Capital Markets: Equity 2019 Comparisons

Last Updated March 05, 2019

Contributed By Zhong Lun Law Firm

Law and Practice

Authors



Zhong Lun Law Firm was founded in 1993 and is one of the earliest partnership law firms approved by the Ministry of Justice. The total number of employees has reached 2,200, including more than 290 partners, more than 1,500 professionals, more than 400 trainee lawyers, paralegals and various professional support staff. The firm has offices in 16 cities all over the globe, including Beijing, Shanghai, Shenzhen, Guangzhou, Wuhan, Chengdu, Chongqing, Qingdao, Hangzhou, Nanjing, Hong Kong, Tokyo, London, New York, Los Angeles and San Francisco. It offers high-standard services to clients from 60 countries and regions around the world. The firm's areas of expertise related to debt and equity work include equity/debt capital markets, real estate, private equity and investment funds, general corporate, foreign direct investments, M&A, banking and finance, ‘One Belt One Road Initiatives’ overseas investment, asset securitisation and financial products, tax laws, bankruptcy, antitrust and compliance, financial lease, dispute resolutions and telecommunications.

At present, the main equity markets in China are the Shanghai Stock Exchange (the “SSE”), the Shenzhen Stock Exchange (the “SZSE”) and the National Equities Exchange and Quotations (the “NEEQ”).

Since the NEEQ is a trading place for the public transfer of shares of non-listed public companies, the listed companies in the NEEQ are mainly non-listed public companies and a small number of A-share delisting companies, the listing of companies in the NEEQ is not a public offering, nor is it a listing. Accordingly, the answers to the related questions below do not include NEEQ related matters.

Since the pilot project for the issuance of stock by innovating enterprises or Chinese depositary receipts (the "CDR") in June 2018 launched by the China Securities Regulatory Commission (the "CSRC") has not yet been implemented officially, at present there are no practical cases. Accordingly, the answers to the related questions below do not include CDR related matters.

Since the proposed establishment of the Science and Technology Innovation Board and its pilot registration system on the SSE in November 2018 by competent authorities are still in the studying stage, no specific regulatory rules have been issued yet. Accordingly, the answers to the related questions below do not include Science and Technology Innovation Board related matters.

The SSE is currently the main board, which is suitable for mature large enterprises.

The SZSE includes the main board, the Small and Medium Enterprise board (the “SME board”) and the Growth Enterprise Market board (the “GEM board”). The main board is suitable for mature large enterprises, the SME board is suitable for medium-sized enterprises with relatively small market value and the GEM board is suitable for small-scale and high-growth entrepreneurial enterprises.

From the perspective of the company's listing financial standards, the financial indicators of the main board and the SME board are relatively high, and the financial indicators of the GEM board are lower than that of the main board and the SME board.

At present, foreign companies are not allowed to be listed in the exchanges above.

There are the Shanghai Composite Index, the Shenzhen Component Index, the Small and Medium-size Enterprise Composite Index (the “SMEI”) and the Growth Enterprise Index (the “GEI”), etc.

The samples of the Shanghai Composite Index or the Shenzhen Component Index are all the stocks listed on the SSE or the SZSE respectively. The samples of the SMEI or the GEI are 100 sampling stocks respectively selected from the SME board or the GEM board, and will adjust the sampling stocks periodically as the relevant adjustment methods.

The regulatory bodies include the CSRC, the SSE and the SZSE.

The CSRC is responsible for an IPO offering review. The SSE and the SZSE will conduct a listing review of companies which have passed the offering review conducted by the CSRC.

The issuer submits the application documents to the CSRC in accordance with the Catalogue of Initial Public Offerings and Listing Application Documents. After obtaining the approval issued by the CSRC, the issuer should submit listing application documents to the SSE or the SZSE based on the board it chooses to be listed, according to Shanghai Stock Exchange Listing Rules, Shenzhen Stock Exchange Listing Rules or Shenzhen Stock Exchange GEM Listing Rules.

The key legislative/regulatory instruments that govern equity listings in China are:

  • Company Law of the People’s Republic of China;
  • Securities Law of the People’s Republic of China;
  • Administrative Measures for Initial Public Offerings and Listing of Stocks;
  • Administrative Measures on Initial Public Offering of Shares and Listing on ChiNext;
  • Administrative Measures on Issue and Underwriting of Securities;
  • Administrative Measures on Significant Asset Restructuring of Listed Companies;
  • Administrative Measures on Takeover of Listed Companies; and
  • Any other rules of the exchanges related to stock issuance and listing.

No response provided.

The company proposing to list on the SSE and the SZSE (the “Proposed Issuer”) shall be a corporation limited by shares duly established and with a validly existing status for more than three years consecutively. For a Proposed Issuer entirely changed from a limited company with the net book value of the original book, its establishment date can be continuously calculated.

If the issuer intends to be listed on the SSE, the main board or the SME board of the SZSE, it needs to satisfy the following requirements financially:

  • In the past three fiscal years, the net profit was positive, and the total amount exceeds RMB30 million. The net profit shall be calculated based on the lower figure of before and after deducting the non-recurring profit and loss;
  • The total net cash flow from operating activities in the last three fiscal years exceeds RMB50 million, or the total operating income in the last three fiscal years exceeds RMB300 million;
  • At the end of the latest fiscal period, the intangible assets (after deducting land use rights, surface aquaculture rights and mining rights, etc) account for no more than 20% of net assets;
  • The total share capital before the issuance is not less than RMB30 million;
  • At the end of the last period, there is no unrecovered loss.

If the issuer intends to be listed on the GEM board of SZSE, it needs to satisfy the following requirements financially:

  • In the past two fiscal years, it has been profitable continuously. The total net profit in the last two fiscal years is not less than RMB10 million (the net profit shall be calculated based on the lower figure of the before and after deducting the non-recurring profit and loss), or it is profitable in the last year, the operations income in the most recent year is not less than RMB50 million;
  • At the end of the latest fiscal period, the net asset is not less than RMB20 million and there is no unrecovered loss;
  • The total share capital after the issuance is not less than RMB30 million.

The company's public offering shares should exceed 25% of the company's total shares, while the company's total share capital should exceed RMB400 million and the proportion of public offering shares shall exceed 10%.

The issuer should provide a financial statement of the last three fiscal years and a clean audit report issued by a certified public accountant.

If the issuer intends to be listed on SSE, the main board or the SME board of the SZSE, it shall satisfy the following requirements in its main business sector:

  • The issuer's production and operation are in line with the national industrial policies. No major changes in the main business in the past three years.

If the issuer intends to be listed on the GEM board of the SZSE, it needs to satisfy the following requirements in its main business sector:

  • The issuer shall mainly operate one kind of business, and its production and operation activities shall be in line with the national industrial policies and environmental protection policies and its main business shall have had no major changes in the past two years.

The issuer shall ensure that same shares have the same rights, and no pre-emption right is allowed.

The IPO of shares and listing shall be sponsored by the sponsor institutions. The sponsor institutions, legal counsel and financial institutions should conduct due diligence and counselling for the issuer and issue a sponsorship report, a lawyer's work report/legal opinion and an audit report respectively.

The issuer's business shall be in line with national industrial policies. Certain industries (including but not limited to securities, futures, banks, etc) need to obtain approval from the relevant industry authorities. Currently, real estate enterprises are restricted from applying for IPO.

The main requirements are the same as for an IPO (see 2.3 Incorporation or Valid Existence).

For companies that re-apply for listing, in addition to meeting the relevant financial indicators of the SSE and the SZSE, if the listing is terminated due to fraudulent issuance or major violations of information disclosure, the company should correct the major illegal acts fully and have removed responsible personnel related to such illegal acts and have made proper arrangements for relevant civil compensation.

The issuer should prepare the application documents for issuance, sponsored by the sponsor and submit the application to the CSRC and obtain approval from the CSRC for public offering of shares and from the stock exchange for listing and trading.

Currently, foreign companies are not allowed to have IPO in China.

See 3.2 Procedures for Companies Incorporated in a Foreign Jurisdiction.

The structuring of an IPO generally includes two approaches. Firstly, initial public offering of shares and listing, and secondly, back-door listing.

If the issuer intends to adopt the back-door listing approach, the listed company (shell company) can realise the indirect listing of the issuer by issuing shares to the issuer’s shareholders to purchase the issuer’s assets held by the shareholders, but the standard must meet the requirements in Administrative Measures for Initial Public Offerings and Listing of Stock. GEM listed companies are not allowed to have back-door listings.

The first approach applies to Administrative Measures for Initial Public Offerings and Listing of Stock, the second approach applies to Administrative Measures on Significant Asset Restructuring of Listed Companies and Administrative Measures for Initial Public Offerings and Listing of Stock.

Subsequent equity offerings of listed companies include capital increase, private placement, allotment of shares and convertible bonds, etc.

Subsequent equity offerings of listed companies should be approved by the CSRC and the stock exchange. However, the offering might fail during the offering procedure.

In an allotment, when the underwriting period expires, if the number of shares subscribed by the shareholders does not reach 70% of the number of shares to be allotted, or the controlling shareholder(s) of the company fail to fulfil the promise of share subscription, then the allotment fails.

The advisers generally include sponsor institutions, legal counsel and financial institutions.

The sponsor institution is the co-ordinator of the IPO, co-ordinating the work of all the intermediaries, conducting compliance counselling for the issuer, submitting the application materials, assisting the completion of the issuance review and generally acting as the leading underwriter and underwriting the issuer's stock.

Legal counsel conducts due diligence for the issuer, helps the issuer to act and operate legally and issues legal opinions.

Financial institutions check the issuer’s financial matters and review the financial compliance and the truthfulness of the financial information.

Some issuers will hire industry or environment advisors to conduct investigations and issue opinion on specific issues.

The prospectus (or offering document) should be submitted at the same time the IPO application is submitted to the CSRC. 

The prospectus mainly includes the following chapters: the offering summary, the issuer's statement, major issues notice, the issuance profile, risk factors, the issuer's basic information, horizontal competition and related transactions, directors, supervisors, senior management and core technical personnel, corporate governance, financial accounting information, management discussion and analysis, business development goals, use of raised funds, dividend distribution policies and other important matters, etc.

The content of the prospectus can usually be divided into legal information, financial information and industrial information.

The issuer and its controlling shareholder, actual controller, directors, supervisors and senior management personnel should ensure that there are no misrepresentations, misleading statements or major omissions in the prospectus and its abstract, and bear the legal responsibilities for its authenticity, accuracy and completeness.

The issuer's lawyers, accounting firms and asset appraisal institutions should ensure that there is no contradiction in the references to the legal opinion, the audit report and the appraisal report in the prospectus, and there are no misrepresentations, misleading statements or major omissions, and should bear legal responsibilities to the authenticity, accuracy and integrity of such statements.

Issuers in specific industries, in addition to abiding by the general requirements of the content and format of the prospectus, should abide by special requirements of the CSRC about the disclosure of information in such industry.

The prospectus should be disclosed on the official website of the CSRC once the IPO filing of the issuer has been officially accepted. Before the approval of the CSRC, and after the approval but before the offering, the disclosure should be promptly revised if necessary.

The issuer applying for the initial public offering to the CSRC will not be exempt from producing the prospectus and other filing documents.

The issuer and the leading underwriter should not exaggerate the propaganda during the marketing process, induce or mislead the investors by improper means, such as false advertisements, and should not disclose information of the issuer other than the public information, such as the prospectus of intent.

No response provided.

The underwriters will publish a research report on securities offerings, and that report should not contain any false or misleading information to the investors.

In violation of the provisions above, the securities regulatory authorities under the State Council may order corrections, give warnings, confiscate illegal income, impose fines or suspend or revoke relevant business licenes.

In addition to underwriters, securities companies and securities investment counselling agencies will also issue securities research reports, which should follow the principles of independence, objectivity, fairness, and prudence, effective prevention of conflicts of interest, fair treatment of issuance objects, and prohibition of the dissemination of false, untrue, misleading information, and prohibition of engaging in insider-trading or manipulating securities market activities.

In an initial public offering, the issuer should file for the quotation of the offline investors, record the purchase price and purchase quantity of the offline investors, and determine the issuance price or issuance price range based on the results of the bookkeeping.

Underwriting is generally structured in the mode of firm commitment or best efforts. For private placement by listed companies which is neither structured in the mode of self-selling nor allotment, it should be structured in best efforts underwriting.

Key terms of the underwriting agreement include the rights and obligations of the parties and underwriting basis. If structured in the mode of firm commitment, the agreement should stipulate the relevant obligation to purchase all of the shares. If structured in the mode of best efforts, the agreement should stipulate the resolutions after the failure of the offering.

Underwriting commission is related to the size of the offering in certain proportion to the raised funds.

Issuers and underwriters and related personnel should not disclose inquiry and pricing information during the process of stock offering and underwriting and they should not manipulate the issuing pricing in any way, otherwise they might be subject to regulatory measures or penalties.

The existing shareholders who hold shares for no fewers than 36 months could transfer his or her or its shares to the public under the principle of equal consultation when the new shares are publicly offered, at the same price of the newly offered shares, but the total number of transferred existing shares and new shares offered should not exceed the number of publicly traded shares as stated in the issuance plan. At present, domestic IPOs generally do not adopt the way in which the company’s shareholders publicly offer shares.

No response provided.

English or New York law may be not used to govern an underwriting agreement.

No response provided.

For a country that has signed a bilateral treaty on civil and commercial matters with China, the effective court judgments of that country are generally enforceable in China.

For effective arbitral awards made in the territory of a party to the New York Convention, such awards are generally enforceable in China.

See 10.4 Enforcement of Foreign Judgments/Arbitration Awards.

No response provided.

At present, foreign investors enter into equity transactions in China mainly through qualified foreign institutional investors (“QFII”) and RMB qualified foreign institutional investors (“RQFII”).

  • About three months for overall change from a limited liability company into a corporate limited by shares;
  • About three months to prepare filing documents;
  • About one month for the sponsor to submit all filing documents to the CSRC;
  • About six to twelve months for the review of filing documents by the CSRC;
  • About three months for the issuer to submit application to the securities exchange;
  • About one month for the securities exchange to approve the listing of the issuer;
  • About one month for the issuer to complete the listing, capital verification and industrial and commercial registration.

In the issuing and listing procedure of equity securities, the main tax issues include:

  • income tax;
  • added-value tax;
  • stamp duty;
  • business tax;
  • property tax, vehicle and vessel tax and GST, etc, related to the issuer’s assets.

Dividend distribution before listing is subject to income tax. If the shareholding period after listing exceeds one year, the dividend distribution is temporarily exempt from personal income tax.

There are no capital duties. Transfer of shares is subject to income tax.

From 17 November 2014, income of the QFII and the RQFII from the domestic transfer of equity investment assets like stocks in China, is temporarily exempt from corporate income tax.

Reporting (financial or otherwise) obligations

Listed companies have continuing information disclosure obligations, and should submit quarterly reports, semi-annual reports, annual reports and interim reports at the occurrence of major events accordingly and in a timely manner.

Disclosure requirements in respect of information regarding the issuer

The annual report should be submitted within four months after the end of each fiscal year. The financial report in the annual report should be audited by an accounting firm with qualifications related to securities and futures.

The semi-annual reports should be submitted within two months after the end of the first half of each fiscal year.

The quarterly reports should be completed and submitted within one month respectively after the end of the third and ninth month of each fiscal year.

At the occurrence of any major event that might have a significant impact on the trading price of the listed company's securities and its derivative products, which is unknown to the investor, the listed company should immediately submit the interim report stating the cause of the event, its current status and possible impact.

Corporate governance requirements

The governance of listed companies should be sound, effective and transparent, strengthen internal and external supervision balance and protect the legal rights of shareholders.

Shareholders, actual controllers, directors, supervisors and senior management of listed companies should exercise their rights and perform their obligations in accordance with the laws, regulations and self-discipline rules and safeguard the interests of listed companies.

Specific rules apply to transactions post-listing

The listed company should maintain its independence and ensure the fairness and legal compliance of related-party transactions.

The listed company's directors, supervisors, senior managers, shareholders holding more than 5% of shares, persons acting in concert and actual controllers should promptly submit to the company's board of directors the list of related persons and statement of related relationships, and the company should perform the review procedures of related-party transactions and strictly enforce the voting avoidance mechanism in related-party transactions.

Application of take-over rules onto listed companies

In the situation of listed companies’ bankruptcy or major violations of laws and regulations in special industries such as securities, banking, insurance, etc, there may be takeover issues.

No response provided.

If the information disclosure obligors violate information disclosure management rules, the SSE or the SZSE may take the following measures:

  • circulate a notice of criticism;
  • publicly denounce;
  • publicly recognise that obligor as the person unsuitable to be a director, a supervisor, or a senior manager in listed companies for no less than three years.

If the information disclosure obligors violate information disclosure management rules, the CSRC may take the following measures:

  • issue orders to make corrections;
  • supervise talks;
  • issue warning letters;
  • record the violations of laws and regulations, non-fulfilment of public commitments, etc, into the integrity record and publish;
  • recognise the violating obligors as unsuitable persons;
  • other supervising measures;
  • if the information disclosure obligor violates the information disclosure management regulations, the CSRC can give warnings, fines and administrative penalties, such as prohibiting the relevant personnel responsible from entering the securities markets;
  • If the obligor is suspected of committing crimes, such person may be transferred to the judicial authority according to the laws and be prosecuted for criminal offences.
Zhong Lun Law Firm

36F, SK Tower,
6A Jianguomenwai Avenue,
Chaoyang District,
Beijing, China, 100022

+86 10 5957 2332

+86 10 6568 1022/18

lvcui@zhonglun.com www.zhonglun.com
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Law and Practice in China

Authors



Zhong Lun Law Firm was founded in 1993 and is one of the earliest partnership law firms approved by the Ministry of Justice. The total number of employees has reached 2,200, including more than 290 partners, more than 1,500 professionals, more than 400 trainee lawyers, paralegals and various professional support staff. The firm has offices in 16 cities all over the globe, including Beijing, Shanghai, Shenzhen, Guangzhou, Wuhan, Chengdu, Chongqing, Qingdao, Hangzhou, Nanjing, Hong Kong, Tokyo, London, New York, Los Angeles and San Francisco. It offers high-standard services to clients from 60 countries and regions around the world. The firm's areas of expertise related to debt and equity work include equity/debt capital markets, real estate, private equity and investment funds, general corporate, foreign direct investments, M&A, banking and finance, ‘One Belt One Road Initiatives’ overseas investment, asset securitisation and financial products, tax laws, bankruptcy, antitrust and compliance, financial lease, dispute resolutions and telecommunications.