According to data released by the Trustee Association, the trust assets of trust companies reached RMB5.5 trillion (US$876.2 billion) in value during the first half of this year, far exceeding the value of the assets of the securities and fund industries. Trust companies have regularly realised growth against expectations and have become the growth standouts in the financial industry, attracting domestic and foreign investors like flies to honey. The author wishes to share here the legal practice issues involved in the acquisitions and restructurings of a number of domestic trust companies.
Basis of acquisitions
Trust companies, as non-banking financial institutions, are regulated by the China Banking Regulatory Commission (CBRC) in China and acquisitions thereof also require the CBRC approval (excluding holdings of less than 5% of the total outstanding tradable shares of listed trust companies). Such acquisitions are governed by the Implementing Measures for Items of Non-banking Financial Institutions that are Subject to Administrative Permissions and the Requirements in Respect of the List and Format of Application Materials for Items of Non-banking Financial Institutions that are Subject to Administrative Permissions.
Stringent access conditions are in place for trust company investors, to avoid trust companies becoming a financing instrument. As an example, take the following requirements for non-banking financial institutions in China to: (1) be an enterprise as legal person; (2) have a good reputation, a good credit and a tax payment record; (3) have no major violations of laws or regulations within the latest two years; (4) be profitable for the past two years; (5) have net assets not less than 30% of its total assets; (6) have funds used to acquire equity stakes being genuine and lawful, not a loan or funds entrusted by others; (7) ensure a single investor and connected persons that have taken an equity stake in the trust company do not exceed two, and of them not more than one being an absolute controller; (8) prohibit transferring the equities of the trust company, pledging the said equities or establishing a trust by the said equities within three years; (9) ensure that in principle, the balance of its equity-type investments does not exceed 50% of its net assets.
It is recommended that an investor be a parent company or holding company. Although the law does not set mandatory requirements in respect of the registered capital or date of establishment of an investor in an acquisition of a trust company, net assets, balance of equity-type investments, two successive years of profitability, etc. are set standards. The regulatory authorities will also require investors to provide their basic particulars and to disclose level-by-level control up to the final actual controller. The regulatory authorities favour as investors parent companies and group holding companies that are rock solid, innovative and seen to be industry benchmarks. Therefore, special purpose vehicles (SPVs) and project companies rarely are able to satisfy the requirements for acquiring a trust company.
It is necessary to guard against the shareholding of foreign investors crossing the red line. The investment percentage of any one foreign investor cannot exceed 20%, and in general that of multiple investors may not exceed 25%. In this respect, the regulatory authority will examine the percentage of the equity subscribed for by the foreign investors, and look at the acquisition transaction documents in detail to determine whether the foreign investors will gain actual control of other investors in the trust company, for example, by agreeing on an acting-in-concert provision with other investors, or having the number of directors of the trust company appointed by the foreign investor far exceeding the number of persons it would be entitled to appoint based on its shareholding. Such provisions need to be handled with great care and discussed in advance with the regulatory authority so as to avoid approval delays.
The percentage of net assets accounted for by balance of equity-type investments needs to be accurately understood. As the law does not clearly explain what “balance of equity-type investments may not exceed 50% of net assets” means, numerous investors mistakenly believe that it refers to the ratio between the percentage of the trust company’s registered capital accounted for by the equity to be acquired and its net assets. However, this is not the case. This term actually refers to the investor’s capital adequacy. As investors typically pay a premium to make an acquisition, the consideration paid for the equity transfer far exceeds the percentage of the registered capital accounted for by the equity in question, and accordingly the actual consideration paid by the investor to acquire the equity in the trust company should be considered the benchmark. The requirement is that such consideration not exceed 50% of its net assets. An investor that fails to satisfy this requirement should first carry out a capital increase.
A degree of latitude
Heeding the prudential review principle. Although the regulatory authority is supposed to render a decision within three months of accepting an acquisition application, in practice it has a certain degree of latitude in its reviews and has the right to request the submission of additional documents that are not specified in law. Therefore, said principle is the “emperor principle” that investors are required to comply with in the course of submitting documents. An investor should fully take into consideration such a possibility when designing the terms of the acquisition agreement by expressly providing for withdrawal from the transaction and the bearing of liability in the event that the approval of the regulatory authority cannot be secured.
In summary, although trust licences are in short supply and the acquisition process of trust companies seems rather forbidding, familiarity with the relevant laws and policies and a solid grasp of the regulatory authority’s approval requirements will go a long way in facilitating any project for the acquisition of a trust company.
Wang Tao is a partner based in the Shenzhen office at Concord & Partners; Yu Yi is an intern based in the Shenzhen office at Concord & Partners
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