Having introduced the “share swap” as a new method to acquire a listed company, it is now time to spend some more words to better describe its use in an acquisition process.
Foreign-Listed
Share Swap: Outlines
When acquiring existing equity or subscribing for new equity in a DE, a foreign investor can now pay with its own foreign-listed shares provided that certain conditions are met: (i) the price of the listed shares of the foreign investor must have been “stable” in the 12 months preceding the acquisition and neither the listed company nor its management should have been penalized by the relevant regulatory authorities in the previous three years (see Art. 28 of the “M&A Regulations 2006”,
http://english.mofcom.gov.cn/aarticle/policyrelease/domesticpolicy/200610/20061003434565.html
). Furthermore, the foreign investor must be domiciled and listed in a jurisdiction with sound regulatory systems. The Chinese target company or its shareholders, to meet these requirements, must hire a qualified Chinese registered intermediary (e.g., securities firm, consultancy company, accounting firm or law firm) to conduct due diligence, as mentioned above, on the foreign company and issue an opinion regarding the accuracy and truthfulness of the relevant application documents and stating that the above conditions have been met (in this sense, Art. 30 M&A Regulations 2006). The MofCOM (
http://english.mofcom.gov.cn/
) must then approve the share swap and the overseas investment aspects of the transaction, and the share swap must be completed within six months of such approval.
Pre-IPO
Share Swap: Outlines
Under the M&A Regulations 2006, a Chinese enterprise or natural person (i.e., the “PRC Founder”) can swap its equity in a DE for shares in an offshore company, which is directly or indirectly controlled by the PRC Founder. (Art. 39, M&A Regulations 2006). The offshore company must be a SPV specifically established by the PRC Founder for the purpose of an overseas listing of the DE, however. The CSRC (China Securities Regulatory Commission, http://www.csrc.gov.cn/) must approve the transaction prior to listing, and the aggregate value of the shares issued should not be lower than the value of the equity in the domestic enterprise under the swap as appraised by a Chinese asset appraisal institution (in this sense, Art. 43, M&A Regulations 2006). Furthermore, the MofCOM must approve the share swap, and a corporate PRC Founder must first apply to MofCOM for verification of the establishment of the SPV. The PRC Founder should also complete registration with the local SAFE (State Administration of Foreign Exchange,
http://www.safe.gov.cn/wps/portal/english/
) authorities for permission to make an overseas investment and apply to CSRC for verification of the listing (Art. 40, M&A Regulations). Lastly, upon CSRC’s verification, the MofCOM will issue a temporary certificate of approval to the DE which will be valid for one year from the date of issuance of its business license (Art. 45, M&A Regulations).
Within 30 days of the completion of the listing, the DE is required to report to the MofCOM regarding the status of the listing and it must submit a plan for the repatriation of funds to China. Proceeds from the overseas offering by the SPV should be remitted to China in accordance with such plan and SAFE rules. More specifically, any profits, dividends or proceeds from share sale that the PRC Founder derived from the offshore SPV must be remitted to China within six months receipt. An important aspect to underline is that if the SPV does not complete an overseas listing within one year from the issue of a business license, or if it fails to report to the MofCOM within 30 days of the SPV’s overseas listing, the share swap transaction will be unwound and the DE will be converted back into a domestic company.
Acquisitions by Chinese-Controlled Offshore Companies
At this point, it must be stressed that while the M&A Regulations 2006 recognize the offshore SPV structure and offshore listing, the M&A Regulations 2006 also subject such SPVs to the MofCOM approval and offshore listing to CSRC approval, extending in practice Chinese jurisdiction to offshore corporate and securities activities. MofCOM’s approval is required when offshore companies controlled or established by Chinese enterprises or natural persons acquire their Chinese affiliates. Relevant parties cannot circumvent these requirements by, for example, establishing new foreign investment enterprises (FIE) to make the acquisition. The Chinese affiliates will not enjoy FIE status for tax and other purposes unless the Chinese-controlled offshore company increases the registered capital of the affiliates by at least 25%.
Moreover, the M&A regulations 2006 also impose a requirement that parties to all acquisitions are required to declare whether any affiliation already exists between them (Art. 15, M&A Regulations 2006). For example (see text of the mentioned article), if the parties are subject to common control, they must reveal the actual controller and explain the purpose of the acquisition and whether the valuation is at fair market value. The same Article (15, M&A Regulations) states that parties are expressly prohibited from using trusts, entrustment arrangement or other methods to sidestep this obligation. The M&A Regulations 2006, clearly aimed at (i) stopping Chinese enterprises and individuals from diverting their assets offshore at less than fair market value and (ii) stopping FIE status from being given to enterprises that are not truly foreign-owned, (the Regulations) will impact such restructuring plans.
Example of Share swap:
In October of 2009, Spanish telecommunications company Telefonica announced a USD 1 billion share swap agreement with Chinese operator China Unicom. This transaction is an example of a foreign-listed share swap where no money changed hands. Instead each company swapped USD 1 billion worth of shares. According the agreement Telefonica received 693.91 million shares (a 2.6% stake) at the price of HKD 11.17 per share bringing their total investment in China Unicom to 8.06%. China Unicom received 40.73 million shares (a 0.88% stake) at the price of EUR 17.24 per share. This agreement is positive for both companies as it provides a way for them to collaborate on entering new markets they have little experience in and also opens the doors for shared technical resources.
So while it makes entry into China very easy the processes are still largely untested, and this should be kept in mind when considering using share swap. But share swap is not the only large change to happen recently. As it will be highlighted after having exposed takeover defenses, the next Chapter in fact treats about revision of concentrations which has been introduced by the new Anti-monopoly Law.
Share Swap
: Summary
|
Share swap does not only represent a new payment method but also a new permitted way to implement an M&A in China.
All share swaps subject to approval by MofCOM: – Off-shore entity must be listed in stock exchange. – MOFCOM approval is valid for six months only. Share swaps must be completed in the specified time period. – On-shore share transfer will be reversed if the MOFCOM approval lapse. SPV may be used (to list PRC assets off-shore- reference to red chip): – A number of PRC governmental approvals required: MOFCOM, CSRC and SAFE. – Proceeds of off-shore listing must repatriate. |
With the present entry we almost exhausted all the aspects concerning acquisitions of listed companies in China. In order to complete the theme, the next entry will be dedicated to “takeover defenses.”
Cristiano Rizzi
(Some of my entries are extracted from my work titled M&A and Takeovers in China, so if you are interested in this topic, please visit:
http://www.kluwerlaw.com/Catalogue/titleinfo.htm?ProdID=9041140484
).