China's State Council to announce new rules for enterprise mergers and reorganizations
April 3, 2014--China's State Council issued the Opinions on Further Optimizing the Market Environment for Enterprise Mergers and Reorganizations in the latter half of March 2014, announcing seven measures to "bring the role of the capital market into play" in promoting enterprise mergers and reorganizations, removing barriers to mergers and reorganizations, lowering relating costs and raising the industry concentration ratio. These measures include allowing qualified enterprises to issue preference shares or to privately place convertible bonds as new payment methods for mergers and reorganisations. The private placement of warrants will also be studied as another alternative.
Given the low concentration ratio, China's industrial structure is quite unreasonable. The problem of enterprises being small and scattered remains prominent. In spite of the fact that 12 ministries and commissions had jointly issued their guiding opinions on promoting the merger and reorganisation of enterprises in key industries in January 2013, corporate mergers and reorganisations still face problems of long and tedious approval procedures, obstacles in mergers across regions and ownership types, heavy tax burdens and financing. The new document mainly aims to optimise the policy environment and remove these barriers.
The Opinions also stress the need to give play to the role of the capital market. Qualified enterprises may raise capital by issuing shares, corporate bonds, debt-financing instruments for non-financial firms, convertible bonds, etc. Securities companies are encouraged to launch financing business for mergers and reorganizations and various types of financial investment entities may participate in mergers and reorganisations by setting up equity investment funds, venture capital, industrial investment funds, merger and acquisition funds and other funds. Where a listed company issues shares for the purpose of mergers and acquisitions, the lower limit for the quantity of shares issued is no longer required. Where a listed company acquires a non-affiliated company, it is no longer mandatory for the company to make a performance commitment. Unlisted public companies do not have to make a total takeover offer for mergers and reorganizations. The mechanism for the pricing of shares in the mergers and reorganizations of listed companies will be reformed to increase the flexibility of pricing. Unlisted public companies are allowed to negotiate the price of shares in mergers and reorganizations.