5.3.2.2.1 Merger

Mergers are popular and will become more popular in China with the encouragement of industry upgrade by the government. It is therefore very desirable to include such a trigger in Article 75 and use it to protect the interest of minority shareholders.

There are two ways to define a merger. One seeks to define the essential characteristics of the transaction, thereby providing principles that allow the court to determine whether a particular transaction is substantively a merger or not, regardless of its form. For example, when the court deems the transfer of control as an essential characteristic to define a merger, then there is linie difference between a legal merger involving a full integration of legal entities and an acquisition of the major assets.1 The second treats alternative forms of transactions authorized by the corporate statue, such as legal mergers, triangular mergers, and acquisitions of major assets, with equal dignity; the planner's choice of the transaction form is respected.2 The law in China adopted the second approach, and by the term merger in this article, we only mean legal mergers, a full integration.

Article 173 of the company law prescribes two types of legal mergers. When a company absorbs any other company and the absorbed company is dissolved, i.e., Company X + Company Y = Company X. The other is when two or more companies combine to establish a new one, and the existing ones are dissolved, i.e., Company X + Company Y = Company Z. The types of merger in Chinese company law are the same as prescribed in the RMBCA and in the Delaware Corporate Statute.3 But it is narrower than the scope of the ALI Principles, which also explicitly include triangular mergers.4

In Chapter 11 (Mergers and Share Exchanges) of the RMBCA, there are 7 sections dealing with different issues concerning mergers. Issues like what the contents of a merger plan should be, what the terms and conditions of a merger should be, voting action and approval procedure, effective date of a merger,notice of appraisal rights, special mergers like mergers between parent and subsidiary or mergers between subsidiaries, and the procedure to abandon a merger plan are all extensively prescribed.

Compared to rules in Chapter 11 of the RMBCA, the rules on mergers in Chinese company law are over-simplified. Three short articles cover the whole merger field. Article 173 lists the types of mergers. Article 174 requires a merger agreement with the name of each party and inclusion of balance sheets and checklists of assets. It does not, however, specify what the basic articles of the agreement should be. Article 175 explains the effect of a merger. Once the companies are merged, the creditor 's rights and debtor's liabilities of the merged companies are assumed by the surviving company or the newly formed company after the merger.5 Company Law 2006 is therefore silent on many issues, such as the contents of merger plans, notice of appraisal rights, prescription of eligible forms of payment, rules on special forms of mergers (simple mergers), and so on. This research, of course, is not intended to compare all the legislative details of a merger between the RMBCA and the Company Law 2006, but the silence on some issues obviously impedes an effective enforcement of the appraisal remedy.

Provided that only transactions subject to a shareholder vote may result in the exercise of appraisal rights, which kinds of mergers need approval and which do not has an impact on the availability of the appraisal remedy. In the US, if it is a simple merger, namely when conditions in 11.04 (g) are not triggered,6 or a parent with a 90 per cent shareholding in its subsidiary merges with the subsidiary, no voting is required by the acquiring company, which means shareholders in the acquiring company have no appraisal rights because in these situations, the acquiring company is slightly changed as well as the shareholders' interests in it. It is also economically effective and time-efficient to spare the voting procedure the otherwise compulsory step. There is no distinction between normal mergers and simple mergers in Chinese company law. To promote transaction efficiency, it is advisable to introduce such a distinction.

Share exchanges are not included in Article 75. In the RMBCA, a share exchange means that a corporation acquires all of the shares of one or more classes or series of shares of another corporation, or all of the interests of one or more classes or series of interests of another entity, in exchange for shares or other securities, interests, obligations, rights to acquire shares or other securities, cash, other assets, or any combination of the foregoing, pursuant to a share exchange plan.7 In a merger, all shares of the corporations or all eligible interests of the unincorporated entities are merged, and in a share exchange, all of one or more classes or series of shares or eligible interests are acquired.8 The two are thus different in scale of purchase, and no dissolution is involved in a share exchange.

But they do have some things in common As explained in Chapter 3, share exchanges can also affect the fundamental expectations of shareholders of that special class or series. In a merger, the shareholders whose interests are eliminated from the original corporation should be entitled to appraisal rights because the original company has been dissolved, the very fact of which is a fundamental change to the dissenting shareholders' interests and defeats their fundamental expectations. By the same token, in a share exchange, the shareholders whose interests are to be acquired by another corporation should also be granted appraisal rights because such a transaction has the same effect on them as in a merger: although the company does not need to be wound up as in a merger, shareholders whose shares are to be acquired cannot maintain their original expectations of investment. It is therefore recommended that share exchanges should also be included among the appraisal triggers to guarantee the possibility of fair value.

The issue of shareholders of which company shall be granted appraisal rights is unstipulated in Article 75, and the impression is that shareholders of both companies can. This is an issue needs to be regulated.

If, without any restrictions, shareholders of the acquiring company can exit in the event of mergers whether the merger is simple or not, the result may not be favourable to the financial perspective as well as the interests of creditors of that company. On the other hand, if shareholders from the acquiring company cannot exit even in case of considerable changes to the company, the situation is unfair to these shareholders. The study in Chapter 3 shows that shareholders of the company (companies) other than the surviving company will be entitled to the appraisal remedy. But if the transaction is likely to be considered a fundamental change to the acquiring company as well, such as a change to the articles of incorporation, rights borne by the shares are changed, or in exchange for interests in another company, the acquiring company has to issue new shares which comprise more than 20 per cent of the voting power of the shares of the company that were outstanding immediately before the transaction, shareholders from the acquiring company are also entitled to vote on the transaction and consequently qualify for appraisal rights in these situation.9

It is therefore suggested that questions of shareholders as to which company can enjoy the rights and whether exceptions are allowed when the company makes significant reinvestments in other entities should be clarified in the future company law reform. In particular, with amendments to Company Law 1993, the 50 per cent reinvestment cap was removed; majority shareholders can decide which percentage of the assets is apportioned to reinvestment.10 In this case, the interests of minority shareholders in the acquiring company are also at stake and need protection.