Richard Ma and Leo Wang of DaHui Lawyers assess the M&A regulatory framework in China
Section 1: GENERAL OUTLOOK
1.1 What have been the key recent M&A trends or developments in your jurisdiction?
China's M&A market continued to grow in 2015. A key recent trend is the government's continued encouragement of M&A as a means of business development in key sectors. In particular, the China Securities Regulatory Commission (CSRC) issued rules to encourage M&A funds to be established for investment in publicly listed companies. In addition, an increased number of foreign investors have acquired shares of PRC-listed companies, either via private placements or via share swap deals.
1.2 What is your outlook for public M&A in your jurisdiction over the next 12 months?
Investors, domestic and foreign, will likely acquire shares of PRC-public listed companies in certain fast growing industries. Examples include: entertainment; agriculture; environmental; and clean energy. The impending conversion from the CSRC approval-based regime for initial public offerings (IPOs) to a registration-based regime may trigger uncertainties as to the valuation of the Chinese market. A shrink in overall market valuation and a potentially easier IPO process may reduce investors' desire to acquire stakes in existing listed companies.
Section 2: REGULATORY FRAMEWORK
2.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
The key laws and regulations are:
Administrative Measures on Takeovers of Listed Companies;
Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors;
Law of the PRC on State-Owned Assets of Enterprises;
Regulations Concerning Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors;
Anti-Monopoly Law; and
Rules of the State Council on the Declaration Thresholds for Concentrations of Operators.
The main regulatory bodies are:
Ministry of Commerce (Mofcom);
National Development and Reform Commission (NDRC);
State Administration for Industry and Commerce (SAIC);
State Administration of Foreign Exchange (SAFE);
State Administration of Taxation (SAT); and
State-owned Assets Supervision and Administration Commission of the State Council (SASAC).
2.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
Takeovers are subject to a number of regulatory approvals. These approvals vary by several factors such as deal value and industry. Additional reporting requirements may also be required depending on the nature of the transaction.
The CSRC is the key authority that oversees the acquisition of public securities. Without its approval the transaction cannot be completed. If the transaction involves foreign investors, then approvals from Mofcom and SAFE are also needed. In addition, Mofcom and SASAC have enforcement power over transactions that would trigger antitrust scrutiny and state-owned assets scrutiny, respectively.
Section 3: STRUCTURAL CONSIDERATIONS
3.1 What are the basic structures for friendly and hostile acquisitions?
The methods of acquiring public companies include: (i) private placement; (ii) acquisition by agreement; and (iii) acquisition by offer. For these purposes, there is no specific distinction between friendly and hostile acquisitions. Conventional measures to counter hostile acquisitions, such as the poison pill, are still subject to case-by-case review/approval under the current legal regime.
3.2 What determines the choice of structure, including in the case of a cross-border deal?
Many factors determine the ideal structure of a deal. These include: the amount of tradable shares; shareholding ratio; market valuation; and the attitude of the target company's board. Foreign investors must also consider regulatory approvals, including Mofcom approval for restrictions on foreign investments in certain industries, SAFE approval on foreign exchange controls and CSRC approval on the takeover deal.
3.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
Subject to deal-specific considerations, it generally takes four to nine months to complete an acquisition. The length of a takeover offer is no less than 30 days and no more than 60 days, except where there is a competitive offer.
3.4 Are there restrictions on the price offered or its form (cash or shares)?
In general, payment may be made in cash, shares or a combination of both. The market has seen more share swaps than cash-only deals in recent years.
3.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
The CSRC and a shareholder's meeting of the target company must approve the acquisition of a public company. Subject to the company's articles of association, an affirmative vote by holders of over 66.7% of shareholders at the general shareholders meeting is the general threshold for approval.
A mandatory general offer would be triggered when a bidder has acquired over 90% of the shares in a listed company.
3.6 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?
Minority shareholders do not receive any special or preferential treatment in takeover deals. However, the acquiring party must offer equal terms to all shareholders.
The CSRC is considered the final defender of minority shareholder interests in China's stock market. Therefore, the CSRC will consider a listed company's interest as a whole, with a particular focus on the protection of shareholders' interest, in its review and approval process.
3.7 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?
Chinese regulations do not prohibit conditional offers, but the CSRC may challenge the capability of a bidder using a conditional offer to carry out the purchase, possibly resulting in the rejection of the deal. However, with proper planning, it is possible to successfully close a deal on the basis of a conditional offer.
In general, a deposit of at least 20% of the total takeover price is required, either in cash or a bank guarantee letter.
Section 4: TAX CONSIDERATIONS
4.1 What are the basic tax considerations and trade-offs?
There are no statutory taxes charged for the approval or registration of a public M&A transaction. However, if the transaction is effected via share transfer, income taxes and stamp duties would be imposed on the seller on the income/capital gain deriving from the sale of its shares. In a share swap deal, the net economic gain of the seller is also taxable.
4.2 Are there special considerations in cross-border deals?
If the seller is a foreign entity, it may be subject to withholding tax or income tax for its income/capital gains. A comprehensive review of the tax consequences in all relevant jurisdictions should be undertaken to determine the optimal deal structure.
Section 5: ANTI-TAKEOVER DEFENCES
5.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
Typical common defensive strategies include:
issuing or repurchasing the target's shares;
modifying the target company's articles of association;
inviting a friendly company to provide a tender offer;
declaring a major transaction that would cause a suspension of trading of the target company's shares. This may substantially increase the timing and the financial cost of the acquirer; or
entering into an agreement with other minority shareholders to take concerted action.
These strategies may be taken jointly or separately.
5.2 How do targets use anti-takeover defences?
There are two primary categories of anti-takeover defences: commercial and governmental. Commercial defences may be directly undertaken by a company's management and/or board in accordance with its corporate rules.
Governmental approaches focus on lobbying the relevant governmental authorities that the transaction should not be approved for a specific reason. Examples include: national security concerns or questions on the sources of funds that would be used as consideration for the takeover.
5.3 Is a target required to provide due diligence information to a potential bidder?
No. The CSRC and stock exchanges require listed companies to regularly file reports and announcements relating to its legal and financial situation. Therefore, no special due diligence information must be produced for a potential bidder during an acquisition.
5.4 How do bidders overcome anti-takeover defences?
A hostile offer bidder should immediately engage qualified underwriter, legal and advisory teams to structure proper strategies to overcome anti-takeover defences in a timely manner. This will ensure compliance with the rules of, and enable bidders to efficiently liaise with, the CRSC and other key government agencies.
5.5 Are there many examples of successful hostile acquisitions?
Section 6: DEAL PROTECTIONS
6.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
In case of competing offers, the target should work closely with the friendly bidder and a team of underwriters and legal counsel to fend off the hostile interloper.
6.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
There are no explicit laws in China prohibiting the use of break fees or lock-up agreements. However, the approval authorities may evaluate such factors when reviewing the deal.
Section 7: ANTITRUST/REGULATORY REVIEW
7.1 What are the antitrust notification thresholds in your jurisdiction?
The notification thresholds apply if:
the total business turnover worldwide of all parties in the deal exceeds RMB10 billion (approximately £1.1 billion) during the previous financial year, and the business turnover in China of at least two parties in the deal each exceed RMB400 million; or
the total business turnover in China of all parties in the deal exceeds RMB2 billion, and the business turnover in China of at least two parties each exceed RMB 400 million.
7.2 When will transactions falling below those thresholds be investigated?
Even if the thresholds are not reached, Mofcom can initiate an investigation if it believes the proposed deal could exclude or restrict competition.
7.3 Is an antitrust notification filing mandatory or voluntary?
Filing is mandatory for any transactions that meet the thresholds above.
7.4 What are the deadlines for filing, and what are the penalties for not filing?
All transactions reaching the threshold must be reported to Mofcom before closing. Failure to notify a transaction can result in a fine of up to RMB500,000, and Mofcom has the power to unwind any transaction unlawfully completed without filing.
7.5 How long are the antitrust review periods?
Legally, the antitrust review period may include two parts: a preliminary review period of 30 days and a formal review period of 90 days, which could be extended for a further 60 days by Mofcom. In our experience, for most deals that clearly will not trigger the formal review, the preliminary review can be completed in one month, subject to Mofcom's workload.
7.6 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 may investigate any unfiled deals if they have restriction or exclusion effects on local competition in China.
7.7 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?
For acquisitions of domestic targets by foreign bidders, in which national security issues are involved, national security investigations shall be conducted pursuant to relevant rules. This is in addition to the antitrust rules mentioned above.
General restrictions on foreign investments, such as industry and foreign exchange restrictions, are also applicable to such acquisitions.
Section 8: ANTI-CORRUPTION REGIMES
8.1 What is the applicable anti-corruption legislation in your jurisdiction?
There are no specific rules relating to anti-corruption in connection with public M&A activity. The general rules of criminal law relating to corruption provide the framework for sanctioning those who engage in corruption.
8.2 What are the potential sanctions and how stringently have they been enforced?
The commonly used sanctions are fines and imprisonment. In recent years, the authorities have stepped up the enforcement of anti-corruptions laws, resulting in many high-profile cases.
Section 9: OTHER MATTERS
9.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
The impeding conversion from the current CSRC-approval based regime for IPOs to a registration-based regime may trigger uncertainties in the capital market. In particular, the current CSRC-approval regime for public M&A will also likely be loosened after the implementation of the registration-based regime for IPOs.
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About the author
Richard Ma is the managing partner and key founding member of DaHui Lawyers. As a recognised expert and preeminent lawyer in the IT/telecoms and media sectors, Ma has advised numerous US/UK investors and other multinational companies on countless successful deals in the Chinese market, ranging from market entry, M&A and joint ventures to financing and restructuring. Ma particularly excels in devising practical and creative solutions to transactional complications, which are frequent in China due to its complex and rapidly developing legal system and unique business environment. Clients frequently commend him on his high level of responsiveness, practical problem solving skills, and strong commercial sense.
About the author
Leo Wang is a member of DaHui Lawyers' M&A and corporate teams. He graduated from Peking University law school and Georgetown University law centre. He has worked for six years with extensive experience in foreign direct investment, M&A, general corporate compliance and outbound investment. He assists clients in a variety of different industries, including IT, entertainment, media telecoms, education, e-commerce and real estate.
His recent representations include a PRC listed company's acquisition of a controlling interest in a Korean-listed company. To date, this deal is one of the largest ever investments made by a Chinese enterprise in a Korean television producer. He has also advised on a public M&A project on behalf of a PRC listed company to purchase two target companies in the video game and entertainment industries in China. He represented two leading exhibition and event organisation companies when purchasing several internationally recognised show events in China.