| Backdoor Listing, which is accompanied by fundraising from stock markets in most cases, refers to a company seeking listing on a stock exchange by means of acquiring an already listed company ("a shell") and injecting activities into it.Backdoor listing is a complicated corporate restructuring process. This paper discusses several key issues in the process of backdoor listings in China's A share market, including shell choosing, pricing and payment. This paper also analyzes typical approaches taken by practitioners, major operational procedures, related regulations and laws in China, and risk management, etc..1. Shell ChoosingIt is the first and the most important step to chose an appropriate shell for a backdoor listing. To some extent, this first step decides whether a backdoor listing is going to succeed.Several key factors must be taken into consideration in choosing a target shell, among which the following are essential:· Size of issued share capital;· Structure of issued share capital and share ownership;· Stock price in the secondary market;· Business of the target company;· Operational performance;· Financial situations;· Quality of the Assets;· Growth of the target company, etc..In the last few years, listed companies with poor financial performance and small capitalization were primary targets by most investors in china, largely due to their lower acquisition cost.2. Pricing of the ShellShell pricing is another decisive step in a backdoor listing. In most cases, it is the biggest challenge for all parties involved to quantify premium of control of the shell company. The premium of control of a target company is related to the size and structure of issued share capital, share ownership and whether the assets can be used for other purposes, etc..Statistic data of die last few years in the A-share market indicate that the premium of control of shell companies is about 25 percent over the net assets on average, although it varies in a wide range case by case. At the same time, the premium of control is sensitive to the related domestic policies and regulations, and also the macro-economic conditions as well. Major social economic development, such as China's accession to the WTO, also has significant impact to control premium3. ApproachesTypical approaches to accomplish backdoor listings in China include agreement takeover, secondary market acquisition, authorization-letter acquisition, award by the court, indirect acquisition, etc..Statistic dada show that agreement takeover of state-own shares and legal-personshares accounts for 69 per cent in 2000 and 66 per cent in 2001 of all the backdoor listing cases. Agreement takeover is clearly the primary approach for backdoor listing in China in recent years.4. Operational ProcedureFrom the viewpoint of a buyer, the operational procedure of a backdoor listing consists of strategic planning, shell choosing, pricing analysis, alternative design, negotiation, financing and the post-acquisition integration.5. PaymentCash, assets exchange, assumption of debt, creditor payment and hybrid payment are the five feasible means of payment in backdoor listings. Statistic data show that cash payment is the primary way partly because of the poor credit situations of domestic enterprises.6. Related Regulations and Laws in ChinaIn China, regulations and laws related to backdoor listing include "Company and Corporation Law", "Securities Law", "Stock Offering and Trading Management Regulations", etc. In addition, it is reported that another related regulation named "Detailed Rules on Merger and Acquisition" is being drafted. However, regulations and laws in this area in China are inadequate as a whole.7. Development TrendsResulting from the development of domestic macro-economy and related regulations & laws, some new trends of backdoor listings emerge in China. The following are some noticeable developments:· Reduction of ownership by th... |
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