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.