April 2023
Di Wu and Teresa Huang
As China moves toward the full implementation of registration-based IPO system, various related regulations have been revised. On February 17, 2023, the China Securities Regulatory Commission (“CSRC”) issued the revised Measures for the Administration of Material Asset Restructurings of Unlisted Public Companies (hereinafter referred to as the “New Measures”), which came into force on the date of issuance.
The New Measures are revised mainly for the purpose of changing the approval system that regulates unlisted public companies’ (hereinafter referred to as “public companies”) purchase of assets by issuing shares which constitutes a material asset restructuring to the registration-based system, including the improvement of the recognition of material asset restructuring, the procedural requirements for changing the examination system to the registration-based system and the improvement of the supervision and administration mechanism.
1. Improvement of the recognition of material asset restructuring
The New Measures do not change the proportional provisions in the Original Measures for the purchase or sale of assets, but stipulate that where the purchase or sale of assets fails to satisfy the prescribed criteria, but the CSRC discovers any major problem that is suspected of violating any industrial policy of the state, law or administrative regulation, the provisions of the CSRC, and may damage the lawful rights and interests of the public company or investors, among others, the CSRC may, under the principle of prudential regulation, order the public company to supplement the relevant information as required by the New Measures, suspend the transaction, or retain an independent financial advisor or any other securities service institution to conduct further inspection and disclose its professional opinions.
In addition, the New Measures also specify that the following circumstances constitute “asset transactions by other means”, and if such a transaction of assets substantially constitutes a purchase or sale of assets, and reaches the criteria for a material asset restructuring, the company shall fulfill the relevant obligations and perform the relevant procedures in accordance with the provisions of the New Measures:
(1) forming a new shareholding enterprise with others by subscription, payment and other means, or increasing or decreasing the capital of existing enterprises;
(2) being entrusted to operate, lease the assets of other enterprises or entrusting operating assets to others for operation or lease;
(3) accepting conditional assets donations or donating assets to others;
(4) other circumstances recognized by the CSRC under the principle of prudential regulation.
2. Procedural requirements under the registration-based system
In terms of disclosure procedures under the registration-based system, the New Measures stipulate that, where, in a material asset restructuring of a public company, the cumulative total of its shareholders exceeds 200 after it places shares to specific investors to purchase assets, such asset restructuring shall be examined by the National Equities Exchange and Quotations (hereinafter referred to as the “NEEQ”) and submitted to the CSRC for registration if the NEEQ approves the restructuring; where, in a material asset restructuring of a public company, the cumulative total of its shareholders does not exceed 200 after it places shares to specific investors to purchase assets, the CSRC shall exempt the registration and the NEEQ shall conduct self-regulation. Where a material asset restructuring of a public company does not involve the offering of shares, the NEEQ shall conduct self-regulation.
3. Supervision and administration under the registration-based system
In terms of supervision and administration, the New Measures place more emphasis on the implementation of self-regulation of material asset restructurings of public companies by the NEEQ, but also require the NEEQ to improve its own supervisory system, especially provides that the NEEQ shall make institutional arrangements on suspension and resumption of the transfer of stocks involved in material asset restructurings of public companies and the prevention of insider trading, among others, and give the NEEQ the right to conduct on-site or off-site inspections and add its obligations to conduct regular examination, periodical reporting and requesting instructions and submitting reports on major examination matters.
At the same time, the New Measures also stipulate that the CSRC shall establish a mechanism for supervising the examination by the NEEQ and may inspect and supervise the examination of the NEEQ.
In short, the New Measures intend to adjust the approval system to the registration-based system while reasonably distinguishing the responsibility of examination and registration, requiring the NEEQ to fully perform the main responsibility of examination and strictly implement the system of requesting instructions and submitting reports on major examination matters. Meanwhile, the CSRC shall concurrently pay attention to industrial policies of the state and the positioning of the NEEQ, and establish a mechanism for supervising and restraining the examination quality and integrity to comprehensively improve the quality and efficiency of examination and registration. In the process of M&A and restructuring, an enterprise should pay attention to whether the project constitutes a material asset restructuring and actively perform the corresponding disclosure procedures to avoid compliance risks.
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