CHINA Law and Practice Contributed by: Bing Zhai, Commerce & Finance Law Offices
5.2 Market Practice on Timing Market practice often exceeds legal require - ments in terms of the timing and scope of dis - closure, as follows: • early disclosure – companies may voluntar - ily disclose negotiations earlier than legally required to manage market expectations or prevent speculation; • detailed disclosures – market practice often includes more detailed disclosures than legally mandated, such as providing addi - tional context about the strategic rationale for the transaction; and • regulatory engagement – companies fre - quently engage with regulators like the CSRC to ensure compliance and avoid delays in approval processes. 5.3 Scope of Due Diligence Due diligence in China typically covers the fol - lowing areas: • financial due diligence – review of financial statements, tax records and cash flow projec - tions to assess the target’s financial health; • legal due diligence – examination of con - tracts, litigation risks, intellectual property and compliance with laws and regulations; • operational due diligence – evaluation of the target’s business operations, supply chain and workforce; • regulatory due diligence – assessment of industry-specific regulations, antitrust risks and foreign investment restrictions; and • environmental, social and governance (ESG) due diligence – this is increasingly important, particularly for transactions involving SOEs or sensitive industries.
to the Public – Equity Change Report ( “Guide- lines No 15” ), or a detailed equity change report, as required by Guidelines No 15 and the Content and Format Guidelines No 16 for Information Disclosure of Companies Offering Securities to the Public – Acquisition Report of Listed Com - panies ( “Guidelines No 16” ), the purpose of the shareholding must be disclosed. If an investor increases its shareholding in the listed company, it must disclose the purpose of the shareholding and whether it intends to continue increasing its holdings within the next 12 months. In the case of a detailed equity change report, the decision- making process and timeline for the acquisition must also be disclosed. 5. Negotiation Phase 5.1 Requirement to Disclose a Deal Typically, no disclosure is required at the initial approach stage unless material information is leaked or the target is a listed company and the approach could significantly impact its share price. For listed companies, disclosure may be required if negotiations reach a stage where the transaction is reasonably certain to proceed, as per the Measures for the Administration of Takeovers of Listed Companies. While signing a non-binding letter of intent (LOI) does not usually trigger mandatory disclosure, listed companies may need to disclose material developments that could affect their share price. Once definitive agreements are signed, immedi - ate disclosure is mandatory for listed compa - nies to ensure market transparency and protect investor interests.
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