5.3.2.2.2 Corporate divisions

Corporate division, as a form of company restructuring, has its rationale. It helps to rearrange the corporate assets, restructure the company, lower the investment risk and enhance the company's profitability by enabling a clearer focus on the business through the restructuring.

Two forms of division are included in the company law. One is division by the formation of new companies,1 the reverse operation of a consolidation as defined in the Delaware Corporate Statute. Expressed by a formula: Company Z = Company X + Company Y. The other is division by acquisition,2 the reverse operation of a merger: Company X = Company X + Company Y. As to the first type, in the split-up of a company, the assets thereof shall be divided accordingly, and the balance sheets and lists of assets prepared.3 The companies resulting from the division shall assume joint and several liability for the debts of the company prior to its division except [unless] otherwise stipulated in a written agreement concluded before the division by and between the company and its creditor.4 As to the second, the result is the creation of a parent company and a 100 per cent subsidiary (or subsidiaries). Currently in China, the form most often adopted is the second one and it is mainly effectuated by state owned companies or companies limited by shares (close companies).5

It is unquestionable that a division as a form of corporate restructuring is a fundamental corporate change since the business focus and management strategy may be modified through divisions, and the proposal for division may encounter opposition from minority shareholders. The substantial change of the interests and investment expectations justifies the availability of the appraisal remedy. But the question whether such an operation always constitutes a substantial change and affects minority shareholder 's interests and expectations should be answered in accordance with the types of divisions we are referring to. In the US, divisions are one form of corporate reorganization and no appraisal rights are granted. In China, this is included in Article 75, but I think it should be restricted to divisions by the formation of new companies, excluding divisions by acquisition. As in the case of merger between parent and (nearly) wholly controlled subsidiaries, a division by acquisition, where a parent company and a 100 per cent sub sidiary (or subsidiaries) are created, hardly affects the interests of shareholders in the parent company, and the appraisal remedy should not be made available to them because such a division does not constitute a change to their fundamental investment expectations.