New opportunities for Chinese enterprises to list D-shares in Europe

By Qu Feng, Dentons
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It has always been uncommon for wholly Chinese owned enterprises to choose and seek a foreign listing in Germany. Germany is the economic and manufacturing heart of Europe and since the United Kingdom’s declaration to leave the European Union (EU), Germany’s central position in the European capital markets has become evidently more important. Deutschland shares or D-shares, as a new means for wholly Chinese owned enterprises to list abroad, have drawn the attention of the capital markets industry. The offering to wholly Chinese owned enterprises of D-shares in Germany can be conducive to enhancing their global competitiveness and expanding their international strategic deployment. This column briefly describes the requirements and conditions of the China Europe International Exchange (CEINEX) for the offering and listing of D-shares.

曲峰 QU FENG 大成律师事务所 高级合伙人 Senior Partner Dentons
Senior Partner

CEINEX was established with respective investments of RMB200 million by the Shanghai Stock Exchange, Deutsche Börse Group and China Financial Futures Exchange. The term “D-share” means a share directly listed and offered on CEINEX in Germany, based on the relevant listing and trading rules of the German stock market, and by a joint stock limited company registered in China following review and approval by both the Chinese and German regulators. A D-share is an overseas listed foreign share under China’s Company Law and is similar in form to a Hong Kong H-share.

Conditions for the listing of D-shares. CEINEX’s listing rules show that its financial conditions for listing are simple. CEINEX conducts its review mainly to determine whether the issuer satisfies the listing conditions, which include the company’s financial indicators, liquidity indicators, etc. By taking a “General Standard” as an example, the main listing conditions include: (1) an operating history of at least three years; (2) a forecast market value for the listed shares of not less than €1.25 million; (3) a minimum offer quantity of 10,000 shares entering the market for trading; (4) the listed shares can be freely traded without a minimum offer percentage; and (5) before submission of the application to the exchange, the issuer is required to prepare a prospectus which is subject to the review and approval of the German financial regulator known as the Federal Financial Supervisory Authority (BaFin).

In addition to the above-mentioned explicit conditions, the initial D-share offerings are also subject to certain implicit conditions. More specifically, for example, having a sound corporate governance structure, a certain business size, relatively stable profitability; and where the purpose and development of funds is reasonable and demonstrates continuity in respect to the offering percentage and offering size requirements. Currently, CEINEX preferentially welcomes domestically listed companies that have already issued A-shares. Such a consideration indicates a hope to create a stable D-share market from the outset and anticipation that the initial issuers of D-shares will have solid performance in the international market. The offering of D-shares by enterprises with a clear business layout or strategy for its business in Europe is even more welcome by CEINEX.

Approvals and regulations. German capital markets are subject to a regulatory model that combines management and review by BaFin and local governments with self-regulatory administration by the securities exchanges. As mentioned above, an issuer that proposes to offer D-shares is required to first submit its prospectus to BaFin for review. Additionally, the issuer, a Chinese stock company that is proposing to offer shares abroad, is required to secure the prior approval from the China Securities Regulatory Commission and comply with China’s Company Law, Securities Law and related laws and regulations.

After the D-shares have been offered and listed, the issuer is additionally required to comply with relevant subsequent obligations specified by the EU and subsequent reviews by the government of the State of Hesse, e.g., disclosure of information obligations, prohibition on insider trading, etc. The laws and regulations an issuer is required to comply with include those at the EU level and at the German level as well as the relevant regulations of CEINEX. If an issuer is an A-share listed company, it is additionally required to comply with and satisfy Chinese laws and regulations on listing A-shares and the subsequent obligations specified by the exchange.

The Prospectus. A prospectus is the core document required for the public offering of shares under the General Standard and Prime Standard regulated by the EU. It is required to have a clear structure, comprehensive contents and reasonable assessments of all aspects of a company including: (1) its actual main business, and the purpose of funds and details of the legal environment; (2) related financial details such as assets and liabilities, operating revenues, profits, losses, etc.; (3) an overview of the issuer and its business organizational structure with details of its shareholders; and (4) a legal assessment of the purpose of the funds raised with information on the offering of the shares, the terms and conditions as well as risk warnings in relation to the offerings, etc.

It should be noted that as the core document prepared by an issuer, the prospectus requires the prior review and approval of BaFin and this is equivalent to a necessary condition for a listing. In the division of the responsibilities among the investment banks and intermediary firms participating in the offshore listing, the prospectus is usually prepared and produced with the assistance of an experienced law firm.

D-shares offer opportunities and outlook. According to media reports, CEINEX has already commenced on the selection of leading enterprises from A-share listed companies to serve as the first batch of D-share issuers. CEINEX supports several D-share listing models including IPOs, the A + D model and secondary offerings of D-shares. Haier is the first Chinese listed company to assign the A + D model to offer D-shares. The roll out of D-shares provides a new platform for the overseas financing of Chinese enterprises and given the special nature of CEINEX, due to Chinese domestic exchanges having a controlling interest therein, compared with other overseas exchanges, we can see greater convenience and efficiency, as well as new opportunities presented in the offering of D-shares by domestic enterprises.

Qu Feng is a senior partner at Dentons

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