Since September 2008, the market value of China Stock Market has fallen two thirds within half a year influenced by the global financial crisis. The relevant Chinese governmental authority had to suspend the approval of IPO and did not resume it until June 2009, which caused hundreds of IPOs of pre-listing companies waiting for approval by China Security Regulatory Commission. Besides, many enterprises had to give up applying for IPO due to strict requirements including the scale of capital stock, the capability of making profits continuously, industry access or other aspects. As a result, it has been an option for numerous investors to enter China A Share Market through Reverse Take-over (RTO)

Since the Chinese Ministry of Commerce and China Security Regulatory Commission together issued The Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors in Sept. 2009, there has been legal basis and policy support for foreign investors to takeover Chinese domestic enterprises. Another alternative has also been offered for foreign investors or investment funds to withdraw from the capital market. Actually, the high PE and high return on investment is an important reason for foreign investors to show great interests in Chinese capital market. Another thing which shall arouse our attention is that in the State Council Standing Committee Conference held on Dec. 31, 2009, Premier Wen Jiabao clearly stated that foreign investors shall be encouraged to participate in the restructuring and merger of domestic enterprises by takeover. Under this circumstance, it will be comparatively easier to obtain the approval of the regulatory authority for foreign investors’ reorganization of the listing company by injecting assets into it.

In such event, due to its unique advantages, listing through bankruptcy restructuring and buying shells by foreign investors (including foreign enterprises and oversea investment funds) has become the priority for the investors to realize financing or even liquidity and withdraw from the capital market.

I.     The Advantages of Listing Through RTO By Means of Bankruptcy Restructuring

1     High efficiency: One of the important transactions in RTO is to restructure the debt of the target company. It is usually difficult, time-consuming and costly to negotiate and discussing the debt restructuring plan with creditors. Compared with this, the bankruptcy restructuring is in progress under the guidance of the court and the debt restructuring plan will be reviewed and approved by the court (even if the creditors disagree with the debt restructuring plan, in case such plan conforms to each party’s benefits by its sole judgment, the court can still approve said plan), it is relatively easier to get such plan approved and is timesaving and low cost to complete debt restructuring.

2     Little risk: Bankruptcy restructuring is a legal procedure under the guidance of the court. It can settle the credits and debts of the target company to the highest degree by means of public announcement, creditors’ meeting and court awards so as tot reduce the risk of the reorganizing party (“Reorganizing Party”).

3     Negotiated price: The important purpose for Reorganizing Party to list through buying shells is to inject the restructuring assets into the target company in order to get the issued share of the target company in return. The issuing price of the share directly determines the number of the final available stocks by Reorganizing Party from the target company. Usually, the issuing price of the share is determined by the average market trading price of the twenty market days of the target company. Accordingly, it might be unfavorable for Reorganizing Party if the issuing price is relatively high. However, in case of RTO by Bankruptcy Restructuring, the issuing price of the shares will be determined by negotiation in accordance with the stipulations of China Security Regulatory Commission. As a result, the issuing price might usually be lower and it will be favorable for Reorganizing Party. To Reorganizing Party, that means they can achieve more available shares in RTO by means of bankruptcy restructuring than those in ordinary RTO with the injection of same restructuring assets .

4     The listed company can be controlled in advance:  By the end of 2008, the companies in China A Share Market have almost completed the non-tradable shares reform. The share of the listed company is mainly composed of floating share with non-sales restrictions and floating share with sales restrictions. Floating share with non-sales restrictions is scattered and has high flow. It is costly and very difficult for Reorganizing Party to get the shares of the target company through buying floating share with non-sales restrictions. On the other hand, it is also difficult for Reorganizing Party to purchase floating share with sales restrictions since the flow of such shares is strictly restricted. However, in case of RTO by means of bankruptcy restructuring, it can be designed in a bankruptcy restructuring plan that the shareholders of the target company transfer their shares to Reorganizing Party so that Reorganizing Party can get certain shares of the target company before the completion of RTO through buying shells and may create favourable conditions for the future restructuring.

5     Easy to get the approval: Until now, there is still no listed company in China Capital Market being bankrupted. The local government where the target company has its domicile is unwilling to see the local listed company become the first bankrupted company in China. Therefore, they will usually support the reorganization of a listed company which is in bankruptcy restructuring. Such support is very important to the reorganization of the target company. This is also the main reason why almost all reorganization of listed companies which are in bankruptcy restructuring can get the governmental approval finally.

II.    The Main Procedure of Listing Through RTO By Means of Bankruptcy Restructuring

1     To lock the target company: The first step of listing through buying shells is to lock the target company Reorganizing Party intends to purchase. However, in Chinese capital market, to obtain qualification of the listed company is subject to special mechanism and strict approval procedure, which causes the resources of the listed company seriously inadequate.

2     To acquire the shares of the target company: It is tremendously significant for Reorganizing Party to successfully list through RTO and reduce the cost of listing through buying shells if Reorganizing Party can acquire the shares of the target company, especially substantial majority of the shares before the completion of RTO through buying shells so as to be able to exercise their voting rights by holding these shares.

3     To complete the debt reorganization of the target company: To peel off the assets and debts of the target company by means of bankruptcy restructuring in order to recombine the target company as a pure shell with no assets or debts and lay a foundation for the assets injection of Reorganizing Party  .

4     To complete the evaluation, audit and profit estimation of the reorganized assets: After the acquire of the pure shell, Reorganizing Party will inject the reorganized assets into the target company and get the issued shares of the target company in return to achieve the purpose of assets injection and gaining of control over the target company. To realize that, it is necessary to evaluate and audit the reorganized assets and estimate the profit after injection of the reorganized assets into the target company. The related evaluation reports, audit reports and profit estimation reports will be submitted to relevant governmental agencies for approval of listing through buying shells.

5     Project approval: After the shareholders’ meeting of the target company approves the plan of listing through buying shells by Reorganizing Party, it shall be submitted to China Security Regulatory Commission for approval. In case Reorganizing Party involves foreign companies, the approval of Ministry of Commerce of the People's Republic of China is also required. If specific industry is involved, it also needs to seek the opinion of the relevant competent department in that industry. After obtaining relevant approvals, Reorganizing Party will finally acquire the issued shares of the target company.

III.  The Legal Service Duan & Duan Law Firm Can Provide for the Project of Listing Through RTO By Means Of Bankrupt Restructuring

Listing through RTO by means of bankrupt restructuring not only involves complicated legal problem but also needs to negotiate with many government entities such as the local government where the target company has its domicile, the court, creditors, shareholders, China Security Regulatory Commission, Ministry of Commerce of the People's Republic of China and other relevant competent governmental authority. Relying on the rich resources, connections and experiences, Duan & Duan Law Firm can provide whole high-efficiency and high-quality legal services and other consultation and negotiation services for the project of listing through RTO by bankrupt restructuring, including but not limited to: 

1     Recommend appropriate target company according to the requirement of the clients; finish the due diligence of the target company; lock the target company rapidly and assist Reorganizing Party to draft the whole plan for listing through buying shells and specific plan for step-by step implementation.

2     Design the bankruptcy restructuring plan of the target company within the acceptable scale of the client according to client’s financial budget, including the strip and reorganization plan of the assets and debts of the target company and a plan for client to acquire portion of the shares of the target company in advance.

3     Be responsible for the coordination with the majority shareholders and creditors of the target company, the local government where the target company has its domicile, the local court and the Supreme People’s Court in order to gain all such parties’ support and make sure that the court will make an award to approve the bankruptcy restructuring plan.

4     Recommend professional intermediary institutions including auditors, estimators, attorneys, sponsors, finance consultants to the client and be responsible to coordinate with such intermediary institutions. Assist to draft the assets reorganization plan and share issue plan of the target company which are suitable to the client’s requirements and make sure that the reports of all the intermediary institutions meet the requirements of China Security Regulatory Commission and other relevant governmental authority.

5     Be responsible to coordinate and communicate with the stock exchange where the target company intends to list, the local security management department where the target company has its domicile, China Security Regulatory Commission, Ministry of Commerce of the People's Republic of China and other relevant governmental authority and make sure that assets reorganization plan and share issue plan will get the approval finally.

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