On 17 February 2023 the China Securities Regulatory Commission (“CSRC”) promulgated the “Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies” (境内企业境外发行证券和上市管理试行办法)(the “Trial Measures”) along with its relevant notes and five supporting guidelines (each, “Supporting Guideline”). The Trial Measures will take effect on 31 March 2023.
The Trial Measures seek to align and unify the institutional requirements and regulatory systems for all overseas offerings and listings by PRC domestic companies outside of Mainland China (“Overseas Listings”), the scope of which includes securities offerings and M&A activities. Under the Trial Measures, all Overseas Listings are required to comply with the filing procedures with the CSRC.
In this client alert, we analyze the Trial Measures from the angles relevant to listing applicants, sponsors and listed issuers, including implications on the transaction process (from fundamental issues such as prohibited IPO applications, to logistical matters such as timetables), and provide some action points for consideration.
(1) To whom do the Trial Measures apply and when would the filing requirements be triggered?
The Trial Measures apply to a number of stakeholders in the listing process, including listing applicants, sponsors, lead underwriters, PRC legal advisers, and also issuers already listed on stock exchanges in Hong Kong and/or overseas.
1.1 Direct Overseas Listings and Indirect Overseas Listings
Overseas Listings by PRC domestic companies referred to below (“Domestic Companies”), either in direct or indirect form1, must comply with the filing and other requirements under the Trial Measures.
- Direct Overseas Listings (境内企业直接境外发行上市) : Overseas Listings by joint-stock companies which are established in Mainland China2 (i.e. H shares).
- Indirect Overseas Listings (境内企业间接境外发行上市): Overseas Listings by Domestic Companies in the names of overseas incorporated entities3, i.e. red-chip listings, AND they satisfy both of the below conditions4:
(i) more than 50% of its audited financial indicators (operating revenue, profits, total assets or net assets) for the most recent accounting year is accounted for by the Domestic Companies; AND
(ii) major business activities or operations are conducted in Mainland China, or main places of business are located in Mainland China OR the majority of senior management domicile in Mainland China or are Chinese citizens.
1.2 Filing events
- Under the Trial Measures and Supporting Guideline5, the filing procedures would be required in certain circumstances including, IPOs, spin-off listings, single or multiple acquisitions of domestic assets, share swaps or transfer of shares, including reverse takeovers, SPAC listings, subsequent issuances of shares6, convertible or exchangeable securities or preference shares, secondary listings, full circulation of H shares and other Overseas Listings. Accordingly, the Trial Measures apply to both listings and post-listing fund raising or M&A activities.
- The Trial Measures do not only cover shares, but also extend to depository receipts, corporate bonds convertible to shares, and other equity securities that are offered and listed overseas, directly or indirectly, by Domestic Companies.7
1.3 Prohibited listing applications
- The Trial Measures have given guidance on situations where applications for Overseas Listings will be prohibited8:
(i) explicit prohibition of Overseas Listings under laws, administrative regulations and relevant state rules;
(ii) national security concerns as reviewed and determined by competent authorities under the State Council in accordance with law;
(iii) crimes committed by the listing applicant, its controlling shareholder(s) or actual shareholder(s) in the last 3 years (e.g. corruption, bribery, embezzlement, misappropriation of property or undermining the order of the socialist market economy);
(iv) the listing applicant is under investigations for criminal or major violations of laws and regulations, and no conclusion of the investigation has yet been made (including suspected wrongdoings leading to heavy environmental pollution, events of major casualties, serious impacts on national economic or social interests); and
(v) material ownership disputes over equity interests held by controlling shareholders (or by shareholders who are controlled by the controlling shareholder or actual controllers).
- If any of the above situations become applicable, the Overseas Listing shall be postponed or terminated, and the listing applicant shall make timely reports to the CSRC.9
(2) Filing requirements, timetable, and process
2.1 Filing requirements
- A Domestic Company seeking an Overseas Listing must fulfill the filing procedures and submit relevant materials with the CSRC10 (the “CSRC Filing”) set out under Supporting Guideline No. 2.
- The CSRC Filing shall be made by the listing applicant in the case of a Direct Overseas Listing, or a designated major domestic operating entity in the case of an Indirect Overseas Listing11.
- The CSRC Filing documentary requirements include (i) Filing Reports (备案报告) with specified contents; (ii) undertakings to be signed by the listing applicants, their sponsors (or lead underwriters) and the company’s PRC counsels; (iii) PRC legal opinions; (iv) where applicable, copies of regulatory opinions, filings or approvals on national security review and/or industry regulation obtained from applicable PRC authorities.
2.2 Filing timetable12
| Triggering Events |
Timing for filing with the CSRC |
| IPO |
Within 3 working days after submission of listing application (i.e. Form A1 in case of a Hong Kong IPO)
In the case of a major change of the applicant before listing in areas of (i) principal business or business qualification; (ii) control or shareholding structure; or (iii) listing proposal or offering structure, the filing should be updated within 3 working days.13
|
| Subsequent share issuance by listed issuer in the same stock market (e.g. rights issues, issuance of convertible securities) |
Within 3 working days after the offering is completed |
| Listings in other stock markets by an listed issuer (e.g. secondary listings) |
Same as IPO |
| Listing of assets via multiple acquisitions, share swaps, transfers of shares (e.g. reverse takeover) |
Same as IPO;
Where no listing application is required, within 3 working days of public announcement by listed issuer. |
Unlisted shares of Domestic Companies applying to covert to listed shares tradable in overseas market
(境内未上市股份全流通) |
Filing/application to be made pursuant to the CSRC’s regulations |
| |
|
- According to the Trial Measures, in cases where the CSRC Filing submitted is in full compliance with its requirements, the CSRC shall within 20 working days after receipt of the documents, publish the filing results.
- Where the filing documents are not in full compliance with the Trial Measures, the CSRC shall request supplemental filings or amendments within 5 working days. The applicant shall provide supplemental submissions in response within 30 working days thereafter.14
- With the promulgation of the Trial Measures, the market remains watchful for guidance from the Hong Kong Stock Exchange on the implications of the CSRC’s filing results, whether on the listing timetable or on the documentary requirements under Hong Kong Listing Rules for Overseas Listings in Hong Kong.
(3) Action points for listing applicants and listed issuers
Various filing and reporting obligations are imposed by the Trial Measures on the listing applicants and listed issuers (in cases of, for example, subsequent issuance of shares, reverse takeovers and M&A activities) and their respective legal representatives, chairmen and general managers. In particular, listed issuers should consult their legal advisers when planning their corporate actions to ensure timely compliance with the obligations where applicable. These obligations include:
| |
Action Points |
Obligations |
| 1. |
Making the CSRC Filing15 |
- The CSRC Filing shall be made in the name of the listing applicant or listed issuer.
|
| 2. |
Pre-filing consultations with the CSRC16 |
- An application to consult with the CSRC may be made before submission of the CSRC Filing pursuant to Supporting Guideline No. 4.
- Issues for consultation with the CSRC include industry regulations, control structures (e.g. VIE) or applicability of the Trial Measures.
|
| 3. |
Written Undertakings & Confirmations17 |
- To be signed by the listing applicant or listed issuer, its legal representative, chairman and general manager.
- As part of the CSRC Filing, the applicant must undertake and confirm with the CSRC that : (i) the filing documents are true, accurate and complete; (ii) the information provided to securities companies may be provided to regulatory authorities overseas; (iii) it strictly complies with all application laws and regulations in PRC; (iv) it shall protect national security and national or government agencies’ secrets; (v) it shall not undermine national and public interest.
|
| 4. |
Specific IPO Case Report18 |
- It includes a summary of the share issuance – such as methods of listing, stock codes of applicant, general listing timetable, expected listing proceeds, listing expenses, offering size and structure, underwriting amount, pricing, details of cornerstone investors etc.
- To be submitted in the names of the listing applicant or listed issuer, together with the sponsor or lead underwriter.
- To be filed after listing.
|
| 5. |
Report on material events after listing19 |
- The issuer shall submit report to the CSRC within 3 working days upon the occurrence and public announcement of a material event.
- The report shall contain details including the timing of such material events.
- Material events are: (i) change of control (see item 6 below); (ii) investigations or sanctions imposed by overseas regulatory agencies or authorities; (iii) change of listing status or transfer of listing segment; (iv) voluntary or mandatory delisting.
|
| 6. |
Change of Control report20 |
In the case of change of control, the issuer shall submit a report to the CSRC covering :
- details of the change e.g. timing and form of change, compliance with disclosure obligations, share holdings of substantial shareholders before and after the change etc.;
- details of the ultimate actual controller e.g. background, percentage of shareholdings etc.
- In the case of change through trusts or asset management arrangements, details of the relevant arrangements etc.
- In the case of change through nominee shareholding arrangements, details of the nominee relationship etc.
- “Control” in the context of Article 22 of the Trial Measures are referred to as actual control via shareholding, voting rights, trust, agreement or other arrangements21.
|
| 7. |
Ad hoc report22 |
In the case of material changes to issuer’s main business after the Overseas Listings such that the Trial Measures no longer apply to the issuer, the issuer shall submit to the CSRC an ad hoc report together with a legal opinion of a PRC lawyer within 3 working days of change. |
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(4) Action points for sponsors, lead underwriters, securities companies
Securities companies engaged in a capacity as sponsor or lead underwriter in an Overseas Listing are subject to the direct obligations imposed by the Trial Measures. These obligations include:
| |
Action Points |
Obligations / Considerations |
| 1. |
1-time Filing with the CSRC23 |
- As transitional arrangements, sponsors and lead underwriters engaged before 31 March 2023 for Overseas Listing applications shall make filing with the CSRC within 30 working days after 31 March 2023 in a prescribed form specified in Supporting Guideline No.5.
- Sponsors or lead underwriters who are being engaged for Overseas Listings after 31 March 2023, shall within 10 working days after signing its first engagement agreement, submit to the CSRC a prescribed form specified in Supporting Guideline No.5.
- Such filing only needs to be done once, but not on case by case basis.
- They must update the CSRC within 10 working days in case of changes of details previously filed.
|
| 2. |
Pre-filing consultations with CSRC24 |
- Where appropriate, securities companies shall assist the listing applicant or listed issuer to consult with the CSRC before submission of the CSRC Filing.
- Please refer to item 2 under Part (3) for details.
|
| 3. |
Verification and supervisory obligations25 |
- Securities companies have the obligation to thoroughly examine and verify the documents for the CSRC Filing.
- Securities companies shall ensure that : (i) the documents do not contain material inconsistencies, are properly drafted and that the conditions for Indirect Overseas Listings are satisfied; (ii) the timely report of material events.
|
| 4. |
Written Undertakings & Confirmations26 |
- At the “1-time filing” under item 1, an undertaking shall be made to the CSRC that all information submitted thereunder are true, accurate and complete, and that item 7 below will be complied with.
- As part of the CSRC Filing, an undertaking shall be submitted to the CSRC confirming that due review and inspection of the filing documents have been conducted, and that the documents are true, accurate and complete.
|
| 5. |
Investor base27 |
- Article 10 of the Trial Measures expressly requires that the target investors for Overseas Listings must be overseas investors save as permitted otherwise.
- Exceptions permitted include: (i) share issuances under ESOP and other equity incentive plans as permitted under the CSRC’s rules in respect of Direct Overseas Listing; and (ii) QDII and ODI investors.
|
| 6. |
Specific IPO Case Report28 |
- Specific IPO Case Report shall be submitted in the names of the sponsor or lead underwriter, together with the listing applicant.
- Please refer to item 4 under Part (3) for details.
|
| 7. |
Annual Disclosure Obligations29 |
- No later than January 31 each year, offshore securities companies that serve as sponsors or lead underwriters for Overseas Listings shall submit an annual report to the CSRC on its relevant business activities in the previous year on all Overseas Listings.
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(5) VIEs
- Where a listing applicant adopts contractual arrangements or structures to own and control indirectly any part of their businesses for the Overseas Listings (the “VIE”), currently the Hong Kong Stock Exchange requires submissions of PRC legal opinions with appropriate regulatory assurances in support of the legality of the VIE arrangements. Relevant disclosures are also required to be made in the prospectuses.30
- Upon the coming into effect of the Trial Measures, the VIE arrangements will form part of the CSRC Filing31. It is currently contemplated by market practitioners that the CSRC will conduct direct communications with, and consolidate views of, regulators of the relevant industries under which the VIE of the listing applicant operates.
- Listing applicants to Overseas Listings may apply to conduct pre-filing consultations with the CSRC in relation to VIE arrangements pursuant to Supporting Guideline No.4. Given the promulgation of the Trial Measures, attention should be given to possible updates from the Hong Kong Stock Exchange on its requirements on VIE arrangements.
(6) Supervision and legal liabilities
- The CSRC and the State Council may impose administrative regulatory measures including order for correction, regulatory talks and warning letters in case of violations of the Trial Measures by listing applicants, or by securities companies, securities service providers and relevant practitioners who provided the relevant services in the Mainland China.32
- In the case of violations of the Trial Measures by Domestic Companies in their Overseas Listings, or violations by offshore securities companies of their obligations thereunder, the CSRC may refer the relevant information to regulatory counterparts in overseas jurisdictions.33
- In particular, in the case of violation by Domestic Company of (i) the CSRC Filing obligations, (ii) the obligations to provide truthful, accurate and complete information or (iii) the prohibition of certain listing applications (paragraph 1.3 above), or if the filing documents contain misrepresentations, misleading statements or any material omission, the CSRC has a right to:34
- order the Domestic Company in breach to rectify, and issue warnings against it;
- impose a fine on the Domestic Company and its controlling shareholders and actual controllers in an amount from RMB1,000,000 up to RMB10,000,000, and their direct persons-in-charge in an amount from RMB 500,000 up to RMB5,000,000.
- In the case of securities companies failing to ensure listing applicants’ or listed issuer’s compliance with the obligations set out in the aforesaid paragraph, the CSRC has a right to issue warnings and impose fine in an amount from RMB500,000 up to RMB5,000,000, and on their direct persons-in-charge in an amount from RMB200,000 up to RMB2,000,000.35
- In the case of securities companies failing to exercise proper diligence, and misrepresentations are made in documents issued pursuant to PRC laws and regulations (or issued pursuant to rules of overseas stock markets, which disrupt PRC domestic market order), the CSRC and the State Council have rights to issue correction order and warnings, and impose a fine in an amount between 1 to 10 times of their revenue (in absence of revenue, a fine in an amount from RMB500,000 up to RMB5,000,000), and on their direct persons-in-charge in an amount from RMB200,000 up to RMB2,000,000.36
(7) Conclusion
The CSRC, through the Trial Measures, aligns the management of Direct Overseas Listings and Indirect Overseas Listings. As the Trial Measures have been recently promulgated, assessments on details of the impact in relation to various stakeholders are on-going. The practical implementations of the Trial Measures are expected to be subject to further guidance from the relevant regulators, including the CSRC, SFC and the Hong Kong Stock Exchange.
Disclaimer: This article is also contributed by Benson Tang, Partner at Shanghai Pacific Legal. Norton Rose Fulbright co-operates and works closely, with Shanghai Pacific Legal, a domestic Chinese law firm, to provide Chinese clients with an integrated international and Chinese domestic legal service. Together, we can assist Chinese clients looking to list their securities in Hong Kong or other international capital markets.
