Overview of listing by way of M&A and reorganisation

By Ni Jieyun, Dentons China
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M&A and reorganisation has long been held as a favourable method of resource allocation that stimulates market vitality and improves the quality of listed companies. However, after the 2013-2016 M&A-centred bull market ended in massive stock market turbulence, a more cautious approach emerged. Now, the regulatory grip appears to be loosening once more following recent years of policy changes.

Overview of listing by way of M&A and reorganisation
Ni Jieyun
Senior Partner
Dentons China

M&A and reorganisation is among the most significant ways to optimise capital allocation. As a type of capital market transaction, it is relatively complicated in terms of content, form and process. Of the numerous steps in an M&A, structural design is among the most important, and needs to be in line with both the transaction objective and the market and regulatory requirements.

In an IPO, M&A and reorganisation can take place either before or after the listing. In terms of form, they are roughly classified into merger and listing, acquisition of a listed company, and material asset reorganisation of a listed company (commonly referred to as “backdoor listing”).

MERGER AND LISTING

After the M&A and reorganisation, the entity to be listed must meet the review requirements for an IPO. In particular, the operating period of the entity must meet certain standards. For example, to acquire 100% of a business from a related third party, the entity must have operated for at least 36 months to be listed on the main boards, or 24 months for the BSE, ChiNext or Star Market.

Merger and listing are especially suitable for relatively sizeable listing entities, and the scale and timing of the M&A should be carefully planned to coincide with the submission of the listing application. In this process, the proportion of cash payment and share-based payment should be carefully measured, in order to ensure that the actual controller has a shareholding at or above the reasonable level. Due diligence should be performed during the acquisition to ensure the legality and compliance of the target company.

ACQUISITION OF LISTED COMPANIES

Acquisition of listed companies is a special kind of stock trading. The manner of acquisition mainly includes acquisition by agreement, secondary market transaction, indirect acquisition, or takeover bid.

Acquisition by agreement is the most commonly adopted method. The ratio of transfer to a single transferee should be not less than 5% unless the transferor and transferee are in an actual control relationship, are controlled by the same entity, are recognised by the competent authority, or the laws and regulations provide otherwise.

Secondary market transactions include centralised competitive bidding and bulk trading. However, due to the high uncertainty of the secondary market, it is generally not considered the best approach for acquiring listed companies, but is more likely a way to supplement or consolidate control.

In indirect acquisition, the purchaser assumes control over the listed company through investment relations, agreements and other arrangements. The most common route is to acquire the equity of a listed company controlled or held by the actual controller of the company. In recent years, voting rights proxy or concerted action agreements have emerged as frequently used means to acquire listed companies.

A takeover bid refers to the method where the purchaser sends a bid announcement to all shareholders of the listed company announcing the intention to acquire all or part of the shares that they hold under clear and unified conditions. Regardless of the acquisition method adopted, if the purchaser holds 30% or more of the issued shares of a listed company and continues to increase its shareholding ratio, it should proceed by issuing a bid in the form of either a full or a partial bid (i.e., mandatory takeover bid). As the stock price is likely to soar beyond the bidding price after the bid is made, almost all purchasers in practice strive to contain their acquisition ratio to within 30%.

In acquisitions of listed companies in recent years, most adopted the mode of transfer by agreement, transfer by agreement + voting rights proxy, or transfer by agreement + subscription of privately offered shares + voting rights proxy.

MATERIAL ASSET REORGANISATION

Backdoor listing, unlike the acquisition of listed companies, involves not only obtaining control over the listed company but also injecting the issuer’s own assets so that the listed company goes through an overhaul as the injected assets become public. The special purpose acquisition company, or SPAC, a phenomenon of recent years, is a type of backdoor listing.

According to the Administrative Measures for the Material Asset Reorganisation of Listed Companies (Revised in 2020), if a listed company buys assets from its purchasers or affiliates within 36 months from the change of control, leading to a fundamental change in the listed company, it constitutes a backdoor listing. In order not to avoid triggering the alarm, a series of “tricks” have grown in popularity, such as making no change in control, purchasing assets from a third party other than the purchaser, and adjusting the target assets. Voting rights proxy is one such tool worthy of attention.

VALUE OF M&A AND REORGANISATION

Payment methods in M&A include cash, shares and convertible bonds. Full payment by cash is generally adopted for small-scale M&A, while payment by shares or a mix of both is used for large-scale M&A. In order to avoid deterioration of financial structure caused by paying a large amount of cash, convertible bonds and other methods may be adopted to manage the change of control.

M&A and reorganisation bring a myriad of value to the capital market, as industrial integration and technological innovation serve as the underlying main theme and new driving force of M&A and reorganization, a new channel to promote supply-side structural reform, and a booster of reform of state-owned enterprises and the growth of private enterprises.

As M&A and reorganisation involves a wide range of expertise and complicated social issues, legal counsel should be well equipped with co-ordination, communication, operational skills, profound social experience, solid legal know-how and, preferably, experience in both litigation and non-litigation services.