With experts predicting greater numbers of corporate restructurings in China, being equipped for the possibilities has never made more sense. Brian Beglin and Fred Chang offer some case advice
A number of Chinese corporate capital structures that made sense in a different macroeconomic environment have undergone restructuring to better align cash flow and expenses for long-term viability, or simply to become “too big to ignore”. This article examines two examples in the distressed/involuntary and in the voluntary/non-distressed areas.
The first involves the solar panel industry, in which a global oversupply relative to recession-dampened demand built up over time, which resulted in capital expenditures, debt financing costs and operating costs far in excess of operating revenues. The second involves the Chinese securities industry, which has faced eroding margins in the past three years, due not merely to global economic headwinds but also to the moratorium on listings imposed by the China Securities Regulatory Commission (CSRC).
Involuntary restructurings make use of the Bankruptcy Law, which took effect in 2007, but which can only still be considered experimental and not self-executing with respect to various classes of “special cases” (listed companies, state-owned companies and regulated financial institutions). Moreover, whether pursued under the Bankruptcy Law or as a solvent entity, a restructuring might founder due to failure to obtain a panoply of administrative approvals that might apply, such as from the State-owned Assets Supervision and Administration Commission (SASAC), the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOFCOM), the State Administration of Foreign Exchange (SAFE), the CSRC, and labour bureaus. Changes in certain rules governing solvent public company restructuring have been implemented or proposed to reduce the approval process.
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Reorganisation of China-formed insolvent company
Companies incorporated in China are subject to the insolvency procedures specified in the Bankruptcy Law. The three principal insolvency procedures provided for under the Bankruptcy Law are liquidation, compromise and reorganisation. Liquidation entails the winding-up of the insolvent company; compromise allows a company to rescue itself from liquidation by agreeing to discounted payments on certain obligations with creditors; and reorganisation allows an insolvent company to continue in business, albeit supervised by an administrator appointed by the court. The purpose of reorganisation (generally) is to allow the insolvent company to restructure its capital structure and continue as a going concern.
Below is a synopsis of the process of a reorganisation in China, which may take at least several months, and in some cases may last for years.
- A reorganisation can be initiated by the application of the insolvent company or its creditor(s), subject to approval from the court.
- During the reorganisation period, the administrator manages and operates the assets of the insolvent company, or the insolvent company is able to manage and operate its assets under the supervision of the administrator (if approved by the court).
- A draft reorganisation plan should be formulated and presented to the creditors’ meeting and the court for approval by the insolvent company or the administrator.
- All creditors must be classified into voting groups, and the reorganisation plan must be approved by each voting group by the approval of more than half of the creditors of that group attending the meeting, which must represent no less than two-thirds of the total claims of that group.
- The reorganisation plan must be reviewed by the court after each voting group approves the plan. The reorganisation plan approved by the court will be binding on the insolvent company and all the creditors of the insolvent company.
- During the supervision period specified in the reorganisation plan, the insolvent company manages and operates its assets.
- If the reorganisation plan is fully performed, upon the completion of the reorganisation plan the insolvent company will not be liable for those debts reduced or waived by the reorganisation plan.
High-profile cases
In the past several years a number of high-profile companies went into reorganisation, signalling an increasing willingness of the Chinese government to allow market forces to allocate capital between performing and non-performing businesses, rather than permit purchasers of debt to assume an implicit bailout even for high-yield instruments. These companies included Wuxi Suntech Power (Wuxi Suntech) and its Cayman-organised parent Suntech Power Holdings (Suntech), one of the then largest solar panel makers in the world.
The linchpin of the onshore reorganisation involved a “white knight” third party, Jiangsu Shunfeng Photovoltaic Technology, purchasing substantially all the assets of Wuxi Suntech at a price of RMB3 billion (US$490 million) in a court-sanctioned auction in late 2013, as an indirect result of which the ratio of repayment to unsecured creditors of Wuxi Suntech reached 31.55%, compared to an estimated ratio of 14.82% were Wuxi Suntech liquidated.
Restructuring of foreign company with assets in China
In March 2013, Suntech defaulted on US$541 million of convertible bonds. Thereafter, Suntech and its offshore bondholders – a working group of which was represented by Bingham – negotiated towards an outcome enabling Suntech to emerge from its insolvency procedures in multiple jurisdictions. As part of this process, Suntech in November 2013 was placed into provisional liquidation proceedings in the Cayman Islands as part of overall reorganisation efforts. Those efforts continue and the joint provisional liquidators are currently seeking Chapter 15 recognition from the US bankruptcy court for the southern district of New York to obtain, among other things, a stay against creditors’ actions.
Creditors of Suntech, a Cayman holding company originally listed on the New York Stock Exchange, face more difficult recovery challenges than creditors of Wuxi Suntech and other operating subsidiaries. Suntech’s primary assets are its direct and indirect equity interests in numerous subsidiaries. As holding company claimants, Suntech’s creditors are in effect subordinated to the claims of secured and unsecured creditors at the subsidiary level.
On the other hand, creditors of Wuxi Suntech have direct claims against that operating company and its assets. This holding company structure has been widely adopted by entrepreneurs in China and throughout the Asia-Pacific region, who are eager to have access to funds in the international capital market but have difficulty obtaining approvals from the central government for the overseas listing of China-incorporated companies.
Under such onshore-offshore structures, creditors of the offshore companies have a claim in liquidation only against the offshore company’s equity in the onshore operating company, and are structurally subordinated to creditors of onshore operating subsidiaries.
Restructuring of a China-formed solvent company
With a view towards stimulating restructuring and consolidation of issuers in the fragmented public securities markets – listed and unlisted companies – the CSRC issued the Administrative Measures for the Material Asset Reorganisation of Non-listed Public Companies on 23 June 2014 and effective from 23 July 2014, and a proposed revision of the Measures for the Administration of Major Asset Reorganisation of Listed Companies on 24 March 2008 and revised on 1 August 2011, which aim to: allow greater flexibility to parties to the reorganisation to price at market; protect shareholder interests through enhanced disclosure; and streamline the often byzantine administrative approval processes for such reorganisations.
Albeit still in draft form, the proposed revision may augur a spate of solvent company consolidations involving third parties, a chief objective of which is to increase market share or even become systemically important in industries that are fiercely competitive, domestically and globally.
The Chinese securities business is a prime example of such an industry. In separate share exchange offers, whose closings are pending: (a) listed Founder Securities will become the sole shareholder of China Minzu Securities for a reported deal amount of RMB15 billion; and (b) unlisted Shenyin & Wanguo Securities listed its own shares in Shenzhen in connection with a proposed merger with listed Hong Yuan Securities, in which the latter’s shareholders will receive either shares or cash valued at RMB40 billion, and the separate legal existence of the latter will be extinguished, in what would be the largest domestic financial industry takeover in Chinese history.
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Brian Beglin is co-managing partner of Bingham McCutchen in Beijing, while Fred Chang is a partner in Beijing
