According to recent market speculation, the China Securities Regulatory Commission (CSRC) is planning to call off listed companies’ acquisitions of target companies in over-focused industries, including internet finance, games, film/television and virtual reality through private placements. In addition, the acquisition, reorganization and refinancing of these four industries is also said to be pending termination.
The CSRC said these rumors are not true, but evidence shows that the CSRC is in fact considering tightening the examination of listed companies’ acquisitions of target companies in the entertainment industry. For example, upon recent disclosure of (but pending announcement of the transaction proposal) the proposed acquisition by Talent International Media of Wuxi Aimeishen Film and Television Culture in cash, which constitutes a material asset reorganization, the Shenzhen Stock Exchange (SZSE) issued a letter of inquiry, pointing out Aimeishen’s significant increase in valuation within a short period. SZSE further requested that Talent Media: (1) focus on the analysis/explanation of its valuation of the material assets reorganization plan to be disclosed; and (2) remind investors of significant risks. A stock exchange sending out a letter of inquiry prior to the announcement of an acquisition and reorganization proposal is a national precedent regarding A-shares.
Historically, most entertainment companies are considered subject to low or inconsistent profitability, which poses great difficulties for A-share listed companies seeking approval from the CSRC for acquisition of entertainment companies. However, there has been a recent increase in such transactions following a series of changes, since the end of 2014, in approval procedures for acquisitions by listed companies and other policy issuances encouraging investment.
Based on the above-mentioned aspects related to entertainment companies, key considerations for such transactions generally include the amount of consideration, profitability predictions, the valuation of transaction targets, and approval from the CSRC and other competent authorities. This article will provide an overview of the choices for transaction structures for these transactions (excluding backdoor listings).
Following the State Council’s policy of encouraging acquisitions and reorganizations by listed companies, the CSRC published the revised Administrative Measures for Material Asset Reorganization of Listed Companies and the Decision on Revising the Administrative Measures for the Takeover of Listed Companies on 23 October 2014. These measures officially relaxed and simplified administrative licensing for acquisitions and reorganizations by listed companies. In 2015, the State Council further simplified administrative approval procedures for acquisitions and reorganization of listed companies, significantly reducing the difficulties listed companies face in obtaining approval for the acquisition of target companies in the entertainment industry.
An all-cash offer that does not constitute a material asset reorganization. If the target assets and the transaction amount would not constitute a material asset reorganization under the reorganization measures, the most convenient structure for an acquisition is an all-cash offer. Under this transaction structure, the listed company would generally only be required to fulfil internal decision-making procedures and may elect to disclose the same on a voluntary (instead of compulsory) basis. However, the listing rules of the Shanghai Stock Exchange (SSE) and the SZSE require listed companies to disclose such a transaction if the investment exceeds 10% of the company’s total assets, or the total investment value exceeds RMB10 million (US$1.5 million).
An all-cash offer that constitutes a material asset reorganization (but not a backdoor listing). The CSRC usually takes a relatively shorter time to examine all-cash offer acquisitions than those involving other types of consideration, making it more convenient for the parties involved. In the event of a limited amount of available cash, and if time permits, the listed company would generally raise acquisition funds through a private placement of new shares before the acquisition.
In accordance with the reorganization measures, in order to conduct a material asset reorganization, a resolution must be adopted by the company’s board, submitted to a shareholders’ meeting for approval, and then disclosed on the next working day. A series of documents must also be submitted in accordance with the guidelines of the SSE and SZSE. Key points to be disclosed for the target assets include: (1) The price of the assets is fair, and should not harm the lawful rights and interests of the listed company and its shareholders; (2) The ownership of the assets is clear, and there must be no legal obstacles to the transfer of the title to assets or the transfer of assets, and the relevant credits and debts have been properly handled; and (3) The assets will improve the continuous operating ability of the listed company, and there is no circumstance that may result in the major assets of the company being cash or, after reorganization, the company having no specific business.
In practice, listed companies normally explain that the key points to be disclosed for such material assets reorganization are compliant with current regulations through multiple financial indicators and signing of earn-out agreements and other measures.
Share offering. Based on certain commercial considerations (such as the need to enter share exchanges, raise funds, or provide incentives to executives of the target company), some listed companies choose to complete an acquisition through a share offering. This kind of transaction structure has a longer period for approval and a certain degree of uncertainty.
Pursuant to the reorganization measures, any purchase of assets through a share offering must be submitted to the CSRC Review Board for Mergers, Acquisitions and Reorganization of Listed Companies for examination. One of the key criteria of the examination is whether the purchase will improve the asset quality, financial status and sustained profitability of the listed company. Therefore, key considerations for this transaction structure are whether the financial statements and profitability of the target company are sufficient to be approved by the CSRC review board, and the degree of CSRC regulation over the industry of the target company.
In summary, the cornerstone of a successful acquisition by a listed company of an entertainment company is the selection of an appropriate transaction structure based on the specific circumstances of the listed company and the target company.
Cloud Li and Ben Chai are associates at DaHui Lawyers
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