Exploring the effect of shareholder background on trust acquisitions

By Dorothy Xing, Jennifer Zhang, Concord & Partners
0
1709
LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link

Trust institutions have, in recent years, basically divided themselves into four types state-owned, local government-owned, financial institution-owned and privately owned, with a mutual entanglement of domestic and foreign capital.

邢冬梅 Dorothy Xing 共和律师事务所 北京办公室 合伙人 Partner Concord & Partners Beijing
邢冬梅
Dorothy Xing
共和律师事务所
北京办公室
合伙人
Partner
Concord & Partners
Beijing

Shareholder backgrounds

Industry figures show that of the 67 trust companies recorded as having offered products in 2012, the controlling shareholder of 19 of them had backgrounds as state-owned enterprises (SOEs), e.g. CITIC Trust, CRC Trust; 29 had local government backgrounds, e.g. Jiangsu Trust, Beijing International Trust; 10 had financial institution backgrounds, e.g. Ping An Trust, Bank of Communication International Trust; and nine had private enterprise backgrounds, e.g. National Trust, New China Trust.

Different shareholder backgrounds have an effect on such things as trust companies’ risk appetite, size of assets under management and product types, resulting in risks specific to the different types of institutions, meaning that they should naturally constitute an important factor to be examined when investors evaluate an acquisition target. This column proposes to carry out an analysis from the perspective of the feasibility of acquiring a trust institution and the effect of shareholder backgrounds on the risks to which a target company is exposed.

张璇 Jennifer Zhang 共和律师事务所 北京办公室 合伙人 Partner Concord & Partners Beijing
张璇
Jennifer Zhang
共和律师事务所
北京办公室
合伙人
Partner
Concord & Partners
Beijing

Types of trust institutions

Private trusts – preferential acquisition targets. Of the four types of trust companies mentioned above, the average shareholding of private capital is relatively low, 39.59%, whereas that of financial institutions is 80.71%. As the most direct and efficient means of participating in a trust company is the transfer or acquisition of the existing equity of a company shareholder, the dispersal of the equity in a private capital-type trust company makes it a more easily locked in acquisition target.

SOE-type trusts – risk of difficulty in matching size and net capital. Pursuant to the Trust Law, losses arising from a breach of its management duties or improper handling of trust matters by the trustee are to be borne by the trust company from its own property. Extrapolating from this, specific trust business risks will be transmitted to the trust company itself. Accordingly, rapid expansion of the size of trust assets requires the size of the net assets of the trust company to match. To rationally and effectively control the risk of mismatch, in 2010 the China Banking Regulatory Commission (CBRC) issued the Administrative Measures for the Net Capital of Trust Companies, the objective of which is to cause trust companies to allocate their limited capital rationally among business of different risk positions and guide trust companies into making differentiated choices of products based on their own net capital level and risk appetite, so as to achieve effective control of overall risks.

Difficulties

In practice, it is quite difficult to increase the net assets of a trust company at the same pace as the rapid growth in the size of trust assets. Figures from an authoritative institution in the industry show that of the top five companies with the highest trust asset to net asset ratio, three of them have a state enterprise background. From this it can be seen that the relative inadequacy of net capital, derived by subtracting the various asset risk funds from net assets, is most pronounced among SOE-type trust companies.

Government-type trusts – difficult-to-avoid local fiscal risks. Due to the inevitable government background, a great many of their offered products also have the outline of a local government platform. According to media reports, of the approximately 30 pooled trust plans offered such platforms in 2012, the majority were government-trust co-operation-type products, with the co-operating parties mainly being prefectural and county-level platform companies within the province.

Government-trust co-operation is essentially based on confidence in, and the support of, local government finances, often taking such forms as requiring local finances to give an undertaking of repayment, the local people’s congress to include repayment in the local fiscal budget, etc., while being more lax and flexible in the control of mortgages, pledges and other such risk prevention and control measures, resulting in the frequent occurrence of risk events. The CBRC issued dedicated notices in 2009 and 2012 to regulate the financing acts of local government financing platform companies and resolutely halt the giving by local governments of security undertakings in violation of regulations.

However, one should not underestimate the risks that reliance on local finances give rise to, and the limitations imposed on future business development directions.

Finance type trusts – eye on systemic risks. The synergy that a bank, securities company or other financial institution brings to a trust company after acquiring an equity stake therein is obvious. Finance-type trusts can be considered the type of trust company that has the best overall strengths. If a securities company, fund company or insurance company that acquires an equity stake in a trust company has trust business qualifications, the support of such a shareholder in an increasingly competitive trust market will assist the trust company in securing even more business.

However, if its products cannot be redeemed upon maturity, risk could be transmitted to other financial institutions that serve as its shareholders, in particular potentially having an adverse impact on the reputation of such shareholders. For example, a bank entrusts the proceeds from a wealth management plan to a securities company to establish a privately offered asset management plan, the assets of which the securities company further entrusts to a trust company to establish a trust product to be used to provide trust loans.

If redemption of the trust product is impossible, the risks of the trust product will be transmitted from the trust company to the securities company and bank, affecting the reputation of the parties along the finance chain.

Accordingly, after a financial institution, particularly a financial enterprise group, completes the disposition of its trust platform, it must, while sharing the successes with the trust company, also duly prepare to assume the risk of shared failure.

concord共和-logo-1

北京市朝阳区麦子店街37号盛福大厦1930室

Suite 1930, Beijing Sunflower Tower, 37 Maizidian Street, Chaoyang District, Beijing

邮编 Postal code: 100026

电话 Tel: +86 10 85276468

传真 Fax: +86 10 85275038

电子信箱 E-mail:

dorothyxing@concord-lawyers.com

jenniferzhang@concord-lawyers.com

www.concord-lawyers.com

LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link