In connection with share placement on the National Equities Exchange and Quotations (NEEQ), the main responsibility of an attorney is to issue a legal opinion on whether the placement of the NEEQ-listed company (the issuer) complies with applicable laws and regulations. In this article, the focuses of legal review prior to issuance of the legal opinion are summarized from the perspective of legal practice.
Placement approval. According to the Measures for the Supervision and Administration of Non-listed Public Companies, if the number of shareholders of the issuer does not exceed 200 as a result of the placement, approval from the China Securities Regulatory Commission (CSRC) must be exempted and the issuer must be subject to self-regulation of the NEEQ. If the number of shareholders of the issuer exceeds 200 as a result of the placement, CSRC approval must be obtained for the placement.
Subscribers to the placement. Eligible subscribers to a placement include chosen investors and eligible investors. The lawyer must confirm whether subscribers to the placement comply with investor suitability stipulations of the Measures for the Supervision and Administration of Non-listed Public Companies and the Administrative Rules of the National Equities Exchange and Quotations Concerning Investor Suitability (for trial implementation) .
Placement process and results. The lawyer must examine proceedings and voting methods of the issuer’s board of directors, board of supervisers and general meeting to ensure compliance with applicable laws and regulations of the PRC and the issuer’s articles of association, which is a precondition to lawful and valid voting results. The lawyer must also issue an explicit opinion on legitimacy and validity of the outcome of the issuer’s placement.
Placement process. The issuer should at least have convened a meeting of the board of directors and a general meeting. In connection with identification of core employees of the issuer, a meeting of the board of supervisers must follow the meeting of the board of directors. Within two transfer days after convention of the meetings, the issuer should disclose documents of the meetings on the information disclosure platform (www.neeq.cc) designated by the NEEQ.
Placement results. In relation to stocks with subscription price to be paid in cash, the lawyer should examine the capital verification report to ensure that the subscription price payable by subscribers, as verified by a CPA firm licensed for securities and futures-related business, has been fully paid and that the requirements of the Announcement on Subscription of Stocks Offered via Placement concerning disclosure on a designated information disclosure platform are complied with.
Apart from stocks with subscription price to be paid in cash, the Share Placement Guidelines of the National Equities Exchange and Quotations set out special provisions regarding subscription of stocks with non-cash assets, which require that the prospectus contains board of directors’ discussion and analysis on reasonableness of asset valuation, and that subscription with equity assets and non-equity assets must undergo audit and valuation procedures, respectively.
Placement contract. The issuer should enter into a Stock Subscription Agreement with Conditions Precedent to Effectiveness with subscribers in connection with the placement. The lawyer must issue a conclusive opinion on legitimacy and validity of the agreement based on review of legal capacity and intention of the parties, as well as contents of the contract.
Pursuant to the Highlights of Review on Share Placement of NEEQ-listed Companies and the Response to Frequently Asked Questions Concerning Share Placement of NEEQ-listed Companies (III) – Management of Raised Fund, Special Provisions of the Subscription Agreement, Fundraising by Special NEEQ-listed Companies, no valuation adjustment mechanism must be contained in the Stock Subscription Agreement with Conditions Precedent to Effectiveness.
Pre-emptive right to subscribe to the placement. Registered shareholders, which means shareholders holding shares in the issuer who are registered with the China Securities Depository and Clearing Corporation Limited (CSDC) as of the date of record, must have the pre-emptive right to subscribe to the shares offered via the contemplated placement. The lawyer should review procedures and results of exercise of pre-emptive right by registered shareholders to ensure compliance with applicable laws and regulations, and confirm whether there is any registered shareholder who waives the pre-emptive right to the placement.
Subscribers and shareholders who are private equity (PE) funds or PE fund managers. If no subscriber to the placement or shareholder of the issuer is a PE fund or PE fund manager that should have completed filing or registration procedure, the lawyer needs simply to provide honest disclosure.
If any PE fund or PE fund manager that should have completed filing or registration procedure is involved, the PE fund manager should be required to issue a commitment letter on completion of filing or registration procedure and confirm the date of application (either submitted or to be submitted) for registration or filing, according to the Response of the National Equities Exchange and Quotations to Questions Concerning Institutional Investors (II) – Response to Questions about Registration and Filing of Private Equity Funds.
Subscribers as nominee shareholders. No subscriber to the share placement can be a nominee shareholder.
Subscribers as employee shareholding vehicles. No subscriber to the share placement can be an employee shareholding vehicle established merely for the purpose of subscription, or an employee stock ownership plan of a company.
Subscribers and the issuer who are subject to joint sanctions due to dishonesty. According to regulations concerning joint sanctions against dishonest persons, the NEEQ imposes sanctions against persons who are subject to joint sanctions due to dishonesty, as shown on the lists publicized on official websites of competent authorities.
If any subscriber to the placement is subject to joint sanctions due to dishonesty, the lawyer should confirm why the subscriber is included in the publicized list, and whether a sufficient disclosure of relevant circumstance has been properly made, before issuing an explicit opinion accordingly. If the issuer or its controlling shareholder, actual shareholder or any controlled subsidiary is subject to joint sanctions due to dishonesty, the share placement must not be implemented unless the circumstance is eliminated.
Jiang Fengtao is the founding partner and Si Rui is a capital market associate at Hengdu Law Firm