Legal Update on PIPE by Foreign Investors in A-Share Listcos II

III、Investment in A-Share listed companies via Northbound Trading Link (“NTL”) of Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect
3.1 NTL of Shanghai-Hong Kong Stock Connect
Under the mechanism of Shanghai-Hong Kong Stock Connect, foreign investors may delegate Hong Kong brokers and apply to the SSE to transact shares in A-Share listed companies as specified in the relevant regulations via an SEHK securities trading-service company in Shanghai. According to the Implementation Measures for the Business of Shanghai-Hong Kong Connect, the stocks available for trading to foreign investors under the NTL of Shanghai-Hong Kong Stock Connect include: (i) the SSE Constituent Index; (ii) the SSE 380 Index; and (iii) A-shares listed on the SSE by companies listed on both the SSE and SEHK.
The above regulations require that stocks of the NTL of Shanghai-Hong Kong Stock Connect shall be quoted and traded in RMB. The trading days and transaction time shall be announced by the SEHK Shanghai Subsidiary on a designated website, and will be traded via competitive bidding.
In addition, foreign investors who conduct a transaction via the NTL of Shanghai-Hong Kong Stock Connect shall obey the following requirements of the Several Provisions on the Interconnection Mechanism for Transactions in the Mainland and Hong Kong Stock Markets:
The shareholding ratio of a foreign investor in a listed company shall not exceed 10% of the total number of shares of such listed company; and
The aggregate number of A-shares held by all foreign investors in a listed company shall not exceed 30% of the total number of shares of such listed company.
However, in the case of a strategic investment, these ratio restrictions will not apply to a foreign investor’s shareholding.
3.2 NTL of Shenzhen-Hong Kong Stock Connect
Under the mechanism of Shenzhen-Hong Kong Stock Connect, foreign investors may delegate Hong Kong brokers and apply to the SZSE to transact shares in A-Share listed companies as specified in the relevant regulations via the SEHK Shenzhen Subsidiary. According to the Implementation Measures for the Business of Shenzhen-Hong Kong Connect, the stocks available for trading to the foreign investors under the NTL of Shenzhen-Hong Kong Stock Connect include:
The SZSE Constituent Index and SZSE Small/Mid Cap Innovation Index stocks with a daily average market capitalization of more than six billion RMB in the six months before the deadline for periodical adjustment review. The market capitalization is calculated based on the actual time of listing if such time is less than six months; and
A-shares listed on the SZSE by companies listed on both the SZSE and the SEHK.
According to the Implementation Measures of the Shenzhen Stock Exchange for Shenzhen-Hong Kong Stock Connect, the Stocks of NTL of Shenzhen-Hong Kong Stock Connect shall be quoted and traded in RMB. The trading days and transaction time shall be announced by the SEHK Shenzhen Subsidiary on a designated website, and will be traded via competitive bidding.
In addition, foreign investors shall comply with the following requirements listed in the Several Provisions on the Interconnection Mechanism for Transactions in the Mainland and Hong Kong Stock Markets:
The shareholding ratio of a foreign investor in a listed company shall not exceed 10% of the total number of shares of such listed company; and
The aggregate number of A-shares held by all foreign investors in a listed company shall not exceed 30% of the total number of shares of such listed company.
In the case of a strategic investment, these ratio restrictions will not be applied to shares held by foreign investors.
IV、Issues for PIPE in A-Share Listed Companies by Foreign Investors
4.1 Industry Access
As discussed above, investment by foreign investors in A-Share listed companies is subject to the approval or record-filing of relevant PRC government authorities and must also comply with any relevant foreign investment access policies. The Negative List specifies the restricted and prohibited areas for foreign investment and imposes limitations on shareholding ratios for a foreign investor’s investment in certain industries. The Strategic Investment Measures stipulate that where laws and regulations have expressly specified limitations on the shareholding ratio of foreign investors for companies in specific listed industries, the foreign investor shall comply with shareholding restrictions and the investor shall not invest in listed companies of those industries in the prohibited category of the Negative List.
4.2 Anti-Monopoly Review
Investment by foreign investors in A-Share listed companies may be subject to anti-monopoly review. Since the promulgation of the Anti-Monopoly Law in 2008, the State Council, MOFCOM and the State Administration of Market Supervision have consecutively promulgated the Regulation on the Declaration Threshold for the Concentration of Business Operators, the Measures for the Review of the Concentration of Business Operators, the Interim Measures for the Evaluation of the Competitive Effect on the Concentration of the Business Operators, the Guiding Opinions for the Declaration of the Concentration of the Business Operators, the Anti-monopoly Review Guidance for Concentrations of the Business Operators and other regulations that detail anti-monopoly review procedures and the required filing documents. According to such regulations, if a foreign investor has acquired the control (including the common control) of a listed company and the total worldwide revenue for the last fiscal year of all business operators participating in the concentration exceeds RMB 10 billion, and at least two business operators’ revenue in China for the last fiscal year each exceeds RMB 40 million; or the total domestic revenue (in China) for the last fiscal year of all business operators participating in the concentration exceeds RMB 2 billion, and at least two of the business operators’ revenue in China for the last fiscal year exceeds RMB 40 million each, such foreign investor is required to make a declaration to the anti-trust authorities and to obtain approval.
Some related cases include CVC’s 2007 submission of anti-monopoly declaration documents to MOFCOM for its strategic investment in the domestic A-Share listed company, Zhuhai Zhongfu, via its subsidiary Asia Bottles (HK) Company Limited, and the July, 2018, COFCO Bio-chemical Investment submission of anti-monopoly declaration documents to the Anti-Monopoly Bureau of the State Administration of Market Supervision for the subscription of private placement shares issued by COFCO Biochem (000930).
4.3 Security Review
When the M&A of a domestic enterprise by a foreign investor falls within the following scope, the foreign investor shall apply to MOFCOM for a security review before the filing for the M&A transaction. Industries likely to trigger the need for a security review include national security and defense-related products or services, agricultural products, key infrastructure, significant transport services, key technology and heavy equipment manufacturing. If the M&A transaction has implications for national security, a security review will be required only if the foreign investor will have de facto control of the domestic enterprise, however, if the national security implication is related to national defense, a security review is required regardless of whether or not the foreign investor will have de facto control of the domestic enterprise. Please note that MOFCOM has not yet published a detailed catalogue specifying the scope of industries for security review. Therefore, to mitigate any legal risk, it is suggested that a foreign investor consult with MOFCOM in advance to verify whether the M&A transaction in question may be subject to a security review.
4.4 Waiver of Tender Offer
According to the Administrative Measures on Takeovers, if the plan to acquire shares of a listed company would mean that the total proportion of shares held by a purchaser will reach 30% of the issued shares of the company, the purchaser will be required to deliver a general offer or partial offer to the shareholders of the listed company before the acquisition can proceed. Under the following circumstances specified in the Administrative Measures on Takeovers, the purchaser may apply to the CSRC to waive such a tender offer requirement:
The purchaser and the transferor of shares can prove that the share transfer will not alter the actual controlling person of the listed company;
The listed company is facing a severe financial crisis, the reorganization plan proposed by the purchaser to save the company has been approved by a general shareholder meeting of the company, and the purchaser guarantees that it will not transfer its interest in the company within three years; and
Other circumstances approved by the CSRC as necessary for the development of securities market and for the protection of the legal interest of the investor.
4.5 Business Competition and Related Party Transactions
According to the Administrative Measures on Takeovers, a foreign investor shall make known in the disclosure documents prepared and published for its investment in the A-Share listed company: any current or potential business competition between the business of the investor and persons acting in concert with the investor and their controlling shareholders, the actual controlling person and the business of the listed company, and any ongoing related party transactions. The disclosure documents shall outline any business competition or related party transactions or relevant arrangement to ensure the avoidance of business competition between the investor, person acting in concert and its related party and the listed company and to maintain the independence of the listed company.
If the investment in an A-Share listed company by the foreign investor meets the back-door listing requirements specified in the Administrative Measures for the Material Asset Reorganization of Listed Companies, the listed company shall comply with the CSRC’s relevant requirements on corporate governance and standard operation of the listed company after the completion of such material asset reorganization in order to maintain its independence from the controlling shareholder, the actual controlling person and other enterprises that are controlled by such persons whether in terms of business, assets, finance, employees, organization or other aspects, and to ensure there is no business competition or other unconscionable related party transaction with the controlling shareholder, actual controlling person or other enterprises that are controlled by such person.