Sohu Proposal for Tax Haven Opposed by Prominent Proxy Adviser

(Bloomberg) -- Chinese internet mogul Charles Zhang’s plan to reincorporate his company in a tax haven is running into some road bumps. Inc. is seeking shareholder approval to relocate its domicile to the Cayman Islands from Delaware, a move that would enable the Chinese news portal to avoid paying U.S. corporate tax on foreign earnings. Chairman Zhang is urging investors to back the proposal, which is part of a simultaneous move to liquidate its existing structure and replace common stock with American Depositary Shares.

But a top shareholder advisory firm is telling investors to reject it, with Institutional Shareholder Services saying in a May 15 report that such a proposal could reduce the company’s disclosure obligations. ISS said that under Cayman Island rules, director nominations and business proposals are limited to shareholders holding at least 5 percent of outstanding shares, which could diminish investor rights. The company would also not be required to follow certain Nasdaq standards.

“Given that the proposed reincorporation would, on balance, have an adverse impact on shareholder rights and decrease the level and amount of information provided to shareholders, support for this proposal is not warranted,” ISS said in the report.

ISS didn’t immediately respond to emailed requests to comment.

Zhang’s key argument has been about tax benefits. While the Beijing-based company has no U.S. operations, it is subject to U.S. corporate income tax as well as levies on rents, royalties, interest and gains from the disposal of investments. For example if it ever sells some of its stake in search engine Sogou Inc., it would face a tax, Zhang said.

U.S. President Donald Trump’s tax reforms have significantly lowered the cost for reincorporation, Zhang said. Sohu is the only company among China’s 15 biggest U.S.- or Hong Kong-listed internet companies to be incorporated in Delaware, with a majority of them registered in the Cayman Islands, according to data compiled by Bloomberg.

“The ISS report is more of a general assessment without specific knowledge of Sohu’s case,” Zhang said during a phone interview on Wednesday. “We have zero operations in the U.S., that’s quite unfair. For U.S. taxes, by re-domiciling we can avoid taxes that we shouldn’t pay.”

Sohu is also taking advantage of a slide in the company’s shares. The stock is down 66 percent since its peak in 2011. Zhang has been ramping up his purchases of shares since early May, pushing the total amount owned by insiders including himself to about 22 percent.

“Sohu’s price is relatively low now, it’s a time that we have the lowest cost to do that,” said Zhang. “This is so unfair, in the last 15 years, we’ve been trying to re-domicile, but we’ve been prohibited because of the cost. Now because of this new tax law and the low stock price, it presents a unique opportunity.”

Sohu has scheduled a shareholder meeting for May 29.

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