As published on law.asia, Thursday 16 March, 2023.
Chinese companies now have a clearer idea of whether they can list overseas when new China Securities Regulatory Commission (CSRC) rules take effect from 31 March 2023.
The CSRC issued the new rules in February to clarify the filing process for companies to list overseas and, more specifically, the listing criteria for variable interest entity (VIE) structures.
Under the new rules, the CSRC is authorised to vet overseas listing applications, ending decades of unregulated offshore IPOs by Chinese companies. “No additional thresholds or conditions for listing abroad [will apply],” the CSRC said.
Shanghai-based partner Dai Lingyun, of Commerce & Finance Law Offices, said the new rules have not so much unblocked the path for listing abroad as they have shown the way.
“The new regulation is a comprehensive change to the previous regulatory system and rules for offshore listings,” he said. “The previous system was less clear, especially since July 2021, when companies have been more confused in many cases.”
The ride-hailing giant DiDi was forced to delist from the US not long after it went public in June 2021 and since then there has been a slowdown in Chinese companies listing in the US.
The CSRC will have the mandate to review any indirect listing, which refers to a company incorporated abroad but operating within China and listing based on equity, assets, earnings or other similar interests in the country, such as a VIE or red-chip structure, special purpose acquisition company and back-door listing.
Data platform WIND shows that as of 17 August 2021, 68.8% of Chinese companies were listed in the US via a VIE structure.
John Xu, a Linklaters partner in Shanghai, believed that the VIE structure may be highly scrutinised by the CSRC at the listing application stage, but it would not mean a complete loss of advantage.
“In the context of pre-IPO financing, if a Chinese company that operates in a foreign-investment prohibited or restricted sector requires access to foreign capital, the VIE structure may still remain the best or the only option,” Xu said.
Dai advised companies intending to list abroad to pay attention to the filing requirements on disclosing the ultimate beneficial owners of all major shareholders and employee stock ownership plans.
The new rules also will require securities firms to report annually to the CSRC on Chinese offshore listings and will bring law firms under the scope of regulation. “Failure to perform the obligations may lead to severe penalties,” Xu said.
A week after the announcement of the new filing regulation, China’s officials introduced another regulation on strengthening confidentiality and archives administration relating to offshore issuance, which also will come into effect on 31 March.
Dai said this regulation would also be one of the bases for law firms to verify companies listed abroad. “We see the synergy of the regulatory authorities in all aspects … The impact and connection between offshore and domestic listings will gradually deepen.”
The HKEX also proposed Listing Rules amendments to follow the CSRC regulation updates, lifting or modifying certain requirements that are no longer necessary, such as mandatory guidance of articles of association.
The new offshore listing regime repeals a nearly three-decade-long mandatory requirement to draw up articles of association for overseas listings, which, Xu said, removed the need to distinguish between domestic and foreign shares of a PRC issuer in the articles of association.
“Since the annual financial reporting and annual general meeting season is fast approaching, H-share issuers may consider taking this opportunity to update and amend their existing articles concerning class meetings and other provisions,” Xu said.