Chinese Corporate Debt and its Effects on the Interests of Minority Shareholders
Toby Chi-to Wai
Abstract: This article concerns minority shareholders’ interests in the increasing Chinese corporate debt threat. It illustrates the costs and benefits of debt in the context of corporate governance. It then looks into a number of listed non-state-owned Chinese companies to examine their gearing levels. The article explains possible conflicts between majority and minority shareholders, and how the interests of minority shareholders can be undermined. Although certain legal mechanisms are available for minority shareholders, the article finds that they are not effective in the context of debt control. This article suggests the introduction of stakeholders’ society approach. However, to implement such concept requires substantial and radical change in corporate law and culture.
Introduction
The debt-to-GDP ratio of China increased significantly in recent years. Among all debts in China, corporate debt plays an important role. A number of renowned listed companies are heavily indebted. As one of the major sources of financing, debt has its advantages, such as avoiding dilution of control and providing tax shielding. Some also view debt as an external corporate governance mechanism, to keep managers aware. Nevertheless, the use of debt can result in majority shareholders expropriating the interests of minority shareholders. High gearing levels can undermine the interests of minority shareholders in the company.
This article takes 30 privately owned Chinese companies as samples and compares them to overseas companies to examine the debt level of the Chinese companies. It looks at how the interests of minority shareholders may be affected, and how conflicts arise between majority and minority shareholders. It finds existing minority shareholders who do not intend to allow the company to become riskier have few options to intervene in the company’s decision making.
This paper finds highly indebted Chinese listed companies have a common issue of concentration of ownership. This provides majority shareholders with great voting power, hence strong control in the company. In addition, derivative claims and shareholders’ remedies available for minority shareholders are not applicable when it comes to companies’ debt control. Shareholders’ remedies usually require management of a company to have breached relevant laws, regulation, fiduciary duties, or the constitution of the company. Even if majority shareholders have expropriated minority shareholders’ interests, it is not easy for the court to intervene. Apart from that, each jurisdiction has its own features, which could make things more difficult. For example, the emphasis of US courts on the “business judgment rule” makes judicial intervention in corporate decision making difficult.
Toby Chi-to Wai has an MSc in Law and Finance, an LLB from Queen Mary, University of London, and an LLB from the China University of Political Science and Law. He is currently at the City University of Hong Kong.
