Investment and Financing under Chinese New Normal

Investment and Financing under Chinese New Normal

After the Adoption of the Amendment of PRC Company Law in 2018

regarding repurchase of share capital in listed Chinese companies

By Hanren Xiao

 

On the 26th of October 2018 China has adopted a major amendment of its Company Law which is a remarkable symbol that the legislation of the Chinese capital market is gradually becoming mature.

The amendment is for the most part about share repurchase. Share repurchase refers to the situation that a company acquires the issued shares of itself – which is an internationally accepted way to accomplish merger and reorganization, optimize governance structure, and stabilize stock price. It is also the basic institutional arrangement for a company in the capital market.

Article 142 PRC Company Law is amended as follows:

“A company shall not purchase its own shares except under any of the following circumstances:

1. To decrease the registered capital of the company;

2. To merger another company holding shares of this company;

3. To use the shares for employee stock ownership plans or equity incentives;

4. It is requested by any shareholder to purchase his shares because this shareholder objects to the company’s resolution on merger or split-up made by the assembly of shareholders;

5. To use the shares for the conversion of corporate bonds issued by listed companies that can be converted into stocks;

6. For the necessity that listed companies maintain the company’s value and shareholder’s rights.

Where a company needs to purchase its own shares for any of the reasons as mentioned in Items (1), (2) of the preceding paragraph, it shall be subject to a resolution of the shareholder’s assembly. Where a company needs to purchase its own shares for any of the reasons as mentioned in Items (3), (5), (6) of the preceding paragraph, it could be subject to article of association or the authorization of shareholder’s assembly and decided by more than 2/3 of the directors present at the board meeting.

After the company purchases its own shares pursuant to the provisions of the preceding paragraph, it shall, under the circumstance as mentioned in Item (1), write them off within 10 days after the purchase; while under either circumstance as mentioned in Item (2) or (4), transfer them or write them off within 6 months; while under either circumstance as mentioned in Item(3), (5) or (6), the total number of shares of the company held by itself shall not exceed 10% of the total issued shares of the company and shall transfer them or write them off within 3 years.

A listed company that acquires shares of itself shall perform information disclosure obligations in accordance with the provisions of the PRC Security Law. The listed company shall conducted through open and centralized trading while acquiring shares of itself by under either circumstance as mentioned in Item (3), (5) or (6).

No company can accept any subject matter taking the stocks of this company as a pledge.”

The three main changes in article 142 are : First, it implements the conditions in which a share repurchase is permitted. Second, it simplifies the resolution process of share repurchase, raise the maximum amount of shares held by the company by itself and extend the period in which the company can hold the repurchased shares. Lastly, it adds regulatory rules for listed companies.

This amendment has further consolidated the basic capital market system, and is providing strong legal support for promoting the steady and strong development of the Chinese capital market. Consequences of this amendment is enormous. Firstly, it helps to improve the value of listed companies. Secondly, it helps improving the financial capital management system and further financial reform. Lastly, it is aiding the protection of rights and interests of most small and mid-size investors in China.

The China Securities Regulatory Commission (CSRC) expressed that they will take measures to strictly investigate and penalize the following illegal acts: insider trading by using share repurchase, manipulating the market, and illegal information disclosure.

Giving more possibilities on allowing the company to repurchase its shares could be more flexible to meet the practical requirements of stabilizing the stock price especially when the stock price is generally undervalued, or the price has undergone an irrational decreasing.

 

 

European Market is more attractive for Chinese investors: New rules on the review of foreign investment in the United States are in place

by Xuehan Yang

Background

After hitting a record high in 2016, China’s overseas M&A activity has entered a “pressure period”, which can be said to be squeezed by internal and external supervision. The first wave of pressure from the foreign investment since the end of 2016 domestic tightening regulation, the second wave of the pressure from the United States, since 2017, the U.S. national security review of foreign investment heavily regulated, strengthen the Foreign Investment Risk Review Modernization Act (FIRRMA) by the national security review subject departments namely Committee on foreign investment in the United States (CFIUS) in August this year.

On October 10th America’s Treasury, the arm of CFIUS, tightened the rules further by issuing provisional rules on FIRRMA’s pilot programme.

 

27 industries facing scrutiny over new U.S. regulations

The interim rules mainly involve two changes. One is to expand CFIUS’s jurisdiction to cover non-controlling and non-passive investments, such as those in key technology sectors, that are subdivided. Second, for the trade of key technologies in the industry covered by the pilot program, a simple and mandatory declaration procedure must be added. A declaration of no more than 5 pages of basic information about the transaction must be submitted 45 days before the expected completion date of the transaction. Failure to do so could result in fines of up to the value of the transaction.

According to information released by the U.S. Treasury Department, the pilot program covers 27 industries, including aircraft manufacturing, aircraft engine and parts manufacturing, computer storage equipment, radio, television and wireless communication equipment, as well as biotechnology research and development, semiconductor and related equipment manufacturing.

The pilot program is scheduled to start November 10. In a statement, the Treasury Department said CFIUS would take public opinion on the interim rules into account in formulating its final rules. CFIUS is also drafting detailed FIRRMA legislation that will be fully implemented in February 2020.

 

Chinese buyers are looking into new markets in northern and eastern Europe

Chinese investors have been looking to Europe and other unconventional markets for some time amid a tightening regulatory environment in the US.

Germany is a major destination for Chinese investment in the EU, however, the German government is considering further lowering the 25% reporting threshold for non-EU companies buying stakes in German companies to 15% this year, with a need to keep a close eye on key investments in defense, infrastructure and IT.

A similar national-security review framework for foreign investment is also in the pipeline in Britain, amid signs that more Chinese buyers are looking for targets in unconventional markets.

But markets like northern and eastern Europe may not yet have a similar framework. So this might be a good chance for more and more Chinese investors to invest in Netherlands, Finland or other European countries.