Research On Legal Responsibility Of Withdrawing The Administrative Application Of The Tender Offer

Jiangsu Rongsheng Heavy Industries co., LTD and Quanjiao government signed the "Property right transaction contract" on April 26,2011. Quanjiao government sold the stock rights of Anhui Quanchai power co., LTD at the transaction price of 2.149 billion yuan to Rongsheng. Through this property transaction, Rongsheng indirectly holds 44.39% equity interest, becoming an indirect controlling shareholder of Quanchai, and must fulfill the mandatory general offer obligation. Rongsheng submitted a tender offer report to CSRC (China Securities Regulatory Commission) on May 4,2011 and then received the notice to supplement more documents. In the following year, Rongsheng stopped continuing to apply. After that, Rongsheng withdrew the application from CSRC on August 17,2012 and retrieved all the documents on August 20, giving up the tender offer of Quanchai ultimately. This process set off a storm among the investors and the securities market. Some institutional investors suffer a heavy loss. A great number of investors believe that Rongsheng deliberately delayed the tender offer process and proclaimed false statement. So they think that Rongsheng should bear the loss of the investors eventually.Chinese "Measures for the Administration of the Takeover of Listed Companies" Article 31 says "Where a purchaser intends to cancel the takeover plan by itself after a tender offer report has been submitted to CSRC and before the tender offer report is publicized, the purchaser shall submit an application to CSRC for canceling the takeover plan, explain the reasons, and make an announcement, and shall not take over the same listed company within 12 months upon announcement." It means that current legislation in our country does allow the purchaser an opportunity to cancel its takeover plan by itself and withdraw the application of the tender offer from CSRC. Rongsheng’s approach does have a legal basis.However, after sorting out the legal relationship of this event, it can be found that there are two levels in the process of takeover by agreement or indirect takeover because of the need for the CSRC’s administrative examination and approval. There are two levels between the underlying contract and tender offer but they take effect at the same time. Actually, the underlying contract and tender offer are closely linked and can influence each other. If CSRC finds any part of the tender offer report inconsistent with any law and does not allow the purchaser to announce it, the underlying contract and tender offer will not take effect according to the law. In this case, the purchaser bears the appropriate obligation to submit a tender offer report to CSRC. If the purchaser (1) does not fulfill the obligation and duty intentionally; (2) it began to fulfill the obligation and duty but with flawed behavior (including deliberately delayed, false records, misleading statements, material omissions or major defects, etc.), and the behavior of the purchaser has impeded the timely approval of CSRC, it could be qualified as violations of obligations. In fact, the appropriate obligation to submit a tender offer report to CSRC is pre-contract obligation. According to the "Honesty-Credit Principle" of Article 42 in "Contact Law", the purchaser should bear the contracting fault liability on the basis of the underlying contract.As for the loss of many investors, the investors cannot ask for compensation directly because the underlying contract and tender offer have not take effect. The investors could submit an application to CSRC, reporting in Rongsheng’s behavior of false statement and in breach of disclosure obligations during this takeover process. After obtaining CSRC’s administrative penalty decision, the investors could file a lawsuit to the court and ask for civil compensation. However, CSRC has not given any decision about this case yet although it claimed that it would give findings in 60 days when receiving the investors’application. If CSRC ultimately find that the purchaser does not announce any false records or misleading statements, then the purchaser would just punished by administration according to Article 193 of "Securities Law" because of its deliberately delayed act. And the loss of the investors will not be able to get a legal response.Overall, with a great deal of controversy and subsequent disputes, it can be found that there is some deficiency in Chinese current legal system. It is lack of laws and regulations about legal responsibility of withdrawing the administrative application of the tender offer and need to be improved. By analyzing legal issues of this case and learning about related foreign laws and regulations, it is envisaged to increase the frequency of information disclosure before the tender offer is announced officially. And administrative approval system in tender offer could be gradually abolished when conditions are ripe in the future. In the short term, in order to cope with the diversity and complexity of the reality, it is recommended, under our existing system, to regularize the right of withdrawing the administrative application or changing partial terms and conditions of the tender offer. In the meantime, legislature should propose to make up for the regulatory loopholes of article 31 and set a clear time limit for submission of tender offer report. By this token, we could balance the interests of the parties in the stock market and maintain the stability of the securities market order.