The China Securities Regulatory Commission (“CSRC”) issued the Measures for the Administration of the Takeover of Listed Companies on 17 May 2006. Effective 1 September 2006, the Measures cover both takeovers and significant share acquisition activities in listed companies.
The Measures apply to acquisitions by investors of listed companies. They impose disclosure and tender offer obligations upon investors crossing certain shareholding thresholds. In determining whether the thresholds have been exceeded, the Measures aggregate the shareholding of other parties that are “working in concert” with the shareholder. The “working in concert” concept is specifically defined in the Measures.
Interest disclosure
Upon acquiring a 5% interest in a listed company, and on every subsequent increase or decrease of 5%, investors are to submit a report to the stock exchange, the CSRC and/or the local CSRC bureau where the company is registered. The percentage entered is based on the information required to be disclosed in the report varies with the size of the stake with more detailed disclosure required as the size of the stake increases. The disclosure bands are between 5-20%, 20-30% and greater than 30%. More complex and complete disclosure is required in the higher bands.
An investor who becomes the controlling shareholder of a listed company must hire a Chinaregistered financial consultant to render its opinion on the contents of the disclosure report. Investors who acquire 30% or more of the shares of a listed company must make a general or partial tender offer for the remaining shares or obtain a waiver from the requirements from the CSRC.
Takeover offer
Investors may make a voluntary tender offer for a company or may be obliged to make a tender offer upon crossing a certain equity threshold. Investors who make a voluntary offer may do so in either a general or partial offer to all of the shareholders of the target. Investors with interest in a listed company exceeding 30% are obliged to make a general or partial offer. The ability to make a partial offer is a major innovation under the new Measures. Previously, a full tender offer was required upon crossing the 30% threshold, and the compulsory tender offer was not infrequently designed to fail as the investor often did not wish to acquire all of the target’s equity.
An investor can also acquire shares through an acquisition agreement but if the acquisition exceeds 30% of the shares, the investor must either apply to the CSRC for a waiver of offer requested or submit a partial offer for the portion of the shares that exceed 30%.
Upon making an offer, the offeror must submit an offer report to the CSRC, local CSRC bureau and stock exchange. The investor must also compile and submit the indicative announcement of takeover, a financial consultant’s report and a lawyer’s report. Similarly, the board of directors of the target company must also compile and submit their own report, including the board’s takeover recommendation and the target company’s financial consultant’s report.
An investor may use cash, securities, a combination of cash and securities and any other approved means to pay for a takeover of a listed company. If the investor makes an offer in order to de-list the target or makes an offer following a waiver rejection by the CSRC, the investor must pay for the shares in cash.
If the offeror chooses to cancel the tender offer, it must notify the CSRC with its reason. The offeror will be barred from proposing a takeover to the same company for one year.
Management Buyout
Under the Measure, management buyouts require shareholder approval. A Board of Directors resolution is also required. The oard resolution in favour of the buyout must be adopted by a majority of the noninterested directors with at least a 66% approval from the independent directors, which must comprise at least 50% of the Board. If approved by the Board, the shareholders meeting will vote on the buyout, whereby a simple majority of votes held by present non-interested shareholders will allow the buyout to proceed. No assets of the company itself can be used to fund the buyout.
Indirect Takeover
An investor is considered an indirect investor while not a direct shareholder in a listed company obtains control of a shareholder. If its direct shares are between 5-30%, it should submit interest disclose reports as expected of other investors. If its indirect shares exceed 30% of the listed company, it should make a general offer or otherwise reduce its indirect shares to at or below 30%.
Waiver
Investors may apply to the CSRC for a waiver from the obligation to make an offer if the investor can prove that the transfer will not cause any change to the controlling party of the listed company, other conditions as stated in the Measures can be satisfied. If applicable, investors may instead apply for an expedite waiver, provided that they meet the necessary conditions. If an expedite waiver is not granted, the investors can choose instead to apply for a waiver. If a waiver is not granted, the investors must reduce their shareholding to 30% within thirty days of notification of the decision or otherwise make a general offer.
Financial Consultant
Both the offeror and target company must hire certified financial organisations to serve as financial consultant. Both are to submit reports to the CSRC (et al) on the financial status of the companies they represent and the takeover.
The investor’s consultant is also to serve as both an advisor and supervisor. It is expected to assist the offeror throughout the entire takeover process as well as for one year following the completion of the takeover in order to supervise the investor for compliance with the relevant laws and regulations.
The investor’s consultant will submit quarterly reports based on the company’s financial reports to the CSRC and local CSRC bureau over the year following the completion of the takeover. The local CSRC bureau will also supervise the listed company with on-site inspections and enquiries to the firm responsible for auditing the company’s accounts. |