China Introduces New Rules to Prevent Major Shareholder Abuse of Position

Major shareholders in China will be prevented from improperly interfering with the operation of banking and insurance institutions by using other licensed institutions to agitate for them at shareholder meetings. Under new rules revealed by China Banking and Insurance Regulatory Commission (CBIRC) designed to regulate the conduct of major shareholders, large shareholders will also be prevented from  using equity to guarantee the debts of unrelated parties as part of an effort to shape the outcome of shareholder meetings.

The draft rules, the “Measures for Supervising the Conduct of Major Shareholders of Banks and Insurance Institutions (for Trial Implementation)”, also tighten supervision of major shareholders behaviour by applying greater scrutiny over certain transactions such as shareholder meeting decisions to reduce or not to pay cash dividends.

Further, the regulatory standards for banks and insurance institutions will be amended, to clarify that major shareholders with equity pledges exceeding 50% are not allowed to exercise voting rights. Banks and insurance institutions will not be permitted to purchase bonds that are not publicly issued by major shareholders and will not be able to provide guarantees. Major shareholders will also be subject to restrictions around the cross-holding of shares of other companies directly or indirectly. 

Banks and insurers will be more easily able to recover compensation from major shareholders who abuse their rights and in the process cause financial losses. The draft measures consist of eight chapters and fifty-eight articles.

The full details of the proposals, “Notice of the China Banking and Insurance Regulatory Commission on Issuing the Measures for the Supervision of the Behavior of Major Shareholders of Banking and Insurance Institutions (for Trial Implementation)”, can be found here.