The China Securities Regulatory Commission ("CSRC") has recently promulgated the "Notice on Several Issues Related to the Overseas Listings of Subsidiaries of Domestically Listed Companies" (the "Notice"). The Notice sets forth higher standards for receiving approval from the CSRC for the overseas listings of subsidiaries of domestically listed Chinese companies.
According to the Notice, subsidiaries of domestically listed Chinese companies may only obtain approvals for an overseas listing if the domestically listed parent fulfills the following requirements:
The domestically listed parent must have been profitable for the prior three years;
The businesses and assets that benefited from the proceeds of any equity issuance or fund-raising activity by the domestically listed parent within the prior three fiscal years cannot be part of the assets of the subsidiary seeking an overseas listing;
The net profit of the subsidiary seeking an overseas listing cannot exceed 50 percent of the total consolidated net profit of the domestically listed parent according to the parent’s most recent fiscal year’s consolidated financial statements;
The net assets of the subsidiary seeking an overseas listing cannot exceed 30 percent of the net assets of the domestically listed parent according to the parent’s most recent fiscal year’s consolidated financial statements;
The domestically listed parent does not compete with its subsidiary seeking an overseas listing, has independent assets and financing available, and does not share any management with the subsidiary;
Directors, senior managers, and any affiliated person of the domestically listed parent and its subsidiary cannot hold in the aggregate more than 10 percent of the equity of the subsidiary prior to its overseas listing;
There has not been any significant affiliated transactions with the domestically listed parent company within the prior three years; and
The domestically listed parent has not violated any applicable laws or regulations within the prior three years.
According to News Morning Daily and Xin Jing Daily, the promulgation of the Notice may create some difficulties for the planned listings of a number of Chinese companies whose subsidiaries are reported to have contributed more than 50 percent of the net profit of their domestically listed parents on a consolidated basis in the most recent fiscal year. The Notice may provide a safe harbor for such companies by: (1) exempting "domestically listed companies with both RMB and foreign currency equity issuances" from the scope of the Notice and (2) construing the term "the most recent fiscal year of the listed company" narrowly to allow certain companies with domestic listings completed less than a year ago to use financial statements from the current year. It remains unclear how the regulatory authorities will rule on these companies’ applications for approval for overseas listings.
There has been an increasing number of Chinese companies listing overseas in recent years, particularly in Hong Kong, the United States, and Singapore. Compared with listing in the Chinese domestic market, listing overseas is attractive to Chinese companies due to several factors:
Listing overseas generally requires a shorter preparation and execution period and has historically seen a higher likelihood of success;
The cost of subsequent financing activities is generally lower once the companies are listed overseas; and
Listing overseas provides access to foreign currency and foreign investors.
The Notice should not present an insurmountable barrier for the continuing trend of Chinese companies seeking to raise equity overseas. However, an increasing number of Chinese companies, particularly privately owned companies, may seek to undergo an initial public offering overseas prior to any domestic listing to avoid the restrictions imposed by the Notice in the future. With companies currently listed on the domestic stock market, substantial restructuring may be required before a significant subsidiary within the scope of the Notice can seek to list overseas.
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