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Has the cross-border mergers and acquisitions of listed companies been fully liberalizedCan I buy loss making assets now, and how can I demonstrate sustained profitability
Is it feasible for ST company to undergo restructuring, be backdoor acquired, or engage in third-party transactions? Is restructuring style shell preservation becoming popular again, and does ST shell still have M&A value
Can the major shareholder of the target company not bet? If they don't bet, the valuation will be lowered, but can they really be released by regulation
As stock prices rise, is it necessary to suspend trading and lock in the restructuring issuance price as soon as possible for major shareholder asset injections? Can the restructuring review speed be greatly accelerated
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The mentality, willingness, and expectations for participating in mergers and acquisitions in the A-share market are undergoing varying degrees of transformation.
Mergers and acquisitions are highly specialized and complex business activities that are subject to strong constraints from various external conditions such as the stock market, securities regulation, and information disclosure, whether certain or uncertain. The launch of the "combination punch" of financial policies by relevant departments at the press conference of the State Council Information Office on September 24th has led to a significant turning point and breakthrough performance in the domestic stock market in terms of transaction price and trading volume; In combination with the coordinated efforts of government departments in other policies such as finance, industry, and employment, a series of relatively sustained and stable policy benefits and market improvement may prompt some market entities to "run" into the market and initiate or participate in specific mergers and acquisitions. This article discusses the understanding and comprehension of a series of new policies and measures for mergers and acquisitions of listed companies from the perspective of professional service providers on the front line of transactions, and attempts to discuss some specific issues and concerns of market entities.
1、 Understanding and comprehension of the new policies for mergers and acquisitions of listed companies
Based on the multiple policies implemented by regulatory authorities to support mergers and acquisitions of listed companies since the beginning of this year, the issuance of the "Opinions" is another concrete manifestation of the country's consistent main line of promoting high-quality development of the capital market. The six articles of the Opinion can be divided into three categories: two directions of action, two specific measures, and two means of guarantee.
（1） Two directions of focus: promoting the rapid development of new quality productivity and accelerating industrial integration
The first article "Assisting the Development of New Quality Productivity" and the second article "Increasing Support for Industrial Integration" in the Opinion include the following specific contents:
From the perspective of the implementation of the above measures, the direction of the "Opinions" clearly points to two core aspects: "new quality productivity industries" and "industrial integration". The main supporting policies, such as allowing cross industry mergers and acquisitions, allowing the acquisition of unprofitable assets, and supporting private equity fund acquisitions of listed companies, are all based on guiding and promoting the above two directions. The "Assisting Enterprises in Cultivating and Developing New Quality Productivity through High Quality Mergers and Acquisitions" merger and acquisition training and exchange event held by the Shenzhen Stock Exchange on September 26 also clearly focused on strategic emerging industries and future industries such as "new energy and integrated circuit industry".
The precise efforts towards the two directions of "new quality productivity industry" and "industrial integration" are completely different from the wave of mergers and acquisitions that once appeared in the A-share market. During the representative period of 2012-2015 in the history of mergers and acquisitions of domestic listed companies, the market experienced a turbulent wave of mergers and acquisitions, with cross industry mergers and acquisitions and "high valuations, high commitments, and high goodwill" decoupled from asset quality advancing rapidly, and ultimately ending in dismal restructuring transactions. The "Opinions" clearly support the merger and reorganization of listed companies, which is in line with the goal of developing new quality productivity, improving the quality of listed companies, enhancing the long-term mechanism of internal stability of the capital market, and jointly promoting the high-quality development of the capital market.
（2） Two types of specific measures: respecting rules and focusing on the big and the small
The third article "Improving regulatory inclusiveness" and the fourth article "Improving payment flexibility and audit efficiency" in the Opinion include the following specific contents:
Compared to Articles 1 and 2 of the Opinion, the specific measures under these two articles have stronger applicability and may have a greater direct impact on various types of mergers and acquisitions.
On the one hand, the specific content of Article 3 "Enhancing Regulatory Inclusiveness" is not about creating new rules or fundamentally changing existing rules. It is more based on the principles of respecting transaction rules and commercial autonomy, and once again clarifies the flexibility of existing mergers and acquisitions. Overall, since the release of the "Restructuring Management Measures" in 2008, the A-share restructuring rules have not set too many obstacles to restructuring transactions. Even in the strictest period of restructuring supervision from 2016 to 2020, the main goal is still to prevent "shell speculation," "deceptive restructuring," and "investment style mergers and acquisitions." In practice, there is still a lot of autonomy for all parties involved in the transaction, and the contents of the third article have been applied in practice. In this Opinion, it is once again clarified that the effect may be more about breaking down some hidden "barriers" in previous M&A and restructuring practices (such as forming habits in some M&A and restructuring, whether or not assets are purchased from related parties, as long as the valuation is evaluated using the income method or market method, performance commitments must be made, etc.).
On the other hand, Article 4 "Improving Payment Flexibility and Review Efficiency" proposes new rules, such as establishing a mechanism for installment payment of consideration for restructured shares and piloting a system for the storage and issuance of matching raised funds on shelves; For example, establishing a simplified review process for restructuring. The payment of restructuring consideration, requirements for review procedures, and other matters can all be classified as "means" in nature. For mergers and acquisitions of listed companies, these methods will not affect the core concern of "asset quality" purchased by the listed company, but they are important factors that affect the success, efficiency, and effectiveness of the restructuring "transaction". The Opinion clearly emphasizes the importance of focusing on the big and the small, and calls for improving the quality of restructuring while to some extent relaxing the constraints on restructuring methods, which is conducive to promoting the specific achievement of mergers and acquisitions.
（3） Two safeguard measures: optimizing the quality of restructuring and ensuring compliance with laws and regulations
The above articles propose and emphasize measures to improve the quality of mergers and acquisitions from both positive and negative perspectives. On the positive side, professional service institutions such as financial advisors, accounting firms, law firms, and evaluation agencies are important participants in M&A and restructuring transactions, and are the actual operators and executors of the transactions. Therefore, improving the service level of these institutions is an efficient way and key strategy to effectively enhance the quality of M&A and restructuring of listed companies, which can be said to start from the beginning and end. The documents released by the Shanghai Stock Exchange in September, such as the "One Volume Guide to Rules, Policies, and Cases of Mergers and Acquisitions of Listed Companies," are also conducive to positively guiding various merger and acquisition participants, including intermediary agencies, and helping them grasp the latest regulatory guidance and correctly stimulate the vitality of the merger and acquisition market. On the other hand, this opinion does not change the previous policy of strong regulation and strict requirements, and "shell protection" restructuring is still not allowed. This is consistent with policies such as the "National Nine Measures" and the "Eight Measures for Science and Technology Innovation" since the beginning of this year, repeatedly reiterating the principle of strengthening supervision and cracking down on various illegal and irregular behaviors that we have always adhered to.
2、 Some Market Concerns under the New Policy of A-share Mergers and Acquisitions
（1） What kind of company can leverage the "East Wind" of industry driven transactions
The new policy for mergers and acquisitions focuses on actively supporting listed companies to conduct mergers and acquisitions around strategic emerging industries, future industries, etc., including cross industry mergers and acquisitions based on transformation and upgrading goals, as well as the acquisition of unprofitable assets that help improve key technological levels. From a macro perspective, it serves the development of important industries in the country through the capital market and its policy measures; From a micro perspective, it aims to promote the quality improvement and market value growth of listed companies, and to advance the interests of listed companies and all shareholders. From this, it can be seen that the logic and goals of the mergers and acquisitions promoted by this new policy are "industry driven" and "innovation driven", which are completely different from the "financial driven" and "stock price driven" that have appeared in history.
How these measures will be implemented in practice, what kind of companies can take advantage of the "east wind", specific rules or guidelines are needed, and a glimpse into the specific audit practices is needed, such as:
What are strategic emerging industries and future industries? The National Bureau of Statistics' "Classification of Strategic Emerging Industries (2018)" has made specific classifications for strategic emerging industries. The specific scope of supported industries may involve specific rules or opinions from relevant departments such as the National Development and Reform Commission and the Ministry of Industry and Information Technology.
What kind of cross industry M&A transactions are carried out in accordance with business logic, such as industrial transformation and upgrading, and seeking a second growth curve? In the draft of the revised "Reorganization Management Measures" for soliciting opinions, the provision in Article 43 (2) of the current rules that "listed companies may issue shares to purchase assets to specific objects other than controlling shareholders, actual controllers, or their controlled affiliates in order to promote industry integration, transformation, and upgrading without changing their control rights" has been deleted. However, the standards for the above issues have not been clearly refined, and specific guidance is still needed to clarify them.
What kind of acquisition of unprofitable assets can meet the standard of 'critical technological level'? At present, there seems to be no clear definition of "key technology level" under the rules. Based on the guidelines and plans such as "Made in China 2025", the Ministry of Industry and Information Technology and other departments have issued a series of guidelines and guidance opinions such as the "Guidelines for the Development of Key Common Technologies in Industries (2017)", which list some key technology contents according to industry classification. How to integrate these contents and standards with the policies and rules of mergers and acquisitions still requires practice.
For industrial mergers and acquisitions of listed companies that meet the above objectives, it is expected that the flexible measures granted by this new policy may be more fully utilized, such as the "reverse linkage" of private equity fund investors' lock up periods, installment issuance of shares, flexible valuation and consideration payment methods, and a fast track review mechanism that meets the conditions, to promote the realization of transactions between the acquiring parties.
However, at the same time, for industry mergers and acquisitions that meet the above objectives, such as adopting special and complex transaction methods such as restructuring and listing (backdoor listing), third-party transactions, etc., it is expected that they still need to undergo the strictest review and disclosure requirements.
（2） What are the trading technology innovations in the pricing and consideration payment of the underlying assets
According to the current "Restructuring Management Measures" and practice, the pricing method for the target assets of major asset restructuring of listed companies mainly refers to the evaluation results of the target asset evaluation report, and a few (such as the acquisition of overseas assets) issue valuation reports without evaluation. As for the evaluation methods, the cost method, income method, and market method are generally used.
The current "Restructuring Management Measures" stipulate that the pricing of major asset restructuring can be based on asset evaluation results or valuation reports [2]. Article 3 of the "Opinions", which supports diversified evaluation methods to determine transaction consideration, further reflects the regulatory tolerance for merger and acquisition restructuring pricing. On this basis, it is expected to further guide and clarify which situations (such as amounts and proportions below certain standards, transactions involving the issuance of shares but not constituting significant asset restructuring, etc.) do not require evaluation or valuation, and only allow the parties to the transaction to independently negotiate and determine the price.
Regarding the payment method for purchasing the underlying assets, the current "Restructuring Management Measures" and other relevant rules stipulate that cash, issuing shares, issuing convertible bonds/directional warrants/depositary receipts, or a combination of the above methods can be used. In practice, the most common way for listed companies to pay consideration is by paying cash and/or issuing shares. In recent years, due to the dual characteristics of convertible bonds such as stocks and bonds, targeted issuance of convertible bonds by listed companies to purchase assets has gradually emerged. The China Securities Regulatory Commission has also issued the "Rules for Listed Companies to Issue Convertible Corporate Bonds to Specific Objects to Purchase Assets" accordingly. However, under current rules, except for cash consideration that can be paid in installments, the consideration is paid through the issuance of securities, which are all issued in one go.
The new policy for mergers and acquisitions proposes for the first time to establish an installment payment mechanism for the consideration of the restructured shares, and to pilot a system for raising funds and issuing them on shelves. This system is conducive to promoting mergers and acquisitions, as well as the implementation of collaborative and integrated plans after the transaction. However, as new things in A-shares, the implementation and effectiveness of installment payment for stock consideration and shelf issuance not only involve the functional work of securities supervision, but also require the joint promotion of relevant supporting policies, market supervision and management, taxation and other relevant departments. Therefore, specific measures need to be observed, implemented and verified.
（3） Is there a supporting promotion measure for tax collection and management of mergers and acquisitions
In mergers and acquisitions transactions, tax matters mainly apply to the provisions of the Enterprise Income Tax Law of the People's Republic of China and the Individual Income Tax Law of the People's Republic of China. For those involving the issuance of shares to purchase assets, special tax treatment, deferred tax and other tax preferential measures may also be applicable, such as the Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Treatment of Enterprise Income Tax in Enterprise Restructuring Business (Caishui [2009] No. 59) and the Notice of the Ministry of Finance and the State Administration of Taxation on Promoting the Treatment of Enterprise Income Tax in Enterprise Restructuring Business (Caishui [2014] No. 109).
However, the current tax collection and management rules related to mergers and acquisitions are somewhat vague or mismatched, and need to be supplemented with supporting measures for clear regulation. For example, under the mechanisms of installment payment of stock consideration and shelf issuance, it is still necessary to clarify how to declare and pay taxes related to mergers and acquisitions.
For example, when the reverse performance commitment (i.e. the counterparty needs to return cash or shares to the listed company after the performance does not meet the standard) fails, there is no clear and unified tax collection and management rule in practice, and the practical operation of tax authorities in different regions is also different (for example, the relevant tax departments in Shanghai believe that there will be no tax refund when the bet fails, while some tax departments in Guangdong Province believe that the compensation for the bet failure can be refunded).
（4） Can there be policy guidance for listed companies to dispose of inefficient assets
The Opinion supports the injection of high-quality assets by listed companies. From the perspective of optimizing the quality of listed companies, "listing" and "injection" are equally important. In addition to some listed companies experiencing overall problems and needing to liquidate their assets, more often than not, some of their subsidiary businesses or assets become inefficient and may even drag down the listed company's "toxic assets" due to their own operations and/or external economic environment, policies, and other reasons, such as the aftermath of blind mergers and acquisitions and asset injections in the history of listed companies. From a practical perspective, setting up inefficient assets that do not conform to the development plan of listed companies may have a more certain beneficial impact on listed companies and small and medium-sized shareholders compared to injecting assets that have yet to achieve expected results in the future.
Listed companies also need policies to provide correct guidance and support for the disposal of assets. For example, whether it is possible to use flexible payment methods to purchase assets like listed companies. Formally, the disposal of inefficient assets by listed companies can be carried out through asset sales, asset swaps, other shareholder capital increases, equity/asset custody, etc. However, the core issue is that the transferee needs to pay actual consideration (such as cash, or better assets that meet the development plan of the listed company, or jointly assume debt), which may be difficult to implement commercially. In this situation, can listed companies be allowed to use targeted share repurchases and asset sales to sell inefficient assets to major shareholders or original asset sellers, and repurchase and cancel their holdings of listed company shares? This way, from another dimension, it can achieve the "in and out" of listed assets, promote the disposal of inefficient assets, and help listed companies transform and develop.
epilogue
Since mid-2023, various reasons have led to a cooling off of IPOs and refinancing in the A-share market, while mergers and acquisitions, as the other end of the seesaw, have gradually become active. In 2024, the country attaches great importance to the construction of the capital market and the important role of mergers and acquisitions in activating the capital market. From February when the China Securities Regulatory Commission held a symposium to support mergers and acquisitions, to March when the Commission issued multiple policies to support listed companies in enhancing their investment value through mergers and acquisitions, to April when the State Council issued new "National Nine Measures" to further encourage mergers and acquisitions, and to the China Securities Regulatory Commission promoting mergers and acquisitions of new quality productivity companies through measures such as the "Sixteen Measures" and the "Eight Measures for Science and Technology Innovation", the Shanghai and Shenzhen Stock Exchanges have revised and improved their relevant rules to support mergers and acquisitions.
If the market's response to policies since the first half of this year is still slow, then with a series of favorable policies and market conditions around the National Day holiday, the enthusiasm of listed companies and various market entities to initiate or participate in A-share market industry mergers and acquisitions has been ignited.
From the perspective of the transaction types of A-share listed companies issuing shares to purchase assets, which account for a very low proportion of the entire market but are the most representative of the review process, as of October 8, 2024, the Issuance and Listing Review Center of the Shanghai and Shenzhen Stock Exchanges has reviewed (including suspension) only 13 mergers and acquisitions transactions of A-share listed companies, involving a total of 4 transactions of companies listed on the Science and Technology Innovation Board and the Growth Enterprise Board, 7 transactions of state-owned holding listed companies, and 9 transactions of related parties of listed companies. In contrast, after the new 924 policy, from September 25th to October 8th, 9 listed companies disclosed their plans to issue shares to purchase assets, or suspended trading and disclosed for the first time their plans to issue shares to purchase assets.
Let us look forward to "Good Wind Frequency Borrowing Power, Sending Me to the Blue Cloud", actively serving the national strategy and the development of new quality productivity with an active capital market.