China revises rules to ease foreign strategic investments in listed companies

20 November 2024

On 1 November 2024, the People’s Republic of China’s (“PRC” or “China”) Ministry of Commerce (“MOFCOM”) and five other national departments jointly issued Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors《外国投资者对上市公司战略投资管理办法》 (“New Measures”). The New Measures are due to come into effect on 2 December 2024 and will then supersede its previous iteration issued at the end of 2005 and amended in 2015 (“2005 Measures”). The New Measures are intended to further open up China’s capital market and thereby attract more foreign investment and talent.

This article highlights some key aspects of the New Measures.

Scope

The Regulation applies to the acquisition and medium or long-term holding of shares traded by foreign investors in PRC A-share listed companies (“Listed Companies”) through private placements (i.e. issuance of new shares to specific investors), transfers by agreement, tender offers, and other means as stipulated by national laws and regulations (“Strategic Investment”). The New Measures also apply to Strategic Investments in companies listed on the National Equities Exchange and Quotations (commonly known as 新三板 in China).

The following are not subject to the New Measures:

  • Qualified Foreign Institutional Investors (QFIIs) and RMB Qualified Foreign Institutional Investors (RQFIIs) investing in Listed Companies;
  • Foreign investors investing in Listed Companies through stock connect mechanisms between PRC onshore and offshore stock exchanges (e.g. investing through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect);
  • Foreign investors’ rights and interests in shares of Listed Companies acquired before its initial public offering in the A-share market (i.e. pre-IPO investments); and
  • Foreign individuals, who comply with the relevant regulations, trading shares of Listed Companies in the secondary market, or acquiring shares of Listed Companies through equity incentives.

Less restrictive conditions

Relaxed asset threshold

The New Measures lower the asset requirements for foreign investors, stipulating that foreign investors must have a minimum of US$50 million actually-owned assets or US$300 million for assets under management. Only when a foreign investor becomes the controlling shareholder of a Listed Company is it required to meet the same asset standards as set by the 2005 Measures, namely, a minimum of US$100 million actually-owned assets or US$500 million for assets under management.

Additionally, the New Measures specify that if the direct investment entity does not meet such asset thresholds but it is wholly owned by an investor that does (“Owner”), the said entity may proceed with the investment, provided that its Owner commits or agrees with the said entity that it shall assume joint liabilities for the investment. 

Expanded scope of foreign investors 

The New Measures now allow foreign individuals, not just foreign enterprises and organisations per the 2005 Measures, to make Strategic Investments aligned with the scope of foreign investors allowed under the Foreign Investment Law. Foreign individuals from the Hong Kong Special Administrative Region, Macao Special Administrative Region, and Taiwan region, as well as PRC citizens residing overseas, are also subject to the New Measures.

Foreign investors have to satisfy various capability and operational requirements, including being legally established; having sound finances, good credit standing, mature management, sound governance structure, good internal control systems, and regular business operations; and not having received any criminal or major regulatory penalties domestically or internationally in the past three years. Aside from the same asset threshold requirement for all foreign investors, foreign individual investors must have the appropriate capacity to identify and tolerate risks.

Enriched investment approaches - Cross-border shares swap

Foreign investors are now allowed to also use non-listed equity interests or shares of foreign companies (“Foreign Shares”) as consideration for Strategic Investments under the New Measures. The conditions are as follows:

  • The Foreign Shares shall be of a company legally established in a jurisdiction with a sound corporate legal system, with neither the company nor its management having been subject to any major penalties by PRC or offshore regulatory authorities in the last three years. If the Strategic Investment is implemented through a transfer by agreement, the Foreign Shares shall be publicly listed; if implemented through private placements or tender offers, the Foreign Shares can be of a non-listed company;
  • The Foreign Shares shall be legally held by the foreign investor and legally transferrable, or legally and newly issued by the foreign investor;
  • The transaction shall comply with relevant PRC laws and rules and regulations of the China Securities Regulatory Commission, stock exchanges, and securities registration and clearing institutions; and
  • The transaction shall comply with relevant PRC regulatory requirements and procedures of foreign investment management.

Shortened lock-up period 

The New Measures reduce the lock-up period for foreign investors in Strategic Investments from three years to 12 months. Where a non-eligible foreign investor implements a Strategic Investment through misrepresentation or other illegal means in violation of the New Measures, such foreign investor is barred from transferring, donating, or charging the shares in the Listed Company, participating in dividends, exercising voting rights or influencing the voting in the Listed Company before the foreign investor has fulfilled all the conditions and during the 12-month lock-up period which will commence only after the foreign investor has fulfilled such conditions.

Despite the shortening of the lock-up period by the New Measures, foreign investors may still be subject to stricter requirements under other applicable laws and regulations (for example, an 18-month lock-up period applies if the foreign investor’s Strategic Investment constitutes the acquisition of control of a Listed Company under the Administrative Measures on Acquisition of Listed Companies). In addition, a shortened lock-up period will not retroactively apply to those Strategic Investments made before the promulgation of the New Measures, in relation to which the original three-year lock-up period as specified in the 2005 Measures shall continue to be followed. 

Lowered minimum shareholding ratio requirement

The 2005 Measures stipulated that the foreign investor’s initial Strategic Investment in a Listed Company should constitute at least 10% of the company’s issued and outstanding shares. Under the New Measures, the minimum shareholding threshold for Strategic Investments made through transfers by agreement and tender offers has been reduced from 10% to 5%, while Strategic Investments made through private placements are exempt from any minimum shareholding requirement.

Other highlights

Removal of MOFCOM’s approval requirement 

To align with the requirements under the Foreign Investment Law, the New Measures remove the MOFCOM approval and record-filing procedures for Strategic Investments under the 2005 Measures. Foreign investors no longer need to obtain MOFCOM’s approval or record-filing to conduct Strategic Investments. The New Measures further clarify that foreign investors or the Listed Company must instead submit relevant investment information to the competent commerce authority: (a) after they have completed the Strategic Investments and (b) when their shareholding ratios change by more than 5%, or the controlling or relative controlling position of foreign parties in the Listed Companies changes, after the Strategic Investments are completed.

Compliance with other regulatory requirements

Foreign investors shall not make Strategic Investments in Listed Companies that fall within the scope of prohibited areas for foreign investment under the negative lists for foreign investment access. To make Strategic Investments in Listed Companies in restricted areas, the Strategic Investments should comply with the restrictions as set out in the negative lists including in relation to shareholding ratio and senior executives. Foreign investors making Strategic Investments also need to comply with the laws and regulations regarding state-owned assets management, concentrations of undertakings, foreign exchange, taxation, national security review, financial supervision, corporate registration, information disclosure, and other domestic regulatory requirements.

Specific requirements for Owners 

Apart from an Owner’s commitment or agreement to take on joint liabilities for a Strategic Investment made by its wholly owned subsidiary when the Owner’s assets/operational conditions are relied upon for the Strategic Investment, the Owner is also subject to the same lock-up period imposed on the foreign investor in terms of any subsequent transfer of ownership in the foreign investor by the Owner. Upon completion of such transfer, the transferee, as the new Owner of the foreign investor, must still meet the conditions outlined in the New Measures (for example, asset threshold), assume the rights and obligations of the previous Owner and the foreign investor in the Listed Company, and fulfil its regulatory obligations such as information disclosure.