Listed company M&A and restructuring gets overhauled

The China Securities Regulatory Commission (CSRC) has enacted the Measures for the Administration of Material Asset Restructuring of Listed Companies (Revised in 2014) (中国证券监督管理委员会上市公司重大资产重组管理办法 (2014年修订)) (Restructuring Measures) and the Measures for the Administration of the Takeover of Listed Companies (Revised in 2014) (上市公司收购管理办法 (2014年修订)) (Takeover Measures) on October 23 2014 and has made several important amendments to the two fundamental laws related to merger and acquisition (M&A) transactions of listed companies. The purpose is to implement some principle requirements set out in the State Council's Opinions on Further Optimising the Market Environment for Enterprise Mergers and Restructurings (国务院关于进一步优化企业兼并重组市场环境的意见) and Several Opinions on Further Promoting the Healthy Development of Capital Markets (国务院关于进一步促进资本市场健康发展的若干意见), both published in 2014. The more significant amendments were made to the Restructuring Measures, while most of the revisions to the Takeover Measures mainly focused on its systems.

The new Restructuring Measures

Simplified approval process

The CSRC has cancelled administrative approvals for the material asset restructuring of listed companies other than backdoor listing and has strengthened information disclosure requirements.

In accordance with the Measures for the Administration of Material Asset Reorganisations by Listed Companies (上市公司重大资产重组管理办法) (Old Reorganisation Measures), amended in 2011, different regulatory requirements are applied to the purchase, sale and other restructurings of listed companies' assets, based on factors such as the size of the transaction. Specifically, in respect of a general material asset restructuring, aside from obtaining the approval of the shareholders of the listed company, the transaction also requires review and approval by the CSRC. For any restructuring such as a backdoor listing in which the aggregate purchased and sold assets both exceed 70% of the total assets of the listed company at the end of the last accounting period in a restructuring transaction, or the selling of all operational assets and the purchasing of other assets by the listed company at the same time in a restructuring transaction, the transaction must further be submitted to the Committee for the Review of the Merger, Acquisition and Reorganisation of Listed Companies (Review Committee) for approval.

The new Restructuring Measures include significant updates to the approval process. Although they maintain the standard of defining material asset restructuring as in the Old Reorganisation Measures, the Restructuring Measures provide that only backdoor listing is subject to the approval by the Review Committee and that only approval of the listed company's shareholders is required for other material asset restructuring transactions. This significantly decreases the CSRC's scope of review. Meanwhile, the amendments strengthen disclosure obligations by increasing the amount of information required in the material asset restructuring report and intensifying interim and post-supervision over the intermediaries and the parties of the transactions.

It should be noted that, under both of the Old Reorganisation Measures and current Restructuring Measures, all transactions related to the purchase of assets involving issuing shares of listed companies are subject to review and approval by the Review Committee.

These revisions have reduced the requirements for administrative review and approval, which makes it more convenient for the listed companies to acquire the equity interests of unlisted companies with cash. Although the purchase of assets through share issuances still needs to go through the Review Committee, the approval system under the Restructuring Measures takes a major step forward compared with the previous version, especially given that numerous companies are waiting to list and acquisitions by listed companies could be an effective alternative exit mechanism for investors. These transactions will therefore become more frequent in the future.

Strengthened backdoor listing requirements

While decreasing the review and approval scope of the CSRC, the Restructuring Measures also strengthen requirements for backdoor listings. The CSRC amended and published the Old Reorganisation Measures in 2011, which clarified the standard of backdoor listing and the corresponding review and approval criteria for the first time. The current Restructuring Measures maintain the previous definition but amend the review and approval requirements for backdoor listings so they are the same as those for IPOs. In fact, these requirements have been explicitly prescribed in relevant provisions promulgated by the CSRC in 2013.

Aside from adjusting the review and approval requirements for backdoor listing on the main board and small and medium-sized enterprises board, the Restructuring Measures further clarify that the backdoor listing is prohibited on the growth enterprise board.

The changes to the review and approval criteria may effectively prevent regulatory arbitrage (i.e. exploiting the difference between the requirements for backdoor listing and those for an IPO). They also reserve some space for synchronous adjustments to the review and approval requirements for backdoor listing if the issuance system undergoes reform.

Enhanced market autonomy

Other than changes to the administrative approval requirements, another development in the Restructuring Measures is the reduced restriction on the trading terms and pricing mechanism of material asset restructurings.

Firstly, the restriction on the pricing mechanism of shares issued in transactions where listed companies purchase assets through share issuance has been eased from previous standards. The market reference price can be any of the average trading price of stocks of the company: 20, 60 or 120 trading days before the resolution of the board of directors on the present purchase of assets through share issuance is announced. In addition, if it is a material change to the share price of the listed company, the board of directors is entitled to adjust the issuance price once.

Secondly, the restriction on a non-affiliated third party purchasing assets through share issuance has been abolished. According to the Old Reorganisation Measures, in the event that a listed company purchased assets from a non-affiliated third party by issuing shares, the shares issued should not have been less than 5% of the total shares of the listed company on a fully-diluted basis or the trading amount not less than Rmb100 million (US$16.2 million) on the main board or small and medium-sized enterprise board or Rmb50 million on the growth enterprise board. The Restructuring Measures cancel all such restrictions.

Thirdly, they also reduce the restriction on the asset pricing and price adjustment mechanism in an asset purchase transaction. According to the previous regulation, the pricing of the trading assets in the material asset restructuring was based on the asset appraisal value. Accordingly, if the listed company projected future earnings to determine the price, it had to execute a profit compensation agreement or make other price adjustment arrangements with the counterparty. The Old Reorganisation Measures provided it was not compulsory to determine the price of the trading assets based on the asset appraisal value. There was also no mandatory requirement on the execution of a profit compensation agreement when the listed companies purchase assets from non-affiliated third parties.

Lastly, there is no longer the requirement of making a profit forecasting report. According to the Old Reorganisation Measures, if a listed company proposed to purchase assets, it had to make a profit forecasting report of the assets to be purchased. In addition, if a listed company proposed purchasing assets by issuing shares or undergoing material asset restructuring transactions that are subject to Review Committee approval, it had to make a profit forecasting report after the completion of the transaction. The Restructuring Measures remove this requirement.

While they relax transaction requirements, the Restructuring Measures also strengthen rules on information disclosure regarding the pricing mechanism of shares issued and assets to be acquired, as well as the influence of the transaction on the listed companies.

These revisions provide more flexibility to transaction methods, conditions and pricing. The enhanced information disclosure system shows that the regulators intend to grant more autonomy to the transaction parties and the market. This may provide more room for the trading mechanism to grow and innovate.

The Restructuring Measures have also made some other changes, including clarifying the separate review and approval system of material asset restructuring transactions (although the provision regarding this system still remains ambiguous and abstract and needs to be clarified in practice), cancelling review and approval of the tender offer, strengthening interim and post-supervision, clarifying the legal basis for the pricing of merger by absorption through share exchange and issuance rules, adding special terms concerning preference shares and enhancing the rights of minority shareholders by calculating and disclosing their votes separately.

The new Takeover Measures

Compared with the 2012 Measures for the Administration of the Takeover of Listed Companies (2nd Revision) (上市公司收购管理办法 (第二次修订)) (Old Takeover Measures), the new Takeover Measures further narrow down the review and approval scope of tender offer exemption items and remove the requirement to obtain approval or no objection from the CSRC in advance. This means that by becoming the controlling shareholder of the listed company through the subscription of new shares and obtaining exemption approval from the shareholder meeting, the exemption is granted automatically without applying to the CSRC for approval. In addition, the 2014 version also adds another two tender offer exemption items. These adjustments and newly-added automatic exemption items will shorten the whole transaction period.

The CSRC has also cancelled administrative approval of the tender offer report and has strengthened interim supervision. The Old Takeover Measures stipulated that the tender offer report or other related documents were not to be released to the public until a confirmation of no objection had been obtained from the CSRC within 15 days after the submission of the application. However, according to the new Takeover Measures, a buyer has the right to release the documents within 15 days after applying to the CSRC, unless the CSRC explicitly expresses objection within this 15-day period. If the CSRC does not object, the buyer is entitled to make the announcement immediately. Although the new rules do not shorten the prior 15-day waiting period, the waiting mechanism is more flexible than that of the previous regulations.

The performance guaranty system has also been improved. The Old Takeover Measures stated that the buyer had to make the performance deposit while making the suggestive announcement of tender offer. However, this increases the acquisition cost for the buyer since the performance deposit cannot be used during the period of tender offer. The 2014 revisions add another two performance guaranty methods, i.e. the letter of guarantee issued by a bank and the letter of undertaking issued by the financial advisor for bearing the joint and several guarantee liabilities, in order to increase the flexibility of the performance guaranty system.

The new Takeover Measures also include other amendments, including expanding the obligations of the financial advisor, partially cancelling the requirements of reporting to the local offices of the CSRC, strengthening interim and post-supervision, as well as increasing penalties.

Quicker deals, more market power

The amendments of these two fundamental measures have cancelled several non-market restrictions on the M&A of listed companies and have reduced administrative review and approval requirements as much as possible. Listed companies and their counterparties can therefore make specific arrangements for their transaction in a more flexible and market-oriented manner. The revisions also encourage listed companies and their controlling shareholders, minority shareholders, board of directors and other participants to be fully involved in the decision-making process of the restructuring of the listed companies, and especially emphasise the role played by the independent directors in the transactions. These send a strong signal that the regulators intend to achieve full marketisation of the regulation of M&A and restructuring of listed companies and will have a profound impact on the material asset restructurings of listed companies in the future.

Based on the effectiveness of the two measures, there will be more restructuring transactions for listed companies, the transaction modes and methods will vary significantly and complicated deal structures (inter alia, forward transactions, leveraged buyouts) will become increasingly common. At the same time, the lightly-regulated environment may, to some extent, bring about large-scale industry integration, not only for the internet, healthcare and other emerging industries, but also for traditional industries such as the real estate sector which will become more active due to the full marketisation of the M&A and restructuring policies.

While these amendments minimise the review and approval scope of M&A and restructuring, the regulators have intensified the approval requirements for backdoor listing. This highlights their strong determination to limit this type of transaction and to stabilise the balance of market supply and demand.


Yi Wang, Wenjun Jiang and Zhengfang Xue, Jun He Law Offices, Shanghai


More from CLP:
Measures for the Administration of Material Asset Restructuring of Listed Companies (Revised in 2014)
Measures for the Administration of the Takeover of Listed Companies (Revised in 2014)
Opinions on Further Optimising the Market Environment for Enterprise Mergers and Restructurings
Several Opinions on Further Promoting the Healthy Development of Capital Markets
Removing roadblocks to M&A