On June 18, 2020, six authorities, including the Ministry of Commerce (MOFCOM), the China Securities Regulatory Commission (CSRC), the State-owned Assets Supervision and Administration Commission, the State Taxation Administration, the State Administration for Market Regulation and the State Administration of Foreign Exchange, jointly published the Measures for Administration of Strategic Investment in Listed Companies by Foreign Investors (Consultation Paper on Proposed Amendment for Public Comments) (“Consultation Paper” or “Measures”), proposing substantial revisions to the 2005 measures currently in effect, the Administration of Strategic Investment in Listed Companies by Foreign Investors published in 2005 (No.28 , “Current Measures”).
On the same day, the Drafting Notes published by the MOFCOM provided the context for the Consultation Paper, highlighting three problems existing in the Current Measures. Firstly, the qualification requirements for foreign strategic investors under the Current Measures are comparatively high – for example, a foreign investor must (a) be a non-natural person; (b) hold at least 10% of shareholding after the investment; (c) own proprietary assets no less than USD 100 million or managed assets no less than USD 500 million; and (d) be subject to a lock-up period of at least 36 months after the investment. Secondly, the investments stipulated in the Current Measures only include transfer by agreement and private placement, while tender offer has not been explicitly included. Also, the stocks of an overseas private company are not permitted as the payment consideration, in other words, cross-border share swap is not allowed. Thirdly, certain articles of the Current Measures need to be adjusted in order to be in line with the recently implemented Foreign Investment Law. Therefore, the Consultation Paper proposes revisions to resolve these three problems.
A summary of the key points of the Consultation Paper are listed as follows.
The Consultation Paper clarifies, aside from transfer by agreement and private placement, “strategic investment” shall include tender offer and other methods permissible under the relevant laws and regulations to acquire and hold the equity stake of an A-share company for certain time period, all of which shall comply with the investment principles and requirements stipulated in the Measures. The Consultation Paper loosens the restrictions on cross-border share swap: it allows a foreign investor, who makes a strategic investment in a listed company by means of private placement or tender offer, to exchange the shares of an overseas private company held by or issued to it as the payment consideration.
The Consultation Paper clarifies that foreign investors can refer to the Measures to make strategic acquisitions of listed companies in the National Equities Exchange and Quotations (NEEQ). It further specifies the following four situations to which the Measures shall not apply: (1) investments in listed companies by Qualified Foreign Institutional Investors (QFIIs) or RMB Qualified Foreign Institutional Investors (RQFIIs); (2) investments in listed companies by foreign investors through Stock Connect; (3) foreign investors acquiring A shares through initial public offering (IPO) and listing of a foreign-invested company limited by shares they invest in; and (4) foreign natural persons satisfying the relevant requirements of the CSRC purchasing and selling shares of listed companies on the secondary market or acquiring shares of listed companies through an equity incentive scheme.
The Consultation Paper clarifies that foreign strategic investors can include foreign natural persons. In addition, it reduces the minimum requirements for total assets of foreign investors (who are not controlling shareholders) and their wholly-owned shareholders, i.e. reducing the threshold of USD 100 million of proprietary assets owned or USD 500 million of managed assets to USD 50 million and USD 300 million respectively. Meanwhile, the Consultation Paper significantly reduces the stock holding lock-up period imposed on the foreign investors from 3 years to 12 months (or a longer period required by the Securities Law or its relevant provisions, if applicable). Moreover, the Consultation Paper cancels the requirement for the proportion of shareholding acquired by a private placement method, reduces the proportion of shareholding requirement from 10% to 5% for a transfer by agreement method, and expressly states that the proportion of shares to be purchased under a tender offer method shall be no less than 5% (or a higher proportion of shareholding required by the Securities Law or its relevant provisions, if applicable).
The Consultation Paper considers the foreign investment information reporting as a procedural requirement for implementing a strategic investment, clarifies the responsibilities of supervision and inspection of the competent commercial authority, and stipulates the punishments on foreign investors or listed companies that fail to report the investment information according to laws. At the same time, it cancels the requirement for obtaining an advance approval and filing from the competent commercial authority for strategic investments by foreign investors. Also, the Consultation Paper requires foreign investors and listed companies to engage advisors to provide professional opinions on whether the strategic investments comply with the provisions of the Measures, and further requires them to disclose such information in the relevant reports including the equity change reports, the tender offer reports and the listed company acquisition reports.
It is worth noting that the reforms taken under the Consultation Paper (i.e. relaxing the qualification requirements of foreign investors, loosening the restrictions on cross-border share swap, and reducing stock holding lock-up period) reflect a policy orientation of the Chinese government to support the healthy and orderly development of the A-share market by encouraging expanding the channels for foreign investment and promoting the medium- and long-term capital inflow, providing conveniences for foreign investors to make strategic investments in A-share listed companies. With the official implementation of the Measures and under a policy direction for further opening up the capital markets, we expect that an increasing number of foreign investors will consider leveraging multiple channels to seek opportunities in investing in A-share listed companies, including but not limited to strategic investments under the Measures and investments through QFII, Stock Connect and Qualified Foreign Limited Partner (QFLP).