MOFCOM releases draft amended measures on strategic investment by foreign invest...

MOFCOM releases draft amended measures on strategic investment by foreign investors in listed companies

On 18 June 2020, the Ministry of Commerce (“MOFCOM”), with the purpose of broadening ways to make use of foreign investment and promoting the healthy development of China’s securities market, released a draft of the amended Administrative Measures for Strategic Investment by Foreign Investors in Listed Companies (the “Draft”), set to revise the existing measures taken effect since 30 January 2006 (the “Measures”).

On 18 June 2020,  the Ministry of Commerce (“MOFCOM”), with the purpose of broadening ways to make use of foreign investment and promoting the healthy development of China’s securities market, released a draft of the amended Administrative Measures for Strategic Investment by Foreign Investors in Listed Companies (the “Draft”), set to revise the existing measures taken effect since 30 January 2006 (the “Measures”). The Draft is open for public comments until 19 July 2020.[i]

Background

Starting last several years, the State Council has issued several notices on measures designed to encourage and promote foreign investment in China, e.g., the Foreign Investment Law of the People's Republic of China (“Foreign Investment Law)” and its implementation regulations, the Circular of the State Council on Several Measures to Boost the Growth of Foreign Investment (Guofa [2017] No. 39) and the Circular of the State Council on Several Measures Concerning the Active and Effective Use of Foreign Investment to Boost High-quality Economic Growth (Guofa [2018] No. 19).

On 30 June 2019, laws and regulations regarding restricted industries for foreign investors have been revised to further open the Chinese market to foreign investors, i.e., the Special Administrative Measures for Access of Foreign Investment (the “Negative List”) (2019 Edition).

With the implementation of the above rules, the Measures has become outdated with provisions that do not reflect the current market situation or national economic policies. Therefore, the Draft proposes to further lift restrictions on foreign investment in Chinese capital markets that are more in line with the above rules.

Key Changes

Compared with the Measures, the Draft proposes to make amendments to the requirements a foreign investor shall meet to be qualified to make strategic investments in A-Share listed, the procedures of strategic investment and the applicability of some relevant rules. After our preliminary review of the Draft, the key changes proposed in the Draft are as follows:

1. Lowering qualification requirements for foreign investors

The Measures set threshold requirements on the total amount of overseas assets that a foreign investor must own or manage to be permitted to invest in Chinese listed companies. In accordance with the Measures, the total amount of both the Investor and its parent company’s actual overseas assets shall not be less than US$100 million or the total amount of both the Investor and its parent company’s managed actual overseas assets shall not be less than US$500 million.

Under the Draft, foreign investors acquiring a non-controlling interest (or their actual controller) are required to own assets of at least US$ 50 million (reduced from US$ 100 million) or to manage assets of at least US$ 300 million (reduced from US$ 500 million). For controlling shareholders, the threshold remains unchanged under the existing Measures (i.e., at least US$ 100 million in owned assets or at least US$ 500 million in managed assets). However, the Draft extends the scope of assets to include assets located both overseas and in China.

Besides, even the total amount of real assets owned by a foreign investor does not meet the above requirements, it is acceptable provided its single shareholder (including foreign legal person or other organization or natural person) meets the requirements. Meanwhile, shareholders of the foreign investor shall bear joint responsibilities for the investment in A-share listed companies.

Moreover, the Draft clarifies that foreign investors making strategic investments include foreign natural persons and allows qualified foreign natural persons to make strategic investments in listed companies.

2. Simplifying procedures: information reporting

Under the Measures, the central-level MOFCOM has approval authority over any foreign strategic investment in Chinese listed companies on a case-by-case basis. After the implementation of the Interim Administrative Measures for the Record-filing of the Incorporation and Change of Foreign-invested Enterprises (the “Interim Administrative Measures”) in July 2017, for strategic investments in industries which do not fall in the Negative List, the approval of the MOFCOM is no longer required, and the post-event record-filing procedures with the competent commerce department shall be gone through instead. However, since the Foreign Investment Law and its implementation regulations took effect in January 2020, the “Interim Administrative Measures” expired, and MOFCOM will no longer participate in the approval/record-filing process based on the new “information reporting mechanism”. And MOFCOM and its local counterparts will focus on supervision and as a result will transform into monitors for foreign investment.

The Draft is in line with the Foreign Investment Law and requires listing companies to complete information reporting on the strategic investment of foreign investors with MOFCOM.

3. Lowering minimum acquisition requirement and shortening lock-up period

The purpose of the Measures was to encourage foreign investors to make medium and long-term investments above a certain scale in Chinese listed companies. Accordingly, the Measures requires foreign investors to acquire at least 10% of the shares issued by the target listed company after their initial investment and subject to a lock-up period of 3 years. The Draft reduces this minimum acquisition requirement of 10% to 5% (not applicable for private placement) and shortens the lock-up period to 12 months, where there are provisions regulating a longer period of lock-up period in the Securities Law and its related regulations, such provisions shall prevail.

4. Cross-border share swap

The Draft explicitly permits foreign investors to pay for shares acquired in Chinese listed companies using equity in foreign non-listed companies.

Although cross-border share swaps are authorized for both listed and private companies under the Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors (“M&A Provisions”), cross-border share swaps are only limited to foreign listed companies, making their implementation very difficult in practice.

Given such restriction, there are few cross-border share swap cases approved by MOFCOM in practice. In this regard, the Draft not only reaffirms the feasibility for foreign investors to make an acquisition by paying with foreign company shares, but also extends the scope of such qualified foreign companies from only listed companies to including non-listed companies and additional share issuing by the foreign investor as well. Based on the Draft, it is understood that MOFCOM will further revise the M&A Provisions accordingly.

It should be noted that, under the Draft, if the acquisition of the A-shares in question effectuated through transferring agreement, the foreign investor must be a foreign listed company.

5. Engaging PRC agency

The foreign investor and the listed Company shall engage agency registered in China to serve as the consultant which will perform due diligence to look into whether the strategic investment meets the conditions set out in article 4 (qualification requirements for foreign investors) and article 5 (requirements for cross-border share swap) in the Draft and issue a consulting report. And foreign investors shall submit such reports while going through the relevant formalities with the China Securities Regulatory Commission.

6. National Equities Exchange and Quotations (NEEQ) [ii]

If the foreign investors intend to make strategic investment in public limited companies listed in NEEQ, the Draft can be referred to in its implementation.

Comments

The Draft will significantly lower the threshold of strategic investment in listed companies for foreign investors. The changes proposed by the Draft seem to signal that this may be more of a possibility in the future. It has been the development strategy of the Chinese government in recent years to further open the market to foreign investors and reduce restrictions on foreign investment in various industries. In this regard, the Draft seems to be designed to complement such trend. Meanwhile, for Chinese listed companies, the Draft provides more opportunities and convenience to overseas investment.

The Measures has been implemented for more than a decade, but some outdated provisions have become the obstacles for strategic investment by foreign investors. With the implementation of the Foreign Investment Law and relevant new rules, we believe the Draft will be promulgated by the authorities soon.

Annex – Summary of the key changes

[i] On 30 July 2018, under the background of Record-filing reform for FIEs, MOFCOM also published the Draft on Revising the Administrative Measures for Foreign Investors' Strategic Investment in Listed Companies for public comment, which has reduced the barriers for investment in listed companies by foreign investors. However, this draft still has not been officially promulgated yet.

[ii] The NEEQ is an over-the-counter (OTC) market that provides greater depth of financing options for Chinese Mainland small-to-medium enterprises. The NEEQ is the only OTC exchange regulated by the China Securities Regulatory Commission (CSRC).