Over the past year, the Chinese government has implemented a series of new policies and rules to transform China’s foreign investment regime and attract more foreign investment. These changes have further opened the Chinese market to foreign investors, streamlined governmental regulation on foreign investment projects and improved market entry.
With China’s ongoing commitment to reforming the regulatory regime for foreign investment, the Ministry of Commerce (MOFCOM), together with other State authorities, released for public comment draft amendments to the Administrative Measures for Foreign Investors’ Strategic Investment in Listed Companies (“Measures”). The draft amendments remove the outdated references, align provisions to the new regulatory regime and add provisions to encourage qualified foreign investors to make strategic investments in Chinese listed companies.
Streamlined approval and filing system
The amendments propose that strategic investments which do not fall under the existing regulatory measures restricting certain types of foreign investment (known as the Negative List) will only be subject to MOFCOM’s online filling procedure. However, strategic investments which fall under the Negative List would still be subject to approval by MOFCOM (or its provincial branch).
This proposed amendment is aligned with the existing rules on the Negative List approach which took effect in 2016.
Increased flexibility on qualification requirements
Financial resources of foreign investors
Currently, a foreign investor or its parent company must have total overseas assets of not less than USD100 million or have at least USD500 million of overseas assets under its or its parent company’s management.
Under the proposed amendment:
- if a foreign investor will be a non-controlling shareholder of a listed company, the foreign investor or its actual controller will need to have total assets of not less than USD50 million or have at least USD300 million of assets under its or its actual controller’s management; and
- if a foreign investor will be a controlling shareholder of a listed company, the existing asset threshold will remain, but the scope of assets will be expanded to cover assets situated both overseas or in China.
Strategic investments in listed companies by foreign individuals
Currently there are only limited legitimate channels for foreign individuals to purchase A shares in Chinese listed companies (for example through QFII or RQFII). The proposed amendments expressly permit foreign individuals to make strategic investments in listed companies, subject to certain qualifications including the individual (i) producing a certificate showing a clean criminal record for the last three years; and (ii) having a compatible risk profile. This proposal is aligned with recent policy developments to encourage foreign individuals to invest in listed companies.
Lessened lockup period
The amendments propose shortening the existing post-purchase share trading restriction applicable to foreign strategic investors from three years to 12 months. It is worth noting, however, that the lock-up period would still be subject to any applicable special requirements under the securities laws and regulations (for example, possibly a longer lock-up period if applicable).
The amendments also propose lifting the existing requirement that foreign strategic share acquisitions must generally be for at least 10% of the shares of a listed company. This will give foreign investors more flexibility on the size of their investment.
Cross-border share swaps
The amendments propose new provisions on cross-border share swaps. Foreign investors will be permitted to make strategic investments in listed companies using equity in overseas companies as consideration where certain requirements are met. In particular:
- the overseas company must be established in a jurisdiction with robust company laws;
- the overseas company and its management must not have been subject to any material punishment by regulatory authorities in the previous three years; and
- the foreign investor must legitimately hold the overseas company’s shares, which must be capable of being legally transferred.
Cross-border share swaps are not mentioned in the existing Measures, but are permitted under the Provisions on Foreign Investors’ Merger with and Acquisition of Domestic Enterprises (“Provisions”) which provide more stringent requirements for cross-border share swaps. For example, the overseas company must be an overseas listed company or an SPV (as defined under the Provisions). This makes implementation of cross-border share swaps difficult in practice. The proposed amendments will provide more flexibility for foreign strategic investment in Chinese listed companies.
Alignment with other special formalities
The proposed amendments clarify that, where the strategic investment involves State-owned enterprises or State-owned equity, the related formalities and administrative rules must be followed. Additionally, if relevant, national security review procedures must be complied with.
Excluded foreign investment
The proposed amendments clarify that the proposals will not apply to certain types of foreign investment, for example, investment by QFII or RQFII and investment through Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect or other stock market connect mechanisms.
The proposed amendments demonstrate further steps being taken towards opening up China’s capital markets to foreign investors and improving market entry for foreign investment. The amendments will provide further flexibility for strategic investment by foreign investors and streamline and simplify the process.
The amendments will also align the regulations on strategic investment to the latest policies and regulatory regime.
There remains, however, issues and ambiguities which still need to be addressed. For example, the relationship between the proposed amendments and existing regulations is still unclear, particularly in relation to cross-border share swaps. It remains to be seen how the finalised measures will deal with this issue. We expect further clarifications to be made in the finalised version.
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020