China: Tsinghua Unigroup and RDA deal is closed, but controversy is far from over

On 19 July 2014, state-owned enterprise Tsinghua Unigroup Ltd. ("Tsinghua Unigroup") and RDA Microelectronics, Inc. ("RDA") jointly announced the completion of the US$907 million merger and acquisition of RDA ("Merger"). The announcement noted that the Merger was completed according to the Agreement and Plan of Merger previously announced on 11 November 2013 and amended on 20 December 2013 ("Merger Agreement"). The Merger Agreement contemplated that the Merger was to be executed through Tsinghua Unigroup's overseas subsidiary company, and when the Merger is completed, RDA would launch into its delisting procedures.

Upon release of the announcement, the market generally viewed Tsinghua Unigroup as the ultimate winner of the bidding war against Shanghai Pudong Science and Technology Investment Co. Ltd ("Pudong Science and Technology"). The competition for acquiring RDA lasted for almost a year between the two Chinese SOEs (Please refer to our previous client alert on this: " Relaxation of NDRC rules has immediate impact, but uncertainty remains if there is only ever one anointed Chinese bid").

However, recent sources have reported that the Merger was suspected of having triggered the notification thresholds under the business concentration rules of China's Anti-Monopoly Law (AML), but the parties apparently failed to complete the required clearance process with the regulator — the Ministry of Commerce ("MOFCOM"), before closing the deal. According to AML, antitrust clearance must be obtained before a transaction is completed if such thresholds are met. Failure to obtain antitrust clearance before completing a transaction is deemed as violation of the AML. So MOFCOM is now investigating into the alleged violation.

Background of the Merger

RDA is a leading Chinese fabless semiconductor company that designs, develops and markets wireless systems-on-chip and radio-frequency (RF) semiconductors for cellular, connectivity and broadcast applications. RDA completed an initial public offering (by way of ADS issue) on the NASDAQ in November 2010.

The bidding war between Tsinghua Unigroup and Pudong Science and Technology began in the second half of 2013. Pudong Science and Technology first made a takeover offer to acquire all the issued securities of RDA, for which Tsinghua Unigroup subsequently made a superior bid which was then accepted by RDA board and recommended to its shareholders. However, Pudong Science and Technology was the first to obtain the "Overseas Acquisitions or Bidding Project Information Report Confirmation Letter" ("Confirmation Letter", also commonly dubbed as "roadpass" on the market) issued by the National Development and Reform Commission ("NDRC"), in compliance with the then effective Interim Administration Measure for the Approval of Overseas Investment Projects ("Order No.21") and National Development and Reform Commission's Notification on the Administration of Outbound Investment Projects ("Decree 1479"). Although it was never expressly provided under the relevant regulations, in practice, NDRC never issued more than one Confirmation Letter for one transaction. So Tsinghua Unigroup couldn't get another roadpass from NDRC. Notwithstanding, Tsinghua Unigroup signed the Merger Agreement with RDA without the roadpass. In a rather unusual stance and through various public channels, NDRC publicly condemned Tsinghua Unigroup's "blatant" violation of the relevant rules, warning that they would not allow the Merger to go through.

On 8 May 2014, NDRC issued Measures for the Administration of Overseas Investment Project Verification and Filing ("Order No. 9"), which replaced Order No.21 and Decree 1479 and is now in effect. Although Order No. 9 significantly relaxes the regulatory review process of China outbound investment, it still maintains the roadpass system, requiring that Chinese outbound investment (in overseas mergers and acquisitions or competitive bidding projects) of US$300 million and above must obtain the Confirmation Letter from NDRC before carrying out any "substantive work" overseas. Furthermore, unless sensitive countries/regions or industries are involved, only those Chinese outbound investments of US$1 billion and above need to obtain approval (verification) from NDRC. Other projects are only required to obtain a filing certificate from NDRC or its local counterparts before closing of the transaction.

So Tsinghua Unigroup is still required under Order No.9 to obtain NDRC's Confirmation Letter before signing the Merger Agreement and should have obtained the filing certificate from NDRC before closing the transaction. But without the Confirmation Letter, it would be impossible for Tsinghua Unigroup to obtain a filing certificate from NDRC.

Transaction structure

Order No. 9 applies to "overseas investment projects carried out by all kinds of legal persons within China" and "legal persons within China providing financing or guarantee through its overseas enterprises or institutions for the purposes of implementing overseas investment projects".

According to the Merger Agreement, Tsinghua Unigroup would set up a holding subsidiary in the Cayman Islands ("Cayman subsidiary") after signing the agreement. The Cayman subsidiary would then merge with RDA, and upon completion of the merger, the Cayman subsidiary would be deregistered, leaving RDA to survive as Tsinghua Unigroup's controlled subsidiary.

Tsinghua Unigroup proposed to merge with RDA through its offshore entity. If the transaction were fully funded through offshore funding without PRC onshore credit support, the Merger should not fall under the ambit of Order No. 9. However, the Merger Agreement stipulated that Tsinghua Unigroup's parent company Tsinghua Holdings Co., Ltd. ("Tsinghua Holdings") must provide guarantee to RDA. Therefore, should Tsinghua Holdings act accordingly (which would appear to have been the case), this transaction should still be caught under Order No.9.

Detailed financing and guarantee arrangements of the transaction were not available in the public domain. Tsinghua Unigroup may bypass the scrutiny from NDRC by closing the acquisition through an offshore subsidiary and raising funds offshore, but it would still need to complete certain filing for record procedures with MOFCOM. In particular, if the transaction triggers the notification thresholds prescribed under AML for business concentrations, Tsinghua Unigroup must notify MFOCOM seeking clearance.

It is unclear whether the transaction has indeed triggered those thresholds. From publicly available information, it would appear that Tsinghua Unigroup did not make any merger filing with MOFCOM, nor completed any of the relevant overseas investment regulatory procedures.

Observations

NDRC is empowered under Order No.9 to make various penalty orders for breach of the regulations. In gravest situations, relevant departments have the right to stop or unwind the transaction. A more direct consequence of such violation is that relevant procedures such as foreign exchange registration and bank lending will be adversely affected. However, if the concerned project is carried out completely outside of China (which generally means that the overseas transaction does not depend on any domestic financing arrangements), the legal risks entailed in the violation of such provisions are arguably limited.

On the other hand, violation of business concentration rules under the AML could carry much significant legal risks. If the notification thresholds are met (by considering the total global and Chinese turnovers of all business undertakings participating in the concentration), the relevant business undertakings should seek MOFCOM's approval before completion of the transaction. These provisions if violated, MOFCOM is entitled to unwind the deal, order to have the acquired shares and assets disposed within a limited time and adopt other necessary measures to restore the business to the state before the concentration. Enterprises can also be fined up to $500,000YUAN and be liable for civil liability to those person suffering losses as a result.

The main operations of both Tsinghua Unigroup and RDA are all based in China, with their main market also being China. So MOFCOM's antitrust investigation, if proceeds, is likely have major ramifications on the Merger.

Nevertheless, RDA has already formally announced to the market on 18 July that it would proceed with the delisting process, and on July 28th has suspended some of its disclosure obligations. Whether or not MOFCOM will in fact launch a formal antitrust investigation and what decision will it make, remains to be seen. The outcome of this unusual and dynamic play among the Chinese state-owned enterprises, Chinese overseas investors and Chinese regulators will undoubtedly bring profound influences to Chinese investors undertaking similar transactions in the future.

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