Share exchange mergers and the legality of cash options 

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Share exchange mergers and the legality of cash options, 换股吸收合并与现金选择权的规范基础

The commercial structure of merger by share exchange is defined as that the merger company exchanging the shares of the target company for the shares held by shareholders of the target company by issuing new shares as consideration by way of private placement, and the merger company becoming the controlling shareholder, or even sole shareholder of the target company.

Ultimately, the merger company survives and the target company ceases to exist upon merger by absorption. Instead of becoming a subsidiary of the merger company, the target company eventually disappears (by merger). Following the share exchange, the objective of the merger company is to merge the assets of the target company, instead of becoming a wholly owned subsidiary.

In practice, there have been problems such as the shareholders of the target company not being parties to the transaction, in which case: What is the standardised basis for dissenting shareholders of the target company to assert cash options against the merger company? In theory, the cash option is a rough and vague concept. Although similar to the repurchase right of dissenting shareholders, it is also different. It is necessary to clarify the legal basis of the cash option. The author will then analyse the normative basis of this issue.

“Cash option” in Article 3 of the Guidelines of the Shenzhen Stock Exchange on Cash Option Business refers to “the right of relevant shareholders to sell the shares of the listed company they hold to a third party, or the listed company, at a pre-agreed price, within a specified period, when the listed company plans to carry out major events such as asset restructuring, merger and division”.

However, the guidelines are only industry rules, and not mandatorily binding on the parties to the merger. In the case of merger, the merger company may hold a shareholders’ meeting to agree to give the dissenting shareholders of the target company the cash option. Such resolutions at the shareholders’ meeting can only be deemed as the shareholders’ meeting’s authorisation of the board of directors to make a tender offer to the dissenting shareholders of the target company on behalf of the company.

If the dissenting shareholders accept the tender offer, they will transfer the shares to the merger company. The dissenting shareholders may then choose to receive the cash consideration offered by the merger company. However, even if the dissenting shareholders of the target company reject the cash offer, they may request the target company to repurchase the shares in accordance with article 142 of the Company Law.

Nowadays, the following expression often appears in the resolutions of shareholders’ meetings of the target company under business practice: “To fully protect the interests of all shareholders of the target company, especially small and medium shareholders, in the share exchange merger, the merger company will act as the cash option provider to the dissenting shareholders of the target company. Under such circumstance, dissenting shareholders of the target company shall not claim the cash option against the target company, or any major shareholder of the target company who approves the share exchange merger.”

The author’s view is that this is not in accordance with the law. Any dissenting shareholders of the target company shall be entitled to claim for share repurchase against the target company in accordance with article 142 of the Company Law. The target companies shall not use such resolution at the shareholders’ meeting to reject the dissenting shareholders’ claim against the target companies. Such dissenting right is a statutory right under the Company Law, which shall not be restricted by the articles or resolutions.

As mentioned above, the share exchange merger is not a true share exchange between the target company and the merger company, but a merger between the target company and the merger company, based on negotiation. The shareholder of the target company is not a party to the transaction. Although the shareholder participates in the process of the transaction indirectly through voting, the legal nature of such voting behaviour is formation of the company’s internal intention, rather than the external intention.

Therefore, in essence, the transaction is a merger by absorption. In the face of the resolution of the merger by absorption, the dissenting shareholders can claim the right to repurchase the shares with cash. In business practice, the resolution of “the dissenting shareholders of the target company shall not claim the cash option against the target company” is inconsistent with the provisions of the Company Law, and the dissenting shareholders of the target company have the legal right to claim for cash repurchase from the company.


Wang Xiaoxin is a senior counsel, Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC/BIAC), and Ai Dunyi is a Masters candidate at the School of Transnational Law of Peking University