Update on restructuring, M&A involving listed companies

The China Securities Regulatory Commission (CSRC) said on 28 February 2014 that it will continue with reforms in mergers and acquisitions (M&A) and restructuring, and establish a parallel approval mechanism across departments. It plans not to use the review of antitrust, investment in foreign countries and foreign investment as preconditions for administrative licensing of M&A and restructuring projects.

Restructuring and M&A of listed companies in China primarily involve activities that have a significant impact on the ownership structure, composition of assets and liabilities, profit and business of listed companies, such as the transfer of the right of control over listed companies (acquisition), asset restructuring (purchase or sale of assets), share repurchases, mergers, division, etc. (See table on opposite page).

Notice 61 [2013] issued by the CSRC provides that if the backdoor listing standards are brought to be equivalent to the IPO standards, some practical problems will arise:

1. Changes in the financial audit standards. According to the original financial audit standards, the net profit of the party which injects the backdoor assets must be positive over the last two fiscal years and must amount to more than RMB20 million (US$3.2 million) in aggregate, while according to the IPO standards, the net profit of an issuer must be positive for the last three fiscal years and amount to more than RMB30 million in aggregate.
2. Increased difficulty in backdoor listing on ChiNext. In the notice, ChiNext is asked not to support backdoor listings. The Shenzhen Stock Exchange’s Rules Governing the Listing of Shares on ChiNext do not support the resumption of the listing of listed companies that are suspended from listing, by means of backdoor restructuring. A very sophisticated design is needed in this case in order to make a backdoor restructuring plan work.

Jonathan Sun is a partner at Zhong Yin Law Firm