Controlling Shareholders Tunneling And Protection Of Minority Investors

With the development of modern corporate governance, the core of Agency Theory has become interest conflicts between controlling shareholders and minority investors, instead of traditional conflicts between owners and management. Controlling shareholders have the power to control the whole company, and can embezzle the interest of minority investors through tunneling. The interest conflicts between controlling shareholders and minority investors, and the minority investors’protection have become the focus of current capital market, which are quite meaningful for both theoretical studies and empirical practices. In China’s capital market, controlling shareholders tunnel publicly traded companies, and invade interests of minority investors are quite common even though it was banned.*ST Hou Wang, Top Software and Wuliangye are the best illusions. China Securities Regulatory Commission (CSRC) now pays more attention on the protection of minority investors. While some controlling shareholders still ignore the surveillance, embezzle the publicly traded companies through related connections, so that they can get the private benefits of control. How to protect the interests of minority investors from embezzling is the key to keep our capital market operating and developing sustainably.From November2010to October2011, Weifang Yaxing Chemical Co. Ltd was investigated by CSRC twice within a year. It was reported that Yaxing Chemical had irregularities about related-party transactions, expropriation of funds and irregular related-party guarantees. This dissertation will take Weifang Yaxing Chemical Co. as the case, based on the Principle of Corporate Governance, the Tunneling and minority investors’protection, thoroughly analyze negative effects of controlling shareholders’tunneling, and discuss the defect of Yaxing’s corporate governance. Furthermore, several questions are asked. In China’s capital market, why the tunneling is still commonly seen despite repeated prohibitions? Under such circumstance, how can we protect the interests of minority investors? How can we make sure the whole market works and develops? This dissertation includes six parts. Chapter I is introduction, which introduces the background of this dissertation, research significance and methods of this research, and concludes the contributions and deficiencies of the study.Chapter Ⅱ is literature review. The former studies on related-party transactions, corporate governance and controlling shareholders’tunneling, and minority investors’ protection are conclude and reviewed in this part. The current studies focus on how the ownership structure, board of directors, institutional investors, internal control, laws and regulations and market surveillance influence on the controlling shareholders’ tunneling and embezzlement.Chapter Ⅲ is theoretical analysis. Elaborating the theory of corporate governance, controlling shareholders’tunneling and propping, protection of minority investors in detail, the following analysis can be fully supported by theory.Chapter Ⅳ is the case study. In the beginning, the facts of Yaxing’s controlling shareholder tunneling and embezzling are listed. Then based on Yaxing Chemical’s annual financial reports, its solvency, operation capacity and profitability are analyzed. According to the analysis, Yaxing Chemical’s operation was in severe condition due to the tunneling and embezzlement by its controlling shareholder. Thus, the interests of minority investors are severely damaged due to Yaxing Chemical’s poor perfonnance. Yaxing’s stock price, cash flow and dividends are the best implications.Chapter Ⅴ discusses the defects in Yaxing’s corporate governance. In accordance with the study, unreasonable ownership structure, non-action of directors board, invalid board of supervisors and internal control, as well as low violation cost are the main reasons of Yaxing’s controlling shareholder tunneling and embezzling the interest of the company and its minority investors.Chapter Ⅵ is conclusion and suggestions. In accordance with the case study, using the former studies and researches for reference, several suggestions on Yaxing’s corporate governance are offered. It is expected that these suggestions can effectively contain the controlling shareholder’s tunneling and embezzlement, so that minority investors’interests can be protected.Large shareholders’tunneling and embezzlement deteriorate the operation and profitability of listed companies. In this dissertation, the flaws and defects of Yaxing’s operate governance are thoroughly analyzed. Hence, several suggestions and methods are offered. By completing the corporate governance, controlling shareholders’tunneling and embezzlement shall be contained, and minority investors’interests are protected.The contributions of this dissertation are listed as follow:(1) Analyzing the negative effects of tunneling on listed companies under current circumstances, especially with current laws and regulations, this case study is quite time-effective.(2) China Securities Regulatory Commission and other market-surveillance institutions have realized the importance of minority investors’ protection. It is necessary to protect and preserve the interests of minority investors, so that China’s capital market can operate and work in long-term. Therefore, a sufficient law system has been established, CSRC mainly focuses on the regulation of controlling shareholders’ behaviors and the information disclosures. With current laws and regulations, it is useless to provoke for legislative perfection. It is suggested that CSRC should pay attention to the violation cost of controlling shareholders. The current violation cost is too low to stop controlling shareholders from tunneling and embezzling.(3) Director of minority investors shall be established, which represent the common interests of minority investors. Director of minority investors does not participate in the company’s daily operation, but it can monitor the behavior of controlling shareholder and director board. With the establishment of director of minority investors, their interests can no longer been dismissed.There are some imperfections about this dissertation as well.(1) This is a case study. The suggestions and methods are based on one typical case, which makes them quite limited. Whether they are effective to the whole market or not, shall be further verified.(2) The key of agency theory is monitor and stimulate. Director of minority investors can elevate the monitor of controlling shareholders and directors board. But the methods to stimulate controlling shareholders to protect minority investors still remain vacant. The motive and capacity of controlling shareholders to tunnel still exist.