Strategic investment in A-share companies by foreign investors

On 31 December 2005, the Ministry of Commerce, the China Securities Regulatory Commission, the State Administration of Taxation, the State Administration for Industry and Commerce and the State Administration of Foreign Exchange jointly issued the Measures for the Administration of Strategic Investments in Listed Companies by Foreign Investors, providing a clear legal basis and operational guidelines for strategic investments in A-share listed companies by foreign investors. The measures took effect one month later in January 2006.

The measures soon were followed in February by a document from the China Securities Depository and Clearing Corporation, the Notice on Relevant Issues Concerning the Opening of A-share Securities Account by Foreign Strategic Investors.

The quick succession of the A-share-focused legislation led to 2006 being dubbed the year of the birth of A-share acquisitions by foreign investors by some market participants.

On 27 September 2013, nearly eight years after the measures took effect, the Ministry of Commerce circulated for public comment a draft amendment of the measures. While the revision has yet to take effect, a close study of the draft will glean certain regulatory trends.

For a foreign investor proposing to make a strategic investment in an A-share company, the major issues to pay attention to include the conditions that the foreign investor and investee must meet and the requirements which the transaction must satisfy under the measures and draft revision.

Listed investee conditions

A potential investee A-share company must satisfy two conditions:

• It must have completed equity segmentation reform or have just listed post equity segmentation reform; and
• It must not be in an industry prohibited to foreign investment under Chinese law.

Foreign investor conditions

A foreign investor proposing a strategic investment into an A-share company must satisfy several conditions:

• The foreign investor must be a foreign legal person or other entity established and operating in accordance with the law, have stable finances, a good credit rating and well-tested management expertise;
• The investor must possess total actual assets abroad of not less than US$100 million or managed total actual assets abroad of not less than US$500 million, otherwise its parent must possess total actual assets abroad of not less than US$100 million or manage total actual assets abroad of not less than US$500 million;
• The investor must have sound governance structure, good internal control systems and compliant business operations; and
• Neither the investor nor its parent company should have been subject to a major penalty imposed by foreign or Chinese regulatory authorities in the past three years.

An earlier provision, the Supplementary Regulations on the Establishment of Investment Companies by Foreign Investors issued by the Ministry of Commerce in June 2006, set out: “Investment companies are permitted to make strategic investments in listed companies in accordance with relevant state regulations, and such companies shall be deemed foreign shareholders of joint stock limited companies.”

The regulations relax restrictions on foreign investors in the A-share market. They permit foreign-invested investment companies to strategically invest in listed companies as foreign investors, as well as facilitate strategic investments in listed Chinese companies.

The draft revision also adds a circumstance under which the above asset threshold can be waived. If a listed company carries out a foreign share swap and acquisition, and makes an offshore investment without causing a change in the actual control of the company, the new investor (by virtue of the share swap) is not subject to the asset threshold.

Transaction requirements

The measures provide that a foreign investor may acquire A-shares via a transfer by agreement, a private placement of new shares, or other methods set out in state laws and regulations. The draft revision expressly adds takeover offers to these acquisition methods.

Unless stipulated otherwise for certain industries, or if approved by the relevant competent authority, an investment may be made in tranches under the measures, provided that the share percentage acquired after completion of the first tranche is not less than 10% of the company’s outstanding shares. This in essence sets a minimum shareholding threshold of 10% for foreign investors making a strategic investment in an A-share company.

The draft revision also adds a circum-stance under which the shareholding percentage threshold is waived, similar to the asset threshold for foreign investors. Pursuant to the regulations, if a listed company carries out a foreign share swap and acquisition, and makes an offshore investment without causing a change in the actual control of the listed company, then it is not subject to the minimum shareholding percentage of 10%.

It should be noted that for industries in which a foreign investment shareholding percentage is expressly stipulated by law, the percentage of shares held by an investor in that industry must comply with the relevant regulations.

The measures additionally require that acquired A-shares not be transferred for three years. This provision clearly reflects the core requirement of the government in respect to strategic investment in the A-share market by foreign investors – namely, encouraging medium and long-term investments so as to maintain the normal order of the securities markets and prohibit speculation.

Finally, it must be noted that trans-actions involving a holder of state-owned shares in a listed company must comply with regulations on the administration of state-owned assets.

Zhang Yichi is a partner of East & Concord Partners