A Preliminary Discussion on the Adjustment of Equity Holders’ Rights in Restructuring Proceedings

Once a restructuring plan containing adjustments to equity holders’ rights is approved by the court, should pledges or preservation measures imposed on such rights be lifted? Article 127 of the *Chongqing Bankruptcy Court’s Guidelines for Handling Enterprise Bankruptcy Cases (Trial Implementation)* stipulates that, where the debtor is insolvent and the equity subject to adjustment under the restructuring plan has been pledged, the pledgee shall cooperate in completing procedures to release the equity pledge. This provision addresses only the obligation of pledgees to release equity pledges when the debtor is insolvent; it does not address whether preservation measures on equity must likewise be lifted, nor does it address the lifting of pledges or preservation measures when the debtor’s assets exceed its liabilities. A pledgee holds rights over equity that are superior in priority to those of a party applying for preservation measures. Thus, if equity pledges must be released, then—by the principle of *a fortiori* reasoning—preservation measures on equity must also be lifted. If a pledgee or preservation applicant refuses to cooperate in releasing the pledge registration or preservation measures, the court may analogously apply Paragraph 59 of the *Minutes of the National Court Conference on Civil and Commercial Adjudication (the ‘Nine-Minutes Minutes’)*—which permits the pledgor to request cancellation of the pledge registration after the statute of limitations on the underlying claim has expired—and allow the administrator or an interested party to petition the court to cancel the pledge registration or preservation measures on the equity. When the debtor’s assets exceed its liabilities, the equity retains some value, and pledges or preservation measures thereon cannot be automatically lifted. In such cases, resolution must be sought through negotiation with the pledgee or preservation applicant, and appropriate compensation may be offered to them. V. Conclusion The adjustment of equity holders’ rights remains a challenging issue in restructuring practice. As demonstrated by the practical difficulties discussed herein, the chosen mode of rights adjustment and the debtor’s asset-liability status significantly influence how equity holders’ rights are adjusted. Administrators handling such matters should therefore carefully assess the debtor’s asset-liability position and select an appropriate rights-adjustment model to ensure fair protection of all stakeholders’ interests. [1] Shen Linping, “Improving Equity Holders’ Rights Adjustment in Recent Listed-Company Restructuring Plans,” *Bankruptcy Law Express*, WeChat Official Account, August 26, 2020. [2] Third Batch of Typical Cases on Judicial Protection of Private Economy by Chongqing Courts. [3] Announcement on Implementation of Capital Reserve Conversion into Additional Shares under the Restructuring Plan of Lifan Industrial (Group) Co., Ltd., Shanghai Stock Exchange website. [4] Article 85(2) of the *Enterprise Bankruptcy Law* provides: “Where a draft restructuring plan involves adjustments to equity holders’ rights, an equity holders’ group shall be established to vote on such matter.” Article 11(2) of the *Interpretation III of the Supreme People’s Court on Several Issues Concerning the Application of the Enterprise Bankruptcy Law* states: “Pursuant to Article 82 of the *Enterprise Bankruptcy Law*, when voting on a draft restructuring plan by groups, creditors or shareholders whose rights are adjusted or affected thereby are entitled to participate in the vote; creditors or shareholders whose rights are not adjusted or affected may, by analogy to Article 83 of the *Enterprise Bankruptcy Law*, abstain from voting on the draft restructuring plan.” [5] Dong Lu, “Exclusion of Shareholders’ Voting Rights in Restructuring Proceedings under Insolvency,” *Tiantong Litigation Circle*, WeChat Official Account, August 29, 2019. Chi Weihong, “Revisiting Equity Holders’ Rights Adjustment and the Absolute Priority Rule in Restructuring Proceedings,” *Tiantong Litigation Circle*, WeChat Official Account, September 8, 2019.

An Empirical Study on Capital Reserve Conversion into Additional Shares in the Bankruptcy Restructuring of Listed Companies

Although the value of a ‘shell resource’ is not explicitly reflected in accounting records, its existence is tangibly felt during restructuring investments. When a listed company enters restructuring proceedings, its remaining assets are typically insufficient to repay all debts; consequently, both existing shares and newly issued shares arising from capital reserve conversion lack financial value. At this point, the consideration paid by investors to acquire shares of the listed company reflects precisely the value of the shell resource. From a legal-theoretical perspective, a listed company’s use of shell value to attract restructuring investors—and its transaction thereof—is legally legitimate. First, although shareholders lose their right to residual asset distribution, the scope of the debtor’s property defined under bankruptcy law excludes the shell value of a listed company; thus, creditors have no legal basis to claim distribution of such shell value. Second, the listed company remains, legally speaking, the shareholders’ company—even after its value deteriorates—and its shell value continues to belong to the shareholders. Although the existence of shell value is evident at the transactional level, and its use to attract restructuring investors finds solid grounding in legal theory, regulatory authorities currently hold a negative view toward shell-resource transactions. The newly revised “National Nine Measures” reaffirms the need to further diminish shell-resource value—a regulatory stance that restructuring investors relying on shell-value logic must take seriously. (III) Voting by the Equity Holders’ Group Before deciding to invest in a listed company’s restructuring, investors must undertake meticulous, time-consuming due diligence, plan negotiations, and resource coordination. Effectively securing approval of the draft restructuring plan thus warrants high priority for restructuring investors. Voting by the equity holders’ group on matters involving adjustments to equity holders’ rights carries considerable uncertainty, for two reasons. First, in listed-company restructuring, newly issued shares resulting from capital reserve conversion are generally not distributed to existing shareholders but instead allocated to attract restructuring investors or offset debts—thus diluting equity holders’ rights. In substance, regardless of the specific adjustment scheme adopted, the underlying logic invariably entails diminishing existing shareholders’ rights and transferring the diminished portion to restructuring investors or creditors. Consequently, equity holders often resist such adjustments. Second, internal conflicts among equity holders impede consensus formation. Capital reserve conversion inherently dilutes the equity interests of all shareholders, meaning the restructuring cost is borne collectively. Yet in practice, most listed companies entering restructuring do so following misconduct by controlling shareholders. Such controlling shareholders are thus culpable. By contrast, minority shareholders typically bear no fault for the company’s descent into restructuring and accordingly demand that controlling shareholders shoulder the entire restructuring cost. Hence, even when controlling or major shareholders agree to introduce investors via capital reserve conversion, minority shareholders frequently oppose the measure—leading to deadlock and the so-called ‘minority-shareholder veto problem.’ Given that the ultimate objective of restructuring law is to mobilize all stakeholders to rescue the listed enterprise, the entire process cannot be derailed solely due to minority shareholders’ objections—thereby forcing liquidation. Current bankruptcy jurisprudence does not precisely allocate fault among different categories of shareholders; rather, it presumes, as a matter of probability, that equity holders collectively bear responsibility for the debtor’s distress. Accordingly, their rights receive only relative protection: even if the equity holders’ group votes against the draft restructuring plan, the court may still approve it by compulsory ruling—provided the court, upon review, determines that certain statutory conditions are satisfied.

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