Chinese internet group gets shareholder approval to reorganize in Cayman

Chinese internet group Inc. announced it has received shareholder approval to dissolve and liquidate its Delaware holding company. Under a reorganization scheme, all outstanding shares of Sohu Delaware will be canceled and replaced on a pro rata basis by American depositary shares of Limited, a Cayman Islands company.

Shareholders approved the plan at a special meeting on May 29. filed a prospectus with the Securities and Exchange Commission on April 23, according to which the business, operations, and assets of Sohu Cayman and its subsidiaries and variable interest entities will be substantially the same as those of Sohu Delaware, except that Sohu Cayman will replace the Delaware company as the top-tier, publicly traded holding company of Sohu Group.

The Beijing-headquartered company intends to proceed with the liquidation of the Delaware entity on May 31. At that time, the Sohu Delaware stockholders will become shareholders of Sohu Cayman “and will have the same relative economic interest in the Sohu Group as they did immediately prior to the Liquidation,” the company said.

Sohu Cayman’s American depositary shares will be listed and traded on the Nasdaq Global Select Market under the “SOHU” symbol in place of the shares of the common stock of Sohu Delaware, which will be delisted. The group expects trading in Sohu Cayman’s shares on Nasdaq to begin on June 1.

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Sohu is one of China’s largest internet companies and in addition to a search engine, the company offers advertising, online gaming and other services.

In a May 17 letter to shareholders, Sohu Chairman and CEO Charles Zhang said one of the main reasons for the reorganization was to establish a more efficient holding company structure that would generate significant economic benefits for the group and its shareholders.

“The Sohu Group has no operations, management, or employees in the U.S. Therefore, we believe that it is quite inefficient for the top-tier holding company of the Sohu Group to be domiciled in the U.S.”

Following the implementation of the scheme, Sohu Group will no longer be subject to U.S. corporate income tax, he noted.

Had the “liquidation proposal” not been approved, the company would have been subject to U.S. corporate tax on certain income of its foreign subsidiaries, including rents, royalties, interest, dividends and investment gains, even though it has no U.S. operations. The group would have also been taxed on the global intangible low-taxed income (GILTI) of its foreign subsidiaries, a new tax introduced in last December’s U.S. tax reform.

In his letter, the Sohu chief executive warned shareholders that the group would be subject to U.S. tax, currently at a rate of 21 percent, if it sold one of its subsidiaries, for example Sogou.

Continuing as a Delaware company would result in “material tax costs” for the group, “which could mean that we would be locked into the burdens of the U.S. Subpart F and GILTI tax regimes indefinitely,” he wrote.

Mr. Zhang further attempted to alleviate investor concerns over differences in corporate governance, shareholder protection and SEC reporting as a result of the reorganization in Cayman.

Investors who focus solely on differences between Delaware and Cayman law would miss the core reasons for the proposed change of domicile, the benefits to the group and its shareholders and risk “to overlook the efforts we have made to carry over various stockholder protections into Sohu Cayman,” he wrote.

For instance, he said, the group will continue to have independent audit, nominating and compensation committees; hold annual meetings of shareholders; and provide other key shareholder protections such as the right to nominate directors and make shareholder proposals that are not normally required for foreign private issuers or Cayman Islands companies.

When the proposal was announced in April, analysts speculated that the new corporate structure would also allow Sohu, like other Cayman-based companies with American depositary shares, to sell the newly proposed Chinese depositary shares on the Shanghai stock exchange.

Alibaba invests in ZTO Express

Meanwhile, Alibaba, China’s Cayman-registered equivalent to Amazon, is upping its investment in Cayman-based ZTO Express, a Chinese logistics and delivery company.

Alibaba announced on Tuesday it is leading a consortium of investors, including Alibaba’s majority-owned logistics affiliate Cainiao Smart Logistics Network, in the acquisition of about 10 percent of ZTO Express (Cayman) for $1.38 billion.

The transaction, which is expected to take effect in June, would be Alibaba’s third investment in a Chinese courier after buying a minority stakes in YTO Express and Best Inc.

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