Benran Huang, Managing Associate, Moge Chen, Associate, and Alex Guo, Associate, Zhao Sheng Law Firm (Linklaters’ joint operation partner in the Mainland), summarise the Mainland’s new Overseas Listing Regime from the perspective of investors of China Based Enterprises. In this first of two articles, the authors outline the new unified filing requirements for both direct and indirect listing activities, and examine the impact on the timetable for different overseas IPO routes.
Following the release of the draft version for public consultation in December 2021, the China Securities Regulatory Commission (CSRC) issued the finalised Trial Measures for the Administration of Overseas Issuance and Listing of Securities by Domestic Enterprises (the Overseas Listing Rules) and a series of associated regulatory guidelines (the Regulatory Guidelines, which together with the Overseas Listing Rules comprise the Overseas Listing Regime) on 17 February 2023 to systematically regulate all types of overseas equity securities issuances and listing activities by enterprises (China Based Enterprises) based in the Mainland, which will take effect from 31 March 2023 (the Effective Date). The Overseas Listing Regime is expected to have a significant impact on all types of overseas public issuances and listing activities (overseas listings), and even pre–initial public offering (IPO) financings to be carried out by China Based Enterprises. (See ‘Overview of the contents of the Regulatory Guidelines’.)
As compared to the consultation draft released in December 2021, the finalised Overseas Listing Regime refines the scope of CSRC’s authority over overseas listings, sets out a clearer list of scenarios where overseas listings would be prohibited (the Listing Negative Scenarios) and provides more detailed guidelines on the filing procedures and associated application document requirements.
Set out below are a few key takeaways from the new regime, which will be discussed in further detail in this and the second article:
- Both direct listing and indirect listing activities, which are regulated very differently from a Mainland regulatory perspective, will become subject to a unified filing requirement with CSRC going forward.
- The new regime will have a different impact on different overseas IPO routes’ timetables.
- Listability of variable interest entity (VIE) structures in principle is not ruled out, but listability could be subject to more challenges under certain circumstances than others. How VIE structures and associated corporate governance arrangements should be set up pre-IPO may be affected.
- Corporate governance changes, disclosure requirements for any employee stock ownership plan (ESOP) and the need to ‘look-through’ ultimate beneficial owners, etc, will have an impact on various market players.
- Issuers may seek clarification from CSRC through a formal communication procedure either prior to or during a filing.
Unified regulatory approach and broad coverage
China Based Enterprises traditionally raised funds in the overseas equity capital markets via one of the following routes:
- direct listing, ie through the issuance of securities by its Mainland incorporated holding company on an overseas stock exchange (most commonly in the Hong Kong Stock Exchange known as H share listing), or
- indirect listing, ie through the issuance of securities of its non–Mainland incorporated holding company (most commonly incorporated in the Cayman Islands or the British Virgin Islands with such holding structure known as a red chip structure) on an overseas stock exchange.
Currently, these two listing routes are regulated very differently from a Mainland regulatory perspective – direct listing activities are subject to the vetting and approval of CSRC, whilst CSRC has no jurisdiction over most of the indirect listing activities conducted in the market. (See ‘Indirect listing activities are not currently unregulated by PRC regulators’.)
Following the coming into effect of the Overseas Listing Regime on the Effective Date (but subject to transitional arrangements discussed in part 2 of this article), both direct listing and indirect listing activities will become subject to a unified filing requirement with CSRC going forward.
In the context of indirect listing activities, ‘China Based Enterprises’ are defined broadly. An issuer’s listing will be deemed to be an indirect listing by a China Based Enterprise if the following conditions are met and, in addition to these specific conditions, a ‘substance over form’ principle needs to be followed in making the determination:
- the issuer’s Mainland company(ies) account for more than 50% of the issuer’s operating income, profits, total assets or net assets (for the latest fiscal year), and
- the primary parts of the issuer’s business activities take place in the Mainland or its main business sites are located in the Mainland, or the majority of its senior management responsible for operations and management are Mainland nationals or habitually reside in the Mainland.
Further, the Overseas Listing Regime applies the filing requirement broadly to:
- all types of direct and indirect listing activities, including IPO, subsequent financing on the same overseas market (Subsequent Financing), dual or secondary listing, or listing via acquisition, merger or other means (for example, backdoor listing or SPAC/de-SPAC) (Backdoor Listing), and
- all types of equity securities including shares, convertible bonds (whether the bonds are listed themselves or not listed but convertible into listed shares) and depositary receipts (for example, American depositary receipts (ADRs) and the increasingly popular global depositary receipts (GDRs)). (Issuance of non–equity securities such as straight bonds is not subject to the Overseas Listing Regime.)
Filing requirements and impact on timetable
The new filing-based regulatory regime gives CSRC the ultimate power to oversee and monitor potential overseas listings of China Based Enterprises.
When to file
In the case of an overseas IPO or a dual or secondary listing after an overseas IPO, the issuer shall file (or in the case of an indirect listing, the issuer shall appoint one of its major Mainland onshore operating entities to file) with CSRC within three working days after its submission of listing application in the overseas market.
The same filing timeline also applies in the case of a Backdoor Listing, except that if no listing application for the Backdoor Listing is required in the overseas market, filing with CSRC shall be made within three working days from the initial announcement of the proposed transaction by the relevant listed company.
With respect to any Subsequent Financing, filing with CSRC shall be made within three working days from the completion of issuance of the Subsequent Financing. (See ‘Is filing for a Subsequent Financing purely a post- completion procedural matter?’)
What to prepare
Regulatory Guideline No 2 sets out detailed guidelines on the preparation of the filing application documents.
Application documents for an overseas IPO primarily include (i) an application report together with shareholder resolutions, board resolutions and the complete shareholding structure of the issuer attached, (ii) any regulatory opinion, filing or approval from the competent sector regulator(s) (if applicable), (iii) security review (ie, foreign investment, cybersecurity or data review) opinion from the competent regulator(s) (if applicable), (iv) Mainland legal opinion, and (v) prospectus or other listing documents.
Compared to the application documents required by CSRC for H share listing under the current approval-based regime, the application documents to be provided to CSRC for H share listing going forward will be simplified to some (albeit limited) extent. Notable changes include:
- Regulatory Guideline No 2 sets out more detailed requirements on the contents to be included in the application report and the Mainland legal opinion, reflecting the latest regulatory focus of CSRC.
- Certain basic corporate materials, such as business license, operating permits and articles of association, will no longer be required to be provided to CSRC.
- Documents evidencing due payment of taxes, etc, will no longer be required to be provided to CSRC, albeit related information is required to be set out in the application report and the Mainland legal opinion.
The same set of application documents is also required in the case of a dual or secondary listing after an overseas IPO, as well as in the case of a typical Backdoor Listing.
With respect to any Subsequent Financing, application documents required and the contents to be included therein are generally more simplified as compared to those required in an overseas IPO.
Impact on timetable
Upon receipt of the application documents, CSRC has in principle a period of 20 working days to review and complete the filing, provided that the application documents are complete and prepared in compliance with the Overseas Listing Regime. The clock will stop if and when an issuer is required to provide supplemental documents to CSRC, or CSRC needs to consult with any other competent regulator(s) to assess the potential application of the Listing Negative Scenarios to the case under review. (See ‘Listing Negative Scenarios’)
The new regime will have a different impact on different overseas IPO routes’ timetables:
- Direct listing: the implementation of the new regime means deregulation from an approval-based system to a filing-based system for direct listings. Issuers can reasonably expect that the CSRC’s review period of will become shorter in practice.
- Indirect listing:
- For big red chip listings, issuers can also reasonably expect a quicker timetable as the previous complicated approval procedures will be replaced in their entirety by the new regime. We may have a chance to observe the resumption of volume in terms of big red chip listings in the future.
- In terms of the more typical small red chip listings, even in the absence of any substantial listing hurdle, the additional CSRC filing requirement still means extra work to be carried out by the issuers, underwriters and their respective advisors, which needs to be factored into the overall timetable of such listing activities.
Additional sector approval or security review procedures may apply
Regulatory Guideline No 2 requires an issuer to provide, as part of the application documents for an overseas IPO, any regulatory opinion, filing or approval from the competent sector regulator(s), as well as a security review opinion from the competent regulator(s) on an as-applicable basis.
Any additional impact on timetable shall be taken into account where an issuer’s business may subject its overseas IPO to any sector approval or security review procedures.
Where an issuer considers that no such procedure is applicable, an appropriate written statement shall be included in its application report, and its Mainland counsel is also responsible for verifying the same and providing confirmation in its legal opinion.
Special requirements may apply to GDRs
For completeness, GDRs to be issued by Mainland listed companies are expected to be subject to special filing rules to be further promulgated as indicated by CSRC.
Benran Huang, Managing Associate, Moge Chen, Associate, and Alex Guo, Associate
Zhao Sheng Law Firm (a member of the Linklaters global network)
© Copyright Zhao Sheng Law Firm, February 2023
SIDEBAR: Overview of the contents of the Regulatory Guidelines
- Regulatory Guideline No 1 elaborates certain provisions under the Overseas Listing Rules, including the Listing Negative Scenarios.
- Regulatory Guideline No 2 sets out the list of filing application documents required, and stipulates the content and format requirements.
- Regulatory Guideline No 3 sets out the reporting requirements after the completion of an overseas listing.
- Regulatory Guideline No 4 sets out the communication procedure with CSRC.
- Regulatory Guideline No 5 sets out the filing and reporting requirements applicable to foreign securities companies.
SIDEBAR: Indirect listing activities are not currently unregulated by PRC regulators
An indirect listing involving a ‘big red chip structure’ is highly regulated by CSRC and other competent regulators. As a result of the applicable regulatory requirements and certain other practical reasons, such an indirect listing structure has been far less common than an indirect listing involving a ‘small red chip structure’ in recent years.
Also for completeness, an indirect listing (as with a direct listing) may nevertheless be subject to a separate security review from a foreign investment, cybersecurity or data perspective, depending on its specific circumstances pursuant to applicable laws and regulations introduced in recent years.
- Big red-chip structure: a red chip structure ultimately controlled by a Mainland enterprise (eg, a state-owned company) rather than Mainland individual(s).
- Small red-chip structure: a red chip structure ultimately controlled by Mainland individual(s).
SIDEBAR: Is filing for a Subsequent Financing purely a post-completion procedural matter?
CSRC allows an issuer to file for its Subsequent Financing after the completion of issuance of the Subsequent Financing with simplified application documents as compared to those required in an overseas IPO.
However, this does not necessarily mean that such filing is purely a procedural matter since, amongst others, (1) the issuer’s Mainland counsel still needs to opine on whether any Listing Negative Scenario is applicable, and (2) the Overseas Listing Regime provides that the issuer shall suspend or terminate any proposed overseas listing (which is not limited to an overseas IPO) if any Listing Negative Scenario exists.
As such, prior to carrying out a Subsequent Financing, an issuer should (1) make proper assessment as to whether there may be any substantial hurdle towards its proposed Subsequent Financing, (2) seek clarification from CSRC on an as-needed basis, and (3) properly arrange the logistics of the Subsequent Financing and filing to avoid potential obligations for violation of the Overseas Listing Regime.
For the avoidance of doubt, where an issuer has already completed its overseas IPO in compliance with the Overseas Listing Regime or the applicable prior listing procedures, and it subsequently becomes subject to any Listing Negative Scenario, we consider the risk of the issuer being asked by CSRC to delist remote, but this factor will likely affect any subsequent overseas listing activity it may wish to carry out.
SIDEBAR: Listing Negative Scenarios
A China Based Enterprise cannot seek overseas listing if:
- the listing is expressly prohibited by laws, regulations or other relevant rules
- the listing may endanger national security as determined by the competent regulator(s)
- it or its controlling shareholder or actual controller has committed a criminal offence of corruption, bribery, embezzlement of property, misappropriation of property or disruption of the socialist market economic order within the last three years
- it is under investigation for suspected criminal offences or material violations of laws, or
- there is a material dispute over the ownership of the shareholding held by the controlling shareholder or the actual controller.