Case Study: Minority Acquisition of a Listed State-owned Enterprise in China
September 01, 2006 | BY
clpstaffListed state-owned enterprises (SOEs) present strategic foreign investors with attractive investment opportunities, as they seem to have a pricing advantage and better corporate governance compared with domestic private companies. However, what challenges are involved in acquiring a minority stake in a listed SOE?
By Toshiyuki Arai, Paul, Hastings, Janofsky & Walker LLP, Shanghai
Many state-owned enterprises (SOEs) in China are in dire need of modernizing manufacturing technology and corporate governance. Moreover, SOEs are often seeking to expand their distribution channels outside of China. In order for this to materialize, introducing a qualified foreign strategic investor seems to be a sensible option. For foreign strategic investors, not only do listed SOEs present China's largest opportunities for future growth, but in the broad scheme of things, they tend to have better corporate governance than private domestic companies and, until the share reform is completed, there seems to be a pricing advantage. Additionally, the exit strategy that was once ambiguous has now been clarified.
Acquiring soes in China
Generally, acquisitions in China are difficult largely due to the government's ability to review and approve the terms and conditions of agreements. At times, government agencies may also comment on minute details. By comparison, for reasons other than anti-trust, it would be unlikely for a government agency in a western country to become involved in approving the terms of an acquisition.
In acquiring listed SOEs, there are additional challenges:
i. stated-owned assets have stringent disposition rules (the State-owned Assets Supervision and Administration Commission (SASAC) has its own views as to the terms and appropriateness of the investor);
ii. there is a general requirement for public auction;
iii. a non-qualified foreign institutional investors (QFII) (that is, a regular manufacturing multi-national investor) cannot purchase or sell securities on the stock exchange;
iv. there are practically no buyouts of SOEs (and the most a
company can acquire at the outset is a 20
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