China Fortune Securities recently transferred a 2% share of its joint venture company, Morgan Stanley Huaxin Securities, to Morgan Stanley, giving the JV partner a controlling stake by raising its share from 49% to 51%.
Since the China Securities Regulatory Commission (CSRC) fully liberalized the shareholding ratio of foreign-funded brokerages in April, some foreign investors have increased their controls over JV brokerages in China.
John Xu, a corporate partner in Linklaters’ Shanghai office, said: “These [new regulations] imposed new requirements for the controlling shareholder to explain its regulatory and compliance position, at both the group and subsidiary level, to the CSRC in order to establish its fitness to acquire the controlling stake in the JV. The new rules also involved significant changes to the corporate governance framework of the JV, and additional obligations of its shareholders to support the JV.”
The CSRC issued the Measures for the Administration of Foreign-Funded Securities Companies in 2018, which relaxed the restrictions on foreign investment in JV securities companies to 51%.
“In light of the Phase One Agreement between the US and China, the Chinese authorities are encouraging more foreign investment, and we may see new 100% foreign-controlled operations in various sectors,” said Xu.
At the same time, more intense scrutiny of foreign investors’ applications is expected with new rules that will provide more extensive requirements in submissions to regulators.
The transfer in stakes marks the accelerated entry of foreign securities companies into China’s market, which now has five foreign-controlled securities companies, including Morgan Stanley Huaxin Securities.
AllBright Law Offices advised China Fortune Securities, Linklaters acted as international counsel to Morgan Stanley, and Linklaters’ China joint operation partner, Zhao Sheng Law Firm, provided PRC legal services to Morgan Stanley.