In the previous article, the author reviewed several listco restructuring cases. The listed companies obtained approval from the China Securities Regulatory Commission (CRSC) through step-transaction plans. Strong points of the step-transaction plans for listco restructuring were also analyzed. It is provided in the Administrative Measures for the Material Assets Reorganization of Listed Companies that the listed company that purchases assets by means of share issuing (except for those listed by backdoor listing) may raise a part of supporting funds at the same time.
It is also provided, in the Questions and Answers on Listed Companies Issuing Shares to Purchase Assets and Raise the Supporting Funds at the Same Time (Q&A), that the supporting funds raised may be used to pay the cash consideration of the M&A transaction, pay the M&A expenses, including taxes and relocation expenses, and be input in construction of projects in progress of the underlying assets. This article enumerates the do’s and don’ts of the step-transaction plans for listco restructuring.
Raising funds to pay the cash consideration of the M&A transaction does not involve cash acquisition as in Step 1 of the step-transaction plan. In the case of Pubang Landscape, it would pay the cash consideration in three instalments. It agreed that Pubang Landscape would pay the third instalment of the consideration in the amount of RMB133 million (US$19.7 million) on the precondition that “Pubang Landscape will pay the third instalment with raised funds if this transaction is not approved by the CSRC, or if the share issuing at the same time as the M&A for raising supporting funds is not successful, or the fund, raised are insufficient”.
The CSRC, however, had doubts about the payment conditions of this third instalment. It queried in its first feedback whether 40% of the share in BRSS (the target company) had been transferred: “If yes, please disclose whether the aforesaid transfer of share and payment of the third instalment of cash consideration with the raised funds in the amount of RMB133 million are in compliance with applicable regulations prior to CRSC approval of this transaction.” It also asked: “Does replacement of the aforesaid consideration for cash acquisition with the raised funds in place comply with the provision of the CSRC on the purposes of raised funds?”
In its reply to the first feedback, Pubang Landscape mentioned that it had not paid the third instalment of consideration for cash acquisition in the amount of RMB133 million. It held that the intended payment of the third instalment of consideration with the raised funds complied with the Q&A, which was effective at the time (the Q&A was promulgated on 17 June 2016 and has become ineffective). Meanwhile, there was no replacement of the third instalment of consideration with the raised funds in place.
In this regard, the CSRC asked in its second feedback: “Whether this transaction was an independent one, and whether it was separable from the transaction of issuing 60% of the shares for asset purchase. If it was a one-off transaction, was it in compliance with applicable regulations that 40% of the shares in BRSS were transferred before this transaction was approved by the CSRC? In the event of two separate transactions, was cash payment for 40% of the shares in BRSS with the raised supporting funds in compliance with applicable provisions of Questions & Answers of the CSRC on Listed Companies Issuing Shares to Purchase Assets and Raise the Supporting Funds at the Same Time?”
In response to the second feedback, Pubang Landscape convened a meeting of directors to adjust the payment method of the third instalment of consideration to “payment by Pubang Landscape with the raised funds”, and reduced the total supporting funds to be raised accordingly.
In the M&A transaction of Pubang Landscape, it was agreed that the third instalment of consideration for cash acquisition in Step 1 should be paid with raised funds. As a result, the implementation of cash acquisition in Step 1 is “connected” with share issuing for assets purchase in Step 2. These two steps become mutually conditional and are in conflict with what the transaction plan reflects, that is, “it will not serve as a precondition for cash acquisition whether the share subsequently issued is approved by the regulator.” On the other hand, in the case of two separable transactions, the supporting funds raised during share issuing for assets purchase can only be used in “this M&A transaction”, that is, the cash consideration in the share transaction. They cannot be used for the consideration for cash acquisition in Step 1. Pubang Landscape was not allowed to use the raised funds to pay the consideration for cash acquisition in Step 1.
“Replacement of a part of a bank loan used in advance for cash purchase of assets” with raised funds essentially constitutes replenishment of working capital of the listed company and repayment of its debt. In the M&A case of Dongcheng Biochemicals, it planned to replace “a part of the bank loan used in advance for cash purchase of assets” with raised funds. The CSRC queried in its feedback “whether replacement of a part of the bank loan used in advance for cash purchase of assets is essentially replenishment of its working capital and repayment of debt, and whether such replacement complies with the provisions of the CSRC on raising supporting funds”. In its response to the feedback, Dongcheng Biochemicals cancelled the fundraising and investment project, and reduced the total amount of funds to be raised accordingly.
In this case, replacement of a bank loan used for cash acquisition with raised funds, in essence, is repayment of the debt of the listed company with the raised funds, which does not comply with the provisions of the then effective Q&A.
In October 2018, the CSRC issued the Questions and Answers on Listed Companies Issuing Shares to Purchase Assets and Raise the Supporting Funds at the Same Time (revised in 2018), which allows listed companies to use raised funds to replenish their working capital of the listed companies and the underlying assets, and repay debts, so as to reduce the M&A loans borrowed by the companies for cash acquisition in Step 1 and alleviate them from other debt stresses.
Yin Yi is an associate at Grandway Law Offices
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