China Publishes Draft Amendments to the Regulations Governing Foreign Strategic Investment in Chinese Listed Companies
Draft New Measures
On 30 July 2018, China's Ministry of Commerce ("MOFCOM"), together with five other ministries, published the draft of the amended Administrative Measures of Foreign Investors Making Strategic Investment into Chinese Listed Companies ("Draft New Measures") and invited comments to be submitted by 29 August 2018. The Draft New Measures, if promulgated, will replace the current administrative measures that were promulgated in 2005 and are currently in force ("Current Administrative Measures").
In general, the Draft New Measures would loosen certain terms regulating foreign strategic investment into Chinese listed companies, further open up the stock market and encourage strategic investments by foreign investors into Chinese listed companies. This is consistent with China's recent efforts to further open its doors to foreign investment (e.g. the adoption of a new and shorter "Negative List" in June 2018), although on certain issues this would also impose new requirements or restrictions.
The following table provides an overview of those key changes proposed by the Draft New Measures with details set out below.
|Topic||Current Administrative Measures||Draft New Measures|
|1||Transaction Structure||Share transfer by agreement and issuance of new shares.||Tender offer is newly added as a way to make such foreign strategic investments, and cross-border shares swap is also expressly allowed.|
|2||Qualification Requirements of Foreign Investors||No less than USD 100 million assets owned or no less than USD 500 million assets under management.||No less than USD 50 million assets owned or no less than USD 300 million assets under management.|
|3||Lock-up Period||3 years.||12 months.|
|4||Investment Threshold||Initial investment not to be less than 10 per cent of shares in a Chinese listed company.||Such requirement has now been dropped.|
|5||Approval/Filing Requirement||Investments require approval from MOFCOM (prior to July 2017).||Only investments in restricted sectors require approval from MOFCOM.|
|6||National Security Review||No reference of the national security review regime.||National security review requirements must be complied with.|
New Transaction Structures Recognised
In addition to share transfer by agreement and issuance of new shares, the Draft New Measures expressly add a tender offer as a recognised way to make foreign strategic investment into Chinese listed companies. The tender offer must comply with the Administrative Measures of Takeover of Listed Companies and other relevant takeover regulations.
Furthermore, the Draft New Measures allow for foreign strategic investment to be made in consideration of shares held (in its offshore subsidiaries) or issued by a foreign investor ("Cross-border Shares Swap") for the first time. While Cross-border Shares Swap is mentioned in the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors ("M&A Provisions"), the M&A Provisions severely restrict the permitted scope of Cross-border Shares Swap, and only shares held in an offshore listed company can be used as consideration for the acquisition of a Chinese entity. This limitation has long been a significant obstacle for Cross-border Shares Swap.
While the Draft New Measures have laid out various requirements for Cross-border Shares Swap (e.g., the company of which the shares are to be paid as consideration shall be duly incorporated in a jurisdiction that has an advanced legal system, and the company as well as its management must not have been subject to any material penalty imposed by supervisory authorities for the past 3 years), these requirements do not impose as onerous limitation as those under the M&A Provisions. However, as the Provisions remain in force, it is yet to be seen how they will be reconciled with Draft New Measures (if promulgated) in practice.
Thresholds for Qualified Foreign Investors Lowered
The Draft New Measures lower the qualification thresholds for the foreign investors for making strategic investment into Chinese listed companies. A qualified foreign investor (or its actual controller) must own assets of no less than USD 50 million or alternatively manage assets of no less than USD 300 million, down from USD 100 million and USD 500 million respectively under the Current Administrative Measures. In addition, while the Current Administrative Measures further require that such assets should be offshore assets, the Draft New Measures seemingly have dropped this requirement. If however the strategic investment will render the foreign investor the controlling shareholder of the Chinese listed company, the existing thresholds (namely assets of USD 100 million owned or assets of USD 500 million managed) still apply.
Further, the requirement that after the initial investment the foreign investor must obtain at least 10 per cent of shares in a Chinese listed company has now been dropped. On the other hand, the lock-up period for foreign strategic investments under the Draft New Measures have been reduced from 3 years to 12 months.
Approval/Filing Requirements Clarified
In line with the various measures the Chinese government has taken towards streamlining the foreign investment regulatory regime, the Draft New Measures have clarified that for foreign strategic investments into those industries that fall within the “Negative List" (as released by the relevant authorities on 28 June 2018), prior approval from MOFCOM or its local branch will be required. For others, post-investment filing within 30 days after registration of the shares with China Securities Depository and Clearing Corporation Limited is sufficient.
National Security Review Mentioned or Expanded?
The Draft New Measures provide that for any strategic investment involving national security review, the relevant rules in this regard must be complied with. This provision is new and is a reminder that separate national security review approval may be necessary for transactions that fall within the remit of the national security measures.
China's national security review measures, adopted in 2011, apply to mergers and acquisitions of domestic companies by foreign investors. The regime can be triggered where a foreign investor merges with, or acquires actual control over, a domestic company active in one of the following sectors: military (or with activities located near military, defence or security installations); key agriculture; key energy; key infrastructure; key transportation; key technology; and key equipment.
The national security review mechanism has, to date, been used sparingly in China in contrast to national security review regimes in other jurisdictions such as CFIUS in the United States. In other jurisdictions, such as Germany, foreign investment review has also stepped up. For example, recently, the German government announced its decision to block two Chinese investments in Germany (namely Yantai’s planned acquisition of Leifeld and State Grid’s planned acquisition of a 20 per cent shareholding in 50Hertz). It remains to be seen whether reference to national security review in the Draft New Measures might encourage the Chinese authorities to conduct more such reviews in the future.