Cross-border merger and acquisition of chinese domestic listed companies

• Author: YANG Dong, HUANG Dingquan, YOU Jiahui
• Pages: 370-400

FRONTIERS OF LAW IN CHINA

VOL. 11 JUNE 2016 NO. 2

DOI 10.3868/s050-005-016-0020-5

ARTICLE

CROSS-BORDER MERGER AND ACQUISITION OF CHINESE DOMESTIC LISTED

COMPANIES

YANG Dong*, HUANG Dingquan**, YOU Jiahui***

Abstract China’s reform of state-owned enterprises (SOEs) and share trading plays an

essential role in cross-border mergers and acquisitions (M&A). Considering most of the

public listed companies enjoying abundant domestic resources as an outcome of SOEs

reform, as well as the new capital and innovative managerial conceptions that foreign

M&A brings in, the SOEs and share-trading reforms are undoubtedly mutually

beneficial. As the reforms deepen, rules are established that state-owned shares cannot

be traded, given potential loss of state-owned assets, which creates a great plight for

foreign M&A through directly purchasing tradable shares within China’s A share market.

Therefore, share-trading reform progressed so as to convert non-tradable shares to

tradable ones, which indeed provides many opportunities for foreign M&A. This article

adopts case study and related empirical analysis methods. After systematic research on

the cases of foreign M&A of listed companies in China that were transacted between

1995 and November 2012, and analyzing each respectively under the framework of the

existing sixteen models in China, those models can be further classified into three

categories concerning the unique share structure as well as the legal environment in

China.

Keywords SOE, mergers and acquisitions (M&A), stock market, MBO

INTRODUCTION .................................................................................................................... 372

I. BACKGROUND: STRUCTURAL REFORM OF THE M&A MARKET.............................. 372

A. Chinese SOEs Reform......................................................................................... 372

* (󰐽) Ph.D in law, Hitotsubashi University; Professor, at School of Law, Renmin University of China,

Beijing 100872, China; Researcher of Center for Civil and Commercial Law of Renmin University of China;

Researcher of Chongyang Institute for Financial Studies of Renmin University of China; Researcher of

Renmin University of China Asia-Pacific Institute of Law. His research covers securities law, financial law,

and competition law. Contact: yangdong456@gmail.com

** (󳮙󳯣󰐘) LL.B student, at School of Law, South China Normal University, Guangzhou 510006, China.

Contact: hingdq@163.com

*** (󰬍) LL.M student, at School of Law, Renmin University of China, Beijing 100872, China. She

majors in securities law, financial law and competition law. Contact: youjiahui17@163.com

This article is a result of the Project 󰦪󱠫󱈺󱓩󱝋 [󱓩2008001 ] [Report on

the Law Integration in East Asia and Its Strategies (Grant No. 2008001)] supported by Asia Research Center,

Renmin University of China.

2016] CROSS-BORDER MERGER AND ACQUISITION OF CHINESE DOMESTIC LISTED COMPANIES 371

B. Categories of Chinese Public Listed Companies’ Shares................................... 373

C. The Share-Trading Reform................................................................................. 374

1. Formation of Dual-Class Share Structure .......................................................374

2. The Necessity of Share-Trading Reform.........................................................375

3. The Contribution of Share-Trading Reform....................................................376

II. EVOLUTION OF FOREIGN M&A REGULATIONS ...................................................... 377

A. Stages of Foreign M&A Legal System Development .........................................377

1. Prohibition (1995–1999) ...............................................................................377

2. Interim Period (1999–2002) ..........................................................................377

3. Removal of the Ban (2002–2003) .................................................................377

4. All-Round Opening-Up (2003–2008) ........................................................... 378

5. Integrity of Legal Regulations on Foreign M&A (2008–Present) .................380

B. Key Regulations................................................................................................. 381

1. The 1995 State Council Ban.......................................................................... 381

2. The 2006 Joint Measures............................................................................... 382

3. The 2006 Joint Interim Provisions................................................................. 382

4. The 2008 State Council Provisions................................................................383

5. The 2010 Measures........................................................................................ 383

III. ANALYSIS OF THREE CATEGORIES OF FOREIGN M&A AND RELEVANT CASES..... 384

A. Category One: Direct M&A............................................................................. 384

1. Model One: Purchasing Tradable Shares..................................................... 384

2. Model Two: Tender Offer............................................................................. 385

3. Model Three: Purchasing Non-Tradable Shares through Agreements ......... 388

4. Model Four: MBO Intervention................................................................... 390

5. Model Five: Procuring Non-Tradable Shares through Auction.................... 391

6. Model Six: International Invitation for Bid.................................................. 391

B. Category Two: Indirect M&A........................................................................... 391

1. Model Seven: Implementing M&A through Domestic Subsidiaries in

China............................................................................................................ 392

2. Model Eight: Indirect M&A through Establishing a Joint Venture with the

Target C ompa ny ........................................................................................... 392

3. Model Nine: M&A with the Foreign Controlling Shareholders of the Target

Companies.................................................................................................... 393

4. Model Ten: M&A of the Domestic Controlling Shareholders of the Target

Companies.................................................................................................... 393

5. Model Eleven: M&A through Intermediaries............................................... 394

6. Model Twelve: Call for Proxy or Proxy Fight.............................................. 394

7. Model Thirteen: Variable Interest Entity (VIE)............................................ 395

C. M&A by Equity Financing............................................................................... 396

1. Model Fourteen: Issuance of Convertible Bonds......................................... 396

2. Model Fifteen: Private Offering of Additional B Shares.............................. 397