Points for SOEs transferring commercial bank equity

The Interim Administrative Measures for the Equity of Commercial Banks, issued on 5 January 2018, adhere to the “penetrative regulation” principle and limit the number of shareholders that a commercial bank may have. The measures specify that the consolidated group of an investor, its affiliates and persons acting in concert, shall neither serve as major shareholders with an equity participation in more than two commercial banks, nor have a controlling share in more than one commercial bank.

Some shareholders began to dispose of their excess holding of commercial bank equity from January 2018 to satisfy the regulatory requirements. Among numerous sellers, state-owned enterprises (SOEs) account for a relatively high percentage, and the procedural obligations that they are required to perform in transferring commercial bank equity are worthy of attention.

Legal basis

Pursuant to article 63 of the Measures for the Regulation of Transactions Involving the State-Owned Assets of Enterprises (order No. 32 of the State-Owned Assets Supervision and Administration Commission of the State Council and the Ministry of Finance [MoF]), “where the state provides otherwise in respect of transactions involving the state-owned assets of financial and cultural enterprises to which the state has made a capital contribution, and the transfer of the state-owned equity of listed companies, such provisions shall be complied with”. When an SOE transfers commercial bank equity, it is required to comply with special regulations for transactions involving finance-type state-owned assets.

The MoF formulated the Administrative Measures for the Transfer of the State-Owned Assets of Financial Enterprises (MoF order No. 54) in 2009. Under this order: (1) the public finance departments shall be responsible for the supervision and administration on the transfer of state-owned assets of financial enterprise according to the principle of unified policies and level-to-level management; (2) the ownership of the state-owned assets of financial enterprises to be transferred shall be clear; and (3) unclear and disputed titles, or those where the transfer of which is prohibited by laws and state policies, may not be transferred.

Transfers of state-owned assets of financial enterprises include the transfer of state-owned property rights of non-listed financial enterprises, and the state-owned shares of listed companies. Such transfers are mainly accomplished through property rights exchange institutions and securities trading systems. Alternatively, where the conditions are satisfied, such transfer can be accomplished by way of an agreement.

The transferor is required to complete a series of procedures, including the transfer plan formulation, internal resolution, securing approval of the public finance departments, selecting the transaction method and venue, qualification review on the acquiring shareholders, signing the transfer agreement, and change of registration.

Change in shareholders

Regardless of whether the transfer is accomplished through a property rights exchange institution, a securities trading system, or by an agreement, it is, pursuant to the Commercial Bank Law and the measures, required to carry out the following procedures for a change in the shareholders of the commercial bank after the transfer.

First, it is required to secure the approval of, or report to, the regulator. Pursuant to articles 24 and 28 of the Commercial Bank Law and the Implementing Measures of the China Banking and Insurance Regulatory Commission (CBIRC) for the Administrative Licensing Items Concerning Chinese-Funded Commercial Banks (amended in 2018), a change of shareholders who control more than 5% of the total capital, or total shares, requires the approval of the State Council’s banking regulator, and a change of shareholders who hold at least 1%, but not more than 5%, of the total capital, or total shares, requires reporting to the State Council’s banking regulator within 10 days of the equity transfer. Changes in a state-owned commercial bank, postal savings bank or joint stock limited commercial bank are accepted, reviewed and decided on by the CBIRC, and changes in an urban commercial bank are accepted, reviewed and decided on by the provincial-level agency of the place where the bank is located.

Second, it is required to review the qualifications of the acquiring shareholder. Pursuant to article 13 of the measures, where a shareholder transfers its commercial bank equity, it is required to inform the transferee that it, the transferee, is required to satisfy the legal conditions and the CBIRC regulations. The CBIRC divides transferees into three categories – domestic financial institutions, foreign financial institutions, and domestic non-financial institutions – and specifies different qualification requirements and prohibitive provisions. It should be noted that if a transferee proposes to acquire equity representing at least 5% of the commercial bank’s total share capital, or total shares, and become a major shareholder of the bank, it is required to satisfy the qualification conditions for a “major shareholder”.

Finally, it is required to inform the board of the bank for internal resolution. Pursuant to the Notice of China Banking Regulatory Commission on Issuance of the Guidelines for the Corporate Governance of Commercial Banks, where a shareholder, particularly a major shareholder, of an unlisted bank is to transfer shares of the bank, it is required to inform the board of that bank in advance. Pursuant to the articles of association of the commercial banks, once the board approves the transfer of equity, the office of the board will be in charge of carrying out the change of registration in the share register including recording the name, address and number of shares of the transferee, notifying relevant parties, recovering the transferor’s equity certificate, issuing an equity certificate to the transferee, and offering its co-operation in the relevant business registration.

Furthermore, a transfer of equity representing at least 5% of the total capital, or total shares, of a commercial bank needs approval. Pursuant to article 44 of the Contract Law and article 9 of Interpretation 1 of the Supreme People’s Court of Several Issues Concerning the Application of the Contract Law of the People’s Republic of China, where laws or administrative regulations require approval for a contract, or specify that a contract enters into effect only upon approval and registration, the court shall determine a contract ineffective without going through these procedures.

Hence, the transferor and transferee of commercial bank equity are suggested to perform their approval obligations in a timely manner and expressly specify the entities bearing the approval obligations, and the corresponding provisions on breach of contract, in the equity transfer contract to minimize the default risk to the greatest extent possible.

Yang Guang is a partner and Wang Yao is an associate at Lantai Partners.