Study On Legal Regime Of Acquisition Finance For Listed Company Takeovers

The market has seen a huge wave of outbound acquisitions by Chineseenterprises. It has become a top priority for the Chinese enterprise toconsider utilizing the international and domestic capital markets tofinance their outbound acquisitions. In developed markets, acquisitionfinance (or“leveraged finance”) is substantially different withtraditional bank loans. A leveraged buyer will not use its own balancesheet and credit to borrow money, or apply its own cash flow towardsrepayment of bank loan. On the contrary, the acquisition bank facilityis secured and backed by the assets of the target companies and furtherdischarged by the cash flow of the target company (from the perspectiveof the target companies, it is usually referred to as “financialassistance” offered to acquirer).In a leveraged finance, the target’s cash and assets being utilizedto retire the buyer’s acquisition loan will not only reduce the target’sassets available for debt service, but also subordinate the target’sexisting creditors’ claim to the claim of the providers of acquisitionfacilities, which is obviously detrimental to the benefit of the existingcreditors. United Kingdom (“UK”) for a long time prohibits “financialassistance” in order to protect the interest of the existing creditorsfrom the infringement of the leveraged finance, which is derived from thedoctrine of “maintenance of legal capital of a limited liabilitycompany”. Chapter2will analyze the origin and development of theprohibition against “finance assistance” and the deregulation trend of“financial assistance” in the modern UK company law.The development of United States (“US”) capital market in1980slargely benefited from leveraged buy-outs, and also suffered from thebankruptcy of big corporates and financial crisis as a consequence of hugeamount of debts created by leveraged buyouts. In this context, therelationship between the leveraged finance and the target’s existingcreditors is mainly regulated by the “fraudulent conveyance” rule underthe Bankruptcy Code, which will be explored in Chapter3.Chapter4will lay out a few suggestions on the Chinese legislationin respect of acquisition finance by reference to the experience of UKand US.