CHINA Law and Practice Contributed by: Shuting Qi, Han Kun Law Offices
11. Activism 11.1 Shareholder Activism
for the majority of cases. These typically involve issues over breach of representations and warran - ties, earn-out calculations or post-closing indem - nification claims. Financial misrepresentations and valuation adjustment mechanism enforcement specifically dominate this category. 10.3 “Broken-Deal” Disputes MAC Clauses Require Specific, Causally-Linked Impact Courts and tribunals have consistently rejected blan - ket assertions that COVID-19 automatically consti - tutes a material adverse change (MAC). To successful - ly invoke an MAC clause under similar situations, the claiming party must demonstrate a specific, quantifi - able and material impact directly caused by the event. Rigid Valuation Formulas Create Hard Obligations In one case, a buyer agreed to acquire a 38% stake in a biotech target based on a valuation formula: the higher of CNY900 million or 25×2020 audited net profit. Due to COVID-19, the target’s 2020 profit surged, making the 38% stake worth CNY10.5 billion – exceeding the buyer’s market capitalisation. The buyer’s attempt to invoke a “change of circumstances” provision did not automatically override the clear contractual formula, demonstrating that precise valuation mechanisms prevail over the impact of extraordinary events. The core lesson under unforeseen events such as COVID-19 is that clear, specific contractual drafting is the primary defence when it comes to broken-deal disputes. Sophisticated parties now include pandem - ic-specific MAC carve-outs, clear valuation mecha - nisms and precise interim covenants in their transac - tion documents.
Though not often seen, shareholder activism is a growing force in China. Publicly reported activist cam - paigns surged ninefold from 2008 to 2023, with over two-thirds occurring after 2018. Recent regulatory reforms have specifically empow - ered shareholder activism. The newly revised Code of Corporate Governance for Listed Companies expands minority rights by allowing investors holding 1% shares of the company to make proposals and by mandating cumulative voting for director elections. In China, the focus of activists is on post-acquisition governance, and disclosure to improve financial per - formance. 11.2 Aims of Activists Though its importance is rising with regulatory chang - es, shareholder activism remains defensive in orienta - tion. Most activism focuses on governance and pay - out demands rather than structural M&A or spin-offs. True activist-impelled divestitures and spin-offs are less common than in Western markets because most Chinese listed companies have controlling sharehold - ers. Legal mechanisms like minority veto rights are used more for blocking conflicted transactions than forcing spin-offs. 11.3 Interference With Completion Though very rare, activists do seek to interfere with completion of announced transactions in China, pri - marily through voting against deals at shareholder meetings. For example, in June 2024, a public com - pany in Shanghai proposed a CNY5.3 billion cash acquisition of a subsidiary of its parent company. Public shareholders holding over 50% of voting rights in respect of this matter voted it down, defeating the transaction entirely.
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