Member Article

The Ministry of Commerce (“MOFCOM”), the China Securities Regulatory Commission, the State Administration of Taxation, the State Administration for Industry and Commerce and the State Administration of Foreign Exchange jointly promulgated the Measures for the Administration of Strategic Investment of Foreign Investors in Listed Companies on 31 December 2005. The Measures, which came into force on 31 January 2006, for the first time allow foreign investors other than qualified institutional investors to acquire A-shares of PRC listed companies. Strategic investment The Measures are applicable to foreign investors who wish to make long or medium-term strategic investments of a certain scale in A-shares in the following types of company: listed companies that have completed share allocation reform and companies that have been newly listed following share allocation reform. MOFCOM approval is required prior to the foreign investor making the strategic investment. Acquisition method The Measures permit a foreign investor to acquire a strategic investment in three ways: a private share assignment agreement, a private placement or any other method sanctioned by PRC law. The Measures do not elaborate on the other methods, but open market acquisitions do not appear sanctioned. Conditions The Measures require that the strategic investments comply with certain principles, including respect for state laws and industrial policies, the protection of the lawful rights of listed companies and their shareholders, the promotion of long-and mid-term investment, the prohibition of speculation and the prevention of restrictions on competition. Strategic investment is subject to the following conditions: • the A-shares must be acquired by means of contractual assignment, private placement of new shares or other lawful means; • the investment may be conducted in stages, provided that the proportion of shares obtained upon completion of the initial investment accounts for at least 10% of the shares issued by the target company; • the acquired A-shares may not be transferred within three years; • the investor’s shareholding must comply with restrictions on foreign shareholding existing in certain industry sectors and no strategic investment is permitted in industry sectors closed to foreign investment; and • if shareholders of state-owned shares in listed companies are involved, the regulations regarding the administration of state assets must be complied with. Investor requirements The foreign investor engaging in strategic investment must satisfy the following conditions: • it is a foreign legal person or other organisation that is established and operates lawfully, is financially stable, creditworthy and has mature management experience; • it or its parent company owns overseas actual assets of not less than US$100 million or manages overseas actual assets of not less than US$500 million; • it has a sound structure of governance, a good internal control system, and standard operating rules; and • neither it nor its parent company has been subject to a serious penalty imposed by Chinese or overseas regulatory institutions in the past three years. If the investor does satisfy these criteria a qualifying parent may undertake joint and several liability for the investment. The Measures require a report to MOFCOM prior to any transfer of the parent’s investing subsidiary. Procedure The Measures set forth the procedures through which a foreign investor can make a strategic investment in a Chinese public company. The procedures vary depending on whether the acquisition is completed by means of a private share assignment agreement or a private placement. The procedures for both acquisition methods have in common that they require the approval of MOFCOM. Upon completion of the investment, the listed company is required to obtain an approval certificate of a foreign investment enterprise. Director and shareholder approval from the target are also required for the investment. The transaction must be completed within 180 days of preliminary approval by MOFCOM. Treatment A listed company in which foreign investors have acquired at least 25% of the shares qualifies as a foreign investment enterprise and may enjoy the preferential treatment that goes with this status.