01The legal nature of pre-dividends

Legally, shareholders can distribute profits from the project company, provided that the project company meets the conditions for profit distribution. Pre-dividend is a concept created, which is a term for distributing shareholders under the conditions of non-compliance with profit distribution by the project company, and in essence, we understand that pre-dividend is the project company's lending of surplus funds to shareholders for use, and actually forming a current payment between shareholders and the project company. After the project company pays dividends to the trust company, the liabilities of the trust company (as the trust trustee) to the project company are formed, and the receivables of the project company to the shareholders are generally formed in accounting treatment. The borrowing of funds between shareholders and the company does not violate the mandatory provisions of laws and regulations.

Since pre-dividends essentially form the liabilities of the trust to the project company, do such liabilities meet the liability management requirements of laws and regulations such as the Measures for the Administration of Trust Companies?

Article 19 of the Measures for the Administration of Trust Companies stipulates that "when a trust company manages, uses or disposes of trust property, it may, in accordance with the provisions of the trust document, adopt methods such as investment, sale, deposit with the interbank, purchase and resale, lease, loan, etc." Where the China Banking Regulatory Commission has other provisions, those provisions shall prevail. Trust companies are not allowed to manage and use trust property by way of sale and repurchase. ”

Article 21 of the Measures for the Administration of Trust Companies stipulates that "a trust company shall not carry out liability business other than interbank spin-off business, and the interbank swap-in balance shall not exceed 20% of its net assets." Except as otherwise provided by the China Banking Regulatory Commission. ”

Article 20 of the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions stipulates that "asset management products shall set an upper limit on the liability ratio (total assets/net assets), and a unified upper limit on the liability ratio shall be applied to similar products." The total assets of each open-ended public offering product shall not exceed 140% of the net assets of the product, and the total assets of each closed-end public offering product and each private offering product shall not exceed 200% of the net assets of the product. When calculating the total assets of a single product, the total assets of the invested asset management products should be calculated together in accordance with the penetration principle. Financial institutions shall not use the share of asset management products entrusted to them for pledge financing and increase leverage. ”

The author's team understands that the Measures for the Administration of Trust Companies have restrictive provisions on liability business, but there are no very clear provisions on whether a trust plan can be liable. The Guiding Opinions on Regulating the Asset Management Business of Financial Institutions unifies the liability ratio of asset management products, which is equivalent to recognizing that asset management products (including trust products) can have liabilities.

However, it should be noted that Article 15 of the Interim Measures for the Trust Management of Trust Company Funds (Draft for Comments) stipulates that "trust companies carrying out fund trust business other than fixed income securities investment fund trust business shall not provide external guarantees with trust property, shall not use trust property by way of sale and repurchase, and shall not integrate or covertly integrate into funds, except as otherwise provided by the banking regulatory authority under the State Council." Whether the advance dividend falls under the "integration of funds or disguised integration of funds" prohibited by the provisions needs to be further explored.

02Compliance and legal risks of pre-dividends

First: compliance risk

Will the pre-dividend arrangement result in the trust project being recognized as a financing business?

The Administrative Code for the Filing of Private Asset Management Plans of Securities and Futures Operators No. 4 - Private Equity Asset Management Plans for Investment in Real Estate Development Enterprises and Projects stipulates that "the term "real debt of famous stocks as used in this specification" refers to an investment method in which the return on investment is not linked to the business performance of the invested enterprise, and is not distributed according to the investment income or loss of the enterprise, but provides investors with a commitment to guarantee principal and guaranteed income, pays fixed income to investors on a regular basis according to the agreement, and redeems the equity or repays the principal and interest by the invested enterprise after meeting specific conditions." Common forms include buybacks, third-party acquisitions, gambling, regular dividends, etc. "Although this provision does not apply to trust companies, under the current unified regulatory standards for asset management products, it has important reference significance for determining whether it is a financing business."

The author's team understands that whether a trust project is financing or investment should be determined according to the overall transaction structure, credit base, source of income and risk-bearing method of the project, etc., and that pre-dividends or the transfer (borrowing) of funds between shareholders and the company are common arrangements in commercial transactions, and the nature of the project cannot be determined solely based on the arrangement or operation of pre-dividends in the project. If the pre-dividend is a disguised realization of fixed income (investment principal and interest) and is not linked to the company's business performance, it may be recognized as a financing business, such as the final return on investment of the trust is linked to the operating performance of the invested project company, the pre-dividend is based on the actual operating situation of the project company and the cash flow surplus as the premise, each shareholder obtains according to the proportion of shareholding, and the pre-dividend during the period is settled accordingly when the final trust exits, and the project company or other shareholders do not promise or guarantee the pre-dividend, The author's team believes that it will not be recognized as a financing business due to the pre-dividend arrangement.

Second: legal risks

1. If the interests of creditors are harmed (e.g., if the project company is unable to repay the relevant payments of creditors due to pre-dividends), creditors may require the trust company to return the pre-dividends in accordance with relevant laws and regulations. Similarly, since pre-dividends constitute a debt, the project company also has the right to claim repayment by the trust.

2. If the profit after the final settlement (liquidation) of the investment project is less than the amount of pre-dividend, it will involve the return of the trust company to the project company, and the trust company may have already distributed to the beneficiaries, resulting in the return being operationally infeasible or difficult. It is recommended that the following points be considered in the operation:

(a) The calculation of the amount or proportion of pre-dividends should be controlled within the final distributable profits of the project company as much as possible, and the situation of return should be avoided as much as possible;

(b) If it withdraws by way of equity transfer, return the advance dividend payment to the project company at the corresponding equity transfer price, and settle the debts formed by the trust and the project company due to the advance dividend;

(c) The trust document fully discloses to investors the possible risks of pre-dividends.

(This article is translated by software translator for reference only.)