Merger Between an H-share Company and an A-share Company

Under the PRC Company Law(中华人民共和国公司法), corporate mergers are classified as merger by absorption and merger by new establishment. A merger by absorption refers to a merger where a company absorbs another company and the absorbed company is dissolved thereafter, following which the absorbed company's claims and debts shall be assumed or undertaken by the surviving company. The PRC Company Law(中华人民共和国公司法) sets forth a general procedure for merger by absorption. However, in the case of a merger where an H-share company absorbs an A-share company, more factors need to be taken into consideration when executing the transaction.

Approving Authority

Unlike in mergers between companies with domestic investment only, a merger between an H-share company and an A-share company may require approval by various authorities, including but not limited to the CSRC, the MOC, and the SASAC (if involving state-owned assets).

Merger Procedure

As the H-share company is a party to the merger, it shall comply with the special procedures applicable to enterprises with foreign investment. The parties shall first obtain preliminary approval from the corresponding foreign investment authorities, after which each party to the merger shall notify its creditors and release a public announcement. If their creditors raise no objections, the parties shall apply for final approval from the foreign investment authority.

Dual-track Examination by the CSRC

Where the H-share company issues new A-shares in exchange for the outstanding shares of the absorbed company, allotment of new A-shares by the H-share company may constitute an initial public offering, and the application shall be filed with the Department of Public Offering Supervision of the CSRC. As the merger also involves an A-share company, an application shall be simultaneously submitted to the Department of Market Supervision of the CSRC in the form and manner required by the relevant departments.

Coordination in Information Disclosures

As the merger involves at least two companies listed in separate stock exchanges, inconsistencies in information disclosure will be unfair to investors in either party and may lead to unreasonable price fluctuation. Therefore, coordination in activities of the merging parties is crucial to the transaction. The difficulties in coordination partly result from the fact that the Hong Kong Exchanges and its counterparts in Mainland China implement different disclosure requirements in terms of timing and disclosure criterion, as well as in the form of disclosure. In addition, the shareholders meeting normally requires 45 days notice for the H-share company while notice of only 15 to 20 days is required for the A-share company. Therefore, the timing of the shareholders meetings of both shall be carefully arranged so as to avoid unnecessary conflicts or inconsistencies.

Suspension of Share Trading

Following the merger, the A-shares in the absorbed company shall be converted into the shares of the surviving company. The conversion rate will be determined based on valuation of the two companies, which is usually closely related to their share price. As the share price of each party may vary substantially, suspension of share trading at an appropriate time before the disclosure of such price-sensitive information shall be taken into account.

Claim by Dissenting Shareholder of the Surviving Company

Pursuant to the PRC Company Law(中华人民共和国公司法), a shareholder who votes against the resolution approving the merger may request the company to purchase his or her equity at a reasonable price. Though the Company Law entitles the dissenting shareholder to file a lawsuit provided that no agreement is made between such shareholder and the company within the required time period, it is silent on how the dissenting shareholder may affect his claims and on what basis the reasonable price is determined. Therefore, the PRC Company Law actually leaves much power with the surviving company to determine share value. In practice, the surviving company usually only offers a chance for the dissenting shareholders to negotiate and not to exercise a cash option, because negotiation is the most cost-saving approach for the surviving company from a commercial perspective.

Cash Option Granted to Shareholders of the Target Company

Unlike the arrangement for dissenting shareholders of the surviving company, outstanding shareholders of the absorbed company are commonly granted a cash option, under which the shareholders may at their own discretion sell their shares to a designated third party at a predetermined conversion price. The cash option offers a convenient approach for the shareholders of the absorbed company to cash out. In practice, however, the share price of the absorbed company will usually jump to a level much higher than the conversion price, deeming the cash option commercially useless. This also partly explains why the cash option is commonly granted to shareholders of the absorbed company but not to those of the surviving company.