On 18 October 2019, the China Securities Regulatory Commission (CSRC) issued the Measures for the Administration of Major Assets Restructurings of Listed Companies (revised in 2019), which amended the basic rules for restructuring and listing of listed companies on the main board market and the Growth Enterprise Market (GEM).
On 29 November 2019, Shanghai Stock Exchange (SSE) issued the Rules for Examination of Major Assets Restructurings of Star Market-Listed Companies of Shanghai Stock Exchange, which provided for the restructuring and listing of Star Market-listed companies. The restructuring and listing rules of the A-share market have been basically established.
Identification standard of fundamental change of companies
The restructuring and listing of a listed company mainly includes three elements: (1) the change of control of the company; (2) the purchase of assets from the acquirer and its affiliates by a listed company after the change; and (3) the purchase of assets leading to the change of the main business, or the change of other financial indicators, under the statutory standards. Among them, the third element is frequently revised, and two changes have taken place with this revision. One is to cancel the net profit as the examination indicator, and the other is to change the examination period of the “cumulative first” principle to three years.
The Measures for the Administration of Major Assets Restructurings of Listed Companies (revised in 2016) stipulate that when the change proportion of one of the five financial indicators – total assets, operating revenue, net profit, net assets and issued shares – reaches 100%, it will constitute restructuring and listing. This provision makes the examination standard of restructuring and listing closer to that of IPO listing.
However, it is quite controversial to regard net profit as one of the examination indicators, because most of the listed companies that need to be restructured and listed are struggling enterprises. If any profit-making assets are injected into loss-making enterprises, a restructuring and listing review may be immediately triggered. If high-quality assets are injected into low-profit enterprises, this is also likely to trigger a restructuring and listing review due to the strong profitability of the assets. Therefore, in this revision, the elimination of net profit as the examination indicator is more conducive to the struggling listed companies’ absorbing high-quality assets, improving the operation quality of listed companies, and safeguarding the rights and interests of minority shareholders.
The “cumulative first” principle refers to when a cumulative calculation method is adopted for the calculation of the above-mentioned change proportion of the indicators. When this principle was first established in the Measures for the Administration of Major Assets Restructurings of Listed Companies (revised in 2011), the examination period of indicators was not specified. As a result, as long as there is a change of control, all subsequent purchases of assets will be included in the cumulation scope, which makes it too easy to trigger the restructuring and listing standards.
In the measures for restructurings 2016, the time limit is set at five years, but this is still too long. Therefore, when revised in 2019, the examination period was further shortened to three years, which is similar to the examination period of many indicators of the main board IPO, and also conducive to struggling listed companies’ absorbing high-quality assets.
Allowing simultaneous supporting financing
In order to give full play to the function of restructuring and listing, the measures for restructurings 2019 loosen the restriction on simultaneous supporting financing for restructuring and listing. Accordingly, the listed companies can raise cash in the form of non-public offering while restructuring and listing, as the supporting funds of this restructuring and listing.
On the one hand, listed companies can easily raise supporting funds without having to conduct a non-public offering again after restructuring and listing, so that they can further ease the pressure of cash flow after putting in high-quality assets. On the other hand, the actual controller can further consolidate the control through subscription.
However, there are still certain restrictions on supporting financing. First, the number of shares issued for supporting financing must not exceed 20% of the current share capital of listed companies. Second, there is a two-year or three-year lock-up period for the shares acquired by supporting financing.
Conditionally releasing GEM
The measures for restructurings 2019 allow enterprises to restructure and list on the GEM again, but limit the acquired assets to the high-tech industry and strategic emerging industry assets in line with the national strategy. This revision not only enables the companies that have already landed on the GEM to put in high-quality assets and make full use of the advantages of the GEM platform, but also improves the attraction of the GEM to unlisted companies, guarantees their subsequent transfer and refinancing functions after listing, and paves the way for the reform of the GEM registration system.
Moreover, it guarantees the positioning of the GEM, only allowing the assets that meet the function positioning of the GEM to carry out backdoor listing. In combination with the above-mentioned provisions on loosening the restriction on supporting financing for restructuring and listing, it is also conducive to guiding the transfer of funds to high-tech industries and strategic emerging industries in line with the national strategy.
Rules of Star Market
The requirements for restructuring and listing are basically the same between the Star Market and the main board and GEM, but there are special provisions for the operating entities in which the assets are injected. In general, in addition to meeting the IPO requirements of the STAR Market, the target company should meet one of two conditions, i.e., having net profit in the past two years that accumulates to not less than RMB50 million (US$7.1 million), or the operating revenue in the past year being not less than RMB300 million and cash flow accumulating to not less than RMB100 million in the past three years.
If the target company has a difference in voting rights, the conditions are stricter. In addition to meeting one of the above two conditions, it also needs to meet the standard that the operating revenue in the past year is not less than RMB500 million. In addition, there are also special rules for the reduction of holdings of unprofitable target companies, and the disclosure rules of financial accounting information when red-chip companies are the target companies.
Tang Cenzhi is a partner and Lin Lefeng is a trainee lawyer at East & Concord Partners
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