the company’s public disclosures, the Court is required to report these issues to the CSRC through the appropriate channels. The CSRC is then responsible for levying the necessary penalties or implementing regulatory actions as warranted.
8. Out-of-Court Restructuring and Affiliate Bankruptcy: In the realm of out-of-court restructuring for listed companies, the Minutes dictate that negotiations with creditors, contributors, and restructuring investors must result in agreements that align with the draft restructuring plan requirements outlined in the Minutes and must include compliance with all mandated information disclosure obligations. Regarding the bankruptcy of affiliates of listed companies, including controlling shareholders and actual controllers or related parties undergoing bankruptcy reorganisation, liquidation, or settlement procedures, it is prohibited to exploit the resources of the listed company without compensation or to harm the interests of minority shareholders. Furthermore, these proceedings must not result in investment funds, asset management plans, or trust plans becoming the controlling shareholders of the listed company. The People’s Court may seek input from the local securities regulatory bureau in such cases, and the Administrative Guidance (Draft for Comments) reiterates that after restructuring, the controlling shareholder of a listed company must not be among the aforementioned three categories. Furthermore, if a significant subsidiary included in the listed company’s financial statements undergoes restructuring that results in the loss of specific business operations or sustainable business capabilities for the listed company, the People’s Court should not approve its restructuring plan. The Minutes also clarify that when a listed company is involved in joint proceedings with an affiliated subsidiary, the relevant courts must communicate in advance and report to the Supreme People’s Court for centralised jurisdiction determination. If a listed company is to settle debts on behalf of an affiliated company, this must be approved by a resolution of the listed company’s creditors’ meeting, and the affiliated company must be either a wholly-owned subsidiary or a controlled subsidiary of the listed company. If other shareholders of the controlled subsidiary include the controlling shareholder, actual controller, or their affiliates of the listed company, the listed company is prohibited from settling the debts of that subsidiary.
9. Restructuring of Delisted Companies: In the context of delisted company restructuring, it is understood that such restructuring does not require dual scrutiny from both the China Securities Regulatory Commission (CSRC) and the Supreme People’s Court. However, the Minutes specify that when the People’s Courts adjudicate the restructuring of delisted companies, they should adhere to the relevant regulations for listed companies regarding information disclosure and insider trading prevention. They must also rigorously review the debt repayment plans, equity adjustment plans for contributors, and operational plans, which are integral parts of the restructuring plan. The higher People’s Courts are mandated to enhance collaboration with the local people’s governments where the delisted companies are based, the local CSRC offices, and the National Equities Exchange and Quotations (NEEQ), and to adopt a specialised consultation mechanism when necessary.
New Impacts
The release of the Minutes and the accompanying Administrative Guidance (Draft for Comments) signifies a pivotal commitment to focusing on the quality enhancement of listed companies in China, with an emphasis on safeguarding the interests of minority investors, balancing the interests of creditors, and returning to the fundamental purpose of the restructuring system. This move aims to orderly clear out companies that do not possess the value to be restructured, either through delisting or bankruptcy liquidation. Moreover, it addresses the recent market issues of “illusory restructuring” and arbitrage activities that exploit the imperfections in the restructuring rules, further curbing such practices. We anticipate that the implementation of these new regulations will have several profound effects on the judicial practice of listed company restructuring:
1. The criteria for companies that lack restructuring value will be more clearly defined, preventing such companies from undergoing bankruptcy restructuring as listed entities. However, after a market exit, they may still legally address debt risks through bankruptcy restructuring.
2. The restructuring process should place a heightened emphasis on the financial integrity and industry empowerment capabilities of potential investors. The design of business plans must ensure the fulfilment and proper arrangement of relevant operational support or asset injection plans, genuinely enhancing the sustainable business capabilities of listed companies.
3. Listed companies grappling with significant compliance issues such as non-operational capital occupation by controlling shareholders and illicit guarantees will encounter a marked escalation in the complexity and expense of restructuring. This trend will force controlling shareholders and relevant parties to tackle substantial compliance challenges at the forefront.
4. Companies with inadequate capital reserves will be unable to hastily reconstitute capital reserves as a means of raising funds for debt repayment prior to restructuring. For companies burdened with substantial and intricate debt structures, it becomes imperative to meticulously craft debt settlement plans that safeguard creditors’ rights and enhance dialogue and negotiation with creditors.
5. The duties of diligence and accountability for administrators and intermediary agencies in the restructuring of listed companies are further defined. There is an increased expectation for these entities to elevate their performance capabilities and to adhere to a more stringent level of professional conduct.