Public mergers and acquisitions in China: overview
A Q&A guide to public mergers and acquisitions law in China.
The country-specific Q&A looks at current market activity; the regulation of recommended and hostile bids; pre-bid formalities, including due diligence, stakebuilding and agreements; procedures for announcing and making an offer (including documentation and mandatory offers); consideration; post-bid considerations (including squeeze-out and de-listing procedures); defending hostile bids; tax issues; other regulatory requirements and restrictions; as well as any proposals for reform.
To compare answers across multiple jurisdictions visit the Country Q&A tool. This Q&A is part of the multi-jurisdictional guide to mergers and acquisitions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/acquisitions-guide.
While the M&A market (both cross-border and domestic) in mainland China (excluding Hong Kong, Macau and Taiwan) had been growing relatively steadily in recent years, with total announced deal value increasing from US$103.47 billion in 2007 to US$307.79 billion in 2012, the market surged in 2013 with total announced deal volume increasing from 3,555 in 2012 to 5,233 in 2013, and total announced deal value rising to US$332.85 billion in total (China Venture Investment Consulting Ltd).
However, the number of inbound M&A transactions has decreased significantly in recent years, with deal volume in 2012 comprising only 42% of the total inbound deal volume in 2011, while the number of transactions continued to decrease from 64 in 2012 to 49 in 2013 (China Venture Investment Consulting Ltd). This trend has coincided with a period of relative economic slowdown and the gradual reshaping of the industrial structure of China's domestic economy, in addition to liquidity difficulties experienced by multinational companies during and after the financial crisis, the readjustment of their strategies, and the slow-down of the domestic economy in China.
More generally though, takeovers of publicly listed Chinese entities have historically tended to be more constrained than takeovers in other jurisdictions, affected by:
The less developed capital markets.
Public sensitivities in takeovers of Chinese listed companies (which, in most cases, are state-owned entities).
Uncertainty in obtaining the requisite governmental approvals.
Domestic public takeovers of Chinese listed entities have generally been driven by the restructuring of state-owned enterprises (SOEs).
Compared with more developed markets, most public takeovers in China take place by way of a privately negotiated bilateral agreement, with a tender offer generally only triggered once the threshold for a mandatory obligation to make a general or partial offer has been met as a result of a negotiated share transfer transaction. That said, 2013 saw examples of contested attempts to take over Chinese listed companies by their competitors in the same industry. Some of these attempts were initiated by ex-officers of the target companies. The Chinese market has yet to see funds or other institutions specialising in sponsoring hostile bids emerge. There were few public takeovers in China in 2013, with the more notable examples being the following:
Food and beverage sector: the acquisition of 30.29% of the listed shares of Chongqing Brewery by Carlsberg, already the actual controller of the target with 29.71% control pre-acquisition. The acquisition was structured as a voluntary partial tender offer to acquire not more than 30.29%. The voluntary tender offer was ultimately successful, with Carlsberg controlling 60% of the listed shares of Chongqing Brewery post-acquisition. To ensure the success of the offer, the target's second largest shareholder entered into a prior agreement with Carlsberg to tender all its shares in the target.
Resources sector: the privatisation of Golden Horse Group by its controlling shareholder, Shenhua Guoneng Energy Group (100% owned by Shenhua Group), through a general offer. The only privatisation in China in 2013, it was conducted to resolve potential competition between two listed Shenhua Group companies in the same industry.
Generally, control of a Chinese listed company can be obtained through either direct or indirect acquisition of control in accordance with the Measures for the Administration of Listed Companies (Takeover Rules). Direct acquisition of control can be achieved through:
Tender offer. An acquirer makes a voluntary offer to all the shareholders of the Chinese listed company to acquire all or part of the shares of the target.
Share transfer. Purchasing shares from existing shareholders of a Chinese listed company by way of agreement is a common way of acquiring direct control in a Chinese listed company. Note that given the mandatory tender offer obligation under the Takeover Rules, public takeovers in China usually take the form of a combination of share transfer and tender offer.
Generally, unless otherwise exempted by the China Securities Regulatory Commission (CSRC), the regulator of the securities market in China (see box, The regulatory authorities), a mandatory general or partial offer obligation is triggered when either:
a person holds a 30% interest in the target company and proposes to increase his holding;
a person expects to hold an interest of more than 30% in the target company following an acquisition by private agreement (see Question 16).
Private placement. An acquirer can also obtain control by subscribing for new shares privately placed by the target. As noted above, a mandatory tender offer obligation will be triggered if the private placement results in the acquirer holding an interest of more than 30% in the target company. In practice, however, this obligation may be exempted by the CSRC if certain conditions are met, including, for example, that the newly subscribed shares are subject to a three-year lock-up restriction and the shareholders' general meeting exempts the acquirer from the tender offer obligation.
Indirect acquisition of control can be achieved through the purchase of a controlling interest in the parent or controlling shareholder of the target company, or by way of other contractual arrangements.
Eligible foreign investors can acquire control of a Chinese listed company through the above means, subject to certain restrictions imposed on foreign investment (see Questions 25 and 26), including, for example, the approval of the Ministry of Commerce (MOC) (the regulator governing foreign investment in China) for the acquisition (see box, The regulatory authorities).
Hostile bids are not prohibited in China but are uncommon in the market for these reasons:
Limited public float. Historically, for a significant number of Chinese listed companies, only a minority of their total issued shares were available for trading on the stock exchange, leading to an environment more suited for transfers by agreement rather than hostile bids. These companies had a segregated share capital structure under which their share capital was split into:
shares that were listed and tradeable on stock exchanges, known as tradeable shares;
shares, known as non-tradeable shares (NTS) (accounting for up to two-thirds of the total shares of listed companies), which could only be transferred between parties by way of agreement or by way of special governmental approvals.
Since 2005, China's State Council, together with the CSRC and other Chinese government authorities, instituted the reform of this capital structure as part of broader capital market reform, so that, by 2007, most Chinese listed companies had completed so-called "desegregation reform" to convert NTS into tradeable shares. However, stringent lock-up requirements continued to apply to the trading of shares in these companies following completion of the desegregation reform. In practice, this acted as an impediment to any takeovers. For example, shareholders holding 5% or more of the shares of a listed company cannot sell down more than 10% of the total issued shares within two years of expiry of a one-year lock-up period imposed following implementation by the company of its desegregation reform.
Listing status as a valuable asset. China's initial public offer (IPO) and listing regime has so far adopted an approval-based approach (as opposed to a registration-based approach), which makes the listing status of a Chinese listed company a valuable asset. As such, controlling shareholders of Chinese listed companies are generally reluctant to sell down their shares or surrender control in Chinese listed companies unless there are special reasons for doing so.
SOE shareholding. In addition, the controlling shareholders of most blue chip listed companies, many of which are SOEs, have not sold down a substantial amount of their shares for strategic economic and national security reasons. In 2014, the Chinese government announced its intention to further reform SOEs in order to encourage diversified ownership structures, and designated China National Pharmaceutical Group Corporation and China National Building Materials Group Corporation as the pilot SOEs for this reform. This indicates that there will be more opportunities to acquire shares in listed SOEs or even take over listed SOEs, though it is unlikely that the state will relinquish its control over strategically important SOEs.
However, 2013 saw some unsolicited attempts to acquire control of Chinese listed companies, including one where Woer Heat-Shrinkable Material Co. purchased shares of fellow listed company and chief competitor in the same industry, Changyuan Group, becoming the target's single largest shareholder, and simultaneously announced a fundraising exercise to acquire further shares in the target (though no takeover bid for the target has yet been made). In this case, the shareholding structure of the target is widely diversified and the chairman of the acquirer was reportedly an ex-senior manager of the target. The target's management is reportedly seeking a white knight to acquire shares in the target as a defence to a possible takeover attempt.
Regulation and regulatory bodies
The key Chinese laws and regulations in this regard are:
The Securities Law (1998) (last amended in 2014 with the amendments being effective from 31 August 2014), the basic statute governing securities-related activities in China.
The Company Law (1993) (last amended in 2013 with the amendments being effective from 2014).
The Takeover Rules (2006) (last amended in 2012), the key rules governing public takeovers in China. In 2014, CSRC proposed a number of significant amendments to the Takeover Rules for public comment. The amended Takeover Rules are expected to be finalised in 2014.
Measures for the Administration of Securities Issuance by Listed Companies (2006) (amended in 2008), applicable if an acquirer intends to subscribe for new shares in a Chinese listed company.
The Listing Rules of the Shanghai Stock Exchange (SSE) (last amended in 2012) (see box, The regulatory authorities).
The Listing Rules of the Shenzhen Stock Exchange (last amended in 2012) (see box, The regulatory authorities).
The Listing Rules of the Growth Enterprise Board (GEB) of the Shenzhen Stock Exchange (amended in 2012).
Procedures for the Administration of Strategic Investment in Listed Companies by Foreign Investors (issued in 2005 and effective from 2006) (Strategic Investment Rules), which set out the eligibility and approval requirements for foreign investors to invest in Chinese listed companies.
The Provisions on Acquisitions of Domestic Enterprises by Foreign Investors (2006) (M&A Rules), which set out the key requirements and procedures for foreign investors to invest in Chinese companies.
The Anti-trust Law (2007).
Provisions of the State Council on the Standard for Filings of Concentrations of Business Operators (2008).
Interim Measures for the Administration of Transfer of Listed Shares Owned by SOEs (2007), the key rules regulating the transfer of state-owned shares in listed companies in China.
The main regulatory authorities of public takeovers in China include:
The MOC (if the acquirer is a foreign investor or the transaction involves competition issues).
The Shanghai and Shenzhen Stock Exchanges.
The State-owned Assets Supervision and Administration Commission (SASAC) (if the transferor is a state-owned enterprise) (see box, The regulatory authorities).
Relevant industry regulatory authorities (for example, if the target is a commercial bank, the approval of the China Banking Regulatory Commission (CBRC) is required to obtain control of that company).
A Chinese listed company must treat all investors equally and is prohibited from providing price-sensitive information to certain persons without the same being made available equally to all investors. As such, access to a target company's information beyond publicly available information is very limited in a tender offer, even if the company is willing to co-operate. As a result, the information disclosed to a bidder in a tender offer mainly consists of information in the public domain.
As in the case of a recommended bid, the due diligence in a hostile bid must also be limited to publicly available information.
Information relating to a Chinese listed company in the public domain mainly includes:
Its IPO prospectus and listing announcement.
Its articles of association and other key internal rules and procedures (for example, the rules of the shareholders' committee, and the rules of the board of directors).
Periodical and ad hoc reports made by the company (see below).
Periodical and ad hoc reports required to be made available to the public by a Chinese listed company include:
Periodical reports. These are:
The annual report, which needs to be published within four months following the end of each financial year. The key information disclosed in it includes, among others, basic information of the company such as registered capital, registered address, and legal representative; key financial information as well as management analysis of the operations of the company; basic information on the shareholders holding 5% or more shares in the company, the controlling shareholders and the actual controller; information about the directors, supervisors and senior managers; analysis of the major events that have occurred within the reporting period and their impact on the company; and the financial audit report.
The half-year report, which needs to be published within two months following the end of the first half of each financial year. This covers most aspects of the annual report but the financial statements are not required to be audited.
Unaudited quarterly reports, in which the company discloses its key financial information.
Ad hoc reports. Where a major event occurs that may have a substantial effect on the trading price of a listed company's shares and its occurrence is not yet known to investors, a listed company must make a public announcement about the event. Examples of a major event include:
a material change in the business strategy or business scope of the company;
a decision about a material investment or purchase of material assets;
a contract being entered into by the company, which may have a significant effect on its assets, liabilities, rights and interests or operations;
the incurrence of any material debt by the company or default by the company on any material debt that is due;
the incurrence of any material deficit or a material loss by the company;
a change to any director or manager or one-third or more of the supervisors of the company, or the chairman of the board or the general manager being unable to perform his duties;
a material change in the shareholding of the major shareholders or actual controllers of the company;
a decision of the company on a capital increase or decrease, merger, split-up, dissolution, or an application for bankruptcy;
any material litigation or arbitration involving the company;
any resolution of the general meeting of shareholders or the board of directors being revoked or invalidated;
any resolution of the board of directors on a new stock offering proposal or any other financing plan or equity incentive scheme;
any court ruling that prohibits the controlling shareholder from transferring its shares;
other circumstances as prescribed by the CSRC.
The Takeover Rules explicitly require the bidder to keep secret information regarding the potential bid before the bid is publicly announced in accordance with applicable laws and regulations (see Question 12). In addition, non-public information relating to the bidding plan is explicitly defined as insider information under the Securities Law, and an insider is under an obligation not to do any of the following:
Trade in securities of the target company.
Divulge any insider information.
Recommend others to trade securities of the target company.
Agreements with shareholders
Reportable shareholding threshold
Generally, reporting obligations are triggered in the following circumstances:
If trading on the exchanges either:
reaches an interest of 5%; or
having reached an interest of 5%, changes the interest by 5% or more (for companies listed on the Shanghai and Shenzhen stock exchanges) or 1% or more (for companies only listed on the GEB).
In the event of transfer by private agreement or by administrative order, court order, donation or inheritance, trading is either:
expected to reach an interest of 5% or more; or
expected to change an interest by 5% or more.
Where a company is listed on the SSE, additional reporting obligations are triggered where the interest held by a person falls below 5% after reaching 5%.
Interests disclosable by a person include:
Interests in shares of the company that are registered under his name.
Interests in shares to which the voting rights attached can actually be controlled by him, even though such shares are not registered under his name.
"Control" of the voting rights attached to shares held by others can be achieved by either concert party arrangements or "control" over the direct holder of the shares. As such, the shares held by any entity within a group with a relationship of control should be aggregated.
In general, the reporting obligations cover all securities issued by a Chinese listed company, including different classes of shares (whether listed or not), American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs) and convertible bonds. Note, however, that the Takeover Rules only expressly apply to holdings in shares and convertible bonds and are otherwise silent as to how interests in other forms of securities and derivatives should be disclosed (and aggregated) for reporting purposes.
In the case of derivatives, to the extent they are convertible into actual shares of the company, it is arguable that their treatment should be similar to the case of convertible bonds and are therefore reportable. Conversely, cash settled derivatives that do not allow the holders to obtain actual shares of the company should arguably not be reportable.
Timing for reporting
Generally, reports to regulators and public announcements need to be made within three days or two trading days (depending on the transaction type) of acquisition of the interests or signing of the acquisition agreement.
Form of reporting
An interests' change report must be filed and announced in either a short-form or long-form report depending on the triggering event.
A short-form report can be used if:
The acquirer (aggregating its interests with those of its concert parties) is not the largest shareholder or actual controller of the Chinese listed company.
The acquirer's holdings (together with those of its concert parties) do not exceed 20% of the total shares issued by the listed company.
In other instances requiring the filing of an interests' change report, the long-form report should be used. The reports must follow the form provided by the relevant rules and contain the information required in the prescribed form.
In both cases above, the acquirer must disclose in the report as to whether it intends to increase its stake in the target company within the next 12 months.
Suspension of trading
In general, once the reportable shareholding threshold is triggered, the acquirer must cease trading in the shares of the target company for a period, the length of which depends on the circumstances. For example:
Where an acquirer's interest reaches 5% of the entire issued share capital of the target company through purchases on the stock exchange, the acquirer is prevented from trading in the target company's shares until three days after the interest has reached 5%.
Where an acquirer expects to hold an interest of 5% or more in the target company by way of private agreement, the acquirer is prevented from trading in the shares of the target company until the reportable event has been publicly announced.
Where a person holding an interest of 5% or more increases or reduces his interest in the target company by 5% or more through trades on the stock exchange, he is prevented from trading in the target company's shares until two days after the reportable event has been publicly announced.
Where a person holding an interest of 5% or more expects to increase or reduce his interest in the target company by 5% or more by way of private agreement, he is prevented from trading in the target company's shares until the reportable event has been publicly announced.
Agreements in recommended bids
It is uncommon in China for the board of the target company to enter into a formal agreement with the bidder on behalf of the target company. Instead, the takeover of listed companies in China usually takes the form of a negotiated agreement between the bidder and the principal shareholder(s), which grant(s) an exclusivity clause to the effect that the principal shareholder(s) will not solicit any other potential buyer than the bidder for an agreed period.
Break fees are very uncommon in a recommended bid in China. This is mainly because the board and shareholders of the target would be unlikely to accept any financial consequence of a lost opportunity to acquire the target's listing status, as the listing status itself is generally viewed as a valuable asset in China (see Question 3).
The bidder must state in the tender offer report (Takeover Rules):
The amount of funds required for the takeover.
The source of the funds.
The commitment it has obtained for such funding or other payment arrangements.
The financial adviser engaged by the bidder must also confirm that the bidder has the ability to make and complete the offer.
In addition (Takeover Rules):
If cash is used for payment, at the time of announcement of the tender offer, the bidder must deposit at least 20% of the total amount of the offered price in an account designated by the China Securities Depositary and Clearing Corporation (CSDCC), the central clearing house of the stock markets in China. The CSRC has put forward proposals to allow the bidder's bank or financial adviser to provide a guarantee in lieu of the 20% deposit which, given the lengthy offer timetable, is expected to reduce costs for the bidder.
If listed securities are used for payment, the bidder must deposit all the relevant securities at the CSDCC, except where the relevant securities are new shares to be issued by a listed company. If the securities used for payment are not listed securities, the bidder must offer a cash option to the shareholders.
Announcing and making the offer
Making the bid public
The indicative timetable below sets out the key dates for both recommended and hostile bids:
Day A: indicative announcement. The bidder must make an indicative public announcement of the key contents of its tender offer report at the time when it notifies the target company of the offer. In particular, where a mandatory offer is triggered (see Question 16 ( www.practicallaw.com/7-107-4609) ), the indicative announcement must be made within three days of the event triggering the mandatory offer. Before the latest amendments to the Securities Law which took effect on 31 August 2014, a bidder making an indicative announcement was also required to submit its tender offer report (together with the opinion of the financial adviser to the bidder in relation to the offer, and other application documents) for pre-vetting by the CSRC and the relevant stock exchange. For the current position, see below, Day B: offer announcement.
Day B: offer announcement. Before the latest amendments to the Securities Law which took effect on 31 August 2014, a bidder could only publish its tender offer report (together with the financial adviser's opinion on the offer) after the issue of a no objection letter by the CSRC and the CSRC had a 15-day period to issue the no objection letter or raise objections (if any). In practice, the CSRC could take a few months, and sometimes up to a year. There is no mandatory requirement as to when the announcement must be made after the issue of the CSRC no objection letter, and a bidder would usually make its offer announcement within ten days from the issue of the no objection letter. The amended Securities Law has removed the requirement for the tender offer report to be submitted for pre-vetting, which would allow the tender offer report to be published without needing a no objection letter from the CSRC. That said, interestingly, proposed amendments to the Takeover Rules published by the CSRC in July 2014 (before the amendment of the Securities Law) state that the bidder can announce the offer after a 15-day period has passed after a summary tender offer report has been filed with the CSRC and no concerns have been raised by the CSRC, therefore retaining the requirement to file a tender offer report with the CSRC prior to publication, though the requirement to obtain a no objection letter from the CSRC would no longer apply. Further clarification is needed as to how (if at all) the new Takeover Rules will reconcile with the tender offer report ceasing to be required under the amended Securities Law. Until this clarification is forthcoming, bidders are advised to check with the CSRC if pre-filing of the tender offer report is still necessary.
Day B + ≤ 20 days: target board response. The target company's board must, within 20 days from the offer announcement, submit to the CSRC and the relevant stock exchange a board report on whether it recommends shareholders to accept the offer (together with the opinion of the independent financial adviser of the company in relation to the offer), and make the board report and the opinion of the independent financial adviser public.
Day B + X (usually five) days + (30 to 60 days) : offer period. The offer period must be between 30 days and 60 days (as specified in the tender offer report), although it can be extended in the context of a competing bid (see below), and usually commences within five days after Day B. Any revision to the offer terms during the offer period must be announced following approval of the revision by the CSRC, and no revision is permitted in the last 15 days before the end of the offer period unless there is a competing bid (see below). During the offer period, shareholders of the target company may preliminarily accept the offer. The preliminary acceptance will become irrevocable three trading days before the end of the offer period.
Post- offer period. Within three trading days after the end of the offer period, the bidder must complete the transfer from all accepting shareholders and announce the offer results to the public. Within 15 days after the end of the offer period, the bidder must report the offer results to the CSRC and the relevant stock exchange, and notify the target company that it has done so.
Where there is a competing bid, the initial bidder can modify its offer terms even in the last 15 days before the end of the offer period. In this case, the offer period is extended by at least 15 days starting from the date of the amended offer, with the expiry date being no later than the latest expiry date of the competing bid(s). Any competing bidder must make its own indicative tender offer announcement no later than 15 days before the end of the offer period of the initial bidder.
In certain circumstances, an announcement may also be required before a bidder has formed a firm intention to make an offer, including:
Where there is an acquisition that gives rise to an obligation to make a mandatory offer (see Question 16).
Where the intended bid is the subject of rumour and speculation or there is an untoward movement in the trading of the shares of the target company. In this case, the target company (as opposed to the bidder) must make an announcement clarifying the facts that led to the rumour, speculation or untoward movement in the trading of the shares. For this purpose, the target company can make enquiries of the suspected bidder and the potential bidder must respond to the enquiry in writing in a prompt manner.
The tender offer report must, among other things, set out the conditions (if any) of the tender offer (Takeover Rules). However, the rules do not set any restrictions on the nature and content of such conditions. Commonly seen conditions relate to the obtaining of required regulatory approvals. There are also precedents where offers are subject to achieving a certain level of acceptance of the offer, and/or de-listing of the target.
As stated in Question 12 ( www.practicallaw.com/7-107-4609) , currently, any conditions set out in the tender offer are effectively subject to the prior approval of the CSRC. The CSRC can reject conditions that are subject to the sole discretion or control of the bidder, as these would in effect permit the bidder to invoke the condition and withdraw the offer on purely subjective grounds. It remains to be seen if the CSRC pre-vetting requirement will be abolished in the amended Takeover Rules. Even if the CSRC pre-vetting requirement is abolished, however, it is uncertain how the market would view conditions that are aimed to allow the bidder to withdraw the offer on purely subjective grounds.
Note that in a tender offer, the shares to be acquired by the bidder must not be lower than 5% of the total shares of the target company.
In both recommended and hostile bids, the following documents are made available to the target's shareholders:
Extract of the tender offer report issued by the bidder. This summarises the content of the tender offer report.
Tender offer report issued by the bidder. This includes:
information about the bidder, the target and the offer;
the conditions of the offer;
the amount, source and confirmation of the funds required for the offer, or other payment arrangements;
analysis of the impact of the offer on the target;
a description of the bidder's plans post-takeover for the target;
a description of any material transactions between the bidder and target.
Opinion issued by the bidder's financial adviser. This includes:
that the particulars included in the tender offer report are true, accurate and complete;
a description of the purpose of the offer;
analysis of the bidder's ability to perform its obligations under the offer;
a description of the sources and legality of the bidder's funds used for the takeover;
analysis of any subsequent plans proposed by the bidder; and
where there is likely to be any competition with, or any related party transactions between the bidder and the target, an analysis of any plan initiated by the bidder for settling any conflicts of interest.
Legal opinion issued by the bidder's legal counsel. This gives an opinion on the legality of the offer.
Board report of the target. This states whether the board recommends that shareholders of the target accept the offer, with its reasoning.
Opinion issued by the independent financial adviser engaged by the target's board (or independent directors). This includes:
analysis of the bidder's eligibility and economic strength in making the offer;
analysis of the potential impact of the takeover on the target's independent operation and continued development;
analysis of the fairness and reasonableness of the offer price, and a recommendation to the public shareholders on whether to accept the offer or not.
There is no express requirement under Chinese law for a target's board to inform or consult its employees on a tender offer. Employees of the target are, in effect, informed of a tender offer through the announcements made by the bidder and the target's board in the same manner as other stakeholders and the general public.
However, there is a general requirement that a company must seek the opinions of its labour union and its employees when taking a decision on its restructuring or any material issues relating to its business operations (Company Law). This concept of employees' rights is, however, not well developed either in law or in practice in the context of tender offers.
Unless otherwise exempted, a mandatory offer is triggered under Chinese law where either:
A person holds an interest of 30% or more in a Chinese listed company and intends to acquire further interests in that company.
A person expects to hold an interest of 30% or more in a Chinese listed company following an acquisition by private agreement.
For this purpose, the interests held by a person in a Chinese listed company include:
Interests in shares of the company registered in his name.
Interests in shares to which the voting rights attached can actually be controlled by him, despite the fact that such shares are not registered in his name.
In general, the offer price can be paid in cash, securities or a combination of the two provided that, where securities to be offered are not listed on a stock exchange, a cash alternative is also provided (Takeover Rules).
However, the bidder must offer cash or at least cash alternatives where the purpose of the offer is to de-list the target, or where a mandatory offer is triggered under the Takeover Rules and the bidder fails to obtain a CSRC exemption from making a mandatory offer.
On a tender offer, the proposed offer price must not be lower than the highest price paid by the bidder for the same class of shares in the target in the six months before the date of the indicative announcement of the tender offer.
In addition, if the offer price is lower than the arithmetic average of the daily weighted average market price of the corresponding class of shares in the target over the 30 trading days preceding the date of the indicative announcement of the tender offer, the financial adviser engaged by the bidder must provide details of the trading of the corresponding class of shares in the previous six months. It must also explain, in its opinion:
Whether there has been any manipulation of the relevant share price.
Whether the bidder failed to disclose any concert parties.
Whether there has been any other consideration payable by the bidder for the acquisition of shares of the target in the preceding six months.
The reasonableness of the proposed offer price.
It is generally difficult for a foreign bidder to offer securities as consideration to shareholders of the target for various reasons. For example, it is not feasible to offer overseas securities as consideration because Chinese individuals and entities are generally not permitted to hold overseas securities unless specifically approved. In addition, it is not practical to offer securities in an unlisted Chinese company as consideration because the transfer of securities in an unlisted Chinese company to or by a foreign investor requires the approval of the MOC.
Compulsory purchase of minority shareholdings
Unlike many other jurisdictions, a bidder does not have the right to squeeze out minority shareholders of a Chinese listed company. However, where the target is de-listed as a result of the tender offer, a minority shareholder has the right to sell his shares to the bidder after the end of the offer period on the same terms as those proposed in the tender offer, even if the minority shareholder did not accept the offer during the offer period (see Question 22).
Restrictions on new offers
No such restriction exists under the Takeover Rules. However, if the bidder cancels a proposed takeover offer after the submission of its tender offer document to the CSRC and before the tender offer document is announced, it must explain its reasoning to the CSRC and make a public announcement of the cancellation. Following this, the bidder cannot launch a new offer within the following 12 months. Once a tender offer is formally announced, the bidder cannot withdraw the offer.
On the expiry of the offer period, if the target fails to continue to meet the public float requirement for listing (that is, 25% for a company whose registered capital is CNY400 million or less and 10% for a company with registered capital exceeding CNY400 million), the target may be required to be de-listed under the applicable stock exchange rules.
Taking the Shenzhen stock exchange procedure as an example (the procedure set by the SSE is not materially different):
If the bidder intends to de-list the target by way of the tender offer, promptly after completion of the offer, the target board must make an application to the stock exchange to de-list the company. The stock exchange makes its decision whether to de-list the target within 15 trading days from receiving the application documents.
If it is not the bidder's intention to de-list the target but no proposal to meet the public float requirement is implemented, the stock exchange:
issues a de-listing warning in relation to the target's shares;
suspends the listing status of the target if the public float requirement is not met within six months of the de-listing warning;
can, if the public float requirement is still not met within a further six months from the suspension, decide to terminate the listing of the target within the following 15 trading day period;
notifies the company and announces its decision within two trading days after the decision to terminate its listing is made.
A company whose listing is terminated becomes formally de-listed after a de-listing settlement period of 30 trading days, starting from the date of the stock exchange's decision to terminate the listing.
If there is still sufficient public float after the takeover and other criteria for listing (such as profit or revenue requirements, and total amount of outstanding shares) are met, neither the target nor the bidder can voluntarily decide to de-list the target.
As hostile takeover bids are uncommon in China (see Question 3), anti-takeover defences are rarely implemented.
The directors of the target owe duties of loyalty and diligence to the company, and must treat all bidders fairly. Decisions made and measures taken by the target's board with regard to a takeover must be conducive to safeguarding the interests of the company and its shareholders. The target company's board cannot unduly obstruct a takeover, nor can it use the resources of the company to provide any form of financial assistance to any bidder.
In particular, after the indicative announcement of a tender offer is made until completion of the takeover, the target company's board cannot, without the approval of the shareholders' general meeting, take any action that could significantly affect the company's assets, liabilities, interests or businesses. Such actions include, for example:
Disposing of the company's assets.
Making external investments.
Adjusting the company's main business.
Providing any guarantee or loan.
In addition, during an offer period, no director of the target can resign.
Despite these mandatory directors' obligations, the target board can implement defence measures such as poison pills if such measures are prescribed by the constitutional documents of the target or approved by the general meeting of the shareholders of the target.
Other regulatory restrictions
Public takeovers in China may require various regulatory approvals depending on factors such as:
The identity of the target (for example, an SOE).
The industry of the target (for example, insurance, banking or automotive).
The size of the transaction.
If required, regulatory approvals delay the takeover process and may make the overall takeover timetable uncertain. The actual approval time varies in each case, but delays of up to one year from the announcement of an offer are not uncommon.
Common regulatory approvals that may be required in a public takeover in China by either a domestic or foreign bidder include:
Approval by the SASAC if a transfer of state-owned shares is involved.
Merger clearance by the MOC if the takeover constitutes a notifiable concentration of undertakings.
Approvals by industry-specific regulators for regulated industries, for example, approval by the CBRC for a takeover of a listed bank.
If the bidder is a foreign investor, additional regulatory approvals may be required including:
Approval by the MOC under the Strategic Investment Rules and the M&A Rules.
National security review organised by a ministerial committee (see Question 26).
Depending on the industry to be invested in, a foreign shareholder may be subject to various shareholding restrictions on foreign investment. Generally, reference should be made to the current version of the Foreign Investment Industrial Guidance Catalogue (Catalogue), which sets out a list of all industry sectors and categorises them according to the extent that they are open to foreign investment.
No foreign investor can invest in a Chinese company if the business of the Chinese company falls within the "prohibited" category in the Catalogue. Where companies falling within the "restricted" category are the subject of a potential offer, the foreign shareholding in the relevant company must comply with any individual or aggregate shareholding ceilings on foreign investment as prescribed by the Catalogue. In general, the main governmental approval required on a takeover involving foreign investment is MOC approval (including its local branches).
Other industry-specific restrictions may also be relevant. For example, while a foreign investor can establish a wholly foreign owned bank in China, an individual foreign investor cannot hold more than 20% of a Chinese-funded bank. Aggregate foreign ownership in an unlisted Chinese-funded bank cannot exceed 25%.
In addition to the general framework for foreign investment set out in the Catalogue and the industry specific restrictions set out in separate Chinese laws and regulations, a new regime of national security review has been formalised in recent years. Under the new regime, the following acquisitions by foreign investors of Chinese enterprises or assets may be subject to review on the grounds of national security:
Acquisitions of a controlling interest in a Chinese enterprise within a sensitive sector that may affect national security, such as key:
energy and resources;
Acquisitions of any stake in any:
Chinese military or military supportive enterprise;
enterprise located in the surrounding area of important or sensitive military facilities;
other enterprise that is of importance to national defence security.
The review is conducted by a ministerial committee jointly headed up by the National Development and Reform Commission and the MOC, together with the relevant industry-specific regulator(s) in question.
The national security review assesses the impact of the acquisition on:
National defence, productivity and supply capabilities.
Operational stability of the Chinese economy.
Research and development of China's technologies key to national security.
The national security review requirement does not apply to acquisitions of Chinese financial institutions by foreign investors, which are the subject of separate regulations yet to be published.
While there is currently no precedent for the exercise of such a national security review, future enforcement of this regime may have an impact on certain transactions involving foreign investments.
The repatriation of profits from China to other jurisdictions (including conversion of the local currency, the Renminbi, to a freely convertible foreign currency for the purpose of the repatriation) is currently not subject to any prior governmental approval. It can be handled directly by a bank entitled to conduct foreign exchange business provided all relevant supporting documents are provided to the bank (for example, resolution of the competent internal body of the target approving the distribution and evidence of the prior payment of withholding tax on the amount of profits to be repatriated).
Following the announcement of the offer and before the end of the offer period, the bidder cannot sell its shares in the target nor acquire shares in the target on terms different from those set out in the offer or otherwise than through the offer. This requirement also applies to any concert parties and any person that has a control relationship with the bidder.
Save as above, there are no restrictions (other than those relating to inside information) on third parties dealing in the securities during the offer period.
On 11 July 2014, the CSRC proposed a number of significant amendments to the existing Takeover Rules for public comment. These amendments are designed to simplify the requirements for government approval and other processes in connection with public takeovers, and provide the CSRC with increased supervisory and punitive powers for non-compliant activities.
Under the proposals, the tender offer report by the acquirer may be issued without requiring a no-objection letter from the CSRC (which in practice, can take months and sometimes up to a year to obtain). Further, subject to other governmental approvals such as MOC approval of foreign investments in the relevant listed company under the Strategic Investment Rules, the acquirer will be permitted to proceed with the tender offer process as long as the CSRC does not raise any concerns within 15 days of the acquirer filing a summary tender offer report with the CSRC.
In addition, the acquirer will not be required to deposit 20% of the consideration for the tender offer at the time of the issuing of the summary report. Instead, a joint and several guarantee on behalf of a bank or the financial adviser to the acquirer will suffice. This has the potential to significantly reduce costs incurred by the acquirer in a public M&A transaction, considering the length of time which may have to be spent on obtaining different government approvals from the issuing of the indicative announcement up to the issuing of the publication of the tender offer report.
As discussed in Question 12 ( www.practicallaw.com/7-107-4609) , the amended Securities Law, which took effect from 31 August 2014, does not make reference to any prior filing of the tender offer report with the CSRC or any waiting period of 15 days for the CSRC to raise concerns.
Clarification of whether, and how, these requirements will apply in future is awaited in the amended Takeover Rules which are expected to be released in 2014.
The regulatory authorities
China Securities Regulatory Commission (CSRC)
Main area of responsibility. The CSRC is the main regulator responsible for the securities market of China, including the takeover of listed companies.
Shanghai Stock Exchange (SSE)
Main area of responsibility. The SSE formulates trading rules, organises transactions and provides services for the takeover of listed companies and related share transfer activities, and supervises related securities trading and information disclosure.
Shenzhen Stock Exchange
Main area of responsibility. The Shenzhen Stock Exchange has the same responsibilities as the SSE.
Ministry of Commerce (MOC)
Main area of responsibility. The MOC supervises and approves takeovers by foreign bidders, and conducts competition reviews (if applicable).
State-owned Assets Supervision and Administration Commission (SASAC)
Main area of responsibility. SASAC supervises and approves the transfer of state-owned shares (if applicable).
The Central People's Government of the People's Republic of China
Description. Official website with links to official legislation issued by various regulatory authorities in Chinese, and some unofficial English translations. May be out of date, except for legislation promulgated by the National People's Congress, its Standing Committee and the State Council.
China Securities Regulatory Commission (CSRC)
Description. Official website with links to up-to-date CSRC rules in Chinese.
Shanghai Stock Exchange (SSE)
Description. Official website with links to up-to-date trading rules in Chinese.
Shenzhen Stock Exchange
Description. Official website with links to up-to-date trading rules in Chinese.
Ministry of Commerce (MOC)
Description. Official website with links to up-to-date MOC rules in Chinese.
State-owned Assets Supervision and Administration Commission (SASAC)
Description. Official website with links to up-to-date SASAC rules in Chinese.
Fang Jian, partner
Professional qualifications. PRC, 1995; New York, US, 2004
Areas of practice. Corporate; M&A; financial regulation.
Advising a foreign investor in relation to a PRC mandatory general offer and non-compete related issues resulting from an offshore merger of equals.
Advising a foreign investor in relation to its co-operation with an acquirer in connection with the acquirer's potential takeover of a PRC listed company.
Grace Yu, managing associate
Professional qualifications. PRC, 2004
Areas of practice. M&A; financial regulation.
Recent transactions Advising a foreign investor in relation to a PRC mandatory general offer and non-compete related issues resulting from an offshore merger of equals.
Advising a foreign investor in relation to its co-operation with an acquirer in connection with the acquirer's potential takeover of a PRC listed company.