By Han Yuting (韩雨亭), Lu Liyi (鲁礼义 )
Issue 586, Sept 10, 2012
Corporation, page 29
Translated by Tang Xiangyang
Original article: [Chinese]

Chen Fashu (陈发树), the richest man in Fujian, is taking on Yunnan’s most influential state-owned enterprise and the massive tobacco monopoly that oversees it.

In 2009, Chen, chairman of the New Huadu Industrial Group, (新华都集团), spent 2.2 billion yuan to purchase a 12 percent stake in the Yunnan Baiyao Group (云南白药), which produces products like medicine and toothpaste. The company is a subsidiary of the Yunnan Hongta Group (云南红塔集团).

The contract said that the deal required approval from Yunnan Hongta’s parent company China National Tobacco Corporation (中国国家烟草公司), also known as China Tobacco. The contract also stated that the Hongta Group had to inform Chen in a timely fashion if the deal was rejected.

After paying, but failing to receive his shares for over two years, Chen has chosen to sue.  The case deals with shares worth a record high for China’s legal system.

The lawsuit has added significance since it challenges state-owned China Tobacco, which holds a monopoly over the tobacco industry that accounts for 38 percent of the world’s cigarette sales. The company also functions as regulator over the industry and invests in several other fields. With a net income of $18.7 billion, it was the 18th largest company in the world by profits in 2010.

The Yunnan Provincial Supreme People’s Court didn’t expect so many journalists at the long-awaited court proceedings on Aug 23. It had to temporarily add a few of rows of seats, but many reporters still had to crowd in.

This was the first time for the two sides to argue in court. But many were disappointed that neither Chen Fashu nor Li Jianbo (李剑波), the legal representative of Hongta Group, showed up. There were just four lawyers; two for each side.  

The core issues were whether Hongta Group purposely delayed fulfilling the contract, whether China Tobacco had the right to reject the deal, whether Chen should get compensation, and whether the deal caused “the loss of state-owned assets.”

Against Great Odds

On Jan 4, 2009 China Tobacco authorized Hongta Group to sell its 12.32 percent share of Baiyao Group. Chen Fashu seized the opportunity and came to Yuxi City of Yunnan Province to sign the contract with Hongta Group and purchase 65.81 million shares for 2.2 billion yuan.

However, after 800 days Chen still hadn’t received the shares, although he’d paid the money. “We’d like to know what happened over the past 800 days,” his lawyer said in court. “What were you thinking? You have to tell us.”

It’s estimated that for a case to go through approval at the State-owned Asset Supervision and Administration Commission (SASAC), the average waiting period is 99 days, while that for the Ministry of Finance is 73 days.

Chen couldn’t wait any longer. So on Dec 8, 2011, he filed suit with the Yunnan Supreme People’s Court and the case was accepted.

On Jan 17, 2012, China Tobacco stated that the application from Hongta Group was rejected on the grounds that it would result in the loss of state-owned assets.

Chen was planning to sue as early as last year. Li Qing (李庆), one of his two lawyers, recalled telling Chen that it was very possible the case would last a long time. “Are you sure we will sue them?” he asked. “Isn’t it better we give up, admit bad luck, get the 2.2 billion yuan back and start another investment immediately? I think time is precious for entrepreneurs.”

But Chen replied, “I have to protect my own rights, even if I can’t get the money for a couple of years.”

Chen has predicted two possible outcomes for the case. The best scenario is he gets the shares, as well as the equity transfer and interest. But he doesn’t see much hope in that since the value of the shares has now increased to over six billion yuan.

The worst situation is he fails in his lawsuit and simply gets the original 2.2 billion yuan investment back. Chen’s lawyers predict the latter since they’re suing a state-owned enterprise and its mother company China Tobacco.

Chen’s family members and friends have been trying to persuade him to give up the case and just get the 2.2 billion yuan back. But Chen has refused to give up.

Li Qing mentioned an online survey in which 90 percent of respondents support Chen and hope the “unreasonable rules” will be improved. But 80 percent say he will lose.

“I’m always confident in the Chinese government’s support of the private economy, “Chen said. “That’s why I’m confident in this case.”

Li Qing said that Chen is hoping to change the disadvantageous position private companies have when facing state-owned counterparts. He hopes it may prevent someone else like him from being trapped in the future.

On Apr 16, Chen’s lawyer applied for administrative reconsideration from China Tobacco, which is also positioned as National Tobacco Monopoly Bureau (国家烟草专卖局) – a regulator. He was refused once again because the bureau claimed it was a company, not an administrative organization. So Chen lodged an administrative appeal with Beijing’s First Intermediate Court, but was refused once again on the grounds that “The case is not covered by the court.”

The two refusals reminded Chen of the film The Story of Qiu-Ju, where the female protagonist tries to sue the head of her village, but is rebuffed with excuses time and again by different agencies unwilling to settle a suit against a government head.

This isn’t the first time for Chen to deal with a state-owned enterprise. He has also invested in Zijin Mining (紫金矿业), Wuyishan Travel (武夷山旅游) and Tsingdao Beer (青岛啤酒). But those three investments each brought him huge profits.

Who Can be the Authority?

Chen has also filed a suit against China Tobacco because, according to a notice released by the Ministry of Finance in 2004, the ministry is the only body authorized to reject the deal.

It’s because of China Tobacco’s rejection that the deal had to be scrapped, but there wasn’t a clear definition of the reason it gave: “preventing the loss of state-owned assets.”

Chen and his lawyers speculate that perhaps the real reason for the rejection is that China Tobacco can’t accept losing the shares now that their value has reached more than six billion yuan.

Li Qing said that “preventing the loss of state-owned assets” was nothing but an excuse.  He says that based on the rules of transferring shares of state-owned enterprises released by the SASAC and China Securities Regulatory Commission (CSRC), China Tobacco has already fulfilled its responsibility. As the investor it already agreed to Hongta Group selling the shares and checked for irregularities when the deal was drawn up. If the contract has no problem, it has to be turned over to the Ministry of Finance.

“China Tobacco has no right to reject,” Li said. “If, as an investor, it regrets having signed the deal, it has to tell the partner immediately. Then it only has to bear the responsibility of breaking a contract. But why did it delay (telling Chen) for that long? This attitude is irresponsible as a supervisor of a state-owned asset.”

But Hongta Group disagrees. A lawyer representing the company said the price of a Yunnan Baoyao share had increased to over 74 yuan, more than double the contracted price. On the day when court proceedings began, the price was 63.3 yuan - still much higher than the contracted price. If the contract was fulfilled, that would be “a loss of state-owned assets.” That was why China Tobacco rejected the deal.

Professor Liu Xue , deputy dean of Peking University’s Guanghua School of Management, said, “Losing state-owned assets shouldn’t be an excuse for state-owned enterprises to break a contract unilaterally.”

Another focus of the court was who has the right to examine and approve the deal.
Hongta Group’s supervisor is China Tobacco Yunnan Industrial Co. Ltd., whose supervisor is China Tobacco. China Tobacco Yunnan Industrial Co. Ltd told Chen it only stated that when the deal was done, it had to report to its mother company, China Tobacco.

Hongta Group’s lawyer said the company had fulfilled its responsibility to report the deal to its supervisor, but it had no say in when the latter would reply. Additionally, it’s not written in law when the latter should reply. He said Hongta Group didn’t break the contract.

In court, Chen’s lawyers frequently repeated that “China Tobacco is only authorized to report the deal [to the Ministry of Finance]. It has no right to reject it.”

He quoted a notice from the Ministry of Finance saying that “Any equity transfer of the subsidiaries of China Tobacco whose value of major business is over 100 million yuan and that of multiple businesses is over 200 million yuan has to be reported to the mother company. The latter will then report it to the Ministry of Finance for examination and approval.”

Li Qing said that in the notice Hongta Group issued to Chen, it had replaced “authorized state-owned asset supervision and administration organization” with “supervisor.”

The Yunnan Supreme People's Court began hearing the case on August 23. At the time of print, no verdict had been announced.