Filing rules, main focuses for overseas listing

The Trial Measures for the Administration of the Overseas Offering and Listing of Securities by Domestic Enterprises and five supporting guidelines were implemented on 31 March. Since then, the authors have assisted a number of enterprises to submit filing applications to the China Securities Regulatory Commission (CSRC) for overseas listing, with two having so far received filing notices (out of a total of five in the market).

Based on experience, the authors summarise the filing rules and main focuses for overseas listing of domestic enterprises.

Principal rules

The above-mentioned trial measures subject all direct and indirect overseas listing activities by domestic enterprises to administration by filing, specifying circumstances that apply to overseas offering and listing of securities, and establishing a negative list system.

Specifically, they:

1. Clarify such concepts as domestic enterprises, overseas offering and listing, and securities, as well as requirements for the filing entity, circumstances, timing, content, materials, and procedures;
2. Establish an oversight co-ordination mechanism, improve arrangements for cross-border co-operation in securities oversight, and establish a mechanism for the circulation of filing information;
3. Specify legal liability due to failure to carry out the filing procedure or falsification of filing materials, increasing the costs for violations; and
4. Relax restrictions on the offering targets of direct overseas offering and listing under specific circumstances, in order to open to foreign markets.

Regulatory focus

According to public disclosure, since the implementation of the above-mentioned trial measures until 7 July 2023, the CSRC had requested supplementary filing material to 51 enterprises with overseas listing filing applications that were accepted, involving more than 200 feedback issues.

The feedback issues and frequency were: equity structure/changes in equity (86 times); shareholder verification (37); equity incentives (23); personal information protection and data security (21); operational compliance and qualifications (18); independence of business/connected transactions (12); foreign investment access (11); determination of main operating entity (8); sales model and customer/supplier concentration (8); multiple submissions of listing applications (6); and use of offering proceeds and compliance of investment projects (6).

Another 16 feedback instances involve inventory, goodwill, revenue, large dividends, appropriation of connected party funds, provision of security, corporate governance and internal controls, work safety, payment of contributions to social security and housing funds, pending litigation, and complaints and oversight of human genetic resources.

Among these requests for feedback, the CSRC’s focus is most frequent in three areas:

(1) Equity structure/changes in equity

• Amounts, pricing basis, price payments and tax payments in the various share changes since the issuer’s establishment and the exchange control details, overseas investment and other such regulatory procedures were carried out; whether instances of benefit funnelling arrangements or the holding of shares by entities forbidden by law from holding shares exist; why the price of a subsequent round of financing was lower than the previous round; and why a shareholder gave up its shares or voting rights without consideration.
• Whether capital contributions have been paid, and whether there is unperformed contribution obligation, illegal withdrawal of a capital contribution, or defect in capital contribution method; and why the registered capital of the main domestic operating entity has not been fully paid in, plus compliance and impact on normal business operation and debt solvency.
• Compliance of the establishment of the equity/variable interest entity (VIE) structure, including exchange control details, overseas investment and other regulatory procedures involved in conception and repatriation of the acquisition, lawful payment of taxes and levies, etc.; specific transaction arrangements among relevant entities under the equity/VIE structure, including the timing, amount, means, method, clarity of title and fairness of pricing of financial support of the domestic entity and relevant fund transactions, profit transfer arrangements, etc.

(2) Shareholder verification

• Look-through examination of shareholders to determine whether there are entities forbidden by law from holding shares.
• Reasons for failure by the actual controller to carry out registration as required for outbound investments under circular 37, its impact on the listing and subsequent arrangements.
• Nominee shareholding: particulars of the actual holder of rights in the shares, reasons for nominee shareholding, details of any changes, compliance, whether there are any disputes, direct or indirect holding of shares of the issuer by an entity forbidden by law from holding shares, funnelling of benefits or conflicts of interest.
• Holding of shares in trust: details of the complete look-through examination and main contents of the contract and asset management arrangement involved in the shareholder’s top level trust, including the trust’s specific method, management authority and fees, contract provision for the amendment and termination, trust assets disposal arrangement, date of execution of the contract and other special clauses, particulars of the ultimate beneficiary, date and method of change in the shares of the issuer in which the actual controller has rights and interests, etc.
• Whether any special rights arrangement exists and its impact on the company’s operation and control, and whether such impact is ongoing; whether any of the shareholders is a domestic private equity fund, and whether it has carried out the procedures for filing of a domestic private equity fund; and details of the capital contributions by state-owned shareholders and the carrying out of state-owned asset administration procedures for contemplated listing.

(3) Equity incentives

• Incentive plan to be implemented after the listing: particulars of the plan, decision-making procedure carried out to formulate it, principles for determining the exercise price, incentive recipient particulars, whether reserved rights have been established, and whether the plan is lawful and compliant; and impact on the original rights and obligations of termination of the previous incentive plan and its conversion into an employee shareholding plan, and the relationship with and convergence arrangement for the incentive plan to be implemented after the listing.
• Incentive plan implemented before filing: compliance, including the carrying out of exchange control and overseas investment regulatory procedures by the incentive recipients, whether outsiders or unspecified recipients are included, and whether it harms the lawful rights and interests of the issuer and other shareholders. If outsiders are included, explain why they were able to acquire equity, the price of such acquisition, basis for valuation and source of funds, and whether there is a funnelling of benefits or nominee shareholding.

Wang Bo is a partner at Commerce & Finance Law Offices. He can be contacted at +86 10 6563 7181 or by e-mail at wangbo@tongshang.com
Peng Caixia is an associate at Commerce & Finance Law Offices. She can be contacted at +86 755 8351 7570 or by e-mail at pengcaixia@tongshang.com