Many listing applicants are in the process of overseas listing now. What are they most concerned about after the promulgation of the New Rules is the impact of these New Rules on the process of overseas listing. The author divides the listing into the following three types:
No need for filing. The listing applicants are not required to file with the CSRC and at their choice able to promote the process of overseas listing after a period of time, including:
listing applicants that have obtained the CSRC's final approval for direct overseas offerings and listings (the "final approval") since the date of promulgation of the New Rules. Such applicants may continue to promote the process of overseas listings within the validity period of the final approval.
However, if the listing applicants fail to complete overseas offerings and listings before the expiry of the final approval, they are still required to complete the filing pursuant to the New Rules.
listing applicants that have obtained the approvals/consents from overseas regulatory authorities or stock exchanges for indirect overseas offerings and listings since the date of promulgation of the New Rules (such as, having passed the listing hearing before the Hong Kong Stock Exchange (HKEX), and having been consent to register in the United States). Such applicants are existing enterprises and may continue to advance overseas offerings and listings prior to September 30, 2023.
Such listing applicants are required to complete the filing again in accordance with the New Rules if needing to re-go through the overseas listing regulatory procedures (for example, the HKEX's listing hearing) or failing to list overseas prior to September 30, 2023. In addition, such listing applicants shall file as required for their subsequent refinancing.
Accelerating the process. Listing applicants should do their best before March 31, 2023 to make phrase achievements, including:
listing applicants whose application for direct overseas listing has been accepted by the CSRC (the "notice of acceptance") since the date of promulgation of the New Rules but have not yet obtained the final approval. Such listing applicants may go ahead for their overseas offerings and listings during the validity period of final approvals that they obtain prior to March 31, 2023; however, if listing applicants fail to obtain the final approvals prior to the deadline, filing with the CSRC will be necessary.
listing applicants that have applied for indirect overseas offerings and listing since the date of promulgation of the New Rules but have not yet obtained the approval/consent for listing. Such listing applicants may continue to achieve their overseas listings as of September 30, 2023 if they are deemed as existing enterprises for their obtaining the approval/consent for overseas listing prior to March 31, 2023; however, if no such approval/consent is obtained within the specified time limit, the listing applicants will be required to complete the filing procedures with the CSRC before successful listing but within a time limit as reasonably decided by them.
It is worth noting that although the CSRC requires such listing applicants to complete filing just before their overseas listing, according to previous projects, the overseas regulators or stock exchanges often take the completion of the filing with the CSRC as a precondition for their approval of listings, for example, the SEHK may schedule a listing hearing only for the listing applicant that has completed the filing, which is similar to the H-share listing application where the SEHK schedules a listing hearing only for the applicant who has obtained the final approval.
listing applicants that have not applied for overseas offerings and listings since the date of promulgation of the New Rules but are likely to submit applications in the short term. If such listing applicants submit the applications prior to March 31, 2023, they can complete the filing in a manner as stated in item (2) above, while if failing to submit the applications within such time limit, they will be required to file with the CSRC within 3 working days after the submission of the listing applications.
Filing in a regular process. What listing applicants need to do is just following the schedule as stipulated in the New Rules but not rushing into any affair by March 31, 2023. These domestic listing applicants include:
those that have not obtained the notice of acceptance from the CSRC for their direct overseas listings since the date of promulgation of the New Rules; the only opportunity for such listing applicants is filing with the CSRC within 3 working days after applying for listing overseas (no earlier than March 31, 2023), as the CSRC will not accept applications for direct overseas listing before March 31, 2023.
those that fail to submit their applications for indirect overseas offering and listing before March 31, 2023; such listing applicants should complete the filing in a manner as stated in item (1) above;
those that have applied for overseas offerings and listings since the date of promulgation of the New Rules but may have no chance to obtain the approval/consent for the overseas listing; such listing applicants should file with the SCRC after March 31, 2023.
Filing Requirements for Follow-up Capital Operations of Overseas Listed Companies
After the New Rules come into effect, whether the CSRC filing is required for the follow-up capital operations of overseas listed companies is determined based on the nature of the companies and their proposed transactions.
It is worth noting that a domestic company going public overseas through investment and M&A as stated in Article 17 of the Trial Administrative Measures that "a domestic company that seeks to directly or indirectly list its domestic assets in overseas market through single or multiple acquisitions, share swaps, transfers of shares or other means" should file with the CSRC within 3 working days after submitting an application overseas; if the overseas application is unnecessary, the listed issuer should file with the CSRC within 3 working days after its first announcement of the detailed arrangements for shares trading. In addition, Paragraph 2 of Article 16 of the Trial Administrative Measures states that subsequent securities issuance by a listed issuer in the same overseas stock market shall be filed with the CSRC within 3 working days after the offering is completed.
Supporting Guideline No.1 provides further explanation of Article 17 of the Trial Administrative Measures, specifying that: (i) if an overseas listed company is subject to the CSRC filing prior to the relevant transaction happening, such transaction will constitute a listing through reverse takeover or otherwise reorganization; (ii) an overseas listed company that is not subject to the CSRC filing prior to the relevant transaction happening will be subject the CSRC filing after the completion of the transaction.
Here are some examples to explain the regulations:
An acquisition of an H-share listed company or a red-chip Hong Kong-listed company that satisfies the requirements for "indirect overseas listing by domestic companies" by a PRC domestic company for backdoor listing is deemed as an "anti-takeover action" under the Listing Rules of Hong Kong and should be examined and approved by the SEHK. Additionally, the listed company should file with the CSRC within 3 working days after submitting the reverse takeover application to the SEHK.
If a red-chip Hong Kong-listed company does not meet the criteria for "indirect overseas listing by domestic companies by a PRC domestic company for backdoor listing, the listed company should file with the CSRC within 3 working days after submitting an application to the SEHK.
If a red-chip Hong Kong-listed company that does not satisfy the requirements for "indirect overseas listing by domestic companies" acquires significant assets of a PRC domestic company in cash through a single or a series of transactions, resulting in more than 50% of the listed issuer's operating revenue, profits, total assets or net assets for the same accounting year accounted for by the domestic company but not a reverse takeover, the listed company will not be required to apply for approval of the transactions from the SEHK but be required to file with the CSRC within 3 working days after the first announcement of the detailed arrangement of the acquisition transactions.
If a red-chip listed company that meets the criteria for "indirect overseas listing by domestic companies" is acquired by an overseas company for backdoor listing, but then the indicators of the listed company no longer meet the criteria, the transaction will not be required to be filed with the CSRC in advance, however, a specific report and a legal opinion issued by a PRC law firm are necessary to be submitted to the CSRC within 3 working days from the date of such change.
If an H-share listed company or a red-chip listed company that meets the criteria for "indirect overseas listing by domestic companies" acquires the assets of a PRC domestic company in cash and the acquisition does not constitute a reverse takeover or a backdoor listing, the listed company will not be required to file with, or report to, the CSRC.
If an H-share listed company or a red-chip listed company that satisfies the requirements for the "indirect overseas listing by domestic companies" issues additional shares in the same stock market, including acquiring assets of the PRC domestic companies by means of a private placement, which does not constitute a reverse takeover or a backdoor listing, the listed company should file with the CSRC within 3 working days after the completion of the share issuance.
If an H-share listed company or a red-chip listed company that meets the criteria of "indirect overseas listing by domestic companies" issues convertible bonds, exchangeable bonds, and preferred shares, the listed company should file with the CSRC within 3 working days after the completion of the share issuance.
Other events that are required to be filed with or reported to the CSRC are as follow:
A listed company that intends to secondarily list in other overseas stock markets should file with the CSRC within 3 working days after submitting an application overseas.
If a listed company does not list in other stock markets just but changes its listing status in an overseas stock market (such as changing from a secondary listing to a dual primary listing) or its listing board without issuing additional shares, the listed company will not be required to file but report to the CSRC within 3 working days after the occurrence and the public announcement of the event.
If a listed company relists after delisting overseas (including delisting to an over-the-counter market), it will be required to file with the CSRC within 3 working days after submitting an application overseas.
If a listed company applies for filing of "full circulation" separately, that is, applying for conversing unlisted domestic shares of an H-share listed company into H shares that are available for trading in Hong Kong, the application should comply with relevant provisions of the CSRC and the listed company should file with the CSRC.
Untying the Grant Red Chips
The CSRC has long ago regulated overseas listings by granting red-chip companies that are registered overseas and controlled by Chinese-funded companies or with Chinese-funded companies as the largest shareholders based on the Circular on Further Strengthening the Administration of Share Issuance and Listing Overseas (Guo Fa [1997] No. 21) issued by the State Council, also known as the "Red-Chip Guidance". The Red-Chip Guideline states that a red-chip company that intends to list overseas with its overseas assets and domestic assets that are generated from domestic investment with overseas assets and have been under its possession for more than three years ("domestic assets lasting three years", otherwise, "domestic assets lasting less than three years") should obtain approval from the provincial government and relevant departments and commissions. Domestic assets lasting less than three years can be listed on overseas stock exchanges only upon approval by the CSRC.
In practice, only a small number of large-scale SOEs have been approved by the CSRC for their domestic assets lasting three years. Most grant red-chip companies apply for listing mainly through divestment of their domestic assets or after their domestic assets last full three years. As a result, the overseas listing by a grant red-chip company has always been uncertain. A private company with a red-chip structure will face difficulties when going public overseas.
Since the effectiveness of the New Rules, the overseas listing by grant red-chip companies has been deregulated, and the companies have had no need to worry about their compliance with the two conditions mentioned above, nor do they need to apply for approval. Instead, they will be treated as small red-chip companies and may go public overseas after filing with the CSRC following the same standards and procedures. This is helpful for companies with red-chip structures formed due to historical reasons and difficulties to go public overseas under the original policies and circumstances. We will see an increasing number of such companies realize their overseas listing under the New Rules.
The Future of Small Red-Chip Listing
Before the promulgation of the New Rules, among others, a small red-chip listing is subject to the loosest regulation in China without the requirement of approval by or filing with the CSRC. After successful listing, the shares held by the original shareholders can be freely traded without approval by or filing with the CSRC. This is true for subsequent issuance of additional shares. After the implementation of the New Rules started, small red-chip companies that satisfy the requirements for "indirectly overseas listing by domestic companies" shall file with the CSRC like H-share companies. Furthermore, compared with the H-share companies, as they should conduct cross-border restructuring first due to their small red-chip structure, the domestic companies' original major shareholders should complete the foreign exchange registration under the Circular 37, and certain domestic investor shareholders should complete the ODI procedures. As a result, the restructuring may take longer time and incur additional capital costs and taxes. Then, will small red-chip listings fade or be neglected in the future?
The author holds a positive view. Small red-chip listing does have its unique advantages: First, the shares held by the original shareholders of a small red-chip company can be fully traded after the company goes public, while the shares held by the original shareholders of an H-share company can be traded only after being filed with the CSRC for full circulation; second, under the current regulations, there is no mandatory requirement that the income obtained by the shareholders of a small red-chip listed company from selling overseas shares must be repatriated back to China, while for the shareholders of an H-share listed company, the income is not allowed to be retained overseas, in this regard, the shareholders of a red-chip company may have more flexible arrangements of their overseas assets; third, it is more convenient for such shareholders to set up a family trust for family asset plans or an employee trust for ESOP arrangements overseas; further, the shares held by the shareholders of a small red-chip listed company are subject to a shorter lock-up period after the company's successful listing than those of an H-share listed company, particularly, the lock-up period for the shares held by the controlling shareholders of an H-share listed company will be three years if the latest draft amendment to the Company Law is adopted as the final version.
In conclusion, the author believes that there will be more domestic companies going public overseas through small red-chip structures in the future. After the effectiveness of the New Rules, the ways of overseas listing will be more open and flexible, and the list applicants will choose the most appropriate ways based on the realities of the companies and their shareholders and the differences among the demands in priority.
This article originally appeared on the website of Commerce & Finance Law Offices
This article and its content only represent the author's own views and should not be considered as legal opinions or suggestions from the Commerce & Finance Law Offices or its lawyers
