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Hong Kong: Chinese companies get some market discipline

Independent shareholders are voting against unnecessary inter-group transactions.

Mainland Chinese companies listing in Hong Kong are still being welcomed with open arms by regulators and sponsoring banks but there are signs that investment institutions are beginning to exert some market discipline on Chinese companies in which they invest.

A recent example came in late March when the independent minority shareholders of state-owned oil and gas exploration company CNOOC voted down proposals by the board of the company to place huge sums of cash with sister company CNOOC Finance Corporation on an unsecured basis, rather than with independent commercial banks.

The proposals were part of what are referred to as ongoing connected party transactions and are commonplace in Hong Kong-listed companies, especially among Chinese state-owned enterprises that have sold minority stakes to the market but remain tightly controlled by government organs. Such transactions are normally granted waivers from independent shareholder approval for a specific time period by the Hong Kong Stock Exchange at the time of listing, after which they require a renewal authority from independent shareholders. Hitherto, such approvals have been largely routine in nature.

Against

That has now changed. After unsuccessful attempts in the past to vote down the arrangements, at CNOOC’s latest general meeting called to approve the proposals more than 52% of independent shareholders voted against the resolution.

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