Chinese M&A unleashed?

Teresa Ko of Freshfields is bullish about the potential for Chinese M&A thanks to new regulations.

What impact will the new M&A regulations in China have?

The new M&A regulations have provided a framework of principles for mergers and acquisitions involving A-share listed companies to take place. That, in itself, is a breakthrough. In the past, transfers of legal person shares have occurred but very much on an ad hoc basis.

These new regulations have laid down a blueprint of steps that need to be taken and will offer more certainty and transparency. It should pave the way to a more orderly M&A market in China.

Have principles been borrowed from the Hong Kong code?

I am delighted to say, yes. Certain basic principles in the first chapter of the regulations show some similarities with the Hong Kong or UK takeovers code. Some of those state very basic things such as requiring the information contained in the offer document to be true and accurate and not be misleading, or requiring directors of target companies to exercise fiduciary duties.

The most exciting aspect of the new regulations is that they have adopted the concept of a mandatory general offer in the event that you buy more than 30% of a listed A share company. This has to be done at a share price that is no less than the highest price that the acquirer paid for the shares of the same class in the market in the last six months and there can be different offer prices for different classes of shares, which would crack the chronic problem of state owned non-listed and non-publicly traded shares having a much lower valuation than listed and publicly traded shares.

Who will police the M&A regulations? The CSRC?

The regulations make it clear that the CSRC has responsibility for administering the regulations. But the frontline responsibility is delegated to the relevant stock exchanges. The stock exchanges will be responsible for reviewing the announcement of the transaction, while the CSRC will vet the transaction.

It remains to be seen whether they are going to further clarify the role of both regulatory authorities where a lack of clarity exists. The same is true of Hong Kong, of course.

Are the stock exchanges behind the new regulations? Are they keen to protect minority shareholder rights?

All this has been driven by the CSRC rather than the local exchanges. The CSRC is keen to enhance the quality of companies listed on both exchanges. This regulation could accelerate further corporate reorganization and eliminate inefficiencies to realise this goal.

In terms of enforcement, will the Chinese media be the body that names and shames?

One of the weaknesses of the UK and Hong Kong takeover codes is the lack of real enforcement power. As drafted, the CSRC is trying to get people to correct misbehaviour on a voluntary basis. If they continue to fail to do so, the CSRC can make an order. But there is no legal sanction. It cannot impose criminal sanctions. But I understand they are working with the State Council to bring about legislation which will impose criminal sanctions on parties breaching the M&A regulations. That will be a step ahead of the position in Hong Kong.

Will these regulations aid foreign companies that wish to buy companies in China?

It will mostly benefit A share companies themselves. If your target is in a restricted industry you will still be required to get relevant governmental approvals and so forth.

So this is not the hoped-for through-train for foreigners. But it is the start of the process.

Based on what you see in China, do you think these regulations will lead to a lot more M&A there?

I would expect so. One interesting development is that for the first time, financial advisers and lawyers are mentioned in a piece of regulation. This gives these professionals fantastic opportunities and will encourage them to advance the process of restructuring of A share companies.

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