Today this entry is about “
Obligation of Disclosure of Substantial Shareholdings” in a takeover bid for a listed company. This is a very important topic regulated in the Takeovers Code.
(The Takeovers Code, is available at the following web-site:
http://www.csrc.gov.cn/pub/csrc_en/laws/overRule/Decrees/200910/t20091028_166902.htm
).
Obligation of Disclosure of Substantial Shareholdings
Information disclosure about ownership of listed companies (reference must be made to Chapter II of the Takeovers Code), the so-called “disclosure of substantial shareholdings” is intended to provide the market with an early warning about a possible takeover.
In this entry I want to stress some of the circumstances, noteworthy the promulgation of the Takeovers Code coupled with the Securities Law provides for broad disclosure with respect to substantial shareholders: in particular when an investor comes to hold 5% of the shares issued by a listed companies, the purchaser must disclose his position.
(Article 13, Takeovers Code, and Article 86, Securities Law).
Substantially
Article 86 of the Securities Law and Article 13 of the Takeovers Code almost coincide (but also Article 14 is to take into consideration).
In particular, article 86 of the Securities Law states:
“Where an investor, through securities trading at a stock exchange, comes to hold or holds with any other person 5 % of the shares as issued by a listed company by means of agreement or any other arrangement, the investor shall, within three days as of the date when such shareholding becomes a fact, submit a written report to the securities regulatory authority under the State Council and the stock exchange, notify the relevant listed company and announce the fact to the general public. Within the aforesaid prescribed period, the investor may not purchase or sell any more shares of the listed company. In case an investor holds or holds with any other person 5 % of the shares as issued by a listed company by means of agreement or any other arrangement, he shall, pursuant to the provisions of the preceding paragraph herein, make report and announcement of each 5% increase or decrease in the proportion of the issued shares of the said company he holds through securities trading at a stock exchange. Within the reporting period as well as two days after the relevant report and announcement are made, the investor may not purchase or sell any more shares of the listed company.”
Article 13 of the Takeovers Code states:
In case the shares of which the entitlements are held by an investor and its concerted parties through securities transaction at the stock exchange reach 5% of the issued shares of a listed company, they shall make a report on the alteration of share entitlements within 3 days after the foresaid fact occurs, submit a written report to the CSRC and the stock exchange, send a copy of the foresaid report to the CSRC representative office at the locality of the listed company (hereinafter referred to as the representative office), notify the listed company and announce it to the general public; and they may not buy or sell the stocks of the foresaid listed company again within the foresaid term. After the shares of which the entitlements are held by the foresaid investor and concerted parties reach 5% of the issued shares of the listed company, if the proportion of the shares of which the entitlements are held thereby by them to the issued shares of the listed company increases or reduces by 5% each time through securities transaction at the stock exchange, they shall give a report and make an announcement according to the preceding Paragraph, and may not buy or sell the shares of the foresaid listed company again within the reporting period or within 2 days upon reporting and announcement.
In disclosing his/her position, the investor must submit a written report to the CSRC and the stock exchange within three business days from the date when such shareholding occurs (Article 86, Securities Law (
http://www.csrc.gov.cn/pub/csrc_en/laws/rfdm/statelaws/200904/t20090429_102757.htm
,). During this period, the investor may not continue to purchase or sell the shares of the listed company, thus, the investor is prohibited from changing his/her ownership position until the market is informed. Furthermore, if the shareholding of a substantial shareholder increases or decreases by 5% each time, they should disclose this information in the same way and must not trade the relevant shares within the disclosure period or within two days thereafter (again in this sense, Article 86 of the Securities Law).
The Takeovers Code, however, sets out more detailed provisions to implement the disclosure requirement. In fact, the Code clarifies that when counting a person’s interests in a listed company, the shareholding of their associates or people acting in concert will be included (see Article 13, Takeovers Code). Then, two different disclosure systems are established for use depending on the level of substantial shareholdings: in particular, (i) if an investor and its concerted parties are not the largest shareholder or actual controller of a listed company, and their joint shareholding is above 5% but below 20%, a simplified disclosure system applies.
(Article 16 of the Takeovers Code states:
In case an investor and its concerted parties are not the largest shareholder or the actual controller of a listed company, and the shares of which the entitlements are held thereby by them reach 5% up to 20% of the issued shares of the listed company, they shall work out a simple report on the alteration of entitlements, which shall include the following contents: (1) the names and domiciles of the investor and concerted parties, as well as the names, places of registration and legal representatives of the investor and the concerted parties if the investor and concerted parties are legal persons; (2) the purposes for holding shares, whether or not the investor and concerted parties intend to continuously increase their entitlements in the listed company within the future 12 months; (3) the name of the listed company, as well as the type, quantity and proportion of the stocks; (4) the time when the shares of which the entitlements are held thereby by them in the listed company reach or exceed 5% of the issued shares of the listed company or the shares of which the entitlements are held thereby by them increases or reduces by 5%, and the method for the foresaid alteration; (5) brief introduction on the purchase and selling of the shares of the foresaid company through securities transaction at the stock exchange within 6 months as of the alteration of entitlements; and (6) other contents as required to be disclosed by the CSRC or the stock exchange. In case the foresaid investor and concerted parties are the largest shareholder or the actual controller of a listed company, and the shares of which the entitlements are held thereby by them reach or exceed 5% of the issued shares of the listed company but do not reach 20%, they shall also disclose the contents as prescribed in Paragraph 1 of Article 17
).
If, however, (ii) their shareholding exceeds 20% and up to 30%, then a detailed report must be made.
(Article 17 of the Takeover Code states:
In case the shares of which the entitlements are held by an investor and its concerted parties reach or exceed 20% but do not exceed 30% of the issued shares of the listed company, they shall formulate a detailed report on the alteration of entitlements for disclosing the following contents in addition to the information as prescribed in the preceding Article: (1) the controlling shareholders and actual controllers of the investor and its concerted parties, as well as the structure chart on their equity control relationship; (2) the prices, necessary capital, sources of capital or other payment arrangements for obtaining the related shares; (3) whether or not there exists intra-industry competition or potential intra-industry competition between the business undertaken by the investor, concerted parties or their controlling shareholders or actual controllers and the business of the listed company; whether or not there is any continuous affiliated transaction; whether or not corresponding arrangements have been made to avoid the intra-industry competition between the investor, concerted parties or their affiliated parties and the listed company and to keep the listed company independent if there exists any intra-industry competition or potential intra-industry competition; (4) follow-up plans for adjustment of the assets, businesses, personnel, organizational structure or articles of association of the listed company for the future 12 months; (5) important transactions between the investor or its concerted parties and the listed company during the preceding 24 months; (6) circumstances not subject to Article 6 of the present Measures; and (7) related documents that can be provided in accordance with Article 50 of the present Measures. In case the foresaid investor and its concerted parties are the largest shareholder or the actual controller of a listed company, they shall employ a financial consultant to issue verification opinions on the contents disclosed in the foresaid report concerning the alteration of entitlements, except for the administrative transfer or alteration of state-owned shares or the share transfer between different subjects as controlled by a same actual controller and the obtaining of shares by way of inheritance. In case the foresaid investor and concerted parties promise to abandon the voting right attached to the related shares for at least 3 years, they can be exempt from hiring the financial consultant and providing documents as prescribed in Item (7) of the preceding Paragraph
).
To conclude this entry, it is necessary to reiterate that an acquirer and its controlling shareholder are not permitted to use the takeover of a listed company to damage the interest of the target company or its shareholders. If they do so, they can be ordered to rectify the problem, and additionally they can be fined. They can also be liable in damages to the company and the shareholders if a loss is suffered. It is important to note that, apart from the shareholders of the listed company, the listed company itself which is the subject of the takeover can have an action against the acquirer and its controlling shareholder if it suffers loss. For example, if the company that is subject to the takeover is required to increase its indebtedness as a result of the takeover, the acquirer will need to be able to justify why such increased indebtedness is not damaging to the interests of the company or the shareholders (see Art. 214 of the Security Law).
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
).