Key focus areas in listed company acquisitions

Due to issues such as the standardization of some target companies, inability to be included into a listed company’s system, or issues with the listed company’s fund arrangements, it has become an approach widely used by listed companies that the controlling shareholder acquires the target company first and then the listed companies will acquire from the controlling shareholder when those issues are resolved. The controlling shareholder usually acquires the target company through setting up a fund, typically in the form of a limited partnership with a PE firm, bank, securities firm or other parties. Listed companies should focus on the following two issues when acquiring target companies.

Whether the acquisition constitutes a connected-party transaction. The essence in determining whether a connected-party transaction is constituted lies in whether the controlling shareholder controls, directly or indirectly, the M&A fund. In practice, the role that the controlling shareholder plays in the partnership, namely general partner (GP) or limited partner (LP), and the percentage of its capital contribution, will be considered. In addition, the controlling shareholder’s influence in the M&A fund’s decision making and the fund’s personnel arrangements are also important criteria for consideration.

In practice, the GP is generally considered to have control of the partnership. Therefore, if the controlling shareholder is the GP, or has a significant contribution in the GP, then it is considered to have control over the M&A fund as or through the GP. For example, in the industry M&A fund established by Suning Commerce Group, Dingyuan Investment, controlled by Suning Commerce Group’s controlling shareholder, Zhang Jindong, is the GP, while Suning Commerce Group, Suning Appliance and other investors are LPs. Unless there is evidence showing that Dingyuan Investment is unable to control the M&A fund, future acquisition of any of the fund’s portfolio companies by Suning Commerce Group should be deemed a connected-party transaction.

Zhang Liguo is the chief partner and Zhang Ying is an associate at Grandway Law Offices