Risks in acquisitions, restructurings by listed companies in China

The term “acquisition/restructuring” as carried out by a listed company means a rights assignment of corporate control carried out between a target company and an acquiring company. As acquisitions/restructurings carried out by listed companies are accompanied by massive capital operations, they will regularly give rise to serious criminal legal risks.

Raising funds. For the acquirer, relying on its own assets to complete the acquisition is usually not possible. Accordingly, the acquisition will be done by way of a “share swap”, or “share for asset swap”. Specifically, this will be accomplished by offering new shares, preference shares, bonds or other such securities, and using their combination as the consideration for the equity of the target company.

As there are multiple restrictions placed on financing through the offering of shares, certain companies, for the purpose of raising funds to complete an acquisition/restructuring, will often use such means as fabricating a transaction, fraudulently increasing assets or revenues, etc., in their prospectus, application for shares, company or enterprise bond offering measures, so as to embellish their performance results and satisfy requirements. Pursuant to article 160 of the Criminal Law and related judicial interpretations, when the proceeds of a fraudulent share or bond offering reach at least RMB5 million (US$793,000), or a fabrication of relevant documents, vouchers, etc., is involved, the person directly in charge will be guilty of the “crime of fraudulent offering of shares or bonds”.