Caixin
Feb 06, 2017 07:58 PM
POLITICS & LAW

Firms Under Fire from Shareholder Rights Group

(Beijing) — A government-affiliated shareholder rights group yesterday notified four mainland-listed companies that they should change their corporate charters because they violate the interests of stock holders.

The move is the latest in a string of petitions by the China Securities Investor Services Center targeting firms it regards as having corporate governance problems.

The organization was established in late 2014 by China’s national securities regulator to protect minority shareholder interests. It holds equity stakes in companies it petitions and performs its job like a shareholder activist.

The four companies it spoke out against this time share in common a recent update to their corporate charters that featured, among other things, increased obstacles to hostile takeover bidders. The shareholder protection center said these hurt the lawful interests of investors, especially small ones.

One provision in all four charters, for example, states that at least two-thirds of the original directors must remain on the board if the company is subject to what management sees as a hostile takeover.

The arbitrary restriction on director replacement is not supported by China’s Company Law and will “very likely cause the old and new controlling shareholders of a listed company to engage in overt and covert struggles and lead to chaos in corporate governance or other scenarios where the firm cannot function normally,” according to the center’s announcement.

One problematic provision in one or more of these companies’ charters include a raised threshold for the company’s board to pass an important resolution, such as changing the corporate charter and increasing or reducing registered capital. Another provision required investors to supply additional paperwork when buying 5% or more of the company.

Neither of the clauses is supported by the country’s law and regulations, according to the center, which requested all of the firms to correct those provisions.

The four companies are Guoguang Electric Co., Blackcow Food Co., Yuan Longping High-Tech Agriculture Co. and Shanghai Zhongji Investment Holding Co.

Earlier data from the center shows it made 363 proposals pressuring for better minority shareholder protection to 166 A-share listed companies from February to June of last year, and 110 of the companies accepted its proposals.

The four companies named recently were representative of many others that rushed to amend their corporate charters in wake of a contentious hostile takeover involving China Vanke, a leading home developer.

Baoneng Group, a much smaller, Shenzhen-based real estate developer, wrestled for control of Vanke with its top managers through open market share acquisitions in a drawn-out battle that started more than a year ago. Many of Vanke’s stakeholders, including investors, employees and consumers, said the contest affected their interests adversely.

Many companies revised their charters to try to prevent hostile takeovers by making it more difficult for acquirers to control the board, even with a majority ownership.

Zhang Xiaojun, a spokesman of the China Securities Regulatory Commission, said in a routine briefing in August that the regulator was paying attention to the development and companies must not use anti-takeover provision to restrict shareholders’ lawful rights.

Contact reporter Wang Yuqian (yuqianwang@caixin.com)

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