In the wake of Chinese companies’ global shopping spree, publicly listed firms on the domestic stock market are apparently a leading force, backed by their robust reputations and abundant financial resources. In order to buy overseas assets, these listed companies must meet certain requirements set by the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOFCOM), the State Administration of Foreign Exchange (SAFE) and the State-owned Assets Supervision and Administration Commission (SASAC), as well as special provisions about corporate governance, major asset restructuring and information disclosure rolled out by the China Securities Regulatory Commission (CSRC) and stock exchanges.
As overseas M&A deals are subject to approvals of multiple regulators, it is important to determine the order of regulatory approvals. In order to accelerate the approval process and further optimize the M&A market, the Ministry of Industry and Information Technology, the CSRC, NDRC and MOFCOM issued the Parallel Administrative Approval Workflow for the Mergers and Acquisitions of Listed Companies in October 2014, clarifying the CSRC’s approval workflow and the order of approval for the overseas investments of ordinary domestic companies.
According to the parallel approval workflow, the approval and registration of overseas investment projects conducted by the NDRC, as well as the approval of foreign investors’ strategic investments in listed companies and the undertaking of concentrated examination conducted by the MOFCOM, are no longer prerequisites to the CSRC’s administrative approval, and these examinations are carried out simultaneously. With the consent of shareholders, listed companies could apply for administrative permits to the CSRC and other relevant regulators, which independently examine and approve the applications at the same time. The change will shorten the time of approval for listed companies’ overseas M&A deals.
The optimization of approval procedures does not come at the price of lax regulation on listed companies. Under the parallel approval workflow, listed companies should take a disclosure-based approach to their proposed M&A projects during the approval process, timely issuing of statements or major risk warnings about the progress of the examination and approval by relevant regulators and the results of application. Listed companies should announce the approval of a reorganization proposal by all the relevant regulators and declare that the reorganization agreement takes effect before implementing the reorganization proposal.
Listed company’s overseas M&A activities are facing more stringent and sophisticated regulatory scrutiny at home due to the great number of stakeholders, complex business procedures and higher level of uncertainties. The CSRC has produced a series of rules to regulate transactions carried out by public companies, including the Measures for the Administration of Material Asset Reorganization of Listed Companies (2016 amended version), Measures for the Administration of the Takeover of Listed Companies (2014 amended version), Administrative Measures for the Issuance of Securities by Listed Companies, and Detailed Implementation Rules for the Non-public Issuance of Stocks by Listed Companies (2011 amended version).
Starting from 8 October 2013, regulators have adopted separate examinations to review asset acquisition and restructuring transactions announced by listed companies. When a company makes an all-cash offer that allows it to get a waiver or expedited review, the CSRC can approve the deal without additional examinations; when a company applies to sell shares to fund asset purchases, the CSRC can scrap the preliminary review and present the proposal to be examined by the acquisition and restructuring committee.
For an overseas takeover deal, if the buyer plans to issue shares to buy the assets, the deal constitutes a backdoor listing, or the company launches a non-public share offering to raise money, the deal would require CSRC blessing to get through.
In addition, the Measures for the Administration of Material Asset Reorganization of Listed Companies have made a clear definition of what constitutes a backdoor listing. In addition to the requirement that the assets to be bought are worth more than the company’s total assets as indicated in the consolidated balance sheet, other provisions are also added about the takeover target’s business revenue, net profit, net asset value, the number of shares to be issued, as well as changes in the combined company’s main business. These stringent requirements are designed to curb backdoor listings and cool irrational speculations on shell companies.
Any transactions, including overseas M&As, made by a publicly traded company must meet disclosure requirements. When a company plans to acquire foreign assets, it must make appropriate information disclosures according to the Administrative Measures for the Disclosure of Information of Listed Companies as well as rules set by the stock exchanges.
In addition to regular disclosures such as quarterly, interim and annual reports, the Measures for the Administration of Material Asset Reorganization of Listed Companies, Measures for the Administration of the Takeover of Listed Companies, and listing rules announced by the Shanghai Stock Exchange and Shenzhen Stock Exchange have made explicit provisions about information disclosure for specific matters. Moreover, the Shanghai Stock Exchange’s information disclosure guidelines and the Shenzhen Stock Exchange’s information disclosure memorandum have offered instructions about what and how to make disclosures and when the trading of a company’s shares have to be suspended and resumed.
Based on the analysis of the regulatory regime, we can conclude that the overall regulatory framework on listed companies’ overseas M&A activities has not gone through significant changes from the macro perspective. But the ongoing evolution in recent years has indicated that regulators are encouraging Chinese companies to extend their business footprint beyond the borders and creating a better legal climate to expedite the “go global” initiative.
Lin Zhong is a partner at EY Chen & Co. Law Firm
51/F, Shanghai World Financial Center
100 Century Avenue, Pudong New District
Shanghai 200120, China
电话 Tel: +86 21 6881 5499
传真 Fax: +86 21 6881 7393