After protests, China reverses course on law that hurt shareholders

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NPC reverses course on company law revisions after dissent

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17 protests held in 11 Chinese regions in Nov & Dec

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Record number of China economic related protests in Oct: CDM

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Rare nationwide protests censored on social media

By James Pomfret and Engen Tham

HONG KONG/SHANGHAI, Dec 23 (Reuters) - China's top legislative body stepped in on Monday to soften the terms of a controversial law meant to strengthen the hands of creditors by letting them target former shareholders in companies, after a wave of rare protests in 11 cities.

The move by the legislative affairs commission of the National People's Congress (NPC), China's parliament, on a recent change to company law followed a spate of 17 shareholder-rights protests in recent weeks.

The commission said it would "urge the relevant courts to take appropriate measures" in efforts to "better optimise" the business environment, state media reported on Monday.

It said the contentious provision should not apply to shareholders who had sold out before the new law took effect in July.

The move comes as Beijing scrambles to manage economic discontent after a collapse in the real estate industry and shore up consumer confidence.

The protests, which experts said had threatened to turn into a broader social stability concern for Beijing, focused on who should be on the hook when private companies of the kind that once powered China's boom cannot pay their debts or go bust.

"You have this protest movement, essentially about people's livelihoods being hurt by the government's policy, and that could be a motivator for them to take a very specific action to try to subdue the discontent," said Kevin Slaten, the head of China Dissent Monitor (CDM), a project of Washington-based rights group Freedom House that tracks protests in China.

A sweeping overhaul of China's company law took effect in July, allowing companies to hold original shareholders accountable for unpaid sums despite having already transferred their shares.

But in a move that surprised legal experts, the Supreme People's Court went further by declaring old shareholders liable for unpaid sums after bankruptcy, even if they had already transferred their shares to new investors.

That retroactive enforcement angered investors who worried about potential liabilities after they had cashed out.

In a now-censored online post, one person compared the situation to selling a car and then having to pay for damages when the new owner crashes.

PROTESTERS ASK TO 'SEE THE CHIEF'

Videos posted on China's Douyin app between late November and early December show protests outside and within the high courts in 11 Chinese areas.

Videos posted online show a mix of younger and older participants shouting demands to "see the chief" justice.

Some sought an explanation of the change in the law and wanted its retroactive element scrapped, citing the new law's provision on the question of investor liability, including that for failed firms.

In Chengdu, the capital of the southwestern province of Sichuan where videos documented three protests, one was emblazoned with the online slogan, "Fairness and justice will definitely win."

Censors took down most videos quickly, though some continue to circulate.

CDM provided Reuters with an archive of the videos. Reuters was able to confirm the identified location of several, but could not confirm their dates and was unable to reach any of the individuals involved.

October's economic protests were the highest since 2022, a CDM tally showed for the most recent month on which it has data.

Until recently, China had made it easy to set up firms with declared equity that could be paid in over years. That allowed firms to be quickly established, secure business and borrow. In effect, shareholders were given years to pay for their stock.

But that loophole also opened the way to fraud.

"You had cases of shareholders, in order to avoid their payment obligation, transfer shares to their own relatives, or to people who were very old, those who had no means to pay, purposefully to avoid taking on their payment obligations," said Ren Yimin, a founding partner of Capital Equity Legal Group.

The collapse this year of developer Evergrande with more than $300 billion in debt, also underscored rising stakes for creditors.

In one of the first retroactive rulings, delivered in August by a Beijing court, the original shareholders who had sold their stake in a company called Ren He were held liable for millions of yuan sought by creditors.

(Additional reporting by Shanghai Newsroom and Antoni Slodkowski in Beijing; Editing by Clarence Fernandez)