Administrative Rules on Material Asset Restructuring of Listed Companies: New Rules on the China Capital Market

ELEMENTS OF MAJOR ASSET RESTRUCTURING

According to Article 10 of the Administrative Rules, the following requirements must be satisfied for material asset restructuring of listed companies:

1) The restructuring must be in line with the State's industrial policies as well as its laws and administrative regulations on environmental protection, land management, and antitrust;

2) The restructuring must not result in noncompliance with the conditions for listing the stock of the company concerned;

3) Assets involved in the restructuring must be fairly priced, and the restructuring must not cause damage to the listed company concerned or to the rights and interests of its shareholders;

4) Ownership of the assets involved in the restructuring must be clear; there must be no encumbrance on the transfer of assets or the transfer of titles; and credits and debts must be handled in accordance with law;

5) The restructuring must be conducive to enhancing the listed company's capacity for sustainable business operations; the majority of the listed company's assets must not be in the form of cash after the restructuring takes place; and the listed company must not lack specific business operations after the restructuring;

6) The restructuring must assist in keeping the listed company's business, assets, finances, personnel, and institutions independent of the actual controller and the interested parties thereof, in compliance with the relevant regulations issued by the CSRC governing the independence of listed companies; and

7) The restructuring must assist in forming or maintaining a sound and effective corporate governance structure in the listed company.

STANDARDS OF MAJOR ASSET RESTRUCTURING

The Administrative Rules provide that “material asset restructuring” means asset transactions other than those which take place in the course of daily operations, in which a listed company or companies under its control purchase, sell, or conduct asset transactions by other means, resulting in a material change in the listed company's main business, assets or income, provided that the assets reach a certain amount as set forth by the relevant rules. In any of the following cases, the purchase or sale of assets by a listed company (or companies) under its control shall constitute a material asset restructuring:

1) The total amount of assets purchased or sold accounts for not less than 50% of the total assets of the listed company as reported in the company's audited consolidated financial report for the last fiscal year;

2) The amount of operating income generated by the assets purchased or sold in the last fiscal year accounts for not less than 50% of the listed company's total operating income in the audited consolidated financial report of the last fiscal year; and

3) The net amount of assets purchased or sold accounts for not less than 50% of the net assets of the listed company as reported in the audited consolidated financial report for the last fiscal year, and is over Rmb50 million.

RESTRUCTURING PROCEDURES

The Administrative Rules detail the following main restructuring procedures:

1) Preliminary Preparations: the listed company concerned shall set up a confidentiality system with the other party to the transaction, enter into a confidentiality agreement with the stock service institution involved, and retain competent intermediary agencies to prepare a due diligence report, an asset assessment report, profit forecast reports, and other relevant documents;

2) The board must pass a resolution for the restructuring and release the following documents: board resolution(s), opinions of independent director(s), and a report covering the material asset restructuring, among others;

3) The shareholders meeting must pass a resolution for the restructuring and release the following information: the method and subject of the transaction, the name of the other party to the transaction, the price or price range of the transaction, the means of pricing or pricing basis, the attribution of profit and loss incurred between the pricing benchmark date and the settlement date, obligations and liabilities for breach of contract specified in the asset transfer contract, the validity of the resolution, authorization granted by the board for the restructuring, and other information requiring clarification;

4) The restructuring plan must be submitted to the regulatory authorities for approval;

5) The listed company must make another announcement when the regulatory authorities make their decision, regardless of whether the restructuring is approved or denied. If approval is granted, the listed company must disclose relevant documents related to the approval; and

6) The restructuring must be completed within 12 months upon receipt of the approval document issued by the regulatory authorities; otherwise, the approval document will expire.

EMPHASIS ON INFORMATION DISCLOSURE AND PREVENTION OF INSIDER TRADING

Compared with the Exposure Draft promulgated in September 2007, the Administrative Rules contain a new chapter entitled “Information Management of Material Asset Restructuring” which was added to improve the prevention of insider trading, make the market more transparent, and protect the rights and interests of investors.

The Administrative Rules emphasize the timeliness, accuracy and completeness of information disclosed by listed companies. For example, sensitive information which may greatly affect the share price must be disclosed promptly, and an application for suspension must be filed with the stock exchange. The Administrative Rules also provide that, when planning and implementing material asset restructuring, persons obliged to disclose information shall disclose all relevant information that could greatly affect the share price to all investors in a fair manner instead of disclosing such information only to a selected group ahead of schedule.

CONCLUSION

Promulgation of the Administrative Rules signifies that the M&A and restructuring of China's listed companies has entered a new era of standardization and development. On the one hand, the relatively specific mode of operations set by the Administrative Rules provides a new opportunity for the asset restructuring of listed companies, and is conducive to the consolidation and upgrading of the industry as well as the expansion of development space for listed companies. On the other hand, in order to prevent insider trading and market manipulation arising from M&A and restructuring activities, the Administrative Rules are stricter with respect to violations, which may help to create a fair and just trading environment and move restructuring of listed companies toward a course of greater standardization and institutionalization.

*About the Author

John Ye has extensive experience in assisting with finance structuring, negotiating and drafting various financing and security documents, and is now heading up the Shanghai office of Alpha & Leader law firm.