In M&A deals involving public companies, even a single purchase of a few percent of the shares can give rise to a public offer obligation that the investor does not properly identify or perform.[1]
The risk does not necessarily stem from the intention to evade the law, but sometimes from seemingly purely technical errors: the lack of shares of the person involved, ignoring an ownership threshold or misinterpreting the exemption condition.
A common reason is that investors only count the number of shares in their own names but ignore the shares of related persons.
The consequences can go far beyond a fine. When the number of shares purchased in contravention of regulations is subject to remedial measures, the investor's goal of gaining control of the business may also be affected. A public tender offer therefore needs to be considered from the beginning of the transaction design, not a procedure that is only checked after the parties have completed the transfer.
"Thresholds" that are easy to ignore
According to Article 35 of the Law on Securities 2019, a case in which a public tender offer is required when organizations, individuals and related persons within the scope of law plan to purchase voting shares, resulting in direct or indirect ownership of 25% or more of the voting shares of a public company.
But 25% isn't the only threshold to watch.
When owning 25% or more, the continued purchase of the direct or indirect ownership rate reaches or exceeds the marks of 35%, 45%, 55%, 65% and 75% also needs to be checked for the obligation to make a public offer, unless it is not required by law[2].
These ownership milestones are not only proportional calculations. The public tender offer is also a mechanism to make the increase in ownership transparent, create conditions for shareholders to access information and consider buying proposals in statutory cases. Therefore, the agreement between the buyer and the seller cannot replace the requirements of the securities law by itself.
For example, the investor and related person are holding 33% of the voting shares of a public company. If buying more shares increases the ownership rate to 36%, the issue to consider is not simply "buying 3% more". The important point is that the transaction has brought the ownership rate past the 35% threshold.
The problem is not only how many additional shares the investor buys, but who makes the transaction, the ownership ratio of the subjects that must be combined before and after the purchase, and whether the transaction falls under the statutory exception.
Common mistakes
The first reason: Only count shares in your name
A common reason is that investors only count the number of shares in their own names but ignore the shares of related persons. However, the determination of related persons to calculate the obligation to make a public offer must be based on the scope referred to in Article 35 of the Securities Law, instead of aggregating all subjects with business relations or belonging to the same group of enterprises. Suppose Company A plans to buy 20% of shares of a public company, while an entity in the category of a person related to A has held 8%; the total ratio to be considered may be 28%, depending on the specific ownership structure.
With a multi-tiered ownership structure, the identification of related persons and indirect ownership requires consideration of the control relationship and specific legal basis. Relying only on the list of shareholders in the name, or the machine multiplying the ownership ratio through the legal entities, can lead to inaccurate conclusions.
The second reason: Assuming that the deal transaction is not a public tender offer
A mistake is to assume that only buying shares through order matching transactions needs to be considered for public tender offers, while agreement transactions between shareholders do not.
In M&A deals, the purchase of shares is usually negotiated and carried out through a transfer contract between the parties. However, the form of an agreement transaction does not automatically exclude the obligation to make a public offer. The decisive issue is whether the transaction is subject to a public tender offer under the securities law, on the basis of the buyer, the ownership ratio before and after the transaction and the statutory exceptions.
Third reason: Split the deal into multiple purchases
M&A deals can be divided into multiple purchases due to financial, schedule, or completion conditions. The split does not eliminate the requirement to check the ownership ratio after each transaction.
Mistakes occur when each transaction is treated as a completely independent transaction. What needs to be monitored is the ownership rate at each point in time and the percentage after each purchase. An individual transaction may be very small, but it is the transaction that makes the ownership rate exceed the legal threshold.
For example, the investor owns 24% and expects to buy an additional 2%. Although the amount of additional purchases is small, the result of owning 26% may give rise to the obligation to make a public offer if the statutory conditions are met and there are no exceptions.
Notably, the division of the deal into several stages does not change the obligation to make a public offer. If from the beginning the parties have designed a roadmap to increase ownership through many thresholds, the corresponding obligations need to be identified in the transaction structure and continue to be checked before each transfer.
Risks arise when investors invoke exceptions but do not fully check the applicable conditions.
Fourth reason: Incorrect understanding of exceptions
The law stipulates cases in which a public tender offer is not required, including the purchase of newly issued shares under the issuance plan approved by the General Meeting of Shareholders, the receipt of transfer under the plan approved by the General Meeting of Shareholders, and a number of transactions between entities that meet the statutory conditions, donation or inheritance. Each exception has its own scope and conditions; it cannot be inferred from the name of the transaction.
Risks arise when investors invoke exceptions but do not fully check the applicable conditions.
In particular, for the case of receiving the transfer according to the plan approved by the General Meeting of Shareholders, it is necessary to compare the requirements of Point b, Clause 2, Article 35 of the Law on Securities, including the resolution clearly identifying the transferor and the transferee. A resolution that only approves the general policy does not automatically meet the conditions for exemption from the public tender offer.
Therefore, the grounds for exceptions need to be identified and verified before closing the transaction structure; the content of the resolution, subject, number of shares and implementation plan must be consistent with the exception cited.
Fifth reason: Not updating the "denominator" when calculating the ownership ratio
The ownership ratio depends simultaneously on the number of voting shares held by related entities and the total number of voting shares of the target company at the time of consideration.
The additional issuance or change of the structure of voting shares may fluctuate the ownership ratio even if the investor does not buy more. However, it is necessary to distinguish a change in the passive rate from the act of buying shares in the case of giving rise to the obligation to make a public offer.
For the proposed purchase, the denominator must be updated and the ratio must be recalculated before execution, rather than continuing to use the capital data at the time of making the due diligence dossier or signing the initial agreement.
Sixth reason: Only consider the public tender offer as a post-purchase procedure
Investors cannot automatically complete the compulsory purchase and then register a public tender offer to legalize the transaction. The order of registration, information disclosure and implementation of the tender offer must comply with applicable regulations.
If the purchase exceeded the threshold without complying with the obligation, the problem is not only the lack of an administrative record; the violation may have been completed and must be assessed according to the sanctioning regulations at the time of implementation.
The consequences of not making a public tender offer do not stop at fines. Depending on the violation, investors may also be subject to remedial measures related to voting rights on the number of shares purchased or forced to sell shares to reduce the ownership ratio as prescribed.
For a deal to gain control, these measures may have more serious consequences than the penalty. The investor may have completed the purchase of shares commercially but did not achieve the voting rights as expected or had to reduce the holding ratio. However, a breach of the obligation to make a public offer does not automatically invalidate the entire transfer contract; it is necessary to distinguish between administrative sanctions, remedial measures and the civil effect of the transaction.
How to avoid violating the bid threshold?
As a precaution, investors need to control the obligation to make a public offer at three times: when designing the deal structure, before signing the contract and before each transfer is completed. The review should focus on five contents:
Firstly, the current direct and indirect ownership ratio of the buyer (if any).
Secondly, the investor's related person and their share ownership rate in the business the investor intends to buy.
Third, determine after the transaction, what will be the total ownership rate of investors and related persons and whether it will reach or exceed the thresholds of 25%, 35%, 45%, 55%, 65% or 75%.
Fourthly, if the transaction falls under the threshold of a public tender offer, are there any grounds for exception and have the conditions of the exception been fully met?
Fifth, has the capital structure and total number of voting shares of the target company changed on the trading date compared to the time of appraisal?
For multi-step deals, an ownership tracker should be maintained after each transaction, reflecting the shares directly held, related persons within the scope of law, indirect ownership to be considered, and the total number of shares with voting rights. If based on the exception of the resolution of the General Meeting of Shareholders, the passage of the resolution that meets the statutory conditions should be designed as a prerequisite before completing the transfer.
In M&A, a few percent of the shares can determine control of the business, but it can also give rise to a public offer obligation. A mistake in determining the ownership threshold or exemption condition can prevent the investor from achieving the goal of the deal, even though the transaction is completed. Therefore, controlling the public offer obligation must begin at the time of the transaction design, not when the risk of breach has already emerged.
