[Abstract]
During enforcement of this case, the Court ruled that where an asset management plan participates in the judicial auction, the manager of the plan may, in its own name, bid in the auction on behalf of the plan; provided that, if the manager wins the auction, the underlying asset should be transferred to the special account of the plan. The Court also made it clear that it is necessary to review the manager’s sources of funds used for the auction. This case pioneered in widening the scope of bidders eligible to participate in a judicial auction and regulating the participation of asset management plans in judicial auction.
[Keywords]
Asset management plan; bidder in judicial auction; collateralized repurchase of securities
Applicant: Haitong Securities Co., Ltd, domiciled in Huangpu District, Shanghai.
Legal representative: Zhou, Chairman of the Board
Person subject to Enforcement: China Wallink Holding Group Co., Ltd., domiciled in Miyun District, Beijing.
Legal representative: Ding.
Person subject to Enforcement: Ding.
The Meditated Settlement Agreement (2019) Hu 74 Min Chu No. 2103 issued by the Shanghai Financial Court (the “Court”) regarding the dispute over collateralized repurchase of securities between Haitong Securities Co., Ltd., as the Plaintiff, and China Wallink Holding Group Co., Ltd. and Ding, as the Defendants, had entered into force, but both the Defendants failed to fulfill their obligations thereunder within the due time. Accordingly, the Plaintiff Haitong Securities Co., Ltd. applied to the Court for enforcement of the Meditated Settlement Agreement. On October 9, 2019, the Court registered the Enforcement Case No. (2019) Hu 74 Zhi No. 483, and later, introduced an auction to disposal of the 27,236,814 unrestricted tradable shares held by the Person subject to Enforcement, China Wallink Holding Group Co., Ltd., in the SZSE-listed Beijing Jingxi Culture & Tourism Co., Ltd. (Stock Name: Beijing Culture, Ticker Symbol: 000802). An intended bidder, Shanghai Haitong Securities Asset Management Co., Ltd., applied to the Court for participation in this auction as the manager of and on behalf of “Haitong Securities Asset Management No. 1 FOF Single Asset Management Plan” (“Asset Management Plan”).
The Court opined that, though the Asset Management Plan itself is not a qualified party to any civil legal relation, the manager may, in its own name, bid in auction, provided that when it wins the bid, transfer the underlying share to the special securities account of the Plan. However, to prevent the manager from abusing its status to the damage of the interest of the investors, the Court should carefully examine the bidding manager’s sources of funds used for the auction, and the manager is obligated to disclose its sources of funds and ensure that the bidding funds are from the Asset Management Plan.
As granted by the Court, the intended bidder Shanghai Haitong Securities Asset Management Co., Ltd. bid in the judicial auction after paying a deposit of RMB28,000,000.
[Comment]
In this case emerged the issues that whether an asset management plan is qualified to participate in judicial auction, and if yes, what procedures shall apply. Recent years have seen rapid development of the asset management industry and asset management plans have become one of the most active market players. Accordingly, asset management plans managed by professional managers have shown increasingly strong intention to participate in enforcement procedures and invest in the assets underlying judicial auction. Participation of asset management plans in judicial auction will create a more active market, enable higher disposal success rate and premium rate, and better protect the rights and interests of the winning parties of the litigations. This is especially true as to cases on collateralized repurchase of securities, wherein stocks of listed companies and other negotiable securities account for a large portion of the properties to be disposed of. Such facts gave rise to many issues which must be addressed—whether an asset management plan may bid in judicial auction and whether the manager of an asset management plan is permitted to bid in its own name but with funds sourced from the plan. During enforcement of this case, the Court established the rules on the qualification of the Asset Management Plan for bidding in the judicial auction, sources of funds, and transfer of the underlying asset, pioneering in regulation of participation by asset management plan in judicial auction.
I. Qualification of asset management plan for bidding in a judicial auction
1. Whether an asset management plan is qualified to participate in judicial auction in its own name?
Through full discussion, the collegiate panel opined that, judicial auction by its nature is a civil conduct and should possess the essential elements to be effective. On this ground, bidders should be citizens, legal persons, or other organizations that have full capacity both for civil rights and civil conducts. Article 14.1 of the Provisions of the Supreme People’s Court on Several Issues Concerning Online Judicial Sale by People’s Courts writes: “A bidder shall have full capacity for civil conduct, and meet additional requirements, if any, imposed by laws and administrative regulations for sale and purchase of the underlying asset.” Therefore, being neither an independent legal person nor an unincorporated organization as defined in the Civil Law and Civil Procedure Law, the Asset Management Plan is not qualified to participate in judicial auction in its own name.
2. Can the manager, in its own name, participate in the judicial auction on behalf of the Asset Management Plan?
Further analysis is required to answer this question.
Firstly, in terms of qualification of civil subjects, the manager in this case is a legal person incorporated according to law and has the capacity for civil rights and civil conduct. Therefore, the manager may, unless otherwise explicitly prohibited by the law, enter into any civil legal relation, or coming to this case, participate in judicial auctions in its own name.
Secondly, in terms of practicability, as required by Article 12 of the Provisions of the China Securities Regulatory Commission on the Administration of Operation of Privately Offered Asset Management Plans of Securities and Futures Business Institutions (“Operation Provisions”), an asset management plan should open a fund account, a securities account, a futures account, and other necessary accounts. And according to the business rules and guidelines of China Securities Depository and Clearing Corporation Limited, an asset management plan established in accordance with laws may open a special securities account. Therefore, if the manager wins the bid, there is no obstacle that will prevent transfer of the underlying stocks to the securities account of the Asset Management Plan.
Thirdly, in terms of regulation systems, Articles 2 and 9 of the Guiding Opinions of the People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange on Regulating the Asset Management Business of Financial Institutions (“New Regulations on Asset Management”) stipulate that, the manager in the asset management business is entrusted to invest with and manage the investors’ property. This provision thus grants the manager the legal capacity to manage and dispose of the property under the Asset Management Plan. Article 8 (9) of the New Regulations on Asset Management further specifies that, it is the manager’s duty to, in its own name, participate in litigation and perform other juridical acts for and on behalf of the investors. Therefore, by bidding in the judicial auction on behalf of the Asset Management Plan, the manager is performing such duty as stipulated in the above regulations.
Moreover, in accordance with Articles 11 (2) and 11 (11) of the Measures of the China Securities Regulatory Commission for the Administration of Privately Offered Asset Management Business of Securities and Futures Business Institutions (“Measures for Asset Management”), securities and futures business institutions engaging in privately offered asset management business as managers should “separately manage, account for, and invest with the property entrusted to it under different asset management plans” and, “in its own name, participate in litigation and perform other juridical acts for and on behalf of the investors”. Hence, Bidding for the stock to be disposed of in a judicial auction is apparently an investment activity that the manager makes with the assets under the plan for and on behalf of the investors. Such investment not only complies with regulatory rules but also is a basic activity of the asset management business.
Lastly, in terms of the legal theory and legal relation, the current theories divide in the nature of asset management business, that is, some deem it to be a trust, while others holds that it is in essence a delegation relation. That said, most asset management plans are designed according to the trust theory. Article 2 of the Trust Law of the People’s Republic of China defines trust as an act by which “a trustor, out of its confidence in the trustee, entrusts certain property it owns to the trustee and the trustee manages or disposes of such property in its own name in accordance with the intentions of the trustor and for the benefit of the beneficiary or for specific purposes.” And in the asset management business, investors entrust their properties to a manager, who will be responsible for the investment and profit allocation; the purpose of such business is “to manage clients’ property as entrusted”. Hence, the asset management business mode falls within the definition of trust.
In addition, Article 2 of the New Regulations on Asset Management provides that: “asset management business refers to the financial services in which a banking, trust, securities, fund, futures, or insurance asset management institution, financial asset investment company, or any other financial institution, as entrusted by an investor, invests and manages the entrusted property of the investor.” This definition is also consistent with the definition of trust in the Trust Law.
According to the general doctrine of the Trust Law, upon establishment of a trust, the trustor forfeits its right to possess, manage, and dispose of the entrusted property to the manager. Therefore, it is a proper conduct of the manager within its authority scope to bid with the entrusted property is and should be granted.
II. Judicial Examination in the Course of Auction
1. Necessity of judicial examination
Judicial auction forms an important part of enforcement by the people’s courts. In judicial auction, the court should maintain judicial authority and protect the legitimate rights and interests of the parties concerned. A manager’s participation in the judicial auction on behalf of its asset management plan is inherently different from a common bidder’s. Therefore, a court should be more prudent in examining the issues that may arise during auction.
In this case, the Court, in order to protect the legitimate rights and interests of the investors under the Asset Management Plan and prevent the manager from leveraging the judicial procedures to infringe on the interests of the investors, examined the judicial auction from the perspective of independence assurance for the property under the Asset Management Plan and the requirements for risk isolation.
2. Examination of property independence under an asset management plan
According to Articles 2, 8, and 15 of the New Regulations on Asset Management, in the asset management business, “a trustor shall bear the risks and enjoy the returns”; the manager “shall separately manage, account for, and invest with the property entrusted to it under different products”; and “the manager shall separately manage, keep separate books for, and separately account the assets under each asset management product, and shall not develop or engage in cash pooling business that is characterized by rollover offering, centralized operation, and partitioned pricing.” According to Articles 6 (2) to (4) of the Measures for Asset Management, the property under an asset management plan should be segregated from the self-owned property of the securities and futures business institutions and the trustee as well as from other assets managed by the securities and futures business institutions or entrusted to the trustee; the securities and futures business institutions and trustees should not account asset management plans as their own property. The assets and interests that the securities and futures business institutions and trustees obtain from management and use of an asset management plan or otherwise should be recognized as the property under such asset management plan. The property under an asset management plan shall be excluded from the liquidation property of the securities and futures business institutions and trustee.
The above provisions have established the independence doctrine for the property under an asset management plan, that is, the entrusted property is independent from the self-owned property of the manager to avoid commingling, either of the trustor’s property with that of the manager, or of properties under different asset management plans. Such independence echoes the segregation of entrusted property in a trust.
Therefore, the manager should bid only with the property of the asset management plan on behalf of which it makes the bid. In order to maintain the rules of the asset management industry, protect investor’s legitimate rights and interests, and promote financial stability, the court should examine the sources of funds that the manager uses for bidding to ascertain that such funds are from a specific asset management plan. To this purpose, the manager is required to produce the proof of fund source, as early as from payment of the deposit.
3. Transfer of the underlying assets after bid winning
When considering the issue whether the manager should be granted to participate in the judicial auction or not, the Court took into account many factors, one of which is how the underlying asset is to be transferred if the manager representing the Asset Management Plan wins the bid. As mentioned above, an asset management plan may open a special securities account and the bidding funds should be sourced from the asset management plan. Therefore, when the manager wins the bid and having made the final payment within the prescribed time, the Court should transfer the underlying shares to the special securities account of the Asset Management Plan rather than the securities account of the manager. This practice is consistent with the requirements for segregation of entrusted properties in the asset management business.
The Court further opined that in like circumstances, if a manager fails to voluntarily disclose in advance that it participated the judicial auction on behalf of an asset management plan but the court later finds that the manager’s bidding funds are from such asset management plan, the court should require such manager, if it wins the auction, to provide the securities account of the asset management plan and transfer the underlying shares to such account.
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