CSRC Issues the Administrative Measures for the Material Assets Reorganizations of Listed Companies

CSRC Issues the Administrative Measures for the Material Assets Reorganizations of Listed Companies

The Chinese Securities Regulatory Commission (“CSRC”) promulgated the Administrative Measures for the Material Assets Reorganizations of Listed Companies (the “Measures”), which came into force on May 18, 2008. For the first time, the material assets reorganization of listed companies is systematically regulated by administration regulations.

The Measures aim to protect the legitimate rights and interests of listed companies and investors and to safeguard the securities market and public interest. The Measures prescribe the transaction decision-making and approval procedures, i.e. the independent directors shall express independent opinions on the reorganization plan (“Plan”); listed companies shall submit the Plan to the Sub-committee of the CSRC for examination and approval under certain circumstances. The Measures also include provisions relating to the purchase of asset by shares issuance, specifying and strengthening the intermediary’s functions and responsibilities. As insider transactions and market manipulation commonly arises during the course of M&A transactions, the new Measures strengthen legal responsibilities for certain illegal acts.

Unlike the draft version of Measures which were issued in September 2007, the Measures require listed companies to disclose the preliminary plan for the material assets reorganization one day after the board of directors passes the resolution.
To prevent associated transactions, the Measures stipulate that listed companies’ boards of directors shall make an explicit determination on whether the material assets reorganization constitutes an associated transaction and shall disclose it in the directors’ resolutions. In the event that the reorganization constitutes an associated transaction, the independent director may retain an independent financial advisor to express an opinion on this issue.

The Measures require the shareholders’ resolutions to provide for the allocation of the profits and losses of the related assets from the price fixing date to the date of delivery; the contractual obligation of transferring ownership of the related assets and liability for breach of contract.

The Measures also introduce an independent financial advisor system. The financial advisor shall continuously supervise the implementation of the material assets reorganization by the listed company for at least one financial year.
Additionally, the Measures set out a new chapter titled Information Management in Material Assets Reorganization. This Chapter provides detailed stipulations regarding certain issues such as the related parties’ obligation of fairly disclosing, clarifying, registering and preserving information, keeping the information confidential and the application to halt trading etc. in the course of the reorganization-preparation and decision making process.

The Chapter titled Special Provisions on Purchase of Assets by Means of Stock Issuance prescribes (i) the prerequisite conditions for listed companies to purchase assets by shares; (ii) the share issuance price, which shall not be less than the average share trading price in the 20 trading days preceding the announcement of the directors’ resolutions; (iii) the lock up period of the shares; (Generally 12 months, but extended to 36 months if the asset seller is controlling shareholder, actual controller, its affiliate or the assets holder has held the assets for less than 12 months; (iv) in the event that the listed companies’ shares acquired by the asset holder reach the statutory proportion, the listed company shall fulfill the corresponding obligation pursuant to the provisions of the Measures for the Administration of the Takeover of Listed Companies; (v) the independent financial advisor and legal counsel shall issue explicit opinions on regulation compliance and risks related to settlements and other follow-up issues.

This Measure is another significant step towards perfecting the fundamental construction of the PRC securities market and symbolizes that the regulation and development of listed companies’ reorganization transactions has reached a new stage.

(written by Helen Yan on bahalf of a Beijing firm for publishing on ALB.)

Author: Helen Yan - Attorney at Law, Member of PRC Bar Association
Tel: 0756-3229508 Mobile: 13928008926
Email: yanhailing@yahoo.com