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July 29, 2005
Guest Column: Share Options Give Market a Boost
[Editor's Note: More than a few multi-national businesses have foregone international adoption of employee stock option plans due to local regulation. Employees in-country may come to believe, wrongly, that headquarters has decided to treat them unfairly when the real obstacle to a corporate benefit is law. A well-intentioned incentive scheme may create a tangle leading to dissension and even disloyalty. Indeed, such a situation has occurred in China.
Over the past few years, Chinese regulators have devoted some thought to a remedy, recently enacting regulation. Today, we turn to Seung Chong, an attorney with Simmons & Simmons in Hong Kong, for a discussion of this development, which, it is interesting to note, involves the non-tradable shares issue. Seung advises on mergers and acquisitions and foreign investment in China.]
Share options give market a boost
By Seung Chong
Last week’s decision by the China Securities Regulatory Commission (CSRC) to allow listed companies to issue share options to employees is a salutary step to boost the domestic markets.
It gives companies the opportunity to add an important constituency to their shareholder base. It also gives the companies a powerful tool to incentivise and retain employees, in particular, senior management who can be rewarded by reference to share performance.
But, in order to take advantage of the regime, a company must apparently have first converted its non-tradeable shares into tradeable shares.
The overhang of non-tradeable shares has been blamed for the underperforming stock market, so the desire to issue options may be a powerful inducement to management to convert the non-tradeable shares.
Multinational companies seeking to standardise their global employment practices have been among the first to implement share incentive schemes in China. But the existing legal regime was not devised with share option schemes in mind.
Grey areas can be found in the rules on securities offerings and “safe harbours” designed to implement a share option scheme. There are also practical obstacles such as the difficulty of remitting foreign currency to exercise options. One solution is to implement cashless schemes. Under this plan, arrangements are made for the option holders to fund the exercise of options, and they are paid the net proceeds of the equity sale. But the problem with cashless schemes is that they defeat the very aim of encouraging long-term holdings by employees.
Some multinational companies have introduced phantom stock schemes or share appreciation rights. These are essentially cash bonus schemes, where the amount is linked to share price rises. Phantom schemes are often seen as undesirable because the payment has to be taken through the profit and loss account.
In devising a new regime, it is hoped that Chinese regulators will create a seamless and internally consistent regime for domestic companies and multinationals. But this may be a tall order.
Several factors need to be taken into account. First, the regulator is in the process of introducing new legal concepts such as the prohibition on companies to provide financial assistance to purchase its own shares.
Second, new option schemes will have to dovetail with the expected amendments to China’s company law. Third, any new regime will have to be an inter-agency effort as State-owned Assets Supervision and Administration Commission oversees many companies that may want to introduce share schemes.
Finally, share option schemes can only work in an environment where good governance is the norm. China needs, among others, tighter rules and enforcement on insider trading and an improved culture of compliance.
[Contact Seung Chong directly by e-mail. This article first appeared in the Financial Times, and is posted here with permission of the author.]
Posted by Richard at 1:44 PM | Comments (0)July 26, 2005
Audio: The Chinese Yuan Revaluation Scheme
Click the little triangle to listen to today's post.
The Chinese Yuan Revaluation Scheme: When An Offer of Appeasement is a Veiled Threat
While John Snow, Secretary of the United States Treasury, publicly offered praise, forex specialists downplayed the revaluation of the Chinese yuan, as did we. Why? A mere 2.1% movement in the currency, a narrow band of 0.3% in which it will trade – when 5-10% was predicted -- and the statement by Li De-shui that five more years will pass before the yuan may (not “will”) trade freely.
Chinese policy will change whenever it does, regardless of announcements. The chaotic torrent of conflicting statements on revaluation prior to that of last Thursday is proof aplenty. (I hesitate linking to them all for lack of space.) So the possibility of further revaluation exists. As does intelligent life on Neptune.
Indeed, it is more than likely than any further revaluation of the currency, if any occurs, will occur in the far-off future. This minor revaluation relieves China of its burden – mounting international pressure to acknowledge and appease. One can almost hear the echoes from half a globe away: “ 好了, 好了！给他们一点点就算了！” (“All right already, give them a little and be done with it!”)
Many outside China, however, had awaited more significant change with bated breath. Did the Chinese leadership expect that less would be seen as more? Not likely.
Since the earliest days of this weblog in 2000, I’ve consistently predicted that the yuan would not be revalued. [Unfortunately, the old site hosted at Salon.com is no longer accessible.] Despite economic indicators, unreliable at their core, and a Western fantasy of a China integrated with the world community, the Chinese leadership was unlikely to jump at an opportunity to injure the national interest where no palpable threat could be discerned.
After all, a fragile financial system and an uncontrollable currency make for frightening bedfellows. Remember what happened in Taiwan after revaluation in the mid-1980s -- I was there when it did -- and that system was stable. Exporters faced a miserable profit crunch that forced many out of business or off into southeast Asia; the island opened to competing imported products; and buyers went elsewhere to find sources. Just as importantly, the culture of the island changed，one would dare to say, radically.
And let us not forget the Chinese export machine that attracts investment, pumps out substantial revenues, employs at least tens of millions and indirectly helps to prolong the life of the Party. I am not talking about a party with funny hats, horns and poppers, but the Chinese Communist Party (CCP).
Technically, my prediction was wrong: the yuan was revalued last Thursday. But only minimally and to no significant effect.
And there was no threat -- no threat that was great enough to stimulate movement by the Chinese. What about the proposed Graham-Schumer bill in the American Congress? It would add a flat 27.5% tax on all Chinese imports. A fantastic idea, but only if your average WalMart shopper (and voter) could find pleasure by adding 27.5% to his bill at the checkout register. One can't imagine this bill passing.
Given the energy invested by the Americans in its full-court press, as well as the keen expectation that seemed to course electrically through world business communities, none can be delighted with the Chinese decision, perhaps not even the Chinese. So is this why the U.S has delayed review of CNOOC’s proposal to purchase Unocal? And CNOOC may now go "hostile?"
"Should the Chinese company fail to gain the backing of Unocal's board, it could explore other options including going hostile by taking an improved offer directly to shareholders. "At the end of the day, this is [Unocal] shareholders' call and not the board's call," says a person close to the deal. "The option is certainly there. Whether we use it depends on what happens in the next few days."
[Both links to FT require a subscription.]
What is the Bush administration to do, given the enormity of its failure to move the Chinese towards assumption of its notion of “free and fair trade?” China’s revaluation scheme is a threat. “We may move,” one might hear them say, “if we move at all, but we will move only in our interest and at the time of our choosing.” A very slight bow in acknowledgement of a demand, but never what might be perceived as 磕头 (“kow-tow”). Americans take notice.
Posted by Richard at 2:34 PM | Comments (0)July 21, 2005
China Removes Yuan Peg
Bloomberg and FT report that China has removed the renminbi's peg to the US dollar. At first glance, one doesn't see how this is anything other than a token offering lacking real substance: the Yuan is re-pegged at 8.11 and then allowed to trade within a very narrow band.
Along with a Q&A in Chinese, here is the statement of the People's Bank of China in English in its entirety:
Public Announcement of the People's Bank of China on Reforming the RMB Exchange Rate Regime
July 21, 2005
With a view to establish and improve the socialist market economic system in China, enable the market to fully play its role in resource allocation as well as to put in place and further strengthen the managed floating exchange rate regime based on market supply and demand, the People's Bank of China, with authorization of the State Council, is hereby making the following announcements regarding reforming the RMB exchange rate regime:
1. Starting from July 21, 2005, China will reform the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. RMB will no longer be pegged to the US dollar and the RMB exchange rate regime will be improved with greater flexibility.
2. The People's Bank of China will announce the closing price of a foreign currency such as the US dollar traded against the RMB in the inter-bank foreign exchange market after the closing of the market on each working day, and will make it the central parity for the trading against the RMB on the following working day.
3. The exchange rate of the US dollar against the RMB will be adjusted to 8.11 yuan per US dollar at the time of 19:00 hours of July 21, 2005. The foreign exchange designated banks may since adjust quotations of foreign currencies to their customers.
4. The daily trading price of the US dollar against the RMB in the inter-bank foreign exchange market will continue to be allowed to float within a band of ��0.3 percent around the central parity published by the People's Bank of China, while the trading prices of the non-US dollar currencies against the RMB will be allowed to move within a certain band announced by the People's Bank of China.
[Editor's note: "??0.3" appears in the original text.]
The People's Bank of China will make adjustment of the RMB exchange rate band when necessary according to market development as well as the economic and financial situation. The RMB exchange rate will be more flexible based on market condition with reference to a basket of currencies. The People's Bank of China is responsible for maintaining the RMB exchange rate basically stable at an adaptive and equilibrium level, so as to promote the basic equilibrium of the balance of payments and safeguard macroeconomic and financial stability.
Posted by Richard at 12:43 PM | Comments (0)July 13, 2005
Audio Update: Foreign Investment in "Local" Radio and TV
Click the little triangle to hear today's post.
UPDATE: Foreign Investment in "Local" Radio & TV
In the winter, rosy forecasts to the contrary, we detailed the restrictions placed upon foreign investment in the Chinese media.
Today's Beijing Morning Post writes of the announcement by the State Administration of Radio Film and Television (SARFT) of additional restrictions aimed at managing the investment behavior of the Chinese media itself. Stating that all TV and radio broadcasting operations are now seen as a forbidden zone for foreign investment (电视、广播频道的经营一贯被看作广电行业对外开放的禁区), the Morning Post writes in part, quoting Article 7 of the relevant regulation:
广电总局向各地方发出《广播影视系统地方外事工作管理规定》。规定明确指出，各地方广播电台、电视台不得向境外机构出租广播电视频道（率），不得与境外机构合资、合作经营广播电视频道（率）。
[Editors Translation: SARFT issued all localities with the Regulations Pertaining to the Management of Foreign Affairs in Localities of the TV Broadcasting System. (Note: the formal English name for this regulation is as yet unknown.) The regulation clearly points out that all local radio and TV stations shall not lease frequencies to, form joint ventures with or cooperatively operate broadcasting stations with foreign organizations.]
Co-operative programming appears to have been prohibited as well. There goes development of the Chinese version of the Antiques Roadshow!
One is not surprised at the development. The media is primarily an organ of state, and only recently a source of revenue. But the further promulgation of prohibitive regulation makes one think that the localities had expressed a good deal of interest in foreign cooperation. More on this as we see foreign reaction to the development.
Posted by Richard at 2:52 PM | Comments (0)July 12, 2005
ABA Event: Employment Issues in China
The ABA will host a CLE breakfast in Shanghai with a call-in for overseas participants.
CURRENT ISSUES FOR PRC WORKERS AND THE IMPLICATIONS FOR THEIR EMPLOYERS
Breakfast: Thursday, July 14, 2005, 7:30-9:00 am, in Shanghai
(Call-in: Wednesday, July 13, 2005, 7:30-9:00 pm EST)
Topic: As China’s legal system becomes increasingly sophisticated, and its economy increasingly developed, workers’ awareness of, and willingness to utilize, labor laws to challenge labor practices are also growing. Foreign-invested companies are feeling the effects of this shift. What are the key issues? How can employers effectively address workers’ concerns?
Speakers:
Mary Gallagher, Ass't Professor of Political Science, Univ. of Michigan
Dong Baohua, Professor, Labor Law Service Center for Workers, East China Univ. of Politics and Law
Ma Jianjun, Partner, Junhe Law Offices
American attorneys may receive CLE credit for participation. For more information, contact Jessica Elliot at 202-662-1663 or email Elliotj@staff.abanet.org.
Posted by Richard at 3:25 PM | Comments (0)July 10, 2005
Audio: Chinese Oil Rigs and Crews in Colorado
Click the little triangle to hear today's post.
Chinese Oil Rigs and Crews in Colorado
Shades of the Golden Horde? The hysteria continues into the 21st century:
"'Over the next couple of years, 10 Chinese [oil] rigs - and crews to operate at least half of those rigs - will be imported from China to the Rocky Mountain region of the U.S.,' said Bill Croyle, a partner in Western Energy Advisors."
In response, "Rep. John Salazar, D-Colo., whose district includes some of...[Colorado's]...largest gas fields, is not happy about the trend.
'I am totally against the Chinese government running the jobs in our country,' Salazar said. 'With the Chinese government getting involved, it's not even a competitive business model. Outsourcing has already claimed millions of jobs. We cannot allow that to happen within our own borders.'"
The Pipefitters Union naturally offered to protect its turf and its membership. But is reported to have stated, incredibly, that "importing Chinese crews could raise issues much like the controversy raised in the 1800s when Chinese laborers were used to build most of the West's railroads."
After all, in the 19th century, violence against Chinese the western U.S. was commonplace. "Attacks began in the 1850s against Chinese gold miners and continued throughout the century. In 1871, for example, a white mob descended on Los Angeles's Chinatown. Fighting erupted and when it was over, 15 Chinese were found hanged. Six years later, arsonists attempted to burn down the entire Chinatown in Chico, California."
I have a good deal of trouble deciding whether this union utterance, if accurate, is simply a bald-faced assertion of labor unrest or a veiled threat at something even less enlightened.
UPDATE, July 11, 2005: The Washington Times carries the story.
Posted by Richard at 6:28 PM | Comments (0)July 8, 2005
Enforcing a Judgment in China
Donald Clarke writes on the difficulties of enforcing a judgment in China. Quoting a Chinese judge: "...over half of civil and economic judgments require coercive enforcement."
Posted by Richard at 3:28 PM | Comments (0) | TrackBackABA Sponsors China Business Webcast and CLE
The American Bar Association, Section of International Law, and
The ABA Center for Continuing Legal Education Present a 90-Minute TeleConference and Live Audio Webcast
Business Opportunities & Challenges in China Today
Thursday, July 21, 2005, 8:30 PM - 10:00 PM ET in the U.S.
(Friday, July 22, 2005, 8:30 AM - 10:00 AM in China)
Overview
* The Chinese foreigh investment and business environments
* Opportunities and risks for foreign enterprises
* Legislative developments in the financial sector of China’s economy, including regulatory framework and administration of the regulatory process; the role of local financial and capital markets; relevant economic, financial and legal trends; and investment incentives and restrictions
Topics and Speakers
International IPO of Chinese companies
Henry Liu, Founder and Managing Partner, Hank Pacific Group (Hong Kong & New York)
Securities Regulations in China
Wenjie Niu, Director of Law Division, China Securities Depository & Clearing (Shenzhen)
Access to China’s Investment Fund Market
Mary S. Podesta, Senior Counsel, Investment Company Institute (Washington, DC)
Regulatory Framework and Access to China’s Insurance Sector
Amy Sommers, Partner, Squire, Sanders & Dempsey (Shanghai)
Disposal of Non-Performing Loans in China
Carson Wen, Chair, China Practice Group, Heller Ehrman White & McAuliffe (Hong Kong)
Program Co-Chairs
Richard B. Romney, Legal Consultant; Co-Chair, ABA International Investment and Development Committee (New York, NY)
Ying White, Counsel, Finance, World Bank; Co-Chair, ABA China Committee (Washington, DC)
American attorneys may earn CLE credit for participation in this program. Details here.
Posted by Richard at 1:13 PM | Comments (0) | TrackBackJuly 1, 2005
Dale Oesterle on CNOOC-Unocal
Note the Editor's updates to this post, found at its conclusion below.
[Editor's Note: I'd like to thank Dale Oesterle, professor of contract law at Ohio State University, who has graciously provided today's post, which also runs on his Business Law Prof Blog. Author of the casebook, The Law of Mergers and Acquisitions (West 2002), he addresses the question: will the US government approve the proposed union of CNOOC-Unocal?]
CNOOC's Bid for Unocal: CFIUS Approval
by Dale Oesterle, Professor of Law
J. Gilbert Reese Chair in Contract Law
Moritz College of Law, The Ohio State University
Hong Kong based CNOOC, Ltd, China's largest offshore oil producer made a bid last week for Unocal Corp. CNOOC is 71 percent owned by state controlled China National Offshore Oil Corporation. The acquisition falls under of the interagency Committee on Foreign Investment in the United States (CFIUS). CFIUS, a committee that has worked in relative obscurity (it is the last chapter, never covered, in my Mergers & Acquisition casebook), will now be in the bright lights. The Unocal acquisition appears to be the first of many attempts by China and Chinese companies to buy American companies.
CFIUS has its origins in the Exon-Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988. A Japanese company, Fujitsu had attempted a takeover of Fairchild Semiconductor Corporation in 1987 and the Exon-Florio Amendment was Congress's response. The President now has the authority to block foreign acquisitions of American companies if the acquisitions "threaten to impair the national security." The President delegated authority under the Act to CFIUS to investigate and advise the President on whether foreign acquisitions threaten national security. CFIUS is chaired by the Secretary of the Treasury and has eleven members -- representatives of the Departments of Treasury, State, Defense, Commerce, and Justice, and the Office of the Trade Representation, the Office of Management and Budget, the Chair of the Council of Economic Advisors, an Assistant to the President for Economic Policy and the Director of the Office of Science and Technology Policy. National security is not defined but Congress included a list of "factors" that include a focus on national defense requirements. Oil would clearly meet one of the factors; oil production is necessary for the "capacity of domestic industries to meet national defense requirements."
The Unocal acquisition will be a test case for CFUIS and our response to China's efforts to buy major American companies. I suspect that CFUIS will recommend that the President block the acquisition and that the President will agree to do so. In so doing, of course, the President will make Chinese officials very unhappy. China, however, does not let Americans buy controlling stakes in Chinese companies and in international affairs, reciprocity is the name of the game.
[Editor's Update, July 3, 2005: In light of this post, see also FT's article Congress Votes to Stymie CNOOC Bid. Subscription required for the entire article. But the first paragraph: "Political pressure surrounding CNOOC’s $18.5bn unsolicited bid for Unocal, the California oil company, was stepped up on Thursday as Washington lawmakers overwhelmingly supported a measure aimed at blocking the bid by cutting off funds for the Bush administration to investigate the deal."]
[Editor's Update, July 8, 2005: From the Financial Times.
"The proposed deal does raise questions but most relate to its commercial logic. China’s belief that it needs to buy resources producers in order to secure supplies makes sense only if its companies can manage them more efficiently than their owners. Otherwise, locking up capital to acquire raw materials that are freely traded on world markets is at best wasteful and at worst very risky. Odder still is CNOOC’s belief that it needs to buy a US oil company to gain access to Asian reserves which it could have bought directly from elsewhere. Integrating management, operations and corporate cultures will be a formidable task, of which the Chinese company has no previous experience, and it may also be obliged to dispose of some of Unocal’s assets."
Subscription required to view the entire article.]
Posted by Richard at 1:13 PM | Comments (0) | TrackBack
