China relaxes measures on foreign strategic investment in listed companies

Introduction

On 1 November 2024, China’s Ministry of Commerce (MOFCOM), China Securities Regulatory Commission (CSRC) and four other Chinese governmental authorities jointly released revised measures (the New Measures) on foreign investors’ strategic investment in listed companies of China (the Strategic Foreign Investment), which came into effect on 2 December 2024.

The New Measures amended the old Strategic Foreign Investment regime promulgated in 2005 (the Old Measures), which had allowed foreign investors satisfying certain requirements to directly acquire and hold shares in PRC listed companies on a medium-to-long term basis. Aiming to attract more high-quality foreign capital into China’s capital markets, the New Measures have substantially lowered the investment qualifications and thresholds and have streamlined the investment procedures. 

The key changes under the New Measures are set out below. 

Key changes under the New Measures

Confirming no MOFCOM approval required for the investment: Pursuant to the Old Measures, all investments made by foreign investors required the prior approval of MOFCOM. However, the Foreign Investment Law, which came into effect on 1 January 2020, removed the requirement for foreign investors to seek MOFCOM approval for any of their investments in China, but the Old Measures were not amended accordingly to reflect this. The New Measures now respond to the earlier legislative changes and confirm that no MOFCOM approval will be required for Strategic Foreign Investment. 

Other regulatory formalities required: The regime on the other regulatory formalities required for  a Strategic Foreign Investment has also been updated under the New Measures. Depending on a particular investment scenario, a Strategic Foreign Investment may be subject to one or more of the following regulatory formalities: (a) seeking registration decision from and completing registration procedures with CSRC and the relevant stock exchanges if new shares will be issued, (b) fulfilling the applicable disclosure and reporting obligations in terms of the change of ownership of the listed company’s shares, (c) completing registration or transfer procedures with securities depository and clearing house, and (d) reporting the updated foreign investment information to the MOFCOM.

Permitting foreign natural persons to make a Strategic Foreign Investment: The New Measures expand the scope of permitted foreign investors from qualified foreign enterprises (or other organizations) to also include qualified foreign natural persons.

Lowering capital requirements on foreign investors: The Old Measures required a foreign investor (or its 100 per cent. parent company) to have no less than USD 100 million in total overseas assets or no less than USD 500 million in total overseas managed assets. The New Measures however have lowered such thresholds to no less than USD 50 million in total actual assets or no less than USD 300 million in total managed actual assets, provided that such foreign investor will not become a controller shareholder of the listed company. However, if the foreign investor will become a controlling shareholder, the existing capital requirements remain unchanged.

Additional method for making a Strategic Foreign Investment: Under the Old Measures, foreign investors were only allowed to make a Strategic Foreign Investment via “private placement” or “transfer by agreement”. The New Measures further allow foreign investors to make a Strategic Foreign Investment via a “tender offer”.

Allowing more non-cash consideration to be paid by foreign investors: Under the Old Measures, a foreign investor can only use shares of overseas listed companies as consideration for a Strategic Foreign Investment. Now, the New Measures have expanded the scope to also include equities of non-listed overseas companies as consideration provided a Strategic Foreign Investment is made through a private placement or a tender offer. However, for a Strategic Foreign Investment made through the transfer by agreement, the New Measures still require a non-cash payment via using the shares in overseas listed companies.

Relaxing minimum shareholding percentage requirement: Under the Old Measures, a foreign investor had to hold at least 10% of a listed company post completion of the Strategic Foreign Investment. The New Measures have now removed such requirement imposed on a Strategic Foreign Investment which is made through a private placement and lowered such requirement to 5 per cent for a Strategic Foreign Investment which is made through a tender offer or a transfer by agreement. 

Reducing lock-up period of a foreign investor: Pursuant to the New Measures, a foreign shareholder is now only subject to a shorter lock-up period for 12 months (or 18 months or other longer period as already required under other laws and regulations for specific circumstances) which has been reduced from three years under the Old Measures. However, for a foreign investor who has made the investment before the New Measures take effect, the lock-up period of a foreign investor remains at three years.

Requiring engagement of intermediaries: Despite the fact that the New Measures have significantly liberalised the requirements on Strategic Foreign Investments, the New Measures in parallel strengthen the responsibilities of intermediaries who provide professional support to foreign investors and the target listed companies. The New Measures require that for any Strategic Foreign Investment, the foreign investor must engage a qualified PRC financial advisory firm, sponsor firm or law firm as intermediaries to conduct due diligence and issue opinions with respect to the compliance of a designated list of matters regarding a Strategic Foreign Investment.

New Measures do not apply to the following foreign investments in PRC listed companies: (a) investments which are made through the (Renminbi) Qualified Foreign Institutional Investor regime or the various stock connect regimes, (b) equity investments in PRC companies which are limited by shares and non-listed, but which are subsequently listed, and (c) investments which are made by foreign natural persons via trading in the secondary market or exercising their share incentive plans.