Amid the ongoing market-oriented reform of mergers and acquisitions, as well as restructurings of listed companies, the latter process is being designed with increasing flexibility. During the past year, there was evidence of the popularity among companies for step transactions in package deals (hereinafter referred to as the step-transaction plan). As for the progress of restructurings, the step-transaction plan also allows listcos to integrate their businesses as early as practicable.
Generally, there are two steps to the aforementioned plan that listcos use for restructurings. In the first step, listcos buy equity (a controlling interest in most cases) in their targets with cash. In the second step, the listcos issue shares and use them as consideration, or use shares plus cash, to purchase the remaining equity in the targets.
According to relevant provisions of the Measures for the Administration of Material Asset Restructurings of Listed Companies, while the listcos may execute the first step involving asset acquisitions with cash on approval at general meetings, the second step, which involves asset acquisitions through the issuance of new shares (or new shares plus cash), shall not be executed until approval is obtained at both from the listcos’ general meetings and from the regulators. While the first step, being an acquisition with cash, is a precondition of the subsequent additional share issue for the purpose of further asset purchases, it is not conditional on approval from regulators.
We have summarized, as follows, cases where step-transaction plans, which listcos adopted on approval from the China Securities Regulatory Commission’s Merger & Acquisition and Restructuring Committee in the last three years.
(1) Acquisition by Yifeng Pharmacy Chain (603939.SH) of 86.31% equity in Shijiazhuang Xinxing Chain Pharmacies. In Step 1, it bought 48.96% of equity with cash. In Step 2, Yifeng issued shares to buy another 37.35% of equity. The total transaction price was RMB1,383.5871 million. The initial disclosure date was 23 June 2018. The portion of equity bought with cash was registered in the name of the acquirer on 15 August 2018. The CSRC’s M&A and Restructuring Committee granted approval on 18 October 2018.
(2) Acquisition by Maoye Communication and Network (000889.SZ) of 100% equity in SINOWEL. In Step 1, 51% of equity was bought with cash. In Step 2, shares were issued to buy the remaining 49% of equity. The total transaction price was RMB1,480 million. The initial disclosure date was 11 October 2017. The portion of equity paid for with cash was registered in the name of the acquirer on 31 May 2018. The CSRC’s M&A and Restructuring Committee granted approval on 8 August 2018.
(3) Acquisition by Yantai Dongcheng Biochemicals (002675.SZ) of 100% equity in Beijing Andike Electronics. In Step 1, 48.5497% of equity was bought with cash. In Step 2, shares were issued to buy the remaining 51.4503% of equity and raise the necessary funds. The total transaction price was RMB1,600 million. The initial disclosure date was 29 June 2017. The portion of equity paid for with cash was registered in the name of the acquirer on 16 October 2017. The CSRC’s M&A and Restructuring Committee granted approval on 30 March 2018.
(4) Acquisition by Pubang Landscape Architecture (002663.SZ) (Pubang) of 100% equity in Beijing Bo Rui Sai Si Information System Integration. In Step 1, 40% equity was bought with cash. In Step 2, shares were issued to buy the remaining 60% of equity and raise the relevant necessary funds. The total transaction price was RMB958 million. The initial disclosure date was 10 September 2016. The portion of equity paid for with cash was registered in the name of the acquirer on 2 November 2016. The CSRC’s M&A and Restructuring Committee granted approval on 31 March 2017.
In this case, although the equity Pubang bought with cash represented less than 50% of the shares in the target, Pubang was able to prove, to the satisfaction of the regulator, that it would be sufficiently able to obtain effective control of the target. To establish this, Pubang provided analysis in line with enterprise accounting standards on several factors, especially including the substantial gap between equity percentages held by Pubang and those held by the second and third largest shareholders of the target, and Pubang’s ability to exercise control over the board of directors of the target.
(5) Acquisition by Skyworth Digital (000810.SZ) of 100% equity in Skyworth LCD Devices (Shenzhen). In Step 1, 51% of equity was bought with cash. In Step 2, shares were issued to buy the remaining 49% of equity. The total transaction price was RMB898.8m. The initial disclosure date was 12 January 2016. The portion of equity paid for with cash was registered in the name of the acquirer on 21 June 2016. The CSRC’s M&A and Restructuring Committee granted approval on 29 April 2016.
Step-transaction plans provide the following benefits: As the first step, involving the cash acquisition of some equity in the targets, may be executed only with approval of the general meeting of the listcos, but without the CSRC’s approval, the M&A parts can move on with much ease, which may help raise efficiency throughout the process. Moreover, in the case where the listed company succeeds in taking control of the target through the first step, earlier inclusion (as compared with scenarios where control is not taken through Step 1) of the target into the consolidated statements of the acquirer, including its contribution to the operating results of the acquirer, will drive the earlier achievement of synergies between the two parties.
Besides, the cash-payment approach enables the counterparties to meet their reasonable liquidity needs faster, therefore providing further assurance for the success of the subsequent restructuring. Arrangements for this purpose were adopted for the deals involving Yifeng Pharmacy Chain, Maoye Communication and Network, Pubang and Skyworth Digital.
Through the second step, where the listcos issue shares to buy the remaining equity in their targets, interests of the counterparties and the management of the targets are closely aligned with interests of the listcos. This share-based payment approach provides two benefits. First, it may facilitate integration between the acquirer and the target, thereby enabling smooth transition. Second, it ensures performance achievement of the target.
Moreover, according to the Measures for the Administration of Material Asset Restructurings of Listed Companies, shares listcos issue for the purpose of asset acquisitions (unless they relate to any backdoor listing) may be used partly to raise funds necessary for meeting needs associated with the said purpose, for example, for paying intermediary fees, so that the financial pressure arising from cash payments may be alleviated.
Yin Yi is an attorney at Grandway Law Offices