The State Administration for Market Regulation's (SAMR) decision to advise antiseptic packaging firm Shandong Xinjufeng Technology Packaging (Xinjufeng) to file its proposed acquisition of an approximate 28.22% stake in Hong Kong-listed rival Greatview Aseptic Packaging (Greatview) is unprecedented and will lead to greater circumspection when assessing filing obligations in hostile takeovers, several lawyers uninvolved with the deal told this news service.
In a Chinese-language stock exchange filing on 4 July, Shenzhen-listed Xinjufeng said it received a reminder letter from SAMR, which advised the company to file with the regulator regarding the proposed acquisition. The vendor is Greatview's current single largest shareholder JSH Venture Holdings (JSH Ventures). JSH Ventures will cease to hold any interest in Greatview upon completion of the planned deal.
The deal presents an interesting case study for the market, one of the lawyers said. The key implication is that legal advisors should be more circumspect in evaluating filing obligation in hostile takeover cases where tip-offs are likely to happen, lawyers said.
Greatview and Xinjufeng are prominent players and direct competitors in the Chinese market of antiseptic packaging. According to a research report by Tianfeng Securities, Greatview and Xinjufeng are the largest Chinese brands in the field, obtaining a market share of 12.3% and 7% in 2020 respectively, although smaller than international brands Tetra Pak (52.6% market share) and SIG Group (11%).
In late January, Xinjufeng announced its intention to acquire a 28.22% stake in Greatview from JSH Ventures. The deal was greeted with strong opposition from Greatview's board. In March, seeking to leverage the regulatory process to block the deal, Greatview filed Xinjufeng’s proposed acquisition with SAMR. Later, two of Greatview's directors sent a tip-off to SAMR, alleging that JSH Ventures failed to notify its initial acquisition of Greatview's share in 2017 and jumped the gun, according to Greatview's stock filings. In response, JSH Ventures and Xinjufeng each made a submission to SAMR, explaining why the previous acquisition and the proposed deal did not trigger a merger review filing, respectively.
The back-and-forth attracted widespread attention in Chinese media. On 6 June, the Shenzhen stock exchange sent an inquiry letter to Xinjufeng, asking it to explain in detail why the proposed deal did not trigger a merger filing. Xinjufeng replied on 16 June.
Transfer of control
When the deal parties' revenue meets SAMR's filing threshold, a key to determining if a filing is triggered is if the deal will cause a transfer of control in the target company, two of the lawyers said. But in this particular deal, the issue is a bit tricky, they added.
For listed companies, it is broadly agreed that a transfer of control occurs when a 30% stake in the target company is acquired, the first lawyer said. This deal (involving a 28.22% stake sale) falls slightly below the accepted percentage, so technically one can argue it did not constitute a transfer of control, the same lawyer added.
Another metric to determine a transfer of control is to see whether the bidder can pass or veto key business decisions of the target company by itself upon deal completion. As Xinjufeng disclosed in its reply to the Shenzhen stock exchange, the average attendance rate of Greatview's shareholder meetings in the past three years varied between 63.97% to 75.83%. Because 28.22% fell short of half of the attendance rate, Xinjufeng argued it cannot pass or veto key business decisions of Greatview by itself and therefore a transfer of control would not occur.
Xinjufeng's rationale made sense, said the second lawyer. But given that a 28.22% stake is close to half of the shareholder attendance rate, if Xinjufeng can gain the support of random minority shareholders, it would be quite easy for Xinjufeng to impose substantial influence on Greatview's business decisions, the second lawyer said.
A third lawyer pointed out that upon deal completion, Xinjufeng will become the only shareholder holding a double-digit stake. The second largest shareholder owns 9.65%, the third 8.05%, the fourth 5.95% and the fifth 5.85%, according to deal documents.
Considering this shareholder structure, it is fair to say that Xinjufeng is able to impose decisive influence on the target company and triggers a filing with SAMR, the third lawyer said.
SAMR’s letter suggesting filing also implies that it is better for deal parties to proactively notify such transactions -- a horizontal combination of two key market competitors, that may generate important and critical influence on market competition, a fourth lawyer said.
Normal filing needed
Furthermore, the deal likely merits a filing under the normal procedure with SAMR, as the combined market share of the deal parties in the Chinese market of aseptic packaging exceeds 15%, the third lawyer averred.
It is possible that SAMR’s review of the deal could end up with a conditional approval as the two companies are direct competitors and it is a horizontal deal, the third lawyer added. The second lawyer noted that the deal poses potential competition concerns.
Notably, in the deal announcement, Xinjufeng said it plans to seek collaboration and enhance communication with Greatview upon completion, especially considering Greatview has some business lines that Xinjufeng lacks.
The lawyers interviewed by this news service all stressed that Xinjufeng and Greatview are direct competitors in the same market, who are strictly prohibited by China’s Antimonopoly Law (AML) from communicating or exchanging any sensitive business information about production, not to mention exploring any cooperative synergies. To do otherwise, may run the risk of violating the country's Antimonopoly Law (AML).