Haixiao Helen Zhang and Yanli Li of Zhong Lun Law Firm assess the regulatory landscape for mergers and acquisitions in China
1. REGULATORY FRAMEWORK
1.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
Public M&A activity is governed by: the Company Law; the Securities Law; the anti-trust law; Administrative Measures for the Takeover of Listed Companies;;Administrative Measures for the Material Assets Reorganisation of Listed Companies; and Measures for Strategic Investment by Foreign Investors upon Listed Companies.
The main regulatory bodies are: the China Securities Regulatory Commission (CSRC); the Ministry of Commerce of the PRC (MOC); the National Development and Reform Commission (NDRC); the State Administration for Industry & Commerce of the PRC (SAIC); the State-owned Assets Supervision and Administration Commission of the State Council (SASAC); and the related judicial organs.
1.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
Takeover regulations are principally enforced by the SEC at an administrative level, including but not limited to holding regulatory talks, issuing warning letters, and ordering a suspension or halt of the takeover.
If the listed company is a foreign invested enterprise or the investors are foreign ones, the MOC is also involved as one of the approval authorities.
If the listed company has state-owned interest, it may also need approval from the SASAC.
2. STRUCTURAL CONSIDERATIONS
2.1 What are the basic structures for friendly and hostile acquisitions?
Generally, an acquirer can conduct a tender offer as a hostile acquisition to all or part of the shares of the target listed company in order to become its controlling shareholder or actual controlling party, on the condition that the acquirer has held five percent or more of the issued shares of the target.
For a friendly acquisition, an acquirer may become a controlling shareholder of a listed company by the acquisition of shares. It may become the actual controlling party of a listed company by establishing investment relationships, executing agreements or other arrangements, and may obtain the control by adopting the aforesaid ways and means simultaneously.
2.2 What determines the choice of structure, including in the case of a cross-border deal?
Various factors: the purpose of the acquisition; the financial capability of the acquirer; potential tax related to the acquisition; government approval or consent; and, time needed for the acquisition.
In a cross-border deal, foreign investors can invest in listed companies according to the Measures for Strategic Investment by Foreign Investors upon Listed Companies and related regulations. The foreign investor can hold shares in listed companies through negotiated transfers, directed placement of new shares by listed companies and other methods stipulated by state laws and regulations.
2.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
It may take about six to nine months for a bidder to be a controlling shareholder or actual controlling party of a listed company, which may depend on the choice of structure and the complexity of the transaction.
The takeover period agreed for a takeover offer should neither be less than 30 days nor more than 60 days, except where there is a competitive offer. An acquirer should not make changes to a takeover offer within 15 days of the expiry of a takeover offer, except where there is a competitive offer. When there are competitive offers and where the date on which the acquirer who makes the initial offer proposes to make changes to its takeover offer is less than 15 days from the expiry of the period of initial tender offer, the takeover period should be extended. The extended offer period should not be less than 15 days and not end later than the expiry date of the last competitive offer. An acquirer who makes a competitive offer should make an indicative announcement on the tender offer no later than 15 days before the expiry of the period of the initial tender offer.
2.4 Are there restrictions on the price offered or its form (cash or shares)?
The offer price for shares of the same class should not be less than the highest price paid by the acquirer for such shares within a six-month period prior to the date of the indicative announcement on the tender offer.
An acquirer may use cash, securities, a combination of cash and securities or other legitimate means to pay the price for the takeover of a listed company.
2.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
Where the takeover is aimed to delist the target company, the acquirer should purchase all the shares pre-accepted by the shareholders of the target company under the terms agreed in the takeover offer. An acquirer who proposes to make a general offer after failing to obtain an exemption from the CSRC should purchase all the shares pre-accepted by the shareholders of the target company.
2.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
An acquirer which proposes the takeover of a listed company by offer should treat all shareholders equally.
Where the shares in which the investor and persons acting in concert with the investor owning the equities in a listed company are to reach or exceed five percent of the issued shares of the listed company, the investor and persons acting in concert should prepare a report on the change in equities within three days of the event occurring. They should submit a written report to the CSRC and the stock exchange, notify the listed company and make an announcement.
2.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
Generally, the closing conditions that the number of shares tendered reaches the minimum threshold is permitted to be set out in a tender offer.
When making the indicative announcement of the tender offer, the acquirer should provide at least one of the following arrangements to ensure that it has the capacity to perform the tender offer: (i) a performance deposit of no less than 20% of the total takeover price; (ii) a letter of guarantee issued by a bank for the price required by the tender offer; or (iii) a written commitment letter issued by the financial consultant stating that it will bear and guarantee liability jointly and severally, specifying that it will make payment if the acquirer has not done so by the expiration of the offer period.
Section 3: TAX CONSIDERATIONS
3.1 What are the basic tax considerations and trade-offs?
Basic tax considerations are mainly decided by deal structure. In share deals, the income received is subject to income tax, and the rate differs depending on the transferor's identity: individual or enterprise. In asset deals, it may involve tax deferral or exemption according to related regulations.
3.2 Are there special considerations in cross-border deals?
Cross-border deals cause various special tax considerations; one is the double taxation agreement. The acquirer may set up a special purpose vehicle to arrange tax planning.
Section 4: ANTI-TAKEOVER DEFENCES
4.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
Generally, the target may take antitrust as the most important anti-takeover defence, according to the specific situation of the transaction. If the acquirer is a foreign investor, national security, protected industry review or foreign ownership restriction are also important anti-takeover defences for the target. Some anti-takeover defences usually used in western countries, such as the poison pill or the white knight, are rarely used in hostile acquisitions in China.
4.2 How do targets use anti-takeover defences?
The target may alert the relevant authority for antitrust, national security or protected industry review, and create execution risk for bidders. The target may also appeal to the relevant authority for hostile acquisitions and actively encourage it not to approve the deal.
4.3 Is a target required to provide due diligence information to a potential bidder?
4.4 How do bidders overcome anti-takeover defences?
The bidder needs to make prudent estimations and sufficient counter-plans for the potential anti-takeover defences of the target, according to the status of the bidder and the target.
4.5 Are there many examples of successful hostile acquisitions?
SECTION 5: DEAL PROTECTION
5.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
Ways to protect a friendly deal include: the execution of confidentiality and lock-up agreements between the bidder and target; and, accelerating the negotiation of pricing terms of the transaction before any hostile bidder has sufficient time to launch a competing offer.
5.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
The restrictions mentioned in 5.1 as deal protection measures would be allowed under PRC laws and regulation, as long as they are fair and reasonable. For example, an astonishingly high break-up fee may be deemed as a violation of directors' fiduciary duties.
SECTION 6: ANTITRUST/REGULATORY REVIEW
6.1 What are the antitrust notification thresholds in your jurisdiction?
Antitrust notification is required when a transaction meets either of the following thresholds:
6.2 When will transactions falling below those thresholds be investigated?
If the transaction has or might have the effect of excluding or restricting competition, Mofcom will investigate.
6.3 Is an antitrust notification filing mandatory or voluntary?
Filing is mandatory for any transaction that meets the notification threshold described in 6.1.
6.4 What are the deadlines for filing, and what are the penalties for not filing?
Under the PRC Anti-Monopoly Law, all transactions should be reported to Mofcom before the undertaking. To minimise any impact of an anti-monopoly review, businesses usually file to Mofcom six months before the undertaking. Where an investigation finds a business has executed a concentration without notifying in accordance with the law, Mofcom can impose a fine of no more than Rmb500,000, and order the business to: stop the execution of the concentration; dispose of shares or assets by a specified deadline; transfer certain business operations by a specified deadline; and, take other necessary measures.
6.5 How long are the antitrust review periods?
Any PRC antitrust review process includes a preliminary review period of 30 days, a formal review period of 90 days, and an extension period of 60 days, making the maximum review period around 180 days.
6.6 At what level does your antitrust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
Mofcom is responsible for the investigation and handling of the failure to declare a concentration of business operators in accordance with relevant PRC law. Mofcom may, as necessary for its operations, entrust provincial commerce departments to assist in the investigation of the failure to declare a concentration of business operators in accordance with relevant PRC law and regulation within their respective jurisdictions.
6.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
Under national anti-monopoly law, where a foreign investor participates in the concentration of undertakings by merging and acquiring a domestic enterprise or by any other means involving national security issues, the matter will be subject to a review of national security as required by the relevant state regulations. Some foreign investment is prohibited or restricted to in certain industries in accordance with the Catalogue of Industries for Guiding Foreign Investment. There are also other obstacles and regulations in the PRC with regard to state-owned enterprise employee replacement, technology import and export control, foreign exchange control and state asset assessment and control during any M&A transaction.
SECTION 7: ANTI-CORRUPTION REGIMES
7.1 What is the applicable anti-corruption legislation in your jurisdiction?
The PRC Criminal Law and PRC Anti-unfair Competition Law (anti-commercial bribery) serve as the legal basis for punishing corruption. The CPC has also issued a series of codes of conduct and ethical rules for party cadres.
7.2 What are the potential sanctions and how stringently have they been enforced?
Punishments for corruption include detention, fixed-term or life imprisonment and supplementary punishments such as fines, deprivation of political rights, and confiscation of property. PRC administrative liabilities may include confiscation of illegal income and a fine between Rmb10,000 to Rmb200,000, in addition to confiscation of illegal gains or revenues in connection with any transaction being investigated and involving bribery.
SECTION 8: OTHER MATTERS
8.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
On January 19 2015, Mofcom published a draft Foreign Investment Law (FIL) and solicited public opinion. Major changes that an FIL may bring to the PRC legal system and foreign investors include: (i) ceasing the use of the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law, and the Wholly Foreign-Owned Enterprise Law in favour of implementing a combination of the three; (ii) changing the existing approval-based administration model to a new model of general reporting with fewer and more transparent administrative reviews and approval; (iii) enhancing supervision of market entry approval for foreign investment, state security review, coordination of dealing with foreign investment; and (iv) relying on actual control standards to define foreign investment, which would help to clarify the legal status about variable interest entities (VIE), a commonly practised cross-border transition structure in some key and restricted industries.
8.2 What are the key recent M&A developments in your jurisdiction?
In November 2014, Mofcom and the PRC Ministry of Civil Affairs published rules to encourage any joint venture sino-foreign investment for the provision of old-age services. In October 2014, Mofcom simplified the approval and filing procedures for outbound investment projects, which hopefully may reduce the filing requirements and time costs for PRC companies wishing to merge or acquire overseas businesses. In August 2014, Mofcom and the Ministry of Health permitted the establishment of wholly-owned foreign investment hospitals on a trial basis in Beijing city, Tianjin city, Shanghai city, Jiashu province, Fujian province, Guangdong province and Haina Province.
First published by our sister publication IFLR magazine. Take your free trial today.
Haixiao Helen Zhang
Zhong Lun Law Firm
About the author
Helen Haixiao Zhang is a recognised PRC legal counsel for multinational companies. She focuses on regulatory compliance, investment and intellectual property, for clients including Abbott, Hershey, Nike and Walmart. She was lead PRC counsel for the Shanghai Government in intellectual property negotiations for Shanghai Disneyland and is one of the main legal counsels advising Shanghai Pudong Government with respect to policies and rules of the China (Shanghai) Free Trade Zone and other legislative matters in compliance.
Zhang joined Zhong Lun Law Firm as an equity partner in 2009 after working with Weil Gotshal & Manges and other international and PRC firms as a senior lawyer and partner for 19 years. She is acting vice-chair of the Women Business Lawyers Committee of IPBA (Inter-Pacific Bar Association), an expert panelist for ethical risk assessment of governmental policies, and a board member of the Administrative Review Committee for Shanghai Pudong Government on Shanghai Free Trade Zone matters. She is also a frequent speaker and author for international conferences and publications in regulatory compliance, investment and intellectual property.
Zhong Lun Law Firm
About the author
Yanli Li is a partner at Zhong Lun Law Firm. She received an LLB from Shandong University, an LLM from Peking University, an LLM from Northwestern University and a certificate in business administration from Kellogg. She is a member of the Beijing Lawyers Association and the Chinese Lawyers Association. She has over 15 years' experience in M&A, capital markets, foreign direct investment and private equity and venture capital.
Li is experienced in solving both legal and commercial issues and advises clients in various industries, including Petro China Company, State Grid Corporation, Lenovo, and Greatwall Automobile. She has been involved in many M&A transactions, and has advised clients on conducting IPOs on the Hong Kong and Shanghai stock exchanges. Li specialises in assisting foreign investors in setting up foreign invested enterprises and in advising on private equity and venture capital establishment and investment. She speaks English and Mandarin.