Core characteristics and regulatory policy trends of listed company restructuring plan in 2024

introduction

In 2024, Chinese courts approved the draft reorganization plans of 11 listed companies, which is less than in previous years, but the innovation and complexity of the reorganization plans are significantly improved. This paper analyzes the characteristics of these draft restructuring plans from a legal perspective, discusses their market significance, and summarizes their far-reaching impact on the capital market and industry development in combination with two important new regulations to be issued by the end of 2024.

PART/01 Core features of the draft reorganization plan

1. Diversification of creditor's rights adjustment and repayment plans

In 2024, the draft reorganization plans of 11 listed companies show diversified characteristics in the adjustment and repayment of creditors' rights.

(1) Wide application of the beneficial right of trust: 4 companies adopted the beneficial right of trust as the means of debt repayment, accounting for 36.36%. For example, by establishing a trust plan, *ST Kao converted part of its creditor's rights into trust beneficial rights, which not only alleviated the cash repayment pressure of investors, but also provided long-term income expectations for creditors.

(2) Cancellation of small general creditor's rights group: some companies (such as *ST Hongyang, *ST Aonong) did not set up small general creditor's rights group, and instead adopted a unified settlement plan, which has the advantage of simplified procedures, but also triggered disputes over the protection of the interests of small and medium-sized creditors.

2. Innovation of investor's equity adjustment

(1) The ratio of capital reserves to increased equity is high: the ratio of capital reserves to increased capital of 11 companies is more than 10 to 10, of which *ST Zhongli is as high as 10 to 24.5. This high percentage conversion provides sufficient shares for the introduction of restructuring investors, but may also dilute minority shareholders' interests.

(2) Equity incentive and employee stock ownership: *ST Hanma introduced an employee stock ownership plan in the restructuring plan, and incentivized core employees by reserving shares to enhance internal cohesion.

3. Restructure investors' diversification and high returns

(1) Synergy between industrial investors and financial investors: In 2024, 28 industrial investors and 125 financial investors participated in the restructuring of 11 companies. Industrial investors mainly come from private capital and state-owned capital, while financial investors are mainly private equity funds and local asset management companies (i.e. local AMC).

(2) The low price of the investment price: the price of the shares transferred by the restructuring investors is generally lower than 80% of the market price, and the investment price of *ST Kao is only 7.78% of the market price. Although this kind of low-price investment reduces the risk of investment, but also raises the question of the protection of minority shareholders' interests.

PART/02 Legal Risks and Disputes of the draft Reorganization Plan

1. The imbalance between the interests of creditors and minority shareholders

(1) The gap between the nominal rate and the actual rate of repayment: Public data show that although the nominal rate of repayment generally reaches 100%, the actual rate of repayment (the market value after debt repayment by shares) is only 45.55% on average. For example, the creditors of *ST East Park paid debt with shares at a price much higher than the market price, resulting in poor actual settlement effect.

(2) The rights and interests of minority shareholders are diluted: the high proportion of capital transferred and the low price of shares lead to a significant decline in the proportion of minority shareholders, and the removal mechanism of some companies (such as *ST Zhongli) fails to fully reflect the impact of the adjustment of rights and interests.

(3) The cancellation of small general creditor groups may cause contradictions: The Enterprise Bankruptcy Law allows the establishment of small creditor groups "when necessary", the original intention is to protect small creditors through appropriate tilt, improve the approval rate of the draft reorganization plan, not to establish small creditor groups may be contrary to this legislative intention. Although the unified settlement scheme is consistent with the principle of equality of claims, in practice, the overall interests of small creditors may be overshadowed by those of large creditors due to their large number. Such an approach might be perceived as ignoring the weak position of small creditors in the reorganization proceedings and affecting the substantive fairness of the reorganization plan.

2. Restructure investors' short-term arbitrage tendency

(1) Low investment price and high return: In 2024, the average return rate of industrial investors and financial investors will reach 165.67% and 124.03% respectively. This high yield is mainly due to the low price of shares and secondary market speculation, rather than the substantial improvement of the company's operating capacity.

(2) Insufficient supervision of the shareholding period: Although the Regulatory Guidelines for Listed Companies No. 11 requires that investors in the reorganization of the change of control hold shares for no less than 36 months, some investors evade supervision through proxy holding and other ways, resulting in unstable control of the company after the reorganization.

3. Risks of information disclosure and insider trading

(1) Inadequate information disclosure: some companies (such as *ST Aonong) did not fully disclose the details of the trust plan in the reorganization plan, resulting in limited rights of creditors and minority shareholders to know.

(2) Potential hidden dangers of insider trading: In the process of reorganization, some insider information insiders (such as management members) are suspected of using undisclosed information to trade, which damages market fairness.

PART/03 Legal Policy Changes:

From "shell" to "quality" supervision

On December 31, 2024, the Supreme People's Court and the China Securities Regulatory Commission jointly issued the "Summary of the Symposium on Effectively Hearing Bankruptcy Reorganization Cases of Listed Companies" (the "Summary") and the "Guideline No. 11 on Supervision of Listed Companies" (the "Guideline"), marking a new stage of deep coordination between justice and supervision of the reorganization system. It is mainly reflected in:

1. Reorganize the value assessment and negative list

The "Minutes" clearly defines several types of "do not have the value of restructuring" situations: involving major illegal delisting, major defects in information disclosure, and administrative penalties. The move is aimed at curbing the abuse of restructuring procedures by "zombie companies" and directing resources to companies with real potential for recovery.

2. Capital accumulation fund conversion and equity structure norms

The Guidelines strictly limit the conversion ratio of the capital provident fund (no more than 15 shares per 10 shares) to prevent excessive dilution of the original shareholders' rights and interests. In the case of 2024, the ratio of profit to increase in *ST is as high as 10 to 24.5, far exceeding the upper limit of the new regulations, and similar operations will be strictly examined in the future.

3. Information disclosure and insider trading prevention and control

The new regulations strengthen the dynamic supervision of information disclosure, requiring the reorganization plan to disclose the "sustainability assessment of business plans". Combined with the case of 2024, when ST Bubu Gao introduced five industrial investors in the reorganization, it was necessary to disclose the difference in the transfer price of different investors (1.65-1.90 yuan/share) and the restricted sale period arrangement to ensure the right of small and medium-sized investors to know.

4. Coordinate the linkage mechanism between trial and court

For the reorganization of affiliated enterprises (such as the synchronous reorganization of the parent company of ST Bubukao), the "Minutes" promote the "parent-subsidiary coordination trial" model, which has been adopted by at least 4 enterprises in 2024, shortening the trial cycle by an average of 21%. At the same time, provincial governments are required to submit a "stability maintenance plan" to the CSRC to strengthen the responsibility of local governments in risk disposal.

PART/04 Conclusion

The draft reorganization plan of listed companies in 2024 shows the characteristics of diversification in innovation, but it also exposes problems such as the imbalance of interests between creditors and minority shareholders, and investors' short-term arbitrage. In the future, the industry needs to further optimize the reorganization mechanism under the legal framework, balance the interests of all parties, promote the high-quality development of the bankruptcy reorganization system, and provide a solid guarantee for the healthy development of the capital market.