The State-owned Assets Supervision and Administration Commission of the State Council, the Ministry of Finance, and the China Securities Regulatory Commission jointly promulgated the Measures for the Supervision and Administration of State-Owned Equities of Listed Companies (the “Administrative Measures”) on May 16, 2018. The Administrative Measures went into effect on July 1, 2018, and the 2007 Interim Measures for the Administration of Transfer of State-owned Equities in Listed Companies (the “Interim Measures”) was abolished. Compared with the Interim Measures, the Administrative Measures have the following characteristics:
1. Update to the regulatory system for changes in state-owned equities
Pursuant to the Interim Measures, the State-owned Assets Supervision and Administration Commission of the State Council was previously responsible for reviewing changes to state-owned shareholders, the Administrative Measures now introduce state-funded enterprises into the regulatory system where a state-funded enterprise may manage non-material changes to state-owned equities through a uniform state-owned equity management information system platform, while state-owned assets administration agencies oversee the changes to state-owned equities of listed companies through such state-funded enterprises and platform system.
2. Increase in the type of changes to state-owned equities
As compared with the Interim Measures, the Administrative Measures provide for additional types of changes to state-owned equities of listed companies to be regulated. Building on transfers through the securities trading system, non-public contracted transfers. Gratuitous transfers, and indirect transfers, open solicitation and transfer, as well as the issuance of exchangeable corporate bonds by state-owned shareholders are added. In addition, state-owned shareholders may increase their shareholding through the securities trading system, contracted transfers, indirectly receive shares, acquire shares of listed companies through tender offers, and subscribe to shares issued by listed companies. Listed companies controlled by state-owned shareholders may engage in absorptive consolidation and issue securities. State-owned shareholders and listed companies may also engage in asset restructuring. As a result, the Administrative Measures now regulate more diverse trading practices.
3. More detailed requirements for all types of transfers
As compared with the Interim Measures, the provisions in the Administrative Measures are more detailed and specific, as well as adjusting the provisions of the original Interim Measures to be more systematic. For example, open solicitation and transfer and non-public contracted transfer are added to the previous circumstances of transfer.
As far as the transferee is concerned, the Administrative Measures specifically provide that if the transferee is an overseas investor, it must meet the requirements under the Catalogue Guiding Foreign Investment in Industries or the negative list administration, as well as the foreign investment security review requirements.
In the case of transfer through the securities trading system, a new circumstance for approval from the state-owned assets supervision and administration agencies is stipulated. If a transfer of shares of a listed company held a state-owned controlling shareholder may cause the shareholding ratio to fall below a reasonable ratio, the review of a state-owned assets supervision and administration agency would now also be required.
With respect to open solicitation and transfer, the Administrative Measures stipulate its definition, procedure, and the information to be disclosed. For non-open contracted transfer, the Administrative Measures specifically enumerated rules regarding its conditions, procedure and transfer prices.
With respect to the issuance of exchangeable corporate bonds by state-owned shareholders, the Administrative Measures stipulate specific requirements for their prices and interest rates.
In addition, the Administrative Measures also point out that in case the various requirements for state-own shareholders thereunder are not met, if a government department, agency, business unit and/or an enterprise fully owned or funded by the state can still control in fact the conduct of an onshore or offshore enterprise through investment relations, agreement or other arrangements, and labeled the securities account as “CS,” then changes to the equities of such enterprise shall also be governed by such measures. Limited partnerships funded by the state are not recognized as having state-owned shareholders, and the regulatory requirements for its shareholding in listed companies shall be separately prescribed.
For enterprises that transact with state-owned shareholders, not only will they be subject to due diligence, they will also need to pay attention to procedural and review issues in the transfer process. If effective approval is not obtained, they may even be found to be criminally liable. Therefore, the disclosure and compliance risks in trading with such enterprises are also relatively higher.