[author: Xiao Xu]
China Securities Regulatory Commission (the “CSRC”) issued a notice on May 9, 2014 to seek public comments for the Administrative Measures on the Acquisition of Unlisted Public Companies (Draft for Comment) (hereinafter referred to as the “Acquisition Measures“).
The Acquisition Measures has 6 chapters: general provisions, equity disclosure, disclosure on change in controlling power, tender offer, regulatory measures and legal liability, and supplementary provisions. The deadline for submission of comments is June 9, 2014.
A CSRC spokesman was interviewed by reporters on May 9, 2014 regarding the Acquisition Measures and answered the questions regarding, among others, the background for enacting the Acquisition Measures, the voluntary implementation of the mandatory general tender offer system and the measures set forth in the Acquisition Measures for protecting small and medium investors.
Background
The Acquisition Measures is based on the Opinions of the State Council on Further Optimizing the Market Environment for the Acquisition and Reorganization of Enterprises (hereinafter referred to as the “Opinion“), which was promulgated by the PRC State Council on March 7, 2014. This Opinion requires relevant governmental authorities to further optimize the acquisition environment for both listed and unlisted companies.
Acquisition Measures
A. Voluntary Implementation of the Mandatory General Tender Offer System: According to Article 3 of the Opinion, “the mandatory system of making a general tender offer to all the shareholders of the target company is not applicable to the acquisition and reorganization of unlisted public companies.” The Acquisition Measures does not require unlisted public companies to implement the mandatory general tender offer system, instead, companies can decide on their own in their articles of association whether or not to apply the mandatory general tender offer system.
B. Protection of Small and Medium Investors: The provisions for protecting small and medium investors are in scattered throughout relevant articles in the Acquisition Measures such as those regarding false disclosure, insider transactions and bad faith behaviors, etc. Article 7 of the Acquisition Measures provides that “the controlling shareholder or actual controller of a target company shall not abuse the shareholder’s rights to harm the lawful rights and interests of the target company or other shareholders. Where a controlling shareholder, actual controller, or affiliated party of a target company harms the lawful rights and interests of the target company or other shareholders, the said controlling shareholder or actual controller shall, before transferring the controlling rights of the target company, take the initiative to eliminate damages. In the event of failure to eliminate damages, arrangements shall be made by using the gains resulting from the transfer of the relevant shares to eliminate all the damages.”
C. Simplification of Report Types of Changes in Equity: The conditions for providing a written report on changes in equity are much more simplified for unlisted public companies when compared to listed companies. The Acquisition Measures merely requires that a report of changes in equity shall be submitted to National Equities Exchange and Quotations[1] if an investor and its persons acting in concert are to reach or exceed ten (10) percent of the issued shares of an unlisted company. The threshold for a listed company is five (5) percent.
In addition, the Acquisition Measures also provides a variety of options of payment methods, performance guarantee, and allows the parties to the transaction to independently negotiate the pricing. Multiple choices are given to purchasers to increase the operational flexibility.
Assessment
The CSRC spokesman emphasized that the unlisted companies are different from listed companies in company scale, investors’ structure and exchange mechanism. As such, more flexible and efficient measures for unlisted companies on information disclosure, corporate governance and asset quality are required. The issuance of the Acquisition Measures will optimize the supervision over the acquisition of unlisted public companies with respect to their commercial practice.
[1] The National Equities Exchange and Quotations, the so-called “third board”, an equity exchange system for small and medium-sized enterprises, is the third national equity exchange after Shanghai Stock Exchange and Shenzhen Stock Exchange the only over-the-counter market regulated by CSRC.
