Listing Chinese companies: Mandatory welfare payment liabilities – Whose authority counts?

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By Chris Devonshire-Ellis 

BEIJING, Sept. 17 – We’ve had an interesting due diligence issue crop up at Dezan Shira & Associates this past few weeks as part of a three firm consortium looking at the assets and liabilities of a Chinese national business (retail industry, 17 stores across China) that wishes to list in Hong Kong. PWC are the primary auditors, Jun He the advising law firm, with Dezan Shira getting our hands dirty digging around in the business’ potato patch. A primary issue cropped up with the topic of mandatory welfare payments to the company employees.

Now, welfare payments in China are a bit of a thorny issue, for many reasons:

  1. they vary regionally, and quite considerably
  2. what is mandatory and what it not is also subject to regional variations
  3. all of them change every year

So it is notoriously difficult to get a handle historically, on what should have been paid, in any given year. We had to go back seven years (statue of limitations) in 17 different cities (cue teams of harrassed looking Dezan Shira internal audit personnel staying in strange inland cities if anyone has noticed). Anyway, it turns out all welfare payments, in all cities, have been dramatically underpaid. Not something of course, any foreign company would do.

The amount ran into hundreds of millions of RMB in potential back payment of owed staff welfare, which wouldn’t look all that great on an investment prospectus for listing on the Hang Seng Index.

The next question – and the first time I’ve been asked this in 15 years – the eminently sensible theme of “Can we negotiate?” Negotiate mandatory welfare payments? Well if so, they don’t seem so mandatory, at least to me anymore.

A few discreet phone calls later, and the word came back – yes, the provincial governments were open to negotiating on the issue. Second question: If that is the case, then who does the legal right to negotiate mandatory welfare payments rest with? The State? Or indeed, the provincial government level ?

It’s one of those classic cases in China law which pitch State level against provincial level powers. Millions of dollars at stake and the potential listing of a Chinese company in Hong Kong.

So the question is then, is it a State or provincial level authority who can agree to the negotiation (and by implication, deliberate agreement to reduce the level) of what are called mandatory welfare payments?

Any comments welcomed and I’ll chip in with the considered opinion of ourselves, Jun He and PWC in a couple of days.