Since the early 1990s, a large number of well-known Chinese companies have been listed in the United States to enhance their global image, and the US stock market has become a haven for many Chinese stocks. However, China concept stocks have been privatized indirectly in the past decade, and the ultimate goal is to return to China and relist. This year, as Chinese companies abandon the US market that they think is no longer friendly, the wave of privatization of Chinese concept stocks has resurfaced.
The traditional reasons why listed companies choose to delist are also applicable to the privatization of Chinese concept stocks (for example: reducing compliance costs and burdens, committing to the company's long-term development, and simplifying the company's shareholder structure, etc.). However, in addition to the above-mentioned traditional reasons, the main driving force of this wave of privatization comes from the increasingly tense Sino-US political and trade relations, the increasingly stringent regulatory review of China concept stocks by US regulators, and the re-listing of China concept stocks in China. Potentially high valuation.
Many Chinese concept stocks with bright prospects and good fundamentals are under pressure to withdraw from the US market, and they need partners with capital and financing expertise to help them achieve this goal. Therefore, the privatization of Chinese concept stocks provides very attractive investment opportunities for private equity institutions.
In this article, we will address the following topics:
1. Typical privatization transaction : What is the typical privatization transaction of China Concept Stock?
2. Main participants and their roles : What are the roles, goals and strategic considerations of the main participants?
3. Main procedural steps and reference timetable : What is the approximate timetable for the main procedural steps from the submission of the privatization proposal?
4. Main strategic considerations : for example: the strategic considerations of the buyer consortium, the strategic considerations of the special committee, the importance of transaction certainty to the parties to the transaction, and the impact of the 13E-3 form and the US Securities and Exchange Commission review on the transaction.
5. Conclusion : Future prospects.
"Private transaction" generally refers to a transaction in which a listed company delists and its shares are no longer publicly traded. Most U.S. listed entities of Chinese concept stocks are incorporated in the Cayman Islands. Although the privatization of a company established in the Cayman Islands can be accomplished through tender offer or arrangement by agreement, the threshold for shareholder approval involved in these transaction structures is higher, and if privatization by agreement arrangement is adopted, it will be subject to the Cayman court. Supervision. Therefore, most of the privatization transactions of Chinese concept stocks have been completed through cash mergers in accordance with the "Cayman Companies Law." In a cash merger, the buyer’s consortium and the target company sign a merger agreement, according to which, upon completion of the merger, all of the target company’s outstanding shares (except those held by the buyer’s consortium and rollover shareholders) will be It is cancelled and exchanged for cash consideration, so that the target company is 100% held by the buyer consortium and upturned shareholders. In most privatization transactions of Chinese concept stocks, the target company’s management or controlling shareholder will join the buyer’s consortium or upturn its shares.
Our discussion in this article is limited to the typical privatization transaction of Chinese concept stocks, namely: the target company is established in the Cayman Islands, the buyer consortium is composed of private equity promoters, and the target company’s management upturns its shares.
It is worth noting that although the buyer consortium and the target company have different positions in the transaction, if they want to successfully complete the privatization transaction, they must understand each other's roles, goals and strategic considerations. Once the merger agreement is signed, the buyer consortium and the target company need to work closely together to prepare the documents to be filed with the US Securities and Exchange Commission, especially the 13E-3 form jointly submitted by the buyer consortium and the target company.
Consortium members need to sign a consortium agreement to stipulate ownership and capital contribution ratio, cost-sharing arrangements, legal and financial advisers’ employment, exclusivity period (that is, consortium members’ exclusive commitments to only conduct proposed transactions through the consortium), and the governance structure after the target company’s privatization , Consortium members’ withdrawal arrangements and compensation for breach of contract. Taking a recent privatization transaction initiated by private equity as an example, 58.com Inc. (NYSE: WUBA), China's largest online classified information mall, intends to privatize through a cash merger. The final merger agreement was signed on June 15, 2020. The buyer consortium is formed by Warburg Pincus, General Atlantic and Ocean Link Partners, together with 58.com founder Yao Jinbo.
If the target company’s management joins the buyer’s consortium or transfers part or all of its equity to a private company that survives the completion of the privatization transaction, a conflict of interest will arise due to the inconsistency of its interests with the public shareholders. Although the Cayman law does not provide for it, if there is a possibility of a conflict of interest among management, the board of directors of the target company should designate a special committee composed of independent and non-conflict-of-interest directors to evaluate the privatization proposal to ensure the privatization of the target company The decision was not made by directors who have an interest in the transaction, nor was it improperly influenced by these directors. Generally, the target company will set up a special committee as soon as possible after receiving the privatization proposal, and the special committee should be given independent bargaining power and decision-making power. It can negotiate the proposed transaction on behalf of the target company’s board of directors, consider the feasibility of other transactions, and recommend the target The company's board of directors approves or rejects the proposed transaction. The special committee should hire independent legal advisers and financial advisers to advise the special committee on the proposed transaction. The special committee and its advisers should have access to the target company’s management, financial forecasts and other non-public information. The target company’s board of directors shall approve or reject the proposed transaction based on the recommendations of the special committee.
The financial adviser of the special committee should conduct financial due diligence on the target company, set the target company's preliminary valuation benchmark, assist the special committee in market research, and evaluate whether to accept the privatization proposal. The financial adviser should write and submit a fairness opinion to the special committee on the fairness of the proposed transaction consideration (from the perspective of public shareholders). The special committee may decide to proceed or reject the proposed transaction based on the assessment of the fairness of the proposed transaction consideration based on the fairness opinion. It is very important that the special committee should carefully consider the scope of the financial advisor’s due diligence, the documents and information reviewed by the financial advisor, and the valuation method used in the fairness opinion, because these issues may be based on the completion of the privatization transaction. Issues in shareholder lawsuits triggered by the fair value of transactions.
Although the timetable for each specific transaction is different, we provide a rough timetable here, listing the main procedural steps from the buyer’s consortium’s submission of the privatization proposal to the completion of the transaction (some steps may be carried out at the same time) ). Please note that before submitting a privatization proposal, it may take several months or more for the buyer consortium to evaluate the target company and market conditions and form a buyer consortium.
Main procedural steps
The buyer consortium submits a privatization proposal to the target company’s board of directors
The first 1 Tian
The target company issues a press release announcing the receipt of a privatization proposal
The first 1-2 days
The board of directors of the target company establishes a special committee
The first 2-5 days
The special committee appoints its independent legal adviser and financial adviser
The first 6-15 days
The buyer’s consortium (and its legal and financial advisors) conducts due diligence on the target company
The first 6-65 days
The financial consultant of the special committee conducts financial due diligence on the target company and reports to the special committee its preliminary valuation opinion on the target company
The first 15-75 days
Special committee conducts market research to assess the feasibility of other transactions
The first 20-80 days
The buyer’s consortium (and its advisers) and the special committee (and its advisers) negotiate the consideration, the terms of the merger agreement and other transaction-related documents
The first 20-99 days
Members of the buyer’s consortium negotiate consortium-related agreements (such as temporary investor agreements, share swap agreements, support agreements, limited guarantees, and equity commitment letters); the buyer’s consortium establishes a new consolidated subsidiary in Cayman
The first 65-99 days
The financial adviser of the special committee submits a fairness opinion to the special committee, the special committee approves the proposed transaction, and recommends the target company’s board of directors to approve the proposed transaction, and the target company’s board of directors approves the proposed transaction
The first 100 Tian
The buyer consortium and the target company sign a merger agreement and other transaction-related agreements
Members of the buyer consortium sign the consortium related agreements
All parties prepare the 13E-3 form and the shareholder voting statement (proxy statement)
The first 101-120 days
The buyer’s consortium and its debt financing parties sign debt financing documents (if debt financing is required)
The first 101-140 days
The parties obtain the approval of the corresponding regulatory authority (if necessary) and the consent of the secured creditor (if the target company has secured creditors)
The first 101-210 days
Submit Form 13E-3 to the US Securities and Exchange Commission and be approved (the US Securities and Exchange Commission may have several rounds of opinions)
The first 120-180 days
The target company mails a shareholder voting statement to shareholders and holds an extraordinary general meeting
The first 181-220 days
The Cayman Registry registers the merger plan, pays the consideration and settles it
The first 220-230 days
Transaction certainty is particularly important for both the buyer consortium and the target company. At the same time, both the buyer consortium and the target company hope to have a choice to withdraw from the transaction under specific circumstances. The buyer’s consortium hopes to have room for exit when debt financing cannot be obtained, and also hopes to restrict the target company’s right to accept a better privatization proposal and thus terminate the merger agreement. The target company hopes to have the right to accept a better privatization proposal to benefit public shareholders, and also hopes to avoid the buyer consortium from terminating the transaction because it cannot obtain debt financing. When both parties negotiate a merger agreement, they will strive to balance the relevant risks. Therefore, the following terms related to the certainty of the transaction are often the focus of negotiation between the two parties.
In the past decade, most of the privatization transactions of Chinese concept stocks involved the management or controlling shareholders of the target company. Article 13e-3 of the Securities Exchange Act of 1934 in the United States imposes strict disclosure requirements on such management’s participation in acquisitions to supervise conflicts of interest (for example, when the management turns over the equity, it may gain public shareholders’ Significant interests). The parties involved in the transaction must submit Form 13E-3 that meets the disclosure requirements to the US Securities and Exchange Commission. The information required to be disclosed in Article 13e-3 includes:
The attachment to Form 13E-3 includes a voting statement used to solicit shareholders of the target company to approve the transaction, and it must be submitted to the US Securities and Exchange Commission for review before seeking approval from the target company’s shareholders. Since Article 13e-3 is designed to protect the rights and interests of minority shareholders, the US Securities and Exchange Commission is likely to scrutinize disclosures regarding the fairness of privatization transactions, and the review process may take several months.
Chinese companies have always held important positions in the global capital market. Given that the U.S. stock market’s attitude towards Chinese companies is becoming increasingly resistant and its attractiveness is declining, and China is currently undergoing securities listing reforms to encourage companies to list in China (including the Shanghai Stock Exchange’s Science and Technology Innovation Board on the first anniversary of the opening of the market), U.S. stocks May begin to privatize aggressively. If Chinese companies can make a correct layout when they delist from the U.S. stock market, it is expected to start a new chapter in company growth and bring a win-win situation for all parties involved.
* Special thanks to David Bulley , Private Equity / Venture Investment / M&A Partner of Appleby Law Firm, for his valuable comments on this article.
The information provided in this article does not constitute legal advice. For further explanation, please refer to the terms/statements linked below. Any information related to the People's Republic of China (hereinafter referred to as "China") is not intended and should not be regarded as constituting an opinion, determination or proof regarding the application of Chinese law. We are not permitted to engage in Chinese legal affairs.