2012.08.06 SHAO, Chunyang、Feng Cheng
PIPE(Private Investment in Public Equity), the PE investment in listed companies, which is different from PE investment in Pre-IPO companies, is another type of PE investment by way of purchasing the shares of a publicly listed company based on the market price. Because the current PRC A-Share securities market is not a fully opened capital market, foreign investors are unable to freely invest in A-Share listed companies. Therefore, based on our understanding of relevant PRC laws and regulations, our research on the publicly available cases and our prior practical experience in similar kinds of projects, we have prepared this introduction for your general reference.
I. Basic Legal Framework for the PIPE Investment in A-Share Listed Companies by Foreign Investors
Under the current existing PRC legal framework, foreign investors can only conduct direct investment in A-Share listed companies through the following two methods: the foreign investors can apply for a QFII (“Qualified Foreign Institutional Investors”) license or conduct the investment via QFII; or the foreign investors can invest in A-Share listed companies as strategic investors.
With respect to the laws and regulations that are applicable to the above-mentioned two investment methods, application of a QFII license or conducting the investment in A-Share listed company via QFII is subject to the requirements under the Administrative Measures for the Domestic Securities Investment by Qualified Foreign Institutional Investors jointly promulgated by the China Securities Regulatory Commission (“CSRC”), People’s Bank of China (“PBOC”) and State Administration of Foreign Exchange (“SAFE”) and the Regulation regarding the Implementation of Administrative Measures for the Domestic Securities Investment by Qualified Foreign Institutional Investors promulgated and implemented by CSRC on July 27, 2012 (collectively “QFII Regulations”); on the other hand, investment in A-Share listed companies by foreign investors as strategic investors will involve more regulatory regulations, including:
1. Regulations governing the entry of foreign investment or industrial regulatory rules
(1) The Administrative Measures on the Strategic Investment in Listed Companies by Foreign Investors (“Strategic Investment Measures”) jointly promulgated by the Ministry of Commerce (“MOFCOM”), CSRC, the State Administration of Taxation (“SAT”), the State Administration of Industry and Commerce (“SAIC”) and SAFE, is the key regulation governing strategic investment in A-Share listed companies by foreign investors. The measures specify the qualification requirements of foreign strategic investors, the basic requirement for the strategic investment (i.e.: the investment ratio shall be no less than 10%, the minimum 3 year lock-up period, etc.), the method of the strategic investment (acquisition by agreement or the private placement of shares) and the approval process, etc.
(2) Provisions on the Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM, is the general regulation governing the M&A of domestic enterprises by foreign investors. The provisions are the default rule when certain things are not clearly specified under the Strategic Investment Measures.
(3) Provisions on Guiding Direction of Foreign Investment promulgated by the State Council and the Foreign Investment Industrial Guidance Catalogue (amended in 2011) promulgated by the National Development and Reform Commission (“NDRC”) and MOFCOM, are the fundamental regulations governing the industrial access and policy of foreign investment.
(4) According to the requirement under the PRC Anti-monopoly Law (“Anti-monopoly Law”), Regulation on the Filing Threshold for the Concentration of Business Operators published by the State Council and other relevant regulatory requirements of MOFCOM, in the event the foreign investor’s M&A of a domestic enterprise reaches the filing threshold, the foreign investor is required to make a prior filing at MOFCOM, otherwise the M&A transaction is not allowed to proceed.
According to the requirements under the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors and the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, in the event of the foreign investor’s M&A of a domestic enterprise that falls under certain industries and where the foreign investor will have de facto control of such domestic enterprise following the M&A transaction, a security review is required.
(5) If the target A-Share listed company is within certain special industries, such as a bank, an insurance company, etc., the approval from the relevant industrial regulatory authority is required, according to applicable regulations. For example, according to China Banking Regulatory Commission (“CBRC”)’s Administrative Measures on the Equity Investment in Chinese Financial Institution by Overseas Financial Institution, approval from CBRC is required in the event of equity investment by overseas financial institutions in Chinese financial institutions (including Chinese commercial bank, urban credit cooperative, rural credit cooperative, trust and investment corporation, financial company for the group enterprise, financial leasing company, etc.)
2. Laws and regulations in relation to the management of state owned asset
The major rule is the Interim Administrative Measures on the Transfer of Shares of Listed Company by State-Owned shareholders jointly promulgated by State-owned Assets Supervision and Administration Commission of the State Council (“SASAC”) and CSRC, which specifies the procedure that is applicable to the trading conducted by state-owned shareholders via securities exchange system, transfer by agreement, gratuitous transfer and indirect transfer.
3. Laws and regulations in relation to the securities regulation
(1) Administrative Measures on the Acquisitions of Listed Companies (“Administrative Measures on Acquisitions”) promulgated by CSRC and its applicable rules are the key securities regulatory regulations.
(2) If the consideration paid by the foreign investor for its investment in A-Share listed companies is in the form of the asset, CSRC’s Administrative Measures for the Material Asset Reorganization of Listed Companies and its applicable rules are also applicable.
II. General Methods for PIPE Investment in A-Share Listed Companies by Foreign Investors
1. Applying for a QFII license or conducting the investment in A-Share listed companies via QFII
According to the QFII Regulations, qualified QFII can invest the RMB financial instruments approved by CSRC (including trading the listed A-Share at the securities exchange). Therefore, foreign investors can acquire the A-Share of the listed companies by applying for a QFII license or via QFII.
A foreign investor must meet the following qualification requirements for the application of a QFII license:
(1) The foreign investor should be an overseas fund management institution, insurance company, securities company and other asset management institution, and if the foreign investor is a:
(a) asset management institution, it shall have at least 2 years of experience in assets management and a minimum USD 0.5 billion of securities assets managed by it in the most recent fiscal year;
(b) insurance company, it shall have an at least 2 years of history since its establishment, and it must have held a minimum USD 0.5 billion securities assets in the most recent fiscal year;
(c) securities company, it shall have at least 5 years of experience in securities operation with a minimum USD 0.5 billion net assets, and managed a minimum USD 5 billion securities assets in the most recent fiscal year;
(d) commercial bank, it shall have at least 10 years of experience in the operation of banking business with a core capital of minimum USD 0.3 billion, and managed a minimum USD 5 billion securities assets within the most recent fiscal year;
(e) other institutional investor (pension fund, charitable foundation, donation foundation, trust company, government investment management company), it shall have at least 2 years of history since its establishment and managed or held a minimum USD 0.5 billion securities assets within the most recent fiscal year.
(2) the applicant is in sound financial shape and credit status, and should meet the requirements set forth by CSRC on the size of the assets and other factors;
(3) employees of the applicant should meet the relevant professional qualification requirement of its home country/region;
(4) the applicant should have a sound management structure and a well-established internal control system, and should conduct business operations in accordance with applicable laws and regulations, and it must not have been substantially punished by regulatory authorities within the most recent 3 years;
(5) the home country/region of the applicant should have a well-established legal and regulatory system, and its securities regulatory authority must have signed the memorandum of understanding with CSRC and has maintained an effective cooperative supervisory relationship;
(6) other criteria as stipulated by CSRC based on the principal of prudent supervision.
In addition, approval from CSRC and the quota approval by SAFE are required for the acquisition of the shares of listed companies by foreign investors according to the QFII Regulations. Within the approved quota, QFII can invest the RMB financial instrument approved by CSRC. However, QFII is required to entrust a domestic commercial bank as the trustee to manage the assets on behalf of QFII, and is also required to entrust a domestic securities company to conduct the domestic securities exchange transaction.
With respect to the acquisition of shares of A-Share listed companies via QFII, foreign investors can entrust one or several QFII(s). The QFII will directly purchase the shares of A-Share listed companies on the domestic securities market and the QFII will disclose that such foreign investor is the actual investor in the relevant information disclosure. In comparison with the required cooperation provided by the transaction’s opponents and the various approval requirements as required for the investment in A-Share listed companies by way of applying a QFII license, and other investment methods as mentioned herein, investment in A-Share listed companies via QFII can be conducted by the foreign investor unilaterally, and there is no need to obtain approval from governmental authority, except with respect to the information disclosure obligation. However, according to the QFII Regulations, there is an investment ratio limitation on the investment in A-Share listed companies via QFII by foreign investors, under which if a single overseas investor holds the shares of a listed company via QFII, the equity interest held by it shall not exceed 10% of the issued shares of such a listed company; and the total equity interest held by all overseas investors in a listed company shall not exceed 30% of the issued shares of such a listed company.
2. Investment in an A-Share listed company as a strategic investor
According to the Strategic Investment Measures, a foreign investor must meet the following qualification requirements for its acquisition of the shares of an A-Share listed company as a strategic investor:
(1) It is a legally established and operated foreign legal person or other organization, with stable financial status, good credit standing and mature management experience;
(2) The total amount of its actual overseas assets shall be no less than USD 100 million or the actual overseas assets managed by it shall be no less than USD 500 million; or the total amount of its parent company’s actual overseas assets shall be no less than USD 100 million or the actual overseas assets managed by its parent company shall be no less than USD 500 million;
(3) It has a sound management structure and a well-established internal control system, and its business operation activities are in compliance with applicable laws and regulations;
(4) It has not received any substantial punishment by an overseas or domestic regulatory authority within the most recent 3 years (including its parent company).
According to the Strategic Investment Measures, a foreign investor’s strategic investment methods can be categorized by the following two methods: private placement and transfer by agreement.
(1) The following procedures shall be completed if the strategic investment is conducted in the form of the private placement of shares by listed companies:
(a) the board of directors of the listed company passes a board resolution;
(b) the shareholder general meeting of the listed company passes a resolution;
(c) the listed company signs the subscription agreement for the private placement of shares with the investor;
(d) submit relevant application documents to the MOFCOM;
(e) after the obtainment of MOFCOM’s approval for the strategic investment by an investor in the listed company, the listed company submits the private placement application documents to CSRC;
(f) obtains CSRC’s approval;
(g) after the completion of the private placement, the listed company obtains the approval certificate for a foreign invested enterprise at MOFCOM, and makes an amendment registration at SAIC based on such approval.
The issuance price of the shares subject to the private placement of the listed company should be no lower than 90% of the average price of the issuer’s shares for the 20 trading days prior to the date of the benchmark pricing. The date of the benchmark pricing can be the date of the announcement of the board resolution, the date for the announcement of the shareholder general meeting resolution, or the initial day of the placement period.
In practice, Art Garden’s subscription of the private placement of shares of Southern Building Material (000906) and Diamondrock Investment’s subscription of the private placement of shares of Jidong Cement (000401) are typical cases of private placement..
(2) The following procedures shall be completed if the strategic investment is conducted through transfer by agreement:
(a) the board of directors of the listed company passes a board resolution;
(b) the shareholder general meeting of the listed company passes a shareholder resolution;
(c) the transferor signs the share purchase agreement with the investor;
(d) the investor submits the relevant application documents to the MOFCOM;
(e) if the investor is an equity holder of the listed company and has obtained the above-mentioned approval, the investor must complete the formalities for the confirmation of the share transfer at a securities exchange, complete the formalities for the registration at a securities registration and settlement institution, and makes a filing at CSRC; if the investor intends to have de facto control of the listed company by way of transfer by agreement, the investor shall submit an acquisition report and relevant document to CSRC for its review and can only proceed with the share transfer confirmation formalities at a securities exchange and apply for the registration at a securities registration and settlement authority if CSRC raises no objection after the review;
(f) After the transfer by agreement is completed, the listed company obtains the approval certificate for a foreign invested enterprise at MOFCOM and makes an amendment registration at SAIC based on such approval.
If the transferor is a state-owned shareholder of the listed company, during the process of transfer by agreement, the share transfer price should be determined based on the average of the weighted average prices of 30 trading days prior to the date of the announcement of the proposed share transfer; where there exists the necessity for a lower transfer price, the minimum price should not be lower than 90% of such averaged price.
In practice, the strategic investment by CVC in “Zhuhai Zhongfu” (000659) and “Carlsberg Hong Kong’s acquisition by agreement of Chongqing Beer” (600132) are typical cases of transfer by agreement.
No matter what strategic investment method is adopted, the A-Shares of the listed company acquired by foreign investors may not be transferred within 3 years. The investment can be conducted in several installments and the proportion of the shares obtained after the completion of the initial investment shall be no less than 10% of the shares issued by the company.
3. Investing the A-Share listed company by way of indirect acquisition
(1) M&A of a listed company via its controlling foreign invested enterprise
Foreign investors can merge and acquire the A-Share listed companies via its foreign invested enterprise with PRC legal person qualification. Foreign investment in this pattern does not need to meet the qualification requirement for the strategic investor or QFII as required under the above-mentioned Strategic Investment Measures or QFII Regulations and there is no need to go through the approval procedure as required for the strategic investor and QFII.
The M&A of A-Share listed companies by foreign investors via its controlled foreign invested enterprise shall be conducted in accordance with the Administrative Measures on Acquisitions, Administrative Measures on the Issuance of Securities by Listed Companies and Implementing Rules on the Private Placement of Shares by Listed Companies, by way of tender offer, acquisition by agreement, subscription of private placement of shares of listed companies to complete the relevant acquisition procedures.
Please note that due to the current strict foreign exchange control of SAFE on the equity investment of foreign invested enterprise by way of using the fund in its capital account, if the foreign investor intends to acquire the listed company via its already established foreign invested enterprise, such foreign invested enterprise should use its self-owned fund. In addition, such a foreign invested enterprise should not be a foreign equity investment enterprise. According to the Circular on the Promoting the Standardized Development of Equity Investment Enterprises promulgated by the General Office of NDRC (Fa Gai Ban Cai Jin [2011] No. 2864), the scope of investment for the equity investment enterprise (including foreign equity investment enterprise) is limited to non-publicly traded securities, which does not include the A-Share of the listed companies.
A typical case was Everwin Pacific Limited’s acquisition of Jiugui Liquor (000799) via Zhonghuang Company.
(2) M&A of a listed company via a foreign investor’s domestically established investment company.
According to the current regulations, the investment company established by the foreign investor may not only make the strategic investment in a domestically listed company, but it also may trade A-Share of domestically listed companies in the secondary market. Of course, there are certain qualification requirements for the establishment of an investment company:
(a) The foreign investor has good credit standing and has the financial strength necessary for the establishment of the investment company, and its total assets shall be no lower than USD 400 million for the year prior to the establishment, and it has established a foreign invested enterprise in China, and its actual paid-in capital contribution to the registered capital exceeds USD 10 million, or (ii) has good credit and the financial strength necessary for the establishment of the investment company, and it has established ten or more foreign invested enterprises in China, and the actual paid-in capital contribution to the registered capital exceeds USD 30 million.
(b) To establish an investment company in the form of an equity joint venture, the Chinese investor shall have good credit standing and the financial strength necessary for the establishment of an investment company, and its total assets shall be no less than RMB100 million for the year prior to the application;
(c) The registered capital of the investment company shall be no lower than USD 30 million.
(3) Foreign investor’s M&A of the controlling shareholder of the listed company to indirectly control the listed company
A foreign investor can wholly or partially acquire the parent company or the controlling shareholder of the listed company in accordance with the Provisions on the Mergers and Acquisitions of Domestic Enterprises by Foreign Investor and the Administrative Measures on Acquisitions, that falls under the supported or the encouraged industry according to the Foreign Investment Industrial Guidance Catalogue, to convert such listed company to a wholly foreign owned enterprise or a foreign invested enterprise, and realize its indirect control of the listed company. Please note that if the parent company of the listed company is a state-owned company, the relevant approval process for the transfer of state-owned assets shall be completed.
The typical case under this method is CDH Investment’s indirect equity investment in Luxi Chemical (000830).
4. Acquire the shares of A-Share listed company by using assets for consideration
Except for using cash for the consideration to purchase the shares of a listed company, foreign investors are allowed to use their legally owned domestic or overseas assets for consideration for the subscription of private placement A-shares by listed companies. If the asset contributed by such foreign investors reaches a certain threshold, then the transaction constitutes a material asset reorganization of the listed company, and such transaction usually is subject to relevant approval from MOFCOM and CSRC.
The typical case under this method includes EGING PV’s reverse merger of Haitong Food (600537) and Meihua MSG’s absorption merger of Wuzhou Minovo (600873).
III. Issues noteworthy for PIPE investment in A-Share Listed Companies by Foreign Investors
1. Industrial Access
As discussed above, the investment by foreign investors in A-Share listed companies is subject to the approval of relevant PRC government authorities and must also comply with relevant foreign investment entry policies. According to the Strategic Investment Measures, with respect to an industry for which the laws and regulations have expressly specified the limitation on the proportion of shares held by a foreign investor, the proportion of the shares of the company that fall under such industry held by such investor shall comply with such requirements; with regard to an industry that is prohibited entry of foreign investment as specified in applicable laws and regulations, the investor shall not invest in the listed company within such an industry. The PRC government has established an industrial entry system for foreign investment and the industries for foreign investment are divided into four categories, which are: encouraged, permitted, restricted and prohibited industries. Foreign Investment Industrial Guidance Catalogue (amended in 2011) in detail lists the encouraged, restricted and prohibited industries and also specifies the limitation on the proportion of shares to be hold by the foreign investors for certain industries.
2. Anti-monopoly Review
Investment by foreign investors in A-Share listed companies may be subject to anti-monopoly review depending on the actual circumstances. Since the publishing of Anti-Monopoly Law in 2008, the State Council and MOFCOM consecutively promulgated Regulation on the Filing 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, and other regulations, to specify the anti-monopoly review procedure and the required filing documents. According to the above-mentioned regulations, in the event of the acquisition of a listed company by a foreign investor, if the foreign investor has acquired the control (including the common control) of the listed company and the total worldwide revenue of all business operators participating in the concentration for the prior fiscal year exceeds RMB 10 billion, and at least two business operators’ revenue in China for the prior fiscal year each exceeds RMB 40 million; or the total revenue in China of all business operators participating in the concentration for the prior fiscal year exceeds RMB 2 billion, and at least two business operators’ revenue in China for the prior fiscal year each exceeds RMB 40 million, such foreign investor is required to make a filing at MOFCOM to seek its approval.
By our knowledge, CVC submitted the anti-monopoly filing document to MOFCOM at the time of its strategic investment in the domestic A-Share listed company, Zhuhai Zhongfu, via its subsidiary Asia Bottles (HK) Company Limited in 2007.
3. Security Review
In the event of the M&A of domestic enterprises within the following industries, the foreign investor shall make a filing at MOFCOM for a security review. The industries within the scope of the security review includes national security, material agriculture products in relation to the national defense security, critical energy and resource, critical infrastructure, critical transportation service, key technology, manufacture of critical equipments. If the M&A transaction has a national defense security implication, a security review is required irrespective of whether the foreign investor will have de facto control of the domestic enterprise or not; if the M&A transaction has a national security implication, a security review is required if the foreign investor will have the de facto control of domestic enterprise. Please note that currently MOFCOM has not published the detailed catalogue of the industries within the scope of security review, therefore, for the purpose of reducing the legal risk, it is suggested that the foreign investor make a prior consultation with MOFOCM to discuss whether the M&A transaction is subject to a security review.
4. Waiver of Tender Offer
According to the Administrative Measures on Acquisition, in the event the shares of a listed company held by a purchaser reaches 30% of the issued shares of the company, the purchaser shall deliver a general offer or partial offer to the shareholders of the listed company before the acquisition can proceed. The purchaser may file an application at CSRC to waive such a tender offer requirement, if the acquisition is in compliance with certain requirements under the Administrative Measures on Acquisition. Under the following circumstances, the purchaser can send an application to CSRC to waive the tender offer requirement:
(1) The purchaser and the transferor can prove that the share transfer will not result in the change of the actual control person of the listed company;
(2) The listed company is facing a severe financial crisis, and 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 warrants that it will not transfer its interest in the company within 3 years;
(3) Subject to the approval of the non-affiliated shareholders of a general shareholder meeting of the company, the newly issued shares of the listed company acquired by the purchaser will result in its shares in the listed company exceeding 30% of the issued shares of such company, and the purchaser warrants that it will not transfer the shares newly issued to it under this transaction within 3 years, and the waiver of the tender offer is approved by a general shareholder meeting of the company;
(4) Other circumstances approved by CSRC as necessary for the development of securities market and for the protection of legal interest of the investor.
According to the above-mentioned requirements, it is relatively difficult for the foreign investor to obtain CSRC’s approval for the waiver of the tender offer requirement, if the strategic investment in the listed company is conducted by way of transfer by agreement, compared with the investment by way of private placement.
5. Horizontal Competition and Affiliate Transaction
According to the Administrative Measures on Acquisition, in the information disclosure documents prepared and published by the foreign investor for its investment in the A-Share listed company, the foreign investor shall disclose whether there exists any horizontal competition or potential horizontal competition between the business of the investor, person acting in concert and its controlling shareholders, actual control person and the business of the listed company, and whether there exists any continuingly affiliate transaction; if there exists any horizontal competition or affiliate transaction, whether relevant arrangement has been implemented to ensure the avoidance of horizontal competition between the investor, person acting in concert and its affiliated party and the listed company, and to ensure the independence of the listed company.
If the investment in an A-Share listed company by the foreign investor satisfies the back door listing requirements as specified in the Administrative Measures for the Material Asset Reorganization of Listed Companies, then according to the above-mentioned Administrative Measures for the Reorganization, after the completion of such material asset reorganization, the listed company shall comply with the relevant requirement by CSRC in the corporate governance and standardized operation of the listed company, to ensure its independence from the controlling shareholder, actual control person and other enterprises that are controlled by such person, in the business, assets, finance, employee, organization and other aspects, and to ensure there is no horizontal competition and other unconscionable affiliate transaction between the controlling shareholder, actual control person and other enterprises that are controlled by such person.
