How should China-listed companies handle overseas restructurings?

On 7 March 2014, the State Council issued the Opinions on Further Optimising the Market Environment for Enterprise Mergers and Restructurings, which propose several innovative measures in respect of approval system reform, financial services, financial and tax policies, land administration policies, etc. On 27 September 2013, the State Council issued the General Plan for the China (Shanghai) Pilot Free Trade Zone (FTZ), planning the outline for opening the Shanghai FTZ to foreign investment, while also introducing new opportunities for listed companies to restructure and acquire overseas assets. Besides, the publication of the above laws and regulations will also relate to the rise and decline of many industries.

Trends of overseas restructurings

Restructurings of quality overseas assets will be the principal means by which China-listed enterprises will go global for the near future. It’s seen as necessary for China-listed companies to enhance their global competitiveness through overseas restructurings and acquisitions to obtain resources that are scarce at home, e.g. technology, brands and overseas sales channels.

Although Western enterprises have first-rate technology and quality, due to market and cost factors in recent years, their business has generally been less than ideal. Market and cost advantages are precisely what Chinese enterprises have, so their success rate in overseas restructurings and acquisitions far exceeds that of their international peers. However, we need to design a best possible transaction structure based on objective reality to both secure the assets that Chinese enterprises want, and comply with the approval requirements of the China Securities Regulatory Commission (CSRC).

Approval requirements

The domestic administrative approvals that China-listed companies are subject to when carrying out overseas restructurings and acquisitions are a major factor affecting their success. When a China-listed company is planning a restructuring of overseas assets, it’s subject to the approval, recordal or registration of the National Development and Reform Commission (NDRC), Ministry of Commerce, State Administration of Foreign Exchange, CSRC and stock exchanges. If it is a state-owned enterprise (SOE), the approval or recordal of the state-owned assets administration authority is also required.

Furthermore, different to usual overseas acquisitions, an overseas asset restructuring by a listed company is required to satisfy the strict requirements of the CSRC regarding the integrity and independence of the overseas assets and the compliance of the restructuring and acquisition agreement. Accordingly, the China-listed company needs to be well versed in the CSRC’s approval procedure and also have full knowledge of the objective circumstances of the overseas assets.

Future zone plan

Pursuant to the Zone Plan, in the future development of the FTZ, exchange control can enhance trading freedom and efficiency through classification and such measures as recordal, authorisation and moving forward of the window, etc. Where approval of the competent commerce authority is involved, the recordal system comes within the purview of the commerce authority; and where NDRC approval is involved, the recordal system comes within the purview of the Shanghai government. According to the plan, in the course of an overseas restructuring carried out by a listed company’s subsidiary established in the FTZ, the administrative approval procedures involved will be greatly simplified.

Restructuring scheme

The following are the schemes recommended by the author for a restructuring and acquisition of overseas assets by a listed company:

Scheme 1 (as shown in the figure): a China A-share-listed company acquires the target assets directly through an offshore special purpose vehicle (SPV). The listed company establishes a holding company and an SPV in Hong Kong and then restructures the overseas assets through such an SPV.

First, the listed company establishes a holding company in Hong Kong, achieving two aims in one stroke: i) if the restructuring of the overseas assets by the China-listed company can succeed in the required time limit, this is beneficial to subsequent management and operation of the listed company, because we are more familiar with Hong Kong laws and regulations; ii) if the restructuring of the overseas assets by the China-listed company proves unsuccessful, we can do appropriate adjustments and list the company on the Hong Kong Stock Exchange, giving rise to a “twin listing drives” structure, and then use the Hong Kong holding company to establish an SPV, which is then ultimately used to carry out the acquisition and restructuring of the overseas assets.

Recently we advised an SOE on acquiring overseas mining assets, and recommended the structure of establishing offshore companies in Hong Kong and Luxembourg. This is also due to the consideration that if the restructuring by the China-listed company fails, it can turn to seek the listing in Hong Kong. Legal and taxation concerns are also involved.

We recommend that clients grasp the appropriate opportunities, consider their own needs, and avail themselves of the various opportunities for overseas asset restructuring and development, which are brought about by the various policies and reforms made by the central government and the Shanghai FTZ.

In the next issue, the author will describe other schemes for overseas restructurings and acquisitions.