Why is Bankruptcy Reorganization So Difficult for Listed Companies?(AI Translation)

【周刊提前读】上市公司破产重整为何艰难？多目标同时求解如何平衡？

Since late June 2024, over 100,000 shareholders of Oriental Group (600811.SH) have been concerned as the stock price dropped below the 1-yuan "delisting by face value" threshold. Oriental Group's stock traded below 1 yuan for 16 consecutive days by July 15, sparking delisting fears. That evening, the company received a "Decision Order" from the Harbin Intermediate People's Court to start pre-restructuring proceedings. This announcement temporarily lifted the stock to 1.05 yuan the next day, staving off immediate delisting [para. 1][para. 2].

Oriental Group, originating at the start of China's reform era by entrepreneur Zhang Hongwei, became Heilongjiang Province's first private public company. For 30 years, its core business has been in modern agriculture and health food. However, the company's expansion into real estate and finance led to unmanageable debt and three years of hefty losses, culminating in a bankruptcy reorganization in 2024. By July 23, 2024, it was seeking restructuring investors due to loan defaults over 2.4 billion yuan, mostly from China Minsheng Bank [para. 2][para. 3][para. 4].

The company typifies distressed publicly listed firms, facing operational crises, debt issues, and regulatory scrutiny from the China Securities Regulatory Commission (CSRC) for disclosure violations. Its restructuring hinges on entering formal proceedings with a plan accepted by all parties involved. Pre-restructuring is seen as a precursor to formal restructuring, usually with more lenient conditions [para. 4][para. 5].

Economic cycles have turned restructuring into a vital tool for resource allocation efficiency. Delisting normalization has driven an increase in restructuring efforts. From 2007 to 2023, around 119 A-share listed companies went through bankruptcy restructuring, with half of these cases occurring from 2020 to 2023. In the first half of 2024, another 21 companies sought restructuring, capturing market attention [para. 6].

Ideally, restructuring aims to solve debt and restore sustainable operations, but often, the goal is to maintain listing status. "Shell preservation reorganization" can result in low-quality outcomes, leading to further delisting [para. 6][para. 7][para. 8].

Special asset investment professionals indicate that the real value in restructuring lies in the 'shell', the listed entity itself, often seen as valuable despite operational issues. This focus on shell value can lead to lawsuits, as seen with the Delong Group's Delong Aero case [para. 8][para. 9].

Equity adjustments, often by converting "capital reserve to share capital," dominate restructuring, but face regulatory gaps regarding pricing and ratios. There are concerns about the discretionary and unstandardized use of this method [para. 8][para. 9][para. 10].

Judicial and regulatory overlaps complicate restructuring. The Supreme People’s Court focuses on creditor interests while the CSRC focuses on minority shareholder rights. Both approval channels can lead to prolonged and complex processes. Unlike overseas practices, A-share companies typically continue trading during restructuring [para. 10][para. 11][para. 12].

The current regulations, mainly the 2012 Supreme People’s Court "Minutes," need improvement. Reform efforts include enhancing coordination between judicial and administrative bodies and focusing on genuine operational recovery to prevent mere debt-elimination restructurings [para. 13][para. 14][para. 15].

Capital reserve conversions have become the go-to mechanism for equity adjustments in restructuring, though not without significant drawbacks. Often, these involve issuing new shares without proper regulatory oversight, impacting creditors and leading to further complications post-restructuring [para. 16][para. 17][para. 18].

To illustrate, the Jiuyou and Guirenniao cases show restructurings that resolved immediate financial issues but failed to restore long-term operational health, leading to repeat delisting risks [para. 19][para. 20][para. 21].

A comprehensive approach combining debt restructuring, asset adjustments, and operational improvements is necessary. Examples like Shuntian Shipbuilding demonstrate that successful restructuring requires alignment between judicial and administrative processes, although rare [para. 23][para. 24][para. 25].

Efforts are underway to standardize restructuring processes, improve governance, and align judicial and regulatory oversight to ensure quality resurrections of distressed companies, moving away from the shell-value focus [para. 26][para. 27].