Amending the Measures for the Administration of Major Assets Restructurings of Listed Companies (Mainland China)

Karl Zhang

The China Securities Regulatory Commission (the “CSRC”) reviewed and approved the Decision on Amending the Measures for the Administration of Major Asset Restructurings of Listed Companies (the “Decision” on “Restructure Measures”) in the 3rd executive meeting of the CSRC in 2019.  The amendments will go into effect on the day of their promulgation and are highlighted below:

1. The “net profit” indicator is no longer a part of the standard for determining post-restructure listings.

The standard for determining “restructure listings” under the 2016 Restructure Measures is changed by easing the regulatory standard for asset injections into a listed company by its shareholders, and having “acquired assets whose net profits generated in the most recent accounting year constitute over 100% of the net profits set forth in the audited consolidated financial report in the previous accounting year in which the control over the listed company is changed” will no longer be regarded as a “restructure listing.”

2. The calculation period for the “cumulative first principle” is further shortened.

The 2016 amendments to the Restructure Measures reduced the calculation period for the “cumulative first principle” from no limit to 60 months, and such period is further reduced to 36 months in the current amendments.  If a listed company purchases assets for the its acquirer within 36 months after the change of control to the extent that the listed company has undergone one of the specific fundamental changes, it would constitute major asset restructuring, and an application shall be filed with the CSRC for approval in accordance with the Restructuring Measures.

3. Restructure listing reform for ChiNext is promoted.

The Decision amends Article 13 to allow new high technology industries and strategic emerging industries that are aligned with national strategies to be restructured and listed on ChiNext.  This amendment changes the Circular on the Strict Implementation of Criteria for Initial Public Offering and Listing of Stocks in the Reviewing Backdoor Listings, which was released by the CSRC in November 2013 to specifically prohibit restructure listings on ChiNext.  The amended provision now states that starting from the day of a change of control in a ChiNext company, if it purchases new high technology and strategic emerging assets from its acquirer and its affiliates to the extent of meeting any of the circumstances set forth in Paragraph 1 of Article 13, the operating entity that corresponds to the purchased assets shall be a company limited by shares or a limited liability company and shall meet the other issuance conditions under the Measures for the Administration of Initial Public Offerings and Listing of Stocks on ChiNext.

4. The ancillary financing for restructure listings is restored.

While the Restructure Measures of 2016 cancelled ancillary financing for restructure listings, Paragraph 1 of Article 44 is now amended to remove the above restriction in view of the current market environment and the increasing robustness of the regulatory system for financing and shareholding reduction.  Pursuant to this provision, a listed company purchasing assets by issuing shares may also concurrently raise a portion of the corresponding funds, with its pricing method to be stipulated under relevant current requirements.

5. Supervision over performance of restructure commitments is enhanced.

The Decision adds one paragraph to Article 59 to enhance supervision over issues arising in the course of performing restructuring commitments.  Pursuant to this provision, if the trading counterparty fails to perform as scheduled or breaches the performance compensation agreements or commitments, the CSRC will issue an order to demand rectification and may take regulatory measures, such as regulatory interviews, issuance of a warning letter, issuance of an order to demand a public explanation, and determination of candidates as inappropriate and record the relevant circumstances in the credit archive.

In general, the current amendments to the Restructure Measures reduce the operational difficulties in conducting mergers and restructurings, which gives greater effect to how mergers and restructurings can improve the asset quality of listed companies as well as help the development of the actual economy.