This entry is dedicated to the description of the “tender offer rules” in the process of a takeovers of a listed company. Today I introduce this theme which is to be completed in the next entry about entries “
Obligation of Disclosure of Substantial Shareholdings.”
Tender Offer Rules:
In conformity with the fairness and openness principles, see in particular
Article
26, the
Takeovers Code
sets out detailed provisions on how to conduct a takeover bid (reference must be done to Chapter III and IV of the Takeovers Code, which is available
http://www.csrc.gov.cn/pub/csrc_en/laws/overRule/Decrees/200910/t20091028_166902.htm
).
In particular, Art. 26 of the Takeovers Code requires that in a takeover bid, all the shareholders of the target company be treated equally and fairly:
“In case a listed company is taken over by means of tender offer, the purchaser shall equally treat all the shareholders of the company under takeover. And all the shareholders that hold the same kind of shares shall be treated equally.”
With the introduction of this new takeover regime, partial bids are also permitted (see the combined dispositions of
Articles
23, 24, 25, 43, 47 and 56 of the Takeovers Code). The partial offer allows to gradually increment the control in a listed company, without the obligation to launch a tender offer on the rest of the capital until the investor reaches the 30% (if a waiver is not granted), granting to the investor a great flexibility. However, it must be stressed that under Article 43 (Takeovers Code), if the bidder in a partial bid receives acceptances for a greater number of shares than specified in the offer, each acceptance shall be on
pro-rata
basis (ex
Article
88, Securities Law
(
http://www.csrc.gov.cn/pub/csrc_en/laws/rfdm/statelaws/200904/t20090429_102757.htm
,
and
Article
43, Takeovers Code) and the excess returned to target shareholders. In any case, it should be noted, that although proportional bids can ensure achievement of equality of opportunities among target shareholders, they shift to bidders the uncertainty as to the number of shares ultimately sold.
It would be unusual for all target shareholders to accept a proportional bid, therefore a bidder must pitch a proportional bid at such level as it estimates will take into account non-acceptances in order to attain the shareholding it wants to acquire. If there are more acceptances than expected, the bidder may have to acquire more shares and spend more than is necessary to gain corporate control.
Then, it is easy to imagine that if there are more acceptances than expected, the investor may have to acquire more shares and spend more than it is necessary to gain corporate control.
It is also necessary to highlight the payment methods in a takeover bid become more flexible (“shares” can be used as consideration); in fact, previously, an offer under a takeover bid must be in cash only, but the new rules have relaxed the stance of this issue. An acquirer can pay the price of the takeover of a listed company by (i) cash, (ii) securities (configuring the so-called
share swaps
,
discussed in the next section), (iii) combination of cash and securities, or any other lawful method, (see Art. 36, Takeovers Code) bringing the legal regime on takeovers in China more in line with international practices.
Another point to be stressed is that the price offered under a takeover bid must not be less than the maximum price that the bidder has paid for the bid security during the six months preceding the date of the bid. In particular Article 35 states that if the offer price is below the arithmetic average value of the daily-weighted average prices during the 30 trading days prior to the date of the bid, a financial consultant must be hired by the bidder to produce a report on issues such as whether there is any manipulation of stock prices, whether the bidder has failed to disclose its concerned parties, whether there is any other arrangement for the bidder to obtain the shares of the target company during the previous 6 months, and finally whether the offer price is “rational” (
… as well as the rationality of the price offer price
.
Article
35, Takeovers Code).
The Takeovers Code has also established another set of rules to ensure that the takeover bid will be conducted in accordance with the principle of equal opportunity previous mentioned and expressed in
Article
26, which provides that all shareholders should be treated equally in takeovers. In fact, this fundamental norm is reinforced by a prohibition against giving of collateral benefits during the bid. Namely,
Article
38 (Takeovers Code) states that “in the case of tender offer, the purchaser may not, after the announcement is made and before the takeover terms expires, sell any share of the company under takeover, nor may it buy any share of the company under takeover by any other means that has not been stipulated in the tender offer or that goes beyond the conditions as stipulated in the tender offer.” Then, the principle of openness is also embodied in the information disclosure regime (Chapter II of the Takeovers Code, “Entitlement Disclosure,” and also
Article
29: information to be contained in the tender offer report). These rules provide a safeguard for target shareholders to prevent coercive tender offers through adequate information disclosure about the tender offer and the right to have reasonable time to consider it. For example, the bidder must inform the market of the terms of the offer
(Article 29 of the Takeovers Code requires the bidder to disclose relevant issue such as the purpose of the takeover, the offer price, and the payment arrangements),
and the offer should be open for a minimum time to avoid shareholders making a hasty decision.
(Article 37 of the Takeovers Code stipulates that the effective period of the offer must be no less than thirty days and no more than sixty days, except where there is a contested offer).
It must be stressed, if the bidder wants to change and vary the terms of the offer, the approval of the CSRC is required (Art. 39, Takeovers Code), and variation cannot occur within 15 days prior to the expiration of the bid unless a competing bid is made (see Art. 40). Moreover, the target’s shareholders can withdraw their acceptance within three days before the expiration of the bid (Art. 42).
In order to ensure equal treatment of all target shareholders, the China’s takeovers regime pays particular attention to minority shareholders after takeover: if the tender offer expires and the acquirer has enough shares, usually 75% (90% where the total capital of the listed company exceeds CNY 400 million) of all outstanding shares, to cause the delisting of the target company, the remaining shareholders have the right to enforce the sale of their shares on the same terms as those in the offer. In this sense
Article
97, Securities Law, and
Article
44, Takeovers Code. According to the listing requirement, a listed company must meet a number of criteria, one of which is that the publicly held shares in a company must account for more than 25% of all outstanding shares, and if the total amount of the issued capital of the company exceeds CNY 400 million, then the publicly held shares must be more than 10%, in this sense,
Article
50, Securities Law.
However, there is a clear loophole from the acquirer’s perspective. Unlike many other foreign countries, the squeeze-out right is not stipulated in Chinese Securities Law; therefore, the tender offeror cannot force out with ease the held-up shareholders even after getting 90% percentage or more of all the total shares. In practice, in order to wipe out those remaining shareholders, a troublesome and controversial cash-out merger has to be employed following the cash or share tender offer.
Finally
, the privatization deal is scarce in China. Due to the high degree of CSRC scrutiny on the IPO application or occasionally even quantity control, the shell value of a listed company is greatly appreciated. There are a number of privatization cases by far, most by the State-controlled giants such as Petrochina and Sinopec (for example, see Sinopec Qilu case, 4.3.6.) in order to remove their listed subsidiaries off the bourse in 2005–2006, and few by private companies like the
share-swap
merger between Xinhu Zhongbao and Xinhu Venture Investment in 2009, which lead to the latter de-listed voluntarily. Those actions were usually taken as required by the stock exchanges with an aim to reducing the subsidiary or affiliate competition and the related party transaction.
In order to complete this theme in the next entry I will expose some other rules on the obligation of disclosure of substantial shareholding.
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
).