On Agreement Acquisition For The Listed Companies In China

By analyzing the legislation in China and authoritative Law Dictionaries abroad, the author clearly defines the three legal elements of agreement acquisition and the acquisition for listed companies can be defined as the behavior of investors to purchase shares from listed companies in cash, stocks or bonds, and thereby obtain the controlling power of those companies. Investors acquire listed companies mainly for the following four reasons: first, efficient financing; second, arbitrage in the secondary market; third, to conduct related transactions; Fourth, the vigorous promotion from the government. In theory, there are different classification methods of the acquisitions of listed company respectively according to several criteria such as the acquisition means, with the permission of the management or not, pre-purchase quantity of shares, legal obligations or not, as well as the relationship with the target company.Chinese legislation provides for three kinds of acquisitions of listed company which are attracting shares in the Stock Exchange, agreement acquisition, and unsolicited takeover. Among them, the agreement acquisition is the major form at present, which refers to the acquisition mode that the acquirer purchases the shares from the target company and gains its controlling power after reaching a purchase agreement with the shareholders in terms of price and quantity outside the security exchange market where there is a centralized auction. Agreement acquisition mainly has the following characteristics: First, transactions take place outside the security exchange market; second, transactions do not have to ask for the agreement of the target company's management; third, its purpose is to obtain the controlling power of the target company. There are both differences and connection between the unsolicited takeover and agreement acquisition. Both of them are off-market transactions and the legal means of the acquisition, which aim at obtaining the control of the target company, and they are both likely to trigger a mandatory unsolicited takeover. Meanwhile, they are much different in trading partners, trading price, applicable situations, acquisition criteria, and the information disclosure.The particularity of the ownership structure, as well as the numerous restrictions on unsolicited takeover determines that agreement acquisition becomes the major method of acquisition of listed company currently in China. For China, agreement acquisition is of special significance, because it plays a positive role in promoting the reduction in state-owned shares, raising the competitive strength of listed companies, optimizing the allocation of resources, and so on, which makes it be vigorously promoted by the government.Drawing lessons from the developing experience of agreement acquisition at abroad, there is little strict distinction between agreement acquisition and unsolicited takeover usually, but due to the drawbacks on the information disclosure and equality of opportunity, agreement acquisition has generally been strictly limited. Common-law countries generally enhance the supervision on the acquisition process to protect the legitimate rights and interests of small and medium shareholders and public investors through jurisprudence and legislation surrounding the disclosure of information, mandatory unsolicited takeover, the person acting in concert, the management's duty of loyalty, experts involvement. There are not frequent acquisition activities in civil law countries because of the equity structure, economic traditions, and so on, but they also have established the corresponding regulatory mechanisms, such as: Japan's supervisor system, the acquisition inspector system in Germany, etc.After ten years of legislation and practice, China has already established a legal system specifying the acquisition of listed company, including information disclosure, mandatory unsolicited takeover, and persons acting in concert, executives'loyal diligence obligations of the target company, the fiduciary duty of the controlling shareholders, and financial advisors. As the general guide, Company Law, Securities Law, and Contract Law have been basically formed, along with some specific norms including the legislation and regulations of the State Council, as well as ministries and commissions, on listed company acquisition and state-owned assets supervision, which have formed a legal system of agreement acquisition of listed company with significant Chinese characteristics.As a way of security transaction, in addition to the general principles of securities law, agreement acquisition should also follow some characteristic principles as a result of its particularity, which generally includes the principle of equality of shareholders, information disclosure principle, and the protection principle of vulnerable interested party, and so on.The principle of equality of shareholders insists the target company's shareholders be entitled to the same treatment, including the rights of equal access to the information of acquisition, receiving offers with the same conditions, and the same reception by appointment.Information disclosure principle requires that the acquirer and shareholders of the target company should complete the disclosure of information in accordance with the law in every phase of agreement acquisition.The protection principle of vulnerable interested party stresses that mass small and medium shareholders and public investors enjoy the same right of information acquisition and equal opportunities with the controlling shareholders. In addition, as for China without a perfect social security system currently, this principle also requires us to pay special attention to the fate of the target company's workers during the acquisition.Although the law does not rule out the agreement acquisition of tradable shares, in practice, agreement acquisition primarily applies to these stocks that can not be listed such as state-owned shares and legal person shares. Hereon, we only discuss the agreement acquisition of non-tradable shares, and the legal procedures of the agreement acquisition of non-tradable in China are as follows: first, the two sides consult with the acquisition affairs; second, the application and approval of acquisition matters; third, the signing of the acquisition agreement; fourth, the acquirer applies for exemption from compulsory unsolicited takeover; fifth, the relevant information disclosure; sixth, the implementation of the agreement.In Securities Law (2005) and Takeover of Listed Companies Procedures (2006), there has been breakthrough of the provisions on some systems such as the mandatory unsolicited takeover, the scope and limitations of persons acting in concert, the civil liability in agreement acquisition, executive's loyal diligence obligations of the target company, the fiduciary duty of the controlling shareholders, and financial advisers, however, there are still many problems, which in summary include the loss of state assets, incomplete protection for interested party, inadequate information disclosure, and so on.The author proposes that, firstly, to strengthen the protection of state assets, in particular, to improve the pricing mechanism on the transformation of state-owned shares during the agreement acquisition; secondly, to establish periodic information disclosure system to increase the punishment on the false disclosure, omissions, misleading of information; thirdly, to make a clear confirmation of the controlling shareholder's fiduciary duty by law, and refine the attribution principles and the burden of proof; finally, to improve the litigation system for medium and small shareholders, expand the scope of direct action and derivative litigation to the controlling shareholders, directors, supervisors and senior management staff and recommend the basic principles of agreement acquisition to be written into law.Following the above argument, the author believes that in a long run, unsolicited takeover is still the developing trend of the acquisition system due to its tremendous advantages of information disclosure, equal opportunities, and arm's length transaction. However, present in China, as a result of the low cost and high efficiency of agreement acquisition, and restrictions on open unsolicited takeover, agreement acquisition will continue to play a primary role in China's acquisition of listed companies.As China's listed company's shareholding structure has been growing scientific, with the further strengthening of legal regulation, and the constant improvement of the security legislation, the problems in acquisitions of China's listed companies will be gradually resolved, and the agreement acquisition system would also move to maturity.