As stressed in a previous entry, both in an equity or asset acquisition the seller and the buyer in evaluating the target company they must use a valuation conducted by a properly established asset appraiser in the PRC as the basis for agreeing the transaction price ( see in this sense Art. 14 of the M&A Regulations 2006 , available at:
http://fdi.gov.cn/pub/FDI_EN/Laws/GeneralLawsandRegulations/RegulationsonForeignInvestment/P020090727403337182397.pdf
). The valuation must be done in accordance with commonly accepted international methods of valuation. The valuation result should be used as a reference for the parties to agree on a price but, where the actual transaction price is less than the valuation by a margin of 10 percent or more, the party subject to the valuation must explain the difference in writing to the appropriate level finance bureau (in this sense, Art. 12, Regulations on Several Issues on the Valuation and Administration of State-owned Assets 2002.
If the price is less than 90 percent of the valuation, the transaction cannot proceed without the approval of the authority responsible for approving the transaction (in this sense see Art. 22of the Interim Administrative Procedures on the Valuation of State-owned Assets of Enterprises 2005, available at the following website:
http://www.fdi.gov.cn/pub/FDI_EN/Laws/law_en_info.jsp?docid=51127
) It is noteworthy, valuations are valid for a period of one year from the valuation date. However, given that it may take some time for the evaluation report to be issued, the actual effective period for a valuation is less than one year. A buyer should check that any valuation that the seller is relying on is still valid. Under SASAC valuation rules, it is not possible to register ownership of the property interest in question or to transfer it unless the parties can produce documentation evidencing approval or filing of the valuation (in this sense see Art. 20 of the Interim Administrative Procedures on the Valuation of State-owned Assets of Enterprises 2005, available at the following website:
http://www.fdi.gov.cn/pub/FDI_EN/Laws/law_en_info.jsp?docid=51127
). Undervaluation has been deemed a serious offense as siphoning and injuring the state assets, which might affect and impede the M&A plan.
In case of a public acquisition, the foreign buyer of a listed shares must follow the Measures for Regulating Takeovers of Listed Company (the so called “Takeover Code”). The foreign buyer must disclose to the CSRC (China Securities Regulatory Commission) and the appropriate stock exchange, and publicly announce the contemplated acquisition, if the buyer and its related parties expect to acquire 5% or more of the outstanding shares of the listed company (in this sense, Article 13 of the Takeover Code, available at the following website::
http://www.csrc.gov.cn/pub/csrc_en/laws/overRule/Decrees/200910/t20091028_166902.htm
: and also Art 86 of the Securities Law, available at:
http://www.csrc.gov.cn/pub/csrc_en/laws/rfdm/statelaws/201205/t20120525_210597.htm
).The same disclosure obligations arise if the buyer subsequently increases or reduces its ownership in the listed company by 5% or more of the outstanding shares of the listed company. In addition, if the foreign investor intends to acquire more than 30% of a listed company, such buyer must acquire any share in excess of the 30% threshold through a tender offer made to all shareholders unless a waiver is granted by the CSRC. The tender offer could either be: (i) a general offer for all of the outstanding shares, or (ii) a partial offer for a portion of the outstanding shares. If the number of tendered shares exceed the buyer’s offer amount, the investor will be required to buy the tendered shares on a pro-rata basis. This is just an introduction, in the next entries I will examine other aspects, considering also the effectiveness of the transfer agreement, before taking into consideration more in details the takeover of listed companies in China.
– CRISTIANO RIZZI