The offshore listing of Chinese enterprises falls into two categories – direct listing, and indirect listing (in which an outbound company is used as a listing vehicle to control a domestic company, also known as red-chip listing).
Direct listing means an enterprise directly applies to foreign securities authorities for issuance of stock in the name of a domestic quasi-listing company and then applies to local stock exchanges for being listed and traded on stock markets, and is commonly referred to as H stock, N stock, S stock or others. Direct listing has a safe and relatively simple path, with advantages that it can directly enter into foreign capital markets, cut the cost of information transmission, help enterprises obtain massive amounts of foreign capital, and has a relatively good international reputation.
Higher financial threshold
However, direct listing presents an enterprise with the differences between outbound and inbound laws, as well as different requirements on corporate governance, stock issuance and trades. More importantly, offshore listing has a higher financial threshold and longer approval time, which excludes many private enterprises, including high-tech enterprises.
Red-chip listing means an enterprise creates a shell company through an offshore structuring mechanism that gradually controls its domestic assets and forms a structure where an offshore shell company controls a domestic company. However, based on specific cases, hesitation or ambiguity of management institutions in designing rules leads to variations of the offshore listing structure, which can be generally divided into three models: variable interest entity (VIE); joint venture (JV); and slow walk approach.
If a prospective listing enterprise is not big in size but desires a quick listing, the JV structure is a noteworthy model.
Laws and provisions
Article 11 in the Provisions on Acquisition of Domestic Enterprises by Foreign Investors (document No. 10) of the Ministry of Commerce (MOFCOM) indicates that if a domestic company, an enterprise or a natural person acquires – in the name of a foreign company established pursuant to law or controlled by it – a domestic company with which it is connected, such acquisition shall be reported to MOFCOM for examination and approval.
The parties should not circumvent the above-mentioned requirements by investment in a domestic foreign-invested enterprise, or by other means.
Prior to document No. 10, article 3 in Notice of the State Council on Further Strengthening of the Administration of Share Issuance and Listing Overseas, promulgated on 20 June 1997, expressly specified that: a domestic enterprise or a domestic shareholding unit of a Chinese shareholder shall obtain approval of provincial governments or relevant authorities of the State Council, and apply to the China Securities Regulatory Commission (CSRC) for a review, before the State Council Securities Commission undertakes examination and approval based on national industry policies, relevant regulations of the State Council and gross annual scales, where it seeks an offshore listing by way of: transferring domestic assets to offshore Chinese-invested, non-listed companies or offshore Chinese-invested listed companies through acquisition, share swap, equity transfer and others; or transferring domestic assets to offshore Chinese-invested non-listed companies and then injecting the assets to offshore Chinese-invested listed companies.
To date, no regulation specifies the situations where the notice mentioned above becomes invalid.
The JV model
The popular application of the JV model is reflected in article 52 of document No. 10: where a foreign investor purchases a shareholder’s equity in a domestic foreign-invested enterprise, or subscribes for the capital increase of a domestic foreign-invested enterprise, the current laws and administrative regulations on foreign-invested enterprises and the relevant provisions on equity change of the investors of foreign-invested enterprises shall be applied. Matters not covered therein shall be handled with reference to these provisions.
On 18 December 2008, the foreign investment administration under MOFCOM issued the Manual Guidance on Administration for Foreign Investment Access, which emphasises that the specific regulation on equity changes of foreign-invested enterprises, or the Provisions on Equity Changes in Foreign-invested Enterprises, which was amended in 2012, should apply to equity purchase and might only require the examination and approval of local authorities on foreign investment.
Article 9 of these provisions provides that: if an equity change is required based on reason A (the negotiating share transfer between enterprise investors) or reason B (the share transfer of enterprise investors to other enterprises with which they are connected, and other transferees based on agreement of various investors) in article 2 of the provisions, an enterprise should submit the following documents: (1) the application letter of investors’ equity changes; (2) the enterprise’s original contract, articles of association and amended agreements; (3) copies of enterprise’s approval certificates and business licence; (4) agreements of the board of directors on equity changes; (5) renewed list of directors after equity changes; (6) share transfer agreement entered into by transferors and transferees and signed by other investors or approved by other means of written approvals; and (7) other documents required by the examination and approval authorities.
Article 10 provides that: an agreement of equity transfer should include: (1) the names, addresses of the transferors and transferee and the names, positions and nationalities of their legal representatives; (2) the amounts and prices of the transferred shares; (3) the completion date and means of the transferring; (4) rights and obligations of assignees based on the contracts and articles of association of the enterprises; (5) liability for breach of contracts; (6) application of the law and dispute resolution; (7) effectuation and termination of the agreement; and (8) the time and avenue for the execution of the agreement.
Based on our experience, the entire structuring period of a JV model could last two to three months. In the future, we will be monitoring for other new models of offshore structures.
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