Tender Offer Issues in Acquiring PRC Listed Companies;

To acquire a PRC listed company, foreign investors need to take note of tender offer rules and their potential effect on proposed acquisitions. Due to the fact that most PRC listed companies are controlled by non-tradable shares (state-owned shares and/or legal person shares) and divestment of such shares is expected as a part of ongoing reforms, tender offer rules may be triggered when foreign investors seek a controlling right by acquiring non-tradable shares.

The Development of Tender Offer Rules

The PRC Securities Law (1999) provides a mandatory tender offer requirement applicable to a takeover of more than 30% of the issued shares of a listed company. Where a takeover is to be conducted, the investor shall make a public offer to all existing shareholders unless exempted by the securities supervisory authority from such an obligation. Differing from previous regulations where a tender offer rule covered stock exchange transactions and also private agreements outside of the market, the Securities Law does not apply this rule to a takeover by agreement between parties. The Administration of the Acquisition of Listed Company Procedures (the Procedures) further define a tender offer rule and create a comprehensive mechanism for its application.

According to the Procedures, a tender offer rule will apply to a takeover where the acquirer will hold or control more than 30% of the issued shares of a listed company upon completion of such takeover. The rule will apply to a takeover either by private agreement between parties or by a public offer.

Pricing and Other Requirements

The Procedures set forth separate minimum permissible price calculation formulas applicable to the public offer of tradable shares and non-tradable shares. For tradable shares, the minimum permissible price is calculated based on the recent trading record within a certain period; for non-tradable shares, either the highest price paid by the same purchaser within the previous six months for the same kind of non-tradable shares or the most recent audited book value per share of the target company. This makes the tender offer rule more practicable. If the purchase price proposed by the purchaser is obviously unfair, the CSRC may require adjustment.

What should be noted is the introduction of a deposit requirement. At least 20% of the total purchase price shall be deposited as a performance guarantee if the purchase price will be paid in cash, or all of the securities shall be deposited with the securities registration and clearance institution for safekeeping if the purchase price will be paid in securities.

Exemption of Tender Offer Obligations

According to the Procedures, the purchaser may, apply to the CSRC for a waiver of public offer acquisition procedures on the increase of its shareholding, a waiver of issuance of public offer to all the shareholders, or a waiver of a public offer acquisition of all the shares. The Procedures allow the applicant to be exempted from the public offer obligation in certain circumstances. One is a waiver application under Article 49, including transfer of shares between connected companies of one person, acquisition for rescuing and restructuring a listed company in serious financial difficulties, new shares issued pursuant to the resolution of a shareholders’ meeting, or share transfer ordered by a court judgment. Another option is a waiver application under Article 51. Generally these are not intended for acquisitions but arise from certain technical reasons, including an increase in the shareholding of a shareholder lawfully holding or controlling more than 50% of the shares, a decrease of share capital, or transfer of state-owned assets.

Recent Market Practice

In previous cases, the CSRC was willing to consider and to grant a waiver of the tender offer rule in general circumstances. Since issuance of the Procedures, it is expected to be more difficult to obtain waivers from the CSRC, unless under a circumstance specifically provided for in the Procedures. Although the CSRC may, pursuant to the Procedures, grant waivers by exercising its discretion in determining additional waiver circumstances, so far there are no such examples in which the CSRC has exercised such discretion.

In Fosun’s acquisition of Nanjing Iron & Steel in September 2003 (the first public offer in China), the acquirer anticipated the scant possibility of obtaining a waiver from the CSRC according to the Procedures. The acquirer directly made a public offer without pursuing a waiver application. As expected, the public offer was not accepted by shareholders, because the market price of the tradable shares at that time was much higher than the offered price that fell within the scope of the minimum permissible price according to the Procedures. This appears to be another lawful way to avoid the application of a tender offer rule, although it is to some extent risky because of the uncertainty of the market price of tradable shares.

Foreign acquisitions of legal person shares in listed companies were prohibited in 1995, and the restriction was only lifted in 2003. In April 2004, Samsung Corning completed a share acquisition of Seg Samsung, which is regarded as the first case of foreign acquisition of an A share listed company. However, the grounds for granting a waiver in this case (for the purpose of company restructuring) cannot apply universally. Neither the Procedures nor the CSRC’s policy is clear how a tender offer rule works for foreign investors since foreign investors are not allowed to buy A shares (except for QFIIs), nor to acquire above a certain level of shareholding in some industries.