Q&A: completing public M&A transactions in China

Completing the transaction

What are the special considerations for unsolicited transactions for public companies?

The laws and regulations of the People’s Republic of China (PRC) do not expressly define the term ‘hostile transaction’ or stipulate detailed countermeasures for hostile transactions.

Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders?

There is no statutory break-up fee stipulated by Chinese laws and regulations.

However, regarding limited liability companies, if any of the shareholders wish to transfer their shares to a third person, or the company is proposed to be combined with other companies, the other shareholders who disagree with the transfer or combination could have the following options to restrict the break-up or transfer, according to Company Law of the PRC:

• purchase the shares to be transferred at the equivalent price offered by the third person; or
• request the company to purchase their shares at a reasonable price.

The break-up fees could also be based on the termination and damage terms, if any, in the joint venture agreement between the shareholders. The parties to a contract could either set a fixed amount or rate of liquidated damages for the break-up or stipulate that the damages shall be subject to actual losses therefrom.

Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security?

Government agencies influence or restrict the completion of a business combination if it relates to solely state-owned companies or state-owned assets. These regulations aim to protect state-owned assets for the purpose of national security.

What conditions to a tender offer, exchange offer, merger, plan or scheme of arrangement or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions?

In practice, there are various types of transaction that occur in China, such as leveraged buyouts, venture capital, mezzanine capital and growth capital transactions, angel investments and private investment in public equity.

Financing may be conditional in a cash acquisition.

If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing?

The buyer and the seller must include all the transaction details in the transaction agreements. In China, most certificates, application letters and reports must be submitted to the relevant and competent authority for approval. As a consequence, the seller is responsible for providing the related documents to the buyer or the relevant authority, such as:

• the company’s business licence;
• the audit report;
• the verification report;
• the asset assessment report;
• the resolution of the board of directors or shareholders; and
• the proof of tax payments.

May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process?

According to the laws and regulations of the PRC, minority stockholders may be squeezed out.

Publicly offered securities (including the shares of list companies) shall be listed and traded on stock exchanges legally formed or be traded on other national securities trading venues approved by the State Council. In China, the stock exchanges mainly refer to Shanghai Stock Exchange and Shenzhen Stock Exchange. Securities listed on stock exchanges shall be traded in the form of open and centralised trading or other forms approved by the securities regulatory agency of the State Council.

Taking Shanghai Stock Exchange, for example, the securities listed on stock exchanges shall be traded as below:

• to buy and sell securities, investors shall open securities accounts and capital accounts, and sign securities trading entrustment agreements with members of the stock exchange. After the agreement takes effect, the investor becomes the client of the member’s brokerage business; and
• investors can entrust members to buy and sell securities through self-service entrustment methods such as written or telephone, self-service terminals, and the internet.

• Practitioners of securities trading venues, securities companies, and securities depository and clearing institutions, staff members of securities regulatory agencies, and other persons prohibited by any law or administrative regulation from participating in stock trading shall not, during their terms of office or the statutory periods, hold, purchase, or sell any stock or other equity securities directly, in any assumed name, or in the name of any other person or accept any stock or other equity securities from any other person as a gift. Upon becoming a person set out in the preceding paragraph, anyone must transfer in accordance with the law the shares or other equity securities that he or she holds. Practitioners of a securities company implementing an equity incentive plan or an employee stock ownership plan may, according to the rules of the securities regulatory agency of the State Council, hold and sell the company’s stock or other equity securities.
• Securities service institutions and persons that issue documents such as audit reports and legal opinions for an offering of securities shall not purchase or sell such securities during the term of underwriting of such securities and six months after the expiration thereof. In addition to the provision of the preceding paragraph, securities service institutions and persons that issue documents such as audit reports and legal opinions for the issuer and its controlling shareholder and actual controller, the acquirer, or the parties to a material asset transaction shall not purchase or sell such securities from the date of accepting engagement to the fifth day after the aforesaid documents are disclosed to the public. If the date on which the relevant work aforesaid is actually carried out is earlier than the date on which engagement is accepted, they shall not purchase or sell such securities from the date on which the relevant work aforesaid is actually carried out to the fifth day after the aforesaid documents are disclosed to the public.

• Where a shareholder holding 5 per cent or more of the shares of stock, a director, a supervisor, or an officer of a listed company or a company with its stock traded on any other national securities trading venue approved by the State Council sells any stock or other equity securities that it holds in the company within six months after its purchase thereof or purchases the stock or other equity securities within six months after its sale thereof, the profits therefrom shall be owned by the company, and the board of directors of the company shall take back such profits, except for a securities company holding 5 per cent or more of the shares of stock as a result of purchasing the remaining unsold stock underwritten by it on a firm-commitment basis or under any other circumstances prescribed by the securities regulatory agency of the State Council. The stock or other equity securities held by a director, a supervisor, an officer, or a natural person shareholder as mentioned in the preceding paragraph shall include the stock or other equity securities held by his or her spouse, parents, and children and held through any other person’s account.

Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies?

The foreign acquiring party must apply for approval to open a bank account in a foreign currency to receive capital for the transaction with the local Administration of Foreign Exchange where the listed company is located within 15 days of receiving the official approval from the Ministry of Commerce. All transactions must generally be completed within 180 days of receiving the official approval.