On November 1, 2024, the Ministry of Commerce, the China Securities Regulatory Commission, the State-owned Assets Supervision and Administration Commission of the State Council, the State Taxation Administration, the State Administration for Market Regulation, and the State Administration of Foreign Exchange jointly issued the Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors (Decree No. 3 of 2024, hereinafter referred to as the “New Measures for Strategic Investment”), which will come into effect on December 2, 2024.
The Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors (Decree No. 28 of 2005, hereinafter referred to as the “Old Measures for Strategic Investment”) were jointly issued by the Ministry of Commerce and five other ministries and commissions on December 31, 2005, and came into effect on January 31, 2006. The purpose of the Old Measures for Strategic Investment was to regulate the strategic investment by foreign investors in A-share listed companies (hereinafter referred to as “Listed Companies”) after the reform of the shareholding division, and they were partially amended on October 28, 2015 by the Decision of the Ministry of Commerce on Amending Part of the Rules and Regulations and Normative Documents (Decree No. 2 of 2015), issued by the Ministry of Commerce.
The Old Measures for Strategic Investment were based on the revoked Law on Sino-foreign Equity Joint Ventures, the Law on Sino-foreign Contractual Joint Ventures and the Law on Foreign-invested Enterprises (together, the “Three-Capital Enterprises Law”), which regulated the approval system for foreign investors’ strategic investments in Listed Companies. For 19 years, they have provided the basis for foreign investors to enter the Chinese securities market and invest in Listed Companies. According to information source, there have been more than 600 cases of Listed Companies obtaining strategic investments from foreign investors under the regime of the Old Measures for Strategic Investment.
However, with the old Three-Capital Enterprises Law being repealed in 2019 by the new Foreign Investment Law, the original approval system for foreign investment in China has been gradually replaced by the Special Administrative System of Foreign Investment Entry (Negative List) and the Information Management Reporting System for Foreign Investment in the Non-Negative List. Under the framework of the new Foreign Investment Law, the approval system of the Old Measures for Strategic Investment is no longer practically implementable. The Old Measures for Strategic Investment set forth strict rules such as a relatively high threshold of capital qualification for foreign investment entry, a long lock-up period (three-years) for A-shares held by foreign investors, and narrow transaction types for foreign investment entry, which blocked the efforts of some foreign investors who did not meet the standards or who desired higher exit flexibility to invest in Chinese A-share listed companies. The Old Measures for Strategic Investment needed to be improved and in synch with the new Company Law implemented in 2024, as well as the constantly updated listing rules in Shanghai and Shenzhen.
Five years after the new Foreign Investment Law came into effect, and after several revisions and consultation drafts, the New Measures for Strategic Investment have finally been introduced. This lengthy process shows the importance and sensitivity of the New Measures for Strategic Investment, and it is evident that the ministries and commissions, including the Ministry of Commerce and the China Securities Regulatory Commission, acted prudently regarding the New Measures for Strategic Investment. We expect that the New Measures for Strategic Investment will open a new chapter for foreign investors’ strategic investment in Listed Companies in China.
I. The New Measures for Strategic Investment will substantially lower the threshold for foreign investors’ strategic investments and will stimulate the willingness of foreign investors to conduct strategic investment transactions
The New Measures for Strategic Investment will substantially lower the entry thresholds for foreign investors to invest in Listed Companies in China in the following ways:
1. The New Measures for Strategic Investment extends the scope of “foreign investors” to include foreign natural persons
Article 3 of the New Measures for Strategic Investment stipulates that ‘foreign investors’ referred to in the New Measures for Strategic Investment refers to foreign natural persons, enterprises or other organizations. Article 35 of the New Measures for Strategic Investment also sets out that investors from Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan, as well as PRC citizens residing in foreign countries, who invest in Listed Companies, shall also refer to the New Measures for Strategic Investment. This rule makes foreign natural persons eligible to make acquisitions in Chinese Listed Companies. This greatly expands the flexibility of the subjects of foreign strategic investments in Listed Companies.
2. The New Measures for Strategic Investment lowers the asset requirements for foreign investors
Article 6 of the New Measures for Strategic Investment requires that a foreign investor’s total real assets shall not be less than USD$50 million or the total real assets under management shall not be less than USD$300 million; if a foreign investor becomes the controlling shareholder of a listed company, the investor is required to meet the same asset standard as stipulated in the Old Measures for Strategic Investment, i.e., have total real assets of not less than US$100 million or total real assets under management of not less than US$500 million.
3. The New Measures for Strategic Investment adds tender offers (not less than 5% of the Listed Company’s issued shares) as a method of strategic investment
Compared with the private placement of new shares and agreement-based transfers as stipulated in the Old Measures for Strategic Investment, the tender offer is internationally recognized and the most important means in the acquisition of Listed Companies. Although there have been many examples of foreign-funded tender offers under the Old Measures for Strategic Investment, such as an offer made to fulfill a mandatory tender offer obligation, or an unsolicited partial offer, it is undoubtedly positive to provide for the form of a tender offer at the regulation level. Because the tender offer is set out in the New Measures for Strategic Investment, the technical difficulties of doing such transactions in the past have also been recognized by the regulatory authorities and barriers have been lifted in this amendment, such as the issue of securities account opening for foreign investors, and the payment process for converting foreign exchange into RMB.
4. The lock-up period for shares acquired by foreign investors has been cut from three years to 12 months
The lock-up period for shares acquired by foreign investors has been cut from three years to 12 months. The New Measures for Strategic Investment stipulate that if the Securities Law of the People’s Republic of China, the regulations of the securities regulatory authorities of the State Council, or the rules of the stock exchanges require a longer period of time for the lock-up period of the shares, such specific regulations shall apply. We understand that the lock-up period stipulated by the New Measures for Strategic Investment is a lower limit for the acquisition of Listed Companies, which is a basic lock-up period, and this lock-up period is actually shorter than that stipulated by the current listing rules in many cases, such as the three year lock-up period of the issuance of shares for obtaining controlling rights, and the restrictions on sales for the major shareholders. Therefore, when analyzing the lock-up period for strategic investments, it is necessary to make a comprehensive judgment based on the transaction structure and method.
5. The New Measures for Strategic Investment lowers the investment ratio requirement for foreign investors
The Old Measures for Strategic Investment required the proportion of foreign strategic investments to be not less than 10%, while the New Measures for Strategic Investment provide for a 5% requirement for strategic investments by way of an agreement-based transfer and tender offer, which is consistent with the listing rules. The ratio restriction has been removed for strategic investments made by way of subscription to private placement. We expect that the nationalized treatment of the ratio threshold will generate foreign investors’ interest in A-share transactions.
6. The New Measures for Strategic Investment breaks new ground in share exchange transactions in strategic investments
The New Measures for Strategic Investment provides that a foreign investor can make investments in Listed Companies by way of paying by its shareholding in offshore companies or by issuing additional shares by itself, with certain conditions attached. Compared with a cash consideration, it is clear that the share exchange will give full play to the parties in the transaction structure and will enable many cash transactions to be carried out in the form of share-based payments, reducing the demand for cash in cross-border transactions and the difficulty of foreign exchange conversion.
II. The New Measures for Strategic Investment introduce a new era of market-oriented regulation
Under the Old Measures for Strategic Investment, the approval system was at the core of the rules, and the approval of the Ministry of Commerce was a prerequisite for strategic investments. Under the new legal framework for foreign investments, the Information Reporting System for Foreign Investment is the basic framework. The information reporting system was insufficient to the disclosure and regulation needs of acquisition and investment in the public securities market and unable to fully meet the market’s need for security, stability, openness, fairness and impartiality. The New Measures for Strategic Investment sets a series of special procedures to ensure that the regulatory authorities minimize restrictions but maximize the regulatory effect of foreign investment in the A-share market in China.
We would like to summarize these special procedures:
1. Eliminate pre-approval of foreign investment under the Old Measures for Strategic Investment and enhance the regulation of foreign investors’ representations, undertakings, and self-inspection
For various types of transactions, foreign investors should report information to the stock exchanges, the registrars, depository agencies and approval authorities involved, sign transaction documents, give undertakings and make disclosures, just as ordinary domestic investors do. Foreign investors are also required to report investment information to the Commerce Departments according to different transaction processes. As with the disclosure requirements of domestic acquisitions of the same type, foreign investors bear the obligation to ensure the authenticity, accuracy, and integrity of the information reported. The New Measures for Strategic Investment also sets out the administrative enforcement and penalty powers of the Commerce Departments.
2. Enhance market-oriented operations, verify with the assistance of intermediaries, and strengthen the responsibilities of intermediaries
Article 8 of the New Measures for Strategic Investment stipulates that where a foreign investor makes a strategic investment, the foreign investor and the listed company shall engage financial advisors, sponsor institutions or law firms registered in China and compliant with the Securities Law of the People’s Republic of China (collectively, the “Intermediaries”) to act as advisors. The Intermediaries shall conduct due diligence and issue professional opinions on the subject qualification of the strategic investment, whether the strategic investment affects national security, whether it involves the Negative Entry List, and other necessary matters, and disclose such opinions to the public.
3. Stipulate the procedure for foreign investment security reviews, concentrations between undertakings, foreign exchange, taxation, and special industry reviews (e.g. the financial industry)
4. Set out the conditions and pathways for foreign investors to exit strategic investments and the information reporting system for foreign investment
5. Stipulate that foreign investors making strategic investments in companies quoted on the National Equities Exchange and Quotations shall be handled according to the New Measures for Strategic Investment
III. Outlook on the impact of the New Measures for Strategic Investment on foreign investments in the mergers and acquisitions of Listed Companies
We believe that the New Measures for Strategic Investment will open a new chapter for foreign investors to invest in the A-share market and we expect the following outcomes:
1. The New Measures for Strategic Investment will be more integrated with the current legal and regulatory system, which will strengthen the transaction expectations of the counterparties and generally favor such transactions
The New Measures for Strategic Investment will be more organically integrated with the new Company Law, Securities Law, Foreign Investment Law and a series of listing rules under the background of the registration system. The clarity of the rules and the market-oriented regulations will result in the market players having clearer transaction expectations, and the transactions will be more structured and regulated.
2. The implementation of the New Measures for Strategic Investment will increase the volume of foreign strategic investments in the market
The New Measures for Strategic Investment lower asset requirements, extend the scope of the subjects and lower the capital requirements as well as align the lock-up period, transaction type, investment ratio and other major issues affecting the transaction structures with the requirements of the Securities Law and the current listing rules for ordinary domestic investors. This will attract more foreign investors intending to make strategic investments in Listed Companies, creating a more liberalized environment for such transactions at the regulatory level, and ultimately lead to an increase in the volume of transactions in the market.
3. The New Measures for Strategic Investment increases the depth of legal counsel’s involvement, and strengthens the professional responsibilities of legal counsel
Under the Old Measures for Strategic Investment, legal counsels generally did not need to conduct special due diligence on foreign investors unless required by listing rules or the regulatory authorities. The New Measures for Strategic Investment stipulates that in each foreign strategic investment transaction, foreign investors must engage Chinese financial advisors, sponsor institutions, or law firms to conduct due diligence and provide professional opinions on whether the investment complies with the provisions of the New Measures for Strategic Investment, and the opinions need to be publicly disclosed. This provision not only expands the scope of a Chinese legal counsel’s foreign-related business, but also imposes greater work responsibilities. We understand that the expanded scope of work and work responsibilities are consistent with a lawyer’s professional responsibilities under the current registration-based system.
4. Many new transactions and methods under the New Measures for Strategic Investment still need to be put into practice
The New Measures for Strategic Investment have introduced new subjects and transaction methods such as natural persons, tender offers, and stock-for-stock transactions. The transaction methods for foreign investors’ strategic investment in A-share Listed Companies will be greatly increased. However, under the current legal framework, how these new transaction models will be implemented still needs to be tested.
The above is for reference purposes only. We recommend that our clients and all foreign investors interested in strategic investment in Chinese A-share Listed Companies carefully study the New Measures for Strategic Investment and conduct a comprehensive review of their existing investments and future investment plans in order to optimize, update, and develop more favorable investment plans.
For further information, please contact:
EI, Tianxiao, Partner, JunHe
leitx@junhe.com
