Three types of shareholders” usually refers to shareholders involved in asset management products such as contractual-type private funds, asset management plans, and trust plans. According to the basic requirements of the securities law, company law and IPO rules, the stability of the equity structure and the clarity of the controlling shareholder and the actual controller are the basic auditing conditions, so enterprises that intend to be listed, and in which there are “three types of shareholders”, usually will be subject to strict and prudent supervision and verification by the regulatory authorities. Meanwhile, due to the influence of the policy factor of the National Equities Exchange and Quotation (NEEQ), the “three types of shareholders” problem is particularly prominent in enterprises to be listed on the NEEQ.
The reason why the “three types of shareholders” problem is the focus of supervision and verification in the IPO process, and the core issue of sustained attention from the regulatory authorities, lies in the legal construction and structural characteristics of the “three types of shareholders” itself. Under the existing legal system, there may be conflicts or challenges in terms of “equity clarity”, “equity structure stability”, and other conditions required by the listing rules, which are mainly reflected in three aspects.
First, the “three types of shareholders” are based on the construction of contracts, asset management plans or trust plans, the legal basis of which is the legal relationship of trust. They do not themselves have a “real” subject and therefore do not have the civil subject qualification and legal person qualification, and there are also problems such as the attribution of shareholders’ rights and the bearing of responsibilities.
Second, the “three types of shareholders” all have a fixed duration, and the term of such duration is usually short. In the meantime, there may be rolling issues, or transfer of shares, or the right to yields in some asset management plans or trust plans, which may cause stability as a shareholder to be questioned.
Finally, the structure of the “three types of shareholders” is complex and may involve multi-layered nesting, grading, and leveraged arrangements. In consideration of the difficulty to verify the actual holding subject or the interest subject, the “three types of shareholders” can easily become the channel for arrangements such as shareholding entrustment, benefit transfer, and connected transaction.
Nevertheless, the regulatory authorities have not completely blocked the path of listing for enterprises involving the “three types of shareholders”. Except for the above-mentioned first issue (which involves the co-ordination and architecture of more fundamental laws), from past successful IPOs, the “three types of shareholders” may not be a substantial obstacle to the IPO review if the enterprise to be listed can: demonstrate the legal compliance of the establishment of the “three types of shareholders”; carry out penetration disclosure against its structure; and state that the shareholding ratio of such shareholder is low.
At a press conference of the China Securities Regulatory Commission (CSRC) on 12 January, the spokesman made clear the IPO review principles for enterprises involving “three types of shareholders”, providing a more operational supervision and verification standard for enterprises to be listed.
It should be noted that the Guiding Opinions on Regulating Asset Management Business of Financial Institutions, promulgated by the People’s Bank of China, China Banking and Insurance Regulatory Commission, CSRC, and the State Administration of Foreign Exchange on 27 April, may provide a new idea about the supervision and verification of the “three types of shareholders” problem.
The main idea of the guiding opinions is to conduct comprehensive supervision of the asset management business of all types of institutions under the financial regulatory mechanism, to eliminate the existence of regulatory arbitrage and a regulatory vacuum.
At the same time, the guiding opinions also try to “set unified standards and rules for problems such as multi-layered nesting, unclear leverage, serious arbitrage, and frequent speculation”, and to “conduct penetration supervision against asset management products and, for multi-layer nested asset management products, identify the ultimate investors of such products, and identify the underlying assets (excluding the publicly offered securities investment funds)”.
Even though the opinions are only a framework regulation for cleaning up and regulating the asset management business as well as asset management products, and concrete rules or guidelines still need to be implemented by the regulatory authorities, the author believes that after the effective implementation of the regulatory objectives and regulatory approaches established in the guiding opinions, especially after the determination of the principles for controlling the nesting structure and “penetration supervision”, the above-mentioned uncertainties of the “three type of shareholders” in terms of “shareholder stability”, “clear equity structure” and “with or without benefit transfer arrangement” will be regulated from the source, eliminating the challenge posed by the “three types of shareholders” against IPO review requirements to the maximum extent.
The opinions can also to a certain extent reconcile the different viewpoints and standpoints of financial supervision and judicial practice on the legality, validity and affirmation of legal consequences of asset management products, and public or external institutions will pin a more explicit expectation on the legal consequences of the structural arrangement of the “three types of shareholders”. This will help eliminate the uncertainty of legal compliance and validity of the “three types of shareholders” in the argumentation of IPO reviews.
Jason Xia is a partner at Wintell & Co. He can be contacted on +86 21 6854 4599 or by email at firstname.lastname@example.org