Today I am going to delineate the new takeover regime in China and I will also introduce the characteristics of the Takeovers Code. This in order to better understand the legal framework regulating the takeovers of listed companies.
Features of the New “
Takeovers Regime in China
” and Content of the “
Takeovers Code
”
Since the new Securities Law (
http://www.csrc.gov.cn/pub/csrc_en/laws/rfdm/statelaws/200904/t20090429_102757.htm
) and Company Law (
http://www.csrc.gov.cn/pub/csrc_en/laws/rfdm/statelaws/200904/t20090428_102712.htm
) took effect in China in 2006, international fluid capital has begun to shift investment from the field of fixed assets to stock acquisitions, private equity as well as enterprise realignment and mergers. Both these two pieces of legislation have contributed in shaping the present framework governing takeovers of listed companies. The Securities Law has introduced a new takeover regime which was refined by the new Takeovers Code (
http://www.csrc.gov.cn/pub/csrc_en/laws/overRule/Decrees/200910/t20091028_166902.htm
). In fact, the 2006 Takeovers Code was promulgated to suit the new circumstances after the shareholding structure reform. Therefore, the Takeovers Code has greatly completed China’s takeover legal regime and is now constituting a sound basis for takeover activities. The takeover of listed companies shall be conducted in line with the principles of
openness
,
fairness
and
equity
(in this sense, Takeovers Code, Article 3).
[A] Listed Company Takeovers: An Introduction
There is a specific regulatory framework applicable to listed company acquisitions. Control acquisitions are subject to special regulations and may trigger tender offer obligations. The dispositions of the Takeovers Code are applicable to acquisitions of over 30% of the outstanding shares of a listed company. In accordance with this equality of opportunity principle, a mandatory bid rule sits also at the heart of another China’s takeover law, namely the Securities law. In fact, Article 88 of the Securities Law states:
Where an investor holds or holds with any other person 30% of the stocks as issued by a listed company by means of agreement or any other arrangement through securities trading at a stock exchange and if the purchase is continued, he shall issue a tender offer to all the shareholders of the said listed company to purchase all of or part of the shares of the listed company.
It is also stated:
It shall be stipulated in a tender offer as issued to a listed company that, where the share amount as promised to be sold by the shareholders of the target company exceeds the scheduled amount of stocks for purchase, the purchaser shall carry out the acquisition according to the relevant percentage (Art. 88, Securities Law).
Before to analyze in detail both the “mandatory bid rule” and the “tender offer” rules, it is necessary to underline that the Takeovers Code sets up a new takeover regime which put an emphasis on takeovers by “tender offers.” Takeover by tender offer should now be seen as the main way to acquire shares in listed companies with a view to gaining corporate control of a target company. However, takeover by private agreement remains also a common method of gaining control of the target company. It is worth to note that, the Takeovers Code strengthens the regulations that prevent opportunistic takeovers, for instance Article 6 states that an investor is barred from taking over any listed company if it has certain problems. In particular, it is stated that an investor may not damage the legitimate rights and interests of a target listed company and its shareholders by taking advantage of the takeover of the listed company. A listed company may not be taken over under any of the following circumstances: (i) The purchaser owes a large amount of debts, and has not paid off its due debts, and the said circumstance is in a continuous state; (ii) The purchaser has ever committed any major illegal act or has ever been suspected of being involved in any major illegal act during the past three years; (iii) The purchaser has ever committed any serious credit-breaking act in the securities market during the past three years; (iv) The purchaser, be it a natural person, is under any of the circumstances as prescribed in Article 147 of the Company Law; or (v) Any other circumstance as prescribed by laws or administrative regulations or as recognized by the CSRC under which no listed company can be taken over (see Article 6, Takeovers Code). Furthermore, when making a takeover bid to be paid in cash, the bidder must deposit no less than 20% of the total amount of the offered price in the bank designated by the securities depository and clearing institution as the performance guarantee (Art. 36, Takeover Code).
Today I am going to complete this entry spending some more words about the
mandatory bid rule
and in the next entry I will give more details about the
tender offer
.
[B] Mandatory Bid Rule
Once the 30% threshold is reached, any further acquisition must be made by general or partial tender offer (Art. 47, Takeover Code). Although the CSRC will continue to grant exemptions on a case-by-case basis, the new Takeovers Code sets a more stringent regime, its rules and dispositions are more detailed, so to obtain exemption is more difficult. An acquirer can also agree to takeover a company by agreement with the company’s shareholders (known as
negotiated takeovers
or “Takeover by Agreement,” regulated in Chapter IV of the Takeover Code). However, once the acquirer acquires 30% of the issued shares of the target company and it continues to acquire shares, it must make a general offer for all (or part) of the company’s issued shares unless the CSRC grants a waiver from making an offer (see Articles 94 to 96 of the Securities Law, and Article 47 of the Takeovers Code). The takeover rules also apply to indirect acquisition (see Chapter V of the Takeover Code, “Indirect Takeovers”), i.e. where the acquirer has acquired an interest in an intermediate company that holds at least 30% of the issued shares of the listed company. (Please note that the term “indirect takeovers” refers to the situation where although an investor does not itself take over a listed company by directly acquiring its shares, the investor gains the control of the listed company by other means such as private agreement, investment relationship or any other arrangement, see Article 56 of the Takeovers Code). This, for example, can occur if a person acquires control of a controlling shareholder. In such a case, a general offer is required to be made. The minimum partial tender offer is for 5% of the outstanding shares. (Significant disclosure and reporting requirements attach to holding a 5% interest in a listed company. The reporting requirements, however, have been simplified from the prior reporting requirements). Prior to 2006, a general tender offer for all shares was required upon reaching the 30% threshold. Through the indirect takeover model and without obtaining a waiver from the CSRC, Nanjing Iron & Steel Co. Ltd. in 2003 was the first Chinese-listed company which faced the mandatory bid.
In China, the obligation to make mandatory bids can be exempted by the CSRC. The Takeover Code has paid considerable attention to this issue, clarifying the grounds upon which the CSRC may grant an exemption. (See Takeovers Code, Articles 61 and 62. For example, exemptions may be granted if the acquirer and the transferor can prove that the transfer has not caused the change of the factual controller of the listed company). In the past A-share restrictions precluded foreign parties from making tender offers, but it is necessary to stress again, the recent regulatory changes, which opened the A-share market to foreign investors, make foreign participation in tender offers feasible. The takeover regulations now also permit the use of non-cash consideration (Cash or shares can be used as consideration and the duration of the tender offer is subject to time limitation. A registered financial advisor must be engaged to review the transaction from a legal and business perspective) (i.e.,
Share swaps:
The amended M&A Regulations 2006 clarify the permitted use of share consideration. The foreign company involved in the transaction must satisfy certain restrictive criteria. Only listed shares having a relatively stable share price for the prior year may be used as consideration, subject to an exception for certain offshore restructurings. The opinion of a registered financial advisor is also required for the use of share consideration in a transaction), allowing the use of equity consideration and more complex structuring arrangements in such a tender offer, although cash consideration must always be made available as an option. In order to improve the efficiency of the system, the CSRC sets out two application processes. More specifically, in some cases where the matter is complicated, the application needs to go through a formal process (Art. 62, Takeovers Code); in other cases where crossing the 30% threshold appears to be technically caused by non-takeover activities such as inheritance or underwriting arrangements, a simplified procedure is to be followed to allow quicker processing (Art. 63, Takeovers Code). It is necessary to highlight that under Article 62 of the Takeover Code, apart from the CSRC, the shareholders of the target company can also pass a resolution to exempt the acquirer from the mandatory bid rule in certain cases (Art. 62.2 and 62.3, Takeovers Code). There is also a newly introduced exemption under which an investor can increase its shareholding by less than 2% in a rolling period of 12 months.
[1]
This was to introduce the mandatory bid rule. In the next entry I will expose the theme of the tender offer rules.
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
).