Listed companies often integrate resources by establishing new joint ventures in order to maintain competitiveness, which may lead to substantive changes in their main business, assets and revenue. When the establishment of new joint ventures falls into the scope of a material assets reorganisation, the Administrative Measures for the Material Assets Reorganisation of Listed Companies, as amended in 2020, require listed companies to meet certain disclosure and approvals requirements.
Material asset reorganisation
According to article 2 of the measures, a material asset reorganisation refers to “an asset transaction in which a listed company and its holding or controlled companies purchase or sell assets or conduct asset transactions by other means outside of their ordinary business activities to a prescribed proportion, resulting in a significant change in the main business, assets and revenues of the listed company”. According to article 15 of the measures, the establishment of a new joint venture of a listed company will constitute a material asset reorganisation if both of the following conditions are met:
(1) the transaction substantially constitutes a purchase or sale of assets; and
(2) the relevant proportion calculated in accordance with the criteria of the measures reaches 50% or more.
Purchase and sale of assets
The measures do not specify the criteria for determining what “substantially constitutes a purchase or sale of assets”. According to the third item of Appendix List No. 2 – Material Assets Reorganisation of Financial Advisers on Mergers and Acquisitions and Reorganisation of Listed Companies, “applicable to listed companies … using assets as capital contribution and not holding them, donating out, entrusting major operating assets to others, etc.”, if a listed company injects non-cash assets into a new joint venture that it does not control, it constitutes a sale of those assets.
Based on the above-mentioned criteria, it is usually determined that whether or not a transaction constitutes a sale or purchase of assets is based on whether the contribution is made with cash, and whether the joint venture is controlled by the listed company.
Specifically, if the listed company and the counterparty both contribute in cash, regardless of whether the listed company controls the joint venture, the transaction does not involve a non-cash asset transaction, and therefore does not constitute a purchase or sale of assets. Such determination is seen in cases of establishing new joint ventures such as CCS Supply Chain Management (2019) and Harbin ZhongFei New Technology Company (2020); if there are cases of capital contribution with non-cash assets, they should be analysed separately according to the specific circumstances.
Where the counterparty contributes with non-cash assets and does not hold a controlling stake, it should be considered as a purchase of assets by the listed company, i.e., the listed company obtains the control of the assets contributed by the counterparty through the newly established joint venture.
If one party contributes with cash and the other with non-cash assets, and the party contributing with non-cash assets controls the joint venture company, the essence of the transaction is similar to the sale and purchase of equity. That is, the party contributing with cash is purchasing the minority equity of the other party, which participates in the establishment of the subsidiary with the assets. Therefore, the party’s contribution with cash constitutes a purchase of assets, and the party’s contribution with non-cash assets constitutes a sale of assets.
Calculation of financial indicators
According to articles 12 and 14 of the measures, in judging the calculation of financial indicators for material asset reorganisation, the ratio of the financial data related to the assets purchased or sold by the listed company to the corresponding financial data of the listed company in the latest fiscal year is used as the judgment standard. There is usually no doubt about the determination of the corresponding financial data of the listed company in the latest fiscal year, and the key discussion lies in how to determine the financial data related to the assets purchased or sold.
In practice, the listed company calculates the relevant financial indexes by taking the entire capital contribution of the counterparty as the purchase or sale of assets. However, the authors believe that, based on the consistent logic of the measures, if the establishment of a joint venture company has been clearly identified as the purchase or sale of assets, the scope of the corresponding purchase or sale of assets has been determined, and the same standard should be implemented in the calculation of financial indicators.
Specifically, if the listed company contributes with non-cash assets and does not hold a controlling stake, the assets contributed by the listed company should be used as the assets sold to calculate the relevant indicators. Conversely, if the counterparty contributes with non-cash assets and does not hold a controlling stake, the assets contributed by the counterparty should be used as the assets purchased by the listed company to calculate the relevant indicators.
Where one party contributes with cash and the other, controlling the joint venture, with non-cash assets, the transaction is analogous to the purchase by the party contributing with cash of the minority equity in the subsidiary of the party contributing with assets. Under article 14 of the measures, the relevant index of the assets purchased or sold shall be the product of the percentage of equity held by the party contributing with cash, and the financial index of the assets contributed by the other party.
Zheng Xiao and Yin Wen are paralegals at Grandway Law Offices
Grandway Law Offices
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