Recently, the Shanghai Stock Exchange (SSE) has drawn up the “SSE Rules for Review of Major Assets Reorganization of Listed Companies on SSE STAR Market (Draft)” (the “Reorganization Review Rules” for short), and publicly solicited opinions from the market. Regarding the drafting background of, the guidelines for and the main contents of the "Reorganization Review Rules", an SSE official answered the related questions.
Q1. Can you brief us on the background of introducing the "Reorganization Review Rules"?
A: Merger and acquisition (M&A) and reorganization is an important way for the companies listed on the SSE STAR Market (the “STAR companies” for short) to continuously improve quality, enhance research and development capabilities, and maintain business competitiveness. The “Implementation Opinions on Launching SSE STAR Market and Piloting the Registration-based IPO System on the Shanghai Stock Exchange” (the “Implementation Opinions” for short) stipulates that the SSE STAR Market shall set up an efficient M&A and reorganization mechanism; the M&A and reorganization of the STAR companies shall be reviewed by the SSE, and the cases involving shares issuance shall be subject to the registration-based IPO system.
In order to implement the requirements of the "Implementation Opinions", under the guidance of the China Securities Regulatory Commission (CSRC), the SSE drafted the "Reorganization Review Rules". As the lower rules under the “Special Provisions on Major Assets Reorganization on SSE STAR Market” (the “Special Provisions of Reorganization” for short) issued recently by the CSRC, the "Reorganization Review Rules" mainly stipulates the review standards and procedures and information disclosure requirements for the major assets reorganization of the STAR companies. The two sets of rules and the “Measures for Administration of Major Assets Reorganization of Listed Companies” (the “Reorganization Measures” for short) together constitute the basic system of rules for the major assets reorganization on the SSE STAR Market.
Q2. What are the guidelines for drafting the “Reorganization Review Rules”?
A: In accordance with the basic principles of market orientation and legalization, the “Reorganization Review Rules” adopts the fundamental objective of supporting the enterprises of scientific and technological innovation in enhancing their innovation capability, research and development strength and market competitiveness through M&A and reorganization, highlights the role of the market mechanism and strives to establish an efficient, transparent and expectable mechanism for review of major assets reorganization. The drafting guidelines are mainly in the following four aspects.
First of all, more emphasis is placed on supporting the efforts of the enterprises of scientific and technological innovation in growing better and stronger. It has been a universal rule for the STAR companies to use M&A and reorganization to obtain the required technologies, patents, markets, talents and other innovative elements in the process of development and expansion. It is also imperative to make the policy and mechanism arrangements for the review of M&A and reorganization on the SSE STAR Market that are suitable for the enterprises of scientific and technological innovation, so as to adequately meet the enterprises’ M&A and reorganization demands for diversity, flexibility and promptness. The "Reorganization Review Rules" highlights the goal of "efficiency", focuses more on inclusiveness, convenience and service, attaches importance to enriching the M&A tools, specifying the inquiry criteria, compressing the review time limit and effectively managing the expectations, follows the development rule of the enterprises of scientific and technological innovation, respects the business choices of the enterprises of scientific and technological innovation, reserves enough space for the M&A and reorganization policies, and supports the enterprises of scientific and technological innovation in independently deciding, advancing and implementing the M&A and reorganization in the same industry and among the upstream and downstream companies.
Secondly, the focus on information disclosure is more emphasized. Focusing on information disclosure in formulating systems is further established for the reorganization review under the registration-based IPO system. On the one hand, it is necessary to adhere to the orientation toward the demands of the investors, carry out inquiries in a bid to achieve adequacy, consistency and comprehensibility in information disclosure, and urge the participants in the reorganization such as the STAR companies, the restructuring counterparties, the financial advisors and the securities service institutions to disclose information truthfully, accurately and completely. On the other hand, according to the characteristics of the M&A and reorganization business and the outstanding problems found in the past, it is required that the STAR companies and related parties should particularly disclose whether the reorganization transaction has the commercial substance, whether the M&A assets have synergistic effects, whether the transaction price is fair, whether the performance compensation is feasible, and whether the transaction design damages the legitimate rights and interests of the STAR company and the small and medium-sized shareholders, and should also fully warn about the potential risks of the reorganization transaction.
Thirdly, openness and transparency are more stressed. On the existing basis, the “sunshine review” is further advanced in the M&A and reorganization on the SSE STAR Market. First of all, the time limit for reorganization review is clearly defined to improve the predictability of the audit. Secondly, the key contents of and the specific requirements for the information disclosure in the reorganization are refined, and the review standards are more open. Thirdly, the entire review progress, including acceptance, inquiries for review, and joint meetings on review, etc., is disclosed to the market, and the review process is more transparent. At the same time, the full-open review will also help to deter the activities of financial fraud and profit delivery in the reorganization, prevent the “false”, “me-too” and “three high levels (of valuation, goodwill and performance commitment)” reorganizations, and form more effective market constraints.
Fourthly, more emphasis is placed on tightening the responsibilities of intermediaries. As an important basis for the implementation of the registration-based IPO system, the requirement for the diligence of the intermediaries shall be implemented in the reorganization review. To tighten the responsibilities of the intermediaries, it is necessary to specify the requirements for performing duties and establish a corresponding accountability mechanism. On one hand, the responsibility of the independent financial consultants for front-end due diligence is emphasized, and it is required that the working papers should be handed in simultaneously when the application is submitted; on the other hand, the review focuses on the repeated and frequent problems in asset integration, effective control, accounting processing, compliance operations and performance compensation in the course of implementing the M&A and reorganization. From the perspective of information disclosure, the duty requirements and the disciplinary mechanism for the independent financial advisors are enriched and refined, and the responsibility for continuous supervision is put in place.
Q3. Can you brie us on the main contents of the “Reorganization Review Rules”?
A: The "Reorganization Review Rules" makes comprehensive requirements for the M&A and reorganization on the SSE STAR Market in terms of the standards and conditions that the STAR companies should meet in implementing the M&A and reorganization, the requirements for disclosing the reorganization information and the information disclosure obligation of the parties involved in the reorganization, the contents, modes and procedures of the reorganization review, and the responsibility for continuous supervision in reorganization, etc.
1. Reorganization conditions and standards. It is stipulated that if a STAR company plans to issue shares to buy assets, the relevant provisions of the “Reorganization Measures” are applicable to the conditions for the share issuance; the issue price shall be subject to the relevant provisions of the “Special Provisions of Reorganization”, which means that it shall not be less than 80% of the market reference price. it is necessary to strictly grasp the listing standards and procedures for reorganization, the listed assets for reorganization shall be in line with the functions of the SSE STAR Market. The listing conditions are more stringent, and shall be subject to the unified review standards for the IPO review, and the listing shall also be reviewed by the SSE STAR Market Stock Listing Committee.
2. Requirements for information disclosure. It is stipulated that the M&A and reorganization information shall be disclosed in a truthful, accurate and complete manner, including the information that has a significant impact on making investment decisions, and the information shall be easy for investors to understand. The respective information disclosure obligations of the STAR companies and other reorganization participants are defined, and it is also required that the relevant information disclosure entities should fully disclose information and warn about risks in terms of the compliance of the reorganization, the scientific and technological innovation characteristics and synergy effects of the underlying assets, the transaction necessity, the rationality of pricing, the feasibility of the performance commitment, etc.
3. Modes and contents of review. Through the review inquiries, the SSE examines whether the M&A and reorganization is in compliance with the statutory conditions and the requirements for information disclosure; special attention is also paid to whether the underling assets in the transaction are in line with the functions of the SSE STAR Market and can result in the synergy with the main business of the STAR company, whether the transaction is necessary, whether the asset pricing is reasonable and fair, and whether the performance commitment is feasible.
4. Review processes. The SSE M&A and reorganization review department will review the applications of the STAR companies for M&A and reorganization, and provide the review opinions, which will be submitted to the SSE joint meeting on review for consideration. The joint meeting on review is composed of the personnel of relevant departments of the SSE, examining the review opinions of the review department and the reorganization plans of the STAR companies and forming the examination opinions. The time for the review of purchasing assets through issuance of shares is limited to 45 days, and the total time limit for the replies of a company is two months, with the time for special circumstances such as review termination to be deducted. With the review passed, the SSE will issue an audit opinion and report to the CSRC for the registration process.
5. Responsibility of independent financial advisers for continuous supervision. During the continuous supervision, the independent financial advisers shall express and disclose opinions on whether the information about the reorganization matters disclosed by the STAR companies is true, accurate and complete, and whether there are still undisclosed major risks. The supervision of the performance commitments for the reorganization is tightened, and the supervision duties shall be performed until the total completion of the performance commitment.
Q4. In what aspects does the “Reorganization Review Rules” implement the “Implementation Opinions” to establish an efficient M&A and reorganization mechanism?
A: In recent years, the CSRC has continued to advance the market-oriented reforms for M&A and reorganization, and achieved encouraging results, which is well recognized in the market. Based on this, the “Reorganization Review Rules” focuses on the following four aspects in implementing the requirements of the “Implementation Opinions”.
First of all, the time limit for review is specified. The time from the acceptance of the application for issuing shares to purchase assets to issuance of the review opinions by the SSE shall not be more than 45 days, and the total time limit for a company's replies is two months; with the connection with the arrangement of the “Special Provisions of Reorganization” that the registration shall take effect in 5 working days, the review system arrangements characterized by shorter time and more definite expectation have been formed on the whole. The qualified reorganization plans of the STAR companies are expected to have the review and registration procedures completed in about one month.
Secondly, the payment tools are enriched. The market-based payment tools for the STAR companies to implement the M&A and reorganization are further enriched. According to the achievements in the current pilot program of targeted convertible bonds for the M&A and reorganization, it is stipulated that the STAR companies may, in accordance with the relevant regulations of the CSRC, purchase assets by issuing the targeted convertible bonds, and may also independently agree on the terms such as the conversion period, the redemption, the sell-back and the modification of the conversion price.
Thirdly, the review process is simplified. The useful practices such as the “separate-lane system” and the “promptness for small amounts” in the current review for M&A and reorganization are fully absorbed, and the review procedures for reorganization are further optimized to improve the review efficiency. Based on the daily information disclosure and regulated operations of the STAR companies and the practice quality of the intermediaries, the review inquiries will be reduced or the application will be submitted directly to the joint meeting on review for consideration, for the reorganization transactions characterized by compliance, rationality and adequate information disclosure or those meeting the standard of “promptness for small amounts”.
Fourthly, the electronic review is implemented. At present, the SSE is stepping up the development of the M&A and reorganization business system. After the system is completed and put into use, the electronic reorganization review will be realized in the whole process, as all the matters such as review inquiry, reply, communication and consultation can be handled on line on the system, providing more convenience for the STAR companies and related parties to submit review materials, reply to the review inquiries, learn about the progress of the review or conduct communication on the review.