Corporate governance obstacles in unfriendly M&As

In 2015, the M&A transaction that attracted the most attention must have been the case between Baoneng and Vanke. In July that year, Baoneng Group began increasing its shares in Vanke. By 24 December, Baoneng already held 24.26% of Vanke’s shares and replaced the China Resources Group as the largest shareholder.

The senior management of Vanke publicly expressed their unwelcoming attitude towards Baoneng the same month. This article analyzes the impact of the change in the largest shareholder to a listed company from the perspective of corporate governance under the Company Law.

Structure of corporate governance

Chapter 4 of the Company Law has defined the separation and mutual monitoring of powers among the shareholders’ meeting, the board of directors and senior management, and the board of supervisors of listed companies and joint stock limited companies.

The shareholders form the shareholders’ meeting as the company’s authority to exercise powers given by the Company Law and the company’s articles of association. The directors elected at the shareholders’ meeting would form the board of directors and are held responsible for the shareholders’ meeting to operate and manage the company’s assets and appoint senior management to execute the board’s resolutions. Supervisors, elected democratically at the shareholders’ meeting, and employees will form the board of supervisors to monitor the exercise of powers by the board of directors and senior management.

Accordingly, a shareholder’s influence on a listed company is mainly reflected in how the shareholder may influence the shareholders’ meeting, board of directors and senior management.

Analysis of Vanke

From the perspective of the shareholders’ meeting, we can see that after Anbang Group, as one of the major shareholders of Vanke, expressed its support for the senior management of Vanke, Vanke’s side (including China Resources Group, Anbang Group and Vanke senior management) held about the same amount of shares in Vanke as that held by Baoneng. With this amount of shares and voting rights held, Baoneng was not able to make a significant impact on any decisions made by the Vanke shareholders’ meeting. From the perspective of the board of directors, because each director is entitled with one vote and any decision made by the board of directors would have to be approved by at least half of the directors, shareholders can make an impact on strategic decisions made by the board of directors through getting a seat on the board. According to the Company Law and the article of association of Vanke, only decisions regarding significant disposal of assets and external guarantee would need the approval of the shareholders’ meeting.

Other major decisions in respect of management and operation, including the hiring and firing of senior management such as the CEO, are still held by the board of directors. Therefore, if Baoneng wishes to have a say in the management and operations of Vanke, it should try to get a seat on the board.

The term of Vanke’s current directors expires in March 2017. If Baoneng wishes to get a seat before the term of the current board, it needs to be aware that the resignation of current directors, nomination of candidates and election of directors for the shareholders’ meeting all need the co-operation of the board of directors.

As Vanke’s senior management team has expressed an unwelcoming attitude towards Baoneng, Vanke’s board of directors may choose not to co-operate through various legal and compliant means. If Baoneng wishes to successfully nominate a director, it will need to rely on the right to hold the shareholders’ meeting and the right of proposal given by the Company Law and the article of association of Vanke.

According to the second paragraph of article 101 of the Company Law, in the case where the board of directors and the board of supervisors fail to perform their duties in holding a shareholders’ meeting, a shareholder who holds, or shareholders who together hold, 10% or more shares for more than 90 consecutive days can convene and preside over the shareholders’ meeting.

According to the second paragraph of article 102 of the Company Law, any shareholder who holds, or shareholders who hold, 3% or more of the shares may put forward an interim proposal 10 days before the shareholders’ meeting. Under these clauses, theoretically, Baoneng can demand to convene an interim shareholders’ meeting and propose to remove current directors or elect replacements when the Vanke board of directors fails to actively respond to Baoneng’s request.

However, in practice, Baoneng faces many difficulties, either in the part of removing the current director or in the part of having its candidates for directors submitted to the shareholders’ meeting for election. First, the article of association of Vanke states that the shareholders’ meeting, without any valid reason, cannot remove directors before their term expires.

Removal of a director before his or her term expires would need to be approved at the shareholders’ meeting by ordinary majority votes. Therefore, to remove directors before their terms expire, Baoneng would have to provide proper reasons and ally with other shareholders to secure majority votes in the shareholders’ meeting.

Second, even though Baoneng can vacate a director’s seat, it will still encounter difficulty in nominating a candidate for the by-election without the board’s co-operation. According to the article of association of Vanke, the nomination committee will screen the candidate before the nomination.

After screening, the candidate will be recommended to the board of directors for approval. Upon approval, the board of directors will then submit the matter to the shareholders’ meeting for a by-election. If the board does not wish to co-operate, the candidates nominated by Baoneng will most likely fail to complete these procedures to proceed to the shareholders’ meeting for election.

Conclusion

From the perspective of corporate governance, a change of the largest shareholder of a listed company may not necessarily lead to changes in the company’s decision-making power in operations and management. If the new major shareholder wishes to get involved with the management and operations of listed companies via the board of directors, it first needs to seek the co-operation of the board. In addition, even in the case where the new largest shareholder holds an absolute advantage in the number of shares held, the listed company can still use the cumulative voting system to elect the directors to avoid the major shareholder controlling the election of directors based on the simple “one share, one vote” method.