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A Brief Introduction to the Latest Legal Issues for PIPE by Foreign Investors in A-Share Listed Companies

2018.11.22 SHAO, ChunyangFENG, Cheng、NIU, Yuandong

In a recent interview addressing some of the major issues in the market, Shiyu Liu, Chairman of the China Securities Regulatory Commission (CSRC) indicated that private equity (PE) firms should be encouraged to purchase shares and become involved in mergers and acquisitions (M&As) of listed companies through participating in private placements, transfer agreements and bulk deals. 1

The type of private equity investment in publicly-owned assets, or as they are more commonly known, “listed companies”, that the regulatory authority is encouraging is sometimes referred to as “PIPE” (private investment in public equity.) 

Unlike PE investment in companies prior to their initial public offering (IPO), which usually happens via private placement of convertible shares/bonds using a negotiated pricing mechanism, PIPE takes the form of PE investment through subscription in or purchase of shares of a publicly listed company based on the open market price. With the PRC A-Share2 securities market not yet fully open, foreign investors have not been able to directly invest in A-share listed companies, and so the opportunity to enter the market through a range of PIPE mechanisms has been attractive. Based on our understanding of relevant PRC laws and regulations, our research and analysis of various cases and our practical experience on similar projects, we have prepared this report for your general reference. 


I. Legal Framework for PIPE in A-Share Listed Companies by Foreign Investors

Within the current PRC legal framework, foreign investors can invest in A-Share listed companies through the following methods: (i) foreign investors can apply for a QFII (Qualified Foreign Institutional Investor) or an RQFII (RMB Qualified Foreign Institutional Investor) license, or invest via the QFII/RQFII program; (ii) foreign investors can invest in A-Share listed companies as strategic investors; and (iii) foreign investors can invest in A-share listed companies through the interconnection mechanism between the Shanghai, Shenzhen and Hong Kong Stock Exchanges, and the stock exchanges of other countries or regions. Under the current regulations for this final method, foreign investors are permitted to invest in A-share listed companies only by participating in competitive bidding on the Shanghai and Shenzhen Stock Exchanges, which is not one of the primary means of investment for PIPE. The focus of this article will therefore be primarily upon the first and second investment methods.


1.1 Relevant regulations on QFII/RQFII

To apply for a QFII license or invest in an A-Share listed company via the QFII program, a foreign investor must satisfy the requirements of the Administrative Measures for the Domestic Securities Investment by Qualified Foreign Institutional Investors jointly promulgated by the CSRC, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE), the Regulations regarding the Implementation of Administrative Measures for Domestic Securities Investment by Qualified Foreign Institutional Investors promulgated and implemented by the CSRC and the Provisions on the Foreign Exchange Administration of Domestic Securities Investment by Qualified Foreign Institutional Investors promulgated and implemented by SAFE in June, 2018 (collectively, the “QFII Regulations”).

To apply for an RQFII license or invest in an A-Share listed company via RQFII, a foreign investor must satisfy the requirements of the Measures for the Pilot Program of Securities Investment in China by RMB Qualified Foreign Institutional Investors enacted by the CSRC, the PBOC and SAFE, the Provisions on the Implementation of the Measures for the Pilot Program of Securities Investment in China by RMB Qualified Foreign Institutional Investors enacted by the CSRC, as well as the Notice of the People's Bank of China and the State Administration of Foreign Exchange on Issues concerning Domestic Securities Investment by RMB Qualified Foreign Institutional Investors jointly issued and implemented by the PBOC and SAFE on June 12, 2018 (collectively, the “RQFII Regulations”)


1.2 Regulations for strategic investors

Most of the regulations relating to foreign strategic investors’ investment in A-Share listed companies are supervisory in nature, and can be categorized into:

A. Regulations concerning foreign investment access and industry supervision

a) The main regulation governing strategic investment in A-Share listed companies by foreign investors is the Administrative Measures on the Strategic Investment in Listed Companies by Foreign Investors (the “Strategic Investment Measures”) revised and promulgated by the Ministry of Commerce (MOFCOM), the CSRC, the State Administration of Taxation (SAT), the State Administration of Industry and Commerce (SAIC) and SAFE on October 28, 2015. The Strategic Investment Measures specifies: the qualifications required for foreign strategic investors; the basic requirements for the strategic investment, including that the investment ratio shall be more than 10% and there be a minimum three-year lock-up period; the methods of the strategic investment, which shall be share transfer by agreement or private placement of shares; and the approval/record-filing process. MOFCOM published the Decision on Revising the Administrative Measures for Foreign Investors' Strategic Investment in Listed Companies (Exposure Draft) on July 30, 2018 (the “Strategic Investment Measures Exposure Draft”) for public comment:

b) The key regulation governing M&A of domestic enterprises by foreign investors is the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors (the “Foreign M&A Provisions”) revised by MOFCOM on June 22, 2009. When matters are not clear under the Strategic Investment Measures, the Foreign M&A Provisions applies as the default rule.

c) The fundamental regulations governing the industry access and foreign investment policies are the Catalogue of Industries for Guiding Foreign Investment (2017 revision) and the Special Administrative Measures (Negative List) for Foreign Investment Access (2018)3 (collectively, the "Negative List") promulgated by the National Development and Reform Commission (NDRC) and MOFCOM. The Negative List brings together special administrative measures on foreign investment access, such as the shareholding ratio requirements and the obligations of senior executives. Any administrative measures that apply to foreign investments in industries that fall outside the Negative List shall be consistent with those applicable to domestic investments.

d) The Law of the People's Republic of China on Sino-foreign Joint Venture Enterprise (2016 revision), the Law of the People's Republic of China on Chinese-foreign Cooperative Enterprise (2017 revision), the Law of the People's Republic of China on Foreign Investment Enterprises (2016 revision), and the Interim Measures for the Administration of Filing for the Incorporation and Change of Foreign-invested Enterprises (MOFCOM No. 6, 2018) (the “Measures on the Administration of the FIE Filing”) enacted by MOFCOM specify that the incorporation of or any changes to a foreign-invested enterprise (FIE) shall be subject to the relevant approval or record-filing procedures. FIEs that are not subject to special administrative measures shall follow the record-filing measures.

e) The PRC Anti-Monopoly Law (the “Anti-Monopoly Law”), the Regulations on the Declaration Threshold for the Concentration of Business Operators published by the State Council, and other relevant regulatory requirements issued by MOFCOM and the Anti-Monopoly Bureau of the State Administration of Market Supervision specify that if the M&A of a domestic enterprise means the foreign investor will reach the declaration threshold, the foreign investor will be required to submit a concentration declaration with the anti-trust authorities, before the M&A transaction can proceed. 

f) The Notice on Establishing the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors promulgated by the General Office of the State Council and the Implementation of Security Review System of Merger and Acquisition of Domestic Enterprises by Foreign Investors promulgated by MOFCOM specify that if the target domestic enterprise that is merged with or is acquired by a foreign investor is of certain restricted industries, and the foreign investor will have de facto control of such domestic enterprise following the M&A transaction, a security review is required.

g) If the target A-Share listed companies are in special industries that are subject to pre-approval requirements, an application for approval by the competent department of the special industry shall be filed according to applicable rules. 

B. Laws and regulations on the management of state-owned assets

The major regulation on the management of state-owned assets is the Measures for the Supervision and Administration of State-Owned Stock Rights of Listed Companies, jointly promulgated by the state-owned Assets Supervision and Administration Commission of the State Council (SASAC), the Ministry of Finance and the CSRC, and constitutes and sets out the principles, rules and relevant procedural requirements that state-owned shareholders shall follow when transferring their shares to foreign investors.

C. Regulations governing securities supervision

a) The key regulation governing securities supervision is the Administrative Measures on the Takeover of Listed Companies (the “Administrative Measures on Takeovers”) promulgated by the CSRC and its supporting systems.

b) If the foreign investor subscribes for shares of A-Share listed companies using assets as consideration, the Administrative Measures for the Material Asset Reorganization of Listed Companies promulgated by the CSRC and its supporting rules will additionally apply.


1.3 Relevant regulations on the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect

The regulations applicable to foreign investors investing in A-share listed companies through the interconnection mechanism between Shanghai Stock Exchange (SSE), Shenzhen Stock Exchange (SZSE) and Hong Kong Stock Exchange (SEHK) are as follows:

a) The framework for the regulatory system is provided by the Several Provisions on the Interconnection Mechanism for Transactions in the Mainland and Hong Kong Stock Markets enacted by the CSRC, which clarifies the application principles of relevant laws and regulations, the rights, obligations and duties of the main market entities and the appropriate territorial administration of Shanghai and Hong Kong investors, among other important content;

b) The Implementation Measures of the Shanghai Stock Exchange for the Shanghai-Hong Kong Stock Connect (2018) enacted by the SSE stipulates specific rules regarding the scope of shares, special transaction matters, quota control and limit of shareholding ratio of foreign investors participating in the trading of stocks listed on the SSE Exchange through a SEHK subsidiary in Shanghai providing relevant securities trading services (SEHK Shanghai Subsidiary);

c) The Implementation Measures of the Shenzhen Stock Exchange for the Shenzhen-Hong Kong Stock Connect (2018) enacted by the SZSE, stipulates specific rules regarding the scope of shares, special transaction matters, the quota control and limit of shareholding ratio of foreign investors participating in the trading of stocks listed on the SZSE through a SEHK subsidiary in Shenzhen providing relevant securities trading services (SEHK Shenzhen Subsidiary);

d) The Detailed Implementation Rules for Registration, Depository and Clearing Services under the Interconnection Mechanism for Transactions in the Mainland and Hong Kong Stock Markets enacted by the China Securities Depository and Clearing Corporation contains specific provisions on the registration, deposit and settlement of stock market transactions between the mainland and Hong Kong.


II. General Methods for PIPE in A-Share Listed Companies by Foreign Investors

2.1 Applying for a QFII license or investing in A-Share listed companies via QFII

According to the QFII Regulations, licensed QFIIs can invest in the RMB financial instruments approved by the CSRC (including trading listed A-shares at a securities exchange). Therefore, foreign investors can acquire the A-shares of the listed companies by applying for a QFII license or via the QFII program.

To become a licensed QFII, the foreign investor applicant must satisfy following requirements: 

a) The applicant should be an overseas fund management institution, insurance company, securities company or other asset management institution; 

b) The applicant should have financial stability and good credit standing and should meet the following the CSRC criteria for asset size and other factors:

i. for an asset management institution, it should have at least two years’ experience in asset management and have managed at least USD 0.5 billion worth of securities assets in the last fiscal year;

ii. for an insurance company, it should have operated for at least two years and held at least USD 0.5 billion worth of securities assets in the last fiscal year;

iii. for a securities company, it should have at least five years of experience in securities operation with a minimum USD 0.5 billion net assets and have managed at least USD 5 billion worth of securities assets in the last fiscal year;

iv. for a commercial bank, it should have at least 10 years of experience in the banking business with tier one capital of at least USD 0.3 billion, and have managed at least USD 5 billion worth of securities assets in the last fiscal year; and

v. for any other institutional investor (such as pension fund, charitable foundation, donation foundation, trust company, and government investment management company), it should have operated for at least two years and have managed or held at least USD 0.5 billion securities assets in the last fiscal year.

c) Employees of the applicant should possess the relevant professional qualifications required in their home country/region;

d) The applicant should have a sound management structure and a well-established internal control system, conduct business operations according to applicable laws and regulations and should not have been subject to any major punishment by regulatory authorities during the past three years;

e) The home country/region of the applicant should have a well-established legal and regulatory system, and the securities regulatory authority should have signed a memorandum of understanding with the CSRC and have maintained an effective cooperative supervisory relationship with the CRSRC; and

f) Any other conditions stipulated by the CSRC, based on the principal of prudent supervision.

In addition, the QFII Regulations stipulate that the acquisition of shares of listed companies by foreign investors requires approval from the CSRC and quota record-filing or approval by SAFE. In practice, this means that once approval has been granted by the CSRC, a QFII can file a “basic quota” with SAFE based the proportion or the overall size of the security assets that will be managed by the applicant. A foreign exchange quota in excess of the basic quota requires approval by SAFE. The calculation of the basic quota will be significantly affected by whether or not the material assets of the company or its group are in the PRC. 

If the material assets are in the PRC, the basic quota will be 0.1 billion USD plus 0.2% of the average asset size over the past three years, minus any RMB Qualified Foreign Institutional Investor’s quotas (“RQFII quota”, in US Dollar terms) already granted to the company. If the material assets are outside the PRC, the basic quota would be 5 billion RMB plus 80% of the average asset size during the last year, minus any RQFII quota granted to the company. A QFII can invest in an RMB financial instrument approved by the CSRC within the recorded and approved quota. However, the QFII must entrust a domestic commercial bank as their custodian to manage the assets on behalf of the QFII, and also must entrust a domestic securities company to handle any domestic securities exchange transactions.

In order to acquire the shares of A-Share listed companies via the QFII program, foreign investors can entrust one or several institutions with QFII qualification. The licensed QFII will directly purchase the shares of A-Share listed companies on the domestic securities market and will disclose in the relevant documents that such foreign investor is the actual investor. While investment in A-Share listed companies by applying a QFII license or other investment methods above requires cooperation from counter-parties of the transactions and/or multiple approval procedures, foreign investment through the QFII program requires no prior approval from governmental authority (though the foreign investor must fulfill its disclosure obligation). However, foreign investment in A-Share listed companies via the QFII program is subject to an investment ratio limitation under the QFII Regulations: a single foreign investor shall hold no more than 10% of the issued shares of a listed company via the QFII program; and the total equity interest held by all foreign investors shall not exceed 30% of the issued shares of a listed company. 

Foreign investors that purchase shares in A-Share listed companies via the QFII program should observe the requirements on the disclosure of interests under the Administrative Measures on Takeovers. Specifically, if securities transactions at securities exchanges result in a QFII holding more than 5% of the issued shares of a listed company, the QFII shall prepare a report on the equity interest change within three days of the occurrence of the transaction and submit to the CSRC and to the relevant securities exchange. The listed company shall be notified of the same, and a public announcement shall also be made. An example of this is provided by Fubon Life Insurance, a QFII in the Taiwan region, which published a report on equity changes about the February 2016 purchase of shares in Liaoning Chengda (600739) made through private placement. 


2.2 Applying for an RQFII license or investing in A-Share listed companies via the QFII program

According to the RQFII Regulations, licensed RQFII can use RMB capital from abroad within the investment quota approved by SAFE to invest in listed securities in the PRC, thereby providing a means for foreign investors to acquire A-Shares of listed companies by applying for an RQFII license or via the RQFII program. 

To become a licensed RQFII, the following requirements must be satisfied:

a) Place of registration and qualification:

i. The applicant should be a Hong Kong (or another pilot area) subsidiary of a mainland fund management company, securities company, commercial bank or insurance company, or a financial institution whose place of registration and principal place of business is Hong Kong (or another pilot area); and

ii. The applicant should have obtained its asset management business qualification from the Hong Kong securities regulatory authority and have already carried out asset management activities; 

b) It should have financial stability and good credit standing;

c) It should have sound corporate governance and internal controls, and its practitioners should hold the relevant qualifications to practice as required by its home country or region;

d) It should be operating in compliance with applicable provisions, and should not have been subject to any major punishment by local regulatory authorities within the past three years or since its incorporation; and

e) It should satisfy other conditions prescribed by the CSRC pursuant to principles of prudent regulation.

The RQFII Regulations adopt the same, or very similar standards to the QFII Regulations. With the approval from the CSRC, an RQFII can obtain a “basic quota” through record-filing with SAFE. If the material assets of an RQFII or its group are within the PRC, the basic quota would be 0.1 billion USD (in RMB terms) plus 20% of the average asset size over the past three years, minus any Qualified Foreign Institutional Investors quotas (“QFII quota”, in RMB terms) already granted to the company. If the material assets are outside the PRC, the basic quota would be 5 billion RMB plus 80% of the asset size of the last year, minus any QFII quota already granted to the company. Quotas in excess of the basic quota shall be approved by SAFE. The investment ratio limitation on the investment in A-Share listed companies via RQFII is the same as for the QFII Regulations: a single overseas investor shall not hold more than 10% of the issued shares a listed company, and the total equity interest held by all overseas investors shall not exceed 30% of the issued shares in a listed company. An RQFII is also required to entrust a domestic commercial bank as their custodian and entrust a domestic securities company to handle the domestic securities exchange transaction.

In the Administrative Measures on Takeovers, there is a general requirement to disclose any equity interests and this applies to investment by foreign investors in A-share listed companies via RQFII program. A recent example is: in October 2016, Hua An Asset Management (Hong Kong), using fund from its RQFII account, subscribed to the new shares issued by Changjiang Runfa (002435) to raise the supporting funds for asset acquisitions.


2.3 Investment in A-Share listed companies by strategic investors

2.3.1 Qualification Requirements

The Strategic Investment Measures stipulate that in order to acquire the shares of an A-Share listed company as a strategic investor, a foreign investor shall meet the following requirements:

a) It is a legally established and operated foreign legal person or other organization,4 with sound financials, good credit standing and well-established management experience;

b) The total value of its overseas assets is more than USD 100 million; or the overseas assets managed by it shall worth more than USD 500 million; or the total value of its parent company’s overseas assets is more than USD 100 million or the overseas assets managed by its parent company are worth more than USD 500 million;5

c) It has a sound management structure and a well-established internal control system, and its business operations comply with applicable laws and regulations;

d) It and its parent company have not received any substantial punishment from an overseas or domestic regulatory authority within the last three years.

2.3.2 Investment Channels

The Strategic Investment Measures stipulate that a foreign investor may conduct strategic investment either by private placement or transfer by agreement. Article 2 of the Strategic Investment Measures Exposure Draft adds a third method, tender offer. 

The requirements for these three methods are as follows:

a) Strategic investment through private placement of shares of listed companies shall comply with the following procedures: 

i. The board of directors of the listed company adopts a board resolution;

ii. The shareholder general meeting of the listed company adopts a resolution;

iii. The listed company and the investor conclude a subscription agreement for the private placement of shares;

iv. The investor submits relevant application documents to MOFCOM;

v. The investor obtains the CSRC approval;6 and

vi. The listed company applies for a change of registration with the relevant market supervision bureau after completion of the private placement transaction.

For item iv, “The investor submits relevant application documents to MOFCOM”, the following details apply:

According to the Measures on the Administration of the FIE Filing and other regulations promulgated by MOFCOM, the incorporation of and changes to foreign-invested enterprises not subject to special administrative measures shall go through record-filing. 

According to the Catalogue of Industries for Guiding Foreign Investment (2017 Revision) promulgated by the NDRC and MOFCOM, unless a domestic company, enterprise or natural person, in the name of an overseas company legally established or controlled by it, merges with or acquires its domestic affiliated company, the incorporation of or changes to foreign-invested enterprises, including foreign strategic investment in the listed companies and relevant matters, are not subject to special administrative measures and the record-filing shall be adopted instead. 

In order to determine whether a strategic investment shall be subject to examination and approval or record-filing, there is a need to consider the following circumstances:

i. According to the Foreign M&A Provisions and the Strategic Investment Measures, approval from MOFCOM is required where a domestic company, enterprise or natural person, in the name of an overseas company legally established or controlled by it, merges with or acquires its domestic affiliated company;

ii. According to the Strategic Investment Measures and regulations on the delegation of approval authority for foreign investment, approval from MOFCOM or the local commerce department is required if the listed company is among the industries subject to special administrative measures under the Catalogue of Industries for Guiding Foreign Investment;7 and

iii. MOFCOM approvals are not required for other transactions subject to record-filing. Record-filings shall be completed according to the Measures on the Administration of the FIE Filing.

A typical example of strategic investment by private placement is Alliance Healthcare Asia Pacific’s 2017 subscription for new shares in Nanjing Pharmaceutical (600713) through private placement as a strategic investor. The MOFCOM explicitly stated that since Nanjing Pharmaceutical was already an FIE prior to the transaction, the Measures on the Administration of the FIE Filing and relevant regulations should apply to the change of significant matters of the company, meaning that MOFCOM approval was not required for introducing the foreign strategic investors.

b) A strategic investment through transfer of shares of the listed company by agreement shall comply with the following procedures: 8

i. The board of directors of the listed company adopts a board resolution;

ii. The shareholder general meeting of the listed company adopts a shareholder resolution;

iii. The transferor and the investor conclude the share purchase agreement;

iv. The investor submits the relevant application documents to MOFCOM;

v. If the investor is an equity holder of the listed company and has obtained the aforementioned approval, the investor must complete the formalities to confirm the share transfer at a securities exchange, complete the formalities for the registration at a securities registration and settlement institution, and file with the CSRC; if the investor intends to have de facto control of the listed company through transfer by agreement, the investor shall submit an acquisition report and relevant documents to the CSRC for its review, and only if the CSRC raises no objection after the review can it proceed with the share transfer confirmation formalities at a securities exchange and apply for registration at a securities registration and settlement authority; and

vi. After the transfer by agreement is completed, the listed company shall make an amendment registration at SAIC based on such approval.

Please refer to section a) above for further details on item iv. “The investor submits the relevant application documents to MOFCOM.” 

Some examples of foreign investors investing in A-share listed companies through transfer agreement include Chow Tai Fook Investment’s9 purchase as a strategic investor in a 30% share of ST Jinggu Forest (600265) from its shareholder Xiaokang Holding through contract, CVC’s strategic investment in Zhuhai Zhongfu (000659), and the negotiated acquisition of Chongqing Beer (600132) by Carlsberg Hong Kong.

Regardless of which strategic investment channel is adopted, the A-shares of a listed company acquired by foreign investors may not be transferred within three years. While the investment fund can receive injection by installment, the shareholding ratio of the investor after the initial investment must be more than 10% of the shares issued by the company. 10

c) Strategic investment by tender offer

According to the Strategic Investment Measures Exposure Draft, strategic investments that are subject to state-specified special administrative measures shall comply with the following procedures:

i. The foreign investor shall prepare a summary tender offer report;

ii. The foreign investor, the listed company or relevant parties shall fulfill the relevant reporting and notification obligations under applicable laws and regulations and the CSRC rules; and

iii. The listed company shall submit the relevant application as per the Strategic Investment Measures Exposure Draft to the local commerce authority and shall comply with specific rules, if any.

Once the competent commerce authority approves in principle the strategic investment by the foreign investor, the foreign investor shall conduct the tender offer transaction based on applicable regulations; when the transaction is completed, the listed company shall apply to the commerce authority for the Certificate of Approval for a Foreign Invested Enterprise.

A recent example of this approach is the August, 2018 tender of by Grand Metropolitan International Holdings Limited to acquire Swellfun (600779). 

d) Investing in A-Share listed companies by indirect acquisition

(1)M&A of a listed company via its controlling FIE

Foreign investors can merge with and acquire A-Share listed companies via FIEs established in the PRC that have PRC legal person status. Under such foreign investment mechanism, the foreign investor does not need to be qualified as a strategic investor or a QFII/RQFII, and the approval procedures for foreign investment by a strategic investor or QFII/RQFII investment do not apply.

The M&As of A-Share listed companies by foreign investors via foreign invested enterprises controlled by the investors shall be conducted according to the Administrative Measures on Takeovers, the Administrative Measures on the Issuance of Securities by Listed Companies, and the Implementation Rules on the Private Placement of Shares by Listed Companies, through tender offer, negotiated acquisition or subscription of private placement of shares of listed companies.

It should be noted that due to the current tight SAFE policies on foreign exchange control, restrictions apply to an FIE using its capital funds for an equity investment. If a foreign investor intends to acquire the listed company via an FIE established by the investor, the FIE shall use only its own funds for the acquisition. 

A typical case of a listed company using its controlling FIE to make such investment, is Everwin Pacific’s 2007 acquisition of Jiugui Liquor (000799) via Zhonghuang Company Limited.

(2)M&A of a listed company via a domestic investment company established by a foreign investor.

Under the current regulations, an investment company established by a foreign investor is able to make strategic investments in a listed domestic company. According to the Provisions of the Ministry of Commerce on the Establishment of Investment Companies by Foreign Investors (amended in 2015), in order to establish an investment company, a foreign investor shall meet the following conditions:

i. The foreign investor has good credit standing and the necessary financial soundness to establish the investment company, with total assets valuing more than USD 400 million for the year prior to the establishment, and it has established an FIE in China with paid-in capital of more than USD 10 million, or it has good credit and the financial soundness necessary to establish the investment company, it has established ten or more FIEs in China, and the foreign investor has a paid-in capital of more than USD 30 million; 

ii. To establish an investment company in the form of a joint equity venture, the Chinese investor shall have good credit standing and the financial soundness necessary to establish an investment company, and have total assets valuing more than RMB100 million for the year prior to the application; and

iii. The registered capital of the investment company shall be a minimum USD 30 million.

A foreign investor seeking to establish an investment company shall be a foreign company, enterprise or economic organization. If there are two or more foreign investors, the foreign investor with the highest proportion of shares shall meet the requirements under item i above.

A typical example of is Hony Capital Fund V LP’s 2016 acquisition of Jinjiang Shares (600754) via the Hony (Shanghai) Equity Investment Fund Center (limited partnership). 

(3)M&A of the controlling shareholder of the listed company by the foreign investor to indirectly control the listed company

According to the Foreign M&A Provisions and the Administrative Measures on Takeovers, foreign investors are permitted to wholly or partially acquire the parent company or the controlling shareholder of listed companies from supported or encouraged industries in the Foreign Investment Industrial Guidance Catalogue, and to convert such listed companies to wholly foreign owned enterprises or FIEs in order to gain indirect control of the listed companies. If the parent company of the listed company is a state-owned company, the relevant approval procedures for the transfer of state-owned assets shall be performed.

Some typical cases include CDH Investment’s 2011 indirect equity investment in Luxi Chemical (000830) and Ulysses Parent’s 2018 indirect equity investment in Luyang Energy-Saving Materials (002088).

Apart from using cash to purchase shares of listed companies, foreign investors can also use their legally owned domestic or overseas assets as consideration to subscribe to private placement of A-shares of listed companies. If the assets contributed by foreign investors reach a defined threshold, then the transaction will constitute a material asset reorganization of the listed company. Even if the transaction amount does not reach the statutory threshold, since the listed companies have acquired assets with the increased company shares, the CSRC approval is still required.

Recent relevant examples include COFCO Biochemical Investment’s acquisition of the shares of COFCO Biochem (000930) through private placement; the acquisition of Wanhua Chemical Industry by Wanhua Chemicals (600309); and the subscription of private placement shares of Aerospace (000901) by Eashine International and Easunlux using the shares of Hiwinglux and IEE as consideration.

Please note that the Strategic Investment Measures Exposure Draft specifies that foreign investors are able to use the shares of foreign companies held by them and/or the newly issued shares of the foreign investors as consideration of strategic investment. The Strategic Investment Measures Exposure Draft no longer requires that foreign companies be listed companies or SPVs, as was required in the Foreign M&A Provisions. According to the Strategic Investment Measures Exposure Draft, if the strategic investment involves a cross-border share swap, the domestic companies and their shareholders shall engage agencies registered in the PRC as consultants to conduct due diligence on the authenticity of the acquisition application documents and the financial situation of the relevant foreign companies, to ascertain whether the conditions for the cross-border share swap are satisfied, and shall submit consultant reports.


III. Investment in A-Share listed companies via Northbound Trading Link (“NTL”) of Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect

3.1 NTL of Shanghai-Hong Kong Stock Connect

Under the mechanism of Shanghai-Hong Kong Stock Connect, foreign investors may delegate Hong Kong brokers and apply to the SSE to transact shares in A-Share listed companies as specified in the relevant regulations via an SEHK securities trading-service company in Shanghai. According to the Implementation Measures for the Business of Shanghai-Hong Kong Connect, the stocks available for trading to foreign investors under the NTL of Shanghai-Hong Kong Stock Connect include: (i) the SSE Constituent Index; (ii) the SSE 380 Index; and (iii) A-shares listed on the SSE by companies listed on both the SSE and SEHK.

The above regulations require that stocks of the NTL of Shanghai-Hong Kong Stock Connect shall be quoted and traded in RMB. The trading days and transaction time shall be announced by the SEHK Shanghai Subsidiary on a designated website, and will be traded via competitive bidding.

In addition, foreign investors who conduct a transaction via the NTL of Shanghai-Hong Kong Stock Connect shall obey the following requirements of the Several Provisions on the Interconnection Mechanism for Transactions in the Mainland and Hong Kong Stock Markets: 

i. The shareholding ratio of a foreign investor in a listed company shall not exceed 10% of the total number of shares of such listed company; and

ii. The aggregate number of A-shares held by all foreign investors in a listed company shall not exceed 30% of the total number of shares of such listed company.

However, in the case of a strategic investment, these ratio restrictions will not apply to a foreign investor’s shareholding.


3.2 NTL of Shenzhen-Hong Kong Stock Connect

Under the mechanism of Shenzhen-Hong Kong Stock Connect, foreign investors may delegate Hong Kong brokers and apply to the SZSE to transact shares in A-Share listed companies as specified in the relevant regulations via the SEHK Shenzhen Subsidiary. According to the Implementation Measures for the Business of Shenzhen-Hong Kong Connect, the stocks available for trading to the foreign investors under the NTL of Shenzhen-Hong Kong Stock Connect include:

i. The SZSE Constituent Index and SZSE Small/Mid Cap Innovation Index stocks with a daily average market capitalization of more than six billion RMB in the six months before the deadline for periodical adjustment review. The market capitalization is calculated based on the actual time of listing if such time is less than six months; and

ii. A-shares listed on the SZSE by companies listed on both the SZSE and the SEHK.

According to the Implementation Measures of the Shenzhen Stock Exchange for Shenzhen-Hong Kong Stock Connect, the Stocks of NTL of Shenzhen-Hong Kong Stock Connect shall be quoted and traded in RMB. The trading days and transaction time shall be announced by the SEHK Shenzhen Subsidiary on a designated website, and will be traded via competitive bidding.

In addition, foreign investors shall comply with the following requirements listed in the Several Provisions on the Interconnection Mechanism for Transactions in the Mainland and Hong Kong Stock Markets: 

i. The shareholding ratio of a foreign investor in a listed company shall not exceed 10% of the total number of shares of such listed company; and

ii. The aggregate number of A-shares held by all foreign investors in a listed company shall not exceed 30% of the total number of shares of such listed company.

In the case of a strategic investment, these ratio restrictions will not be applied to shares held by foreign investors.


IV. Issues for PIPE in A-Share Listed Companies by Foreign Investors

4.1 Industry Access

As discussed above, investment by foreign investors in A-Share listed companies is subject to the approval or record-filing of relevant PRC government authorities and must also comply with any relevant foreign investment access policies. The Negative List specifies the restricted and prohibited areas for foreign investment and imposes limitations on shareholding ratios for a foreign investor’s investment in certain industries. The Strategic Investment Measures stipulate that where laws and regulations have expressly specified limitations on the shareholding ratio of foreign investors for companies in specific listed industries, the foreign investor shall comply with shareholding restrictions and the investor shall not invest in listed companies of those industries in the prohibited category of the Negative List. 


4.2 Anti-Monopoly Review

Investment by foreign investors in A-Share listed companies may be subject to anti-monopoly review. Since the promulgation of the Anti-Monopoly Law in 2008, the State Council, MOFCOM and the State Administration of Market Supervision have consecutively promulgated the Regulation on the Declaration Threshold for the Concentration of Business Operators, the Measures for the Review of the Concentration of Business Operators, the Interim Measures for the Evaluation of the Competitive Effect on the Concentration of the Business Operators, the Guiding Opinions for the Declaration of the Concentration of the Business Operators, the Anti-monopoly Review Guidance for Concentrations of the Business Operators and other regulations that detail anti-monopoly review procedures and the required filing documents. According to such regulations, if a foreign investor has acquired the control (including the common control) of a listed company and the total worldwide revenue for the last fiscal year of all business operators participating in the concentration exceeds RMB 10 billion, and at least two business operators’ revenue in China for the last fiscal year each exceeds RMB 40 million; or the total domestic revenue (in China) for the last fiscal year of all business operators participating in the concentration exceeds RMB 2 billion, and at least two of the business operators’ revenue in China for the last fiscal year exceeds RMB 40 million each, such foreign investor is required to make a declaration to the anti-trust authorities and to obtain approval.

Some related cases include CVC’s 2007 submission of anti-monopoly declaration documents to MOFCOM for its strategic investment in the domestic A-Share listed company, Zhuhai Zhongfu, via its subsidiary Asia Bottles (HK) Company Limited, and the July, 2018, COFCO Bio-chemical Investment submission of anti-monopoly declaration documents to the Anti-Monopoly Bureau of the State Administration of Market Supervision for the subscription of private placement shares issued by COFCO Biochem (000930). 


4.3 Security Review

When the M&A of a domestic enterprise by a foreign investor falls within the following scope, the foreign investor shall apply to MOFCOM for a security review before the filing for the M&A transaction. Industries likely to trigger the need for a security review include national security and defense-related products or services, agricultural products, key infrastructure, significant transport services, key technology and heavy equipment manufacturing. If the M&A transaction has implications for national security, a security review will be required only if the foreign investor will have de facto control of the domestic enterprise, however, if the national security implication is related to national defense, a security review is required regardless of whether or not the foreign investor will have de facto control of the domestic enterprise. Please note that MOFCOM has not yet published a detailed catalogue specifying the scope of industries for security review. Therefore, to mitigate any legal risk, it is suggested that a foreign investor consult with MOFCOM in advance to verify whether the M&A transaction in question may be subject to a security review.


4.4 Waiver of Tender Offer

According to the Administrative Measures on Takeovers, if the plan to acquire shares of a listed company would mean that the total proportion of shares held by a purchaser will reach 30% of the issued shares of the company, the purchaser will be required to deliver a general offer or partial offer to the shareholders of the listed company before the acquisition can proceed. Under the following circumstances specified in the Administrative Measures on Takeovers, the purchaser may apply to the CSRC to waive such a tender offer requirement:

i. The purchaser and the transferor of shares can prove that the share transfer will not alter the actual controlling person of the listed company;

ii. The listed company is facing a severe financial crisis, the reorganization plan proposed by the purchaser to save the company has been approved by a general shareholder meeting of the company, and the purchaser guarantees that it will not transfer its interest in the company within three years; and

iii. Other circumstances approved by the CSRC as necessary for the development of securities market and for the protection of the legal interest of the investor.


4.5 Business Competition and Related Party Transactions

According to the Administrative Measures on Takeovers, a foreign investor shall make known in the disclosure documents prepared and published for its investment in the A-Share listed company: any current or potential business competition between the business of the investor and persons acting in concert with the investor and their controlling shareholders, the actual controlling person and the business of the listed company, and any ongoing related party transactions. The disclosure documents shall outline any business competition or related party transactions or relevant arrangement to ensure the avoidance of business competition between the investor, person acting in concert and its related party and the listed company and to maintain the independence of the listed company.

If the investment in an A-Share listed company by the foreign investor meets the back-door listing requirements specified in the Administrative Measures for the Material Asset Reorganization of Listed Companies, the listed company shall comply with the CSRC’s relevant requirements on corporate governance and standard operation of the listed company after the completion of such material asset reorganization in order to maintain its independence from the controlling shareholder, the actual controlling person and other enterprises that are controlled by such persons whether in terms of business, assets, finance, employees, organization or other aspects, and to ensure there is no business competition or other unconscionable related party transaction with the controlling shareholder, actual controlling person or other enterprises that are controlled by such person. 


1. Xinhua, October 19, 2018.

2. A-share refers to mainland China domestic shares, denominated in RMB and traded on the Shanghai and Shenzhen stock exchanges.

3. In China's pilot free trade zones, if the investments fall within the state-specified scope of implementation of special access administrative measures, the Provisions of the Special Access Administrative Measures for Foreign Investment in the Pilot Free Trade Zone (Negative List) (2018 Edition) shall apply.

4. The Strategic Investment Measures Exposure Draft expands the definition of entities of strategic investments from “foreign legal persons or other organizations” to “foreign companies, enterprises and other economic organization or individuals”.

5. The Strategic Investment Measures Exposure Draft amends the current requirement of “the total amount of its actual overseas assets is not less than USD100 million or the total amount of its managed actual overseas assets is not less than USD500 million” to “actual total assets of the foreign investor shall be not less than USD50 million or the actual total assets managed by the foreign investor shall be not less than USD300 million”, and the last three-year sales limitation for foreign investors acquiring shares of A-share listed company through strategic investment is reduced to twelve months.

6. The Decision of the Ministry of Commerce on Revising Certain Regulations and Normative Documents promulgated by MOFCOM on December 28, 2015, deletes the provision that “after receiving the letter of in-principle approval issued by MOFCOM concerning the Investor's Strategic Investment in the Listed Company, the Listed Company submits, to the CSRC, the application documents for directed issue of new shares, and the CSRC carries out verification and approval on the application pursuant to the law”.

7. According to Article 3 of the Strategic Investment Measures Exposure Draft, strategic investment in areas within the scope of special administrative measures shall be approved and administered by MOFCOM and the commerce authorities of all provinces, autonomous regions, centrally-administered municipalities, municipalities with unilateral planning and the Xinjiang Production and Construction Corps (the "provincial commerce authorities") within their respective area of authority. For strategic investment where the investment amount is below the quota, the provincial commerce authorities are responsible for approval and administration.

8. According to the Strategic Investment Measures Exposure Draft, for strategic investment through negotiated transfer and which is subject to state-specified special administrative measures on industry admittance, the transaction shall comply with the following procedures: (1) internal procedures of the listed company pursuant to applicable laws, regulations and articles of association of the company; (2) a share transfer agreement has been concluded between the transferor and the investor; and (3) the foreign investor shall submit a relevant application to the local commerce authorities of the place of the listed company for the transaction. If there are applicable special provisions, such provisions shall prevail.

9. Defined as a foreign investor since it is a legal entity wholly owned by Taiwan, Hong Kong or Macao investors

10. The Strategic Investment Measures Exposure Draft discontinues the 10% shareholding ratio requirement after initial investment that was included in the current Strategic Investment Measures.


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