Press Q&A: Measures for Strategic Investment by Foreign Investors in Listed Companies

商务部、中国证监会等六部门有关司局负责人就《外国投资者对上市公司战略投资管理办法》答记者问

Source (Chinese): STA Policy Database — 政策解读 (November 1, 2024)

English translation: Independent translation. Not an official government translation.

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On November 1, the Ministry of Commerce, the China Securities Regulatory Commission, the State-owned Assets Supervision and Administration Commission of the State Council, the State Taxation Administration, the State Administration for Market Regulation, and the State Administration of Foreign Exchange jointly revised and issued the Measures for Strategic Investment by Foreign Investors in Listed Companies (hereinafter the "Measures"). To ensure the smooth implementation of the Measures, the heads of relevant departments of the six agencies answered questions from the press regarding the Measures.

Q1: What is the background and significance of the revision of the Measures?

Answer: The report of the 20th National Congress of the Communist Party of China stated that it is necessary to "adhere to a high level of opening up to the outside world and accelerate the construction of a new development pattern featuring domestic circulation as the mainstay and domestic and international dual circulation mutually reinforcing each other" and to "improve the functions of the capital market and increase the proportion of direct financing." The Third Plenary Session of the 20th Central Committee required "the orderly expansion of China's commodity market, service market, capital market, labor market, and other markets to the outside world" and "increasing the convenience for foreign investment to conduct equity investment and venture capital in China." To resolutely implement the decisions and plans of the CPC Central Committee and the State Council, MOFCOM, together with the CSRC, SASAC, STA, SAMR, and SAFE, has conducted in-depth research to advance the revision of the Measures.

Strategic investment refers to the conduct of a specific foreign investor directly acquiring and holding shares in a listed company on a medium-to-long-term basis. In 2005, five departments including MOFCOM, the CSRC, the STA, the former State Administration for Industry and Commerce, and SAFE issued the Measures, providing an institutional framework for foreign investors to make strategic investments in listed companies. According to statistics, since the implementation of the Measures, foreign investors have cumulatively made strategic investments in over 600 listed companies, playing a positive role in promoting the healthy development of China's capital market.

In recent years, as China's economy has continued to develop healthily and reform and opening up has further deepened, the securities market has expanded further, generating demand for the introduction of more quality foreign investment. Moreover, with the enactment or revision of laws such as the Foreign Investment Law, the Securities Law, and the Company Law, the relevant regulatory systems have undergone major adjustments, making it urgent to revise and improve the Measures in light of the new situation. Guiding more quality foreign investment toward listed companies not only promotes the expansion and quality improvement of foreign investment utilization, but also helps drive China's industrial upgrading and the healthy and stable development of the capital market. At the same time, China's securities market regulatory system has been increasingly refined, providing institutional safeguards for effective risk prevention. During the revision process, public comments were solicited, and opinions of relevant institutions, experts, and scholars were broadly gathered through meetings and other means. Overall, all parties generally welcomed the revision of the Measures and put forward specific suggestions for amendment. We carefully studied the opinions and suggestions of all parties, revised the Measures, and issued the updated version.

Q2: The revised Measures have facilitated foreign investors in making strategic investments in listed companies. Can you provide an overview?

Answer: MOFCOM, together with the CSRC, SASAC, STA, SAMR, and SAFE, has conducted in-depth research to revise and optimize the Measures based on the principles of further expanding opening up, supporting long-term and value-based investment, and preventing and mitigating risks. The revised Measures primarily lower investment thresholds in five areas, aiming to further broaden channels for foreign investment in the securities market, leverage the fundraising potential of the strategic investment channel, and encourage foreign investors to engage in long-term and value-based investment:

First, allowing foreign natural persons to make strategic investments. The original Measures only permitted foreign legal persons or other organizations to make strategic investments; foreign natural persons were not allowed to invest. This revision aligns with the Foreign Investment Law of the People's Republic of China by including foreign natural persons within the scope of foreign investors, allowing them to make strategic investments in listed companies.

Second, relaxing the asset requirements for foreign investors. The original Measures required that the foreign investor's total actual overseas assets be no less than USD 100 million or total managed overseas assets be no less than USD 500 million. To facilitate and promote the introduction of more long-term capital into listed companies, this revision appropriately lowers the asset requirements for foreign investors who will not become controlling shareholders. If the foreign investor will not become a controlling shareholder of the listed company after the strategic investment, the asset requirement is lowered to total actual assets of no less than USD 50 million or total managed assets of no less than USD 300 million. If the investor will become a controlling shareholder, the requirements remain at total actual assets of no less than USD 100 million or total managed assets of no less than USD 500 million.

Third, adding tender offer as a method of strategic investment. The original Measures provided only two methods of strategic investment: private placement (targeted issuance) and negotiated transfer. In accordance with relevant provisions of the Securities Law of the People's Republic of China and the actual conditions of the securities market, this revision adds tender offer as a permitted method for foreign investors to make strategic investments.

Fourth, for strategic investments conducted through private placement or tender offer, allowing the use of shares of offshore unlisted companies as payment consideration. The original Measures contained no provisions regarding cross-border share swaps. Strategic investment, as a special form of M&A, was subject to the requirements of the Provisions on the Merger and Acquisition of Domestic Enterprises by Foreign Investors. Those provisions stipulated that for cross-border share swap M&A of domestic enterprises, the equity used as payment must be that of an offshore listed company. In this revision, to attract foreign investors to comprehensively utilize cash, equity, and other methods for strategic investment in listed companies, and to facilitate domestic listed companies in acquiring overseas assets through cross-border share swaps, while also considering that private placement and tender offer already have regulatory rules to ensure transaction fairness, we have implemented classified management for cross-border share swaps. For strategic investments conducted through private placement or tender offer, cross-border share swaps using equity of offshore unlisted companies are permitted.

Fifth, appropriately lowering shareholding ratio and lock-up period requirements. The original Measures required that the proportion of listed company shares acquired by a foreign investor in its initial strategic investment be no less than 10%, and that the acquired shares not be transferred within three years. In this revision, in light of securities market regulatory rules, we have eliminated the shareholding ratio requirement for strategic investments conducted through private placement, and lowered the shareholding ratio requirement for strategic investments conducted through negotiated transfer or tender offer from 10% to 5%. The lock-up period requirements have been appropriately relaxed while maintaining the medium-to-long-term investment nature of strategic investments: the foreign investor's lock-up period has been adjusted from no less than 3 years to no less than 12 months. If other provisions require a longer lock-up period (such as Article 75 of the Securities Law, Article 74 of the Administrative Measures for the Takeover of Listed Companies, and Article 59 of the Administrative Measures for Registration-based Securities Issuance by Listed Companies), those provisions must be complied with.

Q3: The revised Measures include provisions on strengthening regulation and risk prevention. Can you provide an overview?

Answer: The CPC Central Committee and the State Council attach great importance to coordinating development and security. The Third Plenary Session of the 20th Central Committee required preventing risks, strengthening regulation, and promoting the healthy and stable development of the capital market. In the new Measures, we strive to build a collaborative regulatory framework supported by market self-discipline, government regulation, and social oversight, while strengthening coordination with the security review and anti-monopoly review systems. This approach ensures that while opening up is steadily expanded, management loopholes are effectively sealed, risks are prevented and mitigated, and the national security bottom line is maintained.

First, strengthening intermediary institution accountability. Intermediary institutions are required to be engaged to issue professional opinions on whether the strategic investment is compliant. If the intermediary institution determines through due diligence that it is non-compliant, the securities registration and settlement institution shall not process the relevant procedures, and the CSRC may penalize negligent intermediary institutions in accordance with the Securities Law and other provisions. The intermediary institution must explain the total shareholding of the foreign investor and its persons acting in concert through various methods (including QFII/RQFII, Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, and other mechanisms) to prevent multi-channel shareholdings from exceeding equity limits or acquiring control. Violations of the negative list shall be handled by the relevant authorities.

Second, allowing investors to make compliance commitments during information disclosure. When fulfilling information disclosure obligations, foreign investors shall simultaneously disclose whether the strategic investment complies with the Measures, and may make compliance commitments at the request of relevant parties, voluntarily agreeing not to exercise voting rights or pledge shares for a certain period if any violation occurs.

Third, coordination with the foreign investment security review system. Where a foreign investor's strategic investment in a listed company affects or may affect national security, a security review shall be conducted in accordance with the Measures for Security Review of Foreign Investment and other relevant provisions.

Fourth, coordination with anti-monopoly review rules. Where a strategic investment meets the standards for concentration of undertakings, an anti-monopoly review filing must be made. Where it constitutes a concentration of undertakings and meets the filing standards specified by the State Council, the undertakings shall file with the State Council's anti-monopoly enforcement agency in advance; concentration shall not be implemented without filing.

Fifth, adding administrative penalty provisions for the competent commerce authority. In addition to each jointly issuing department performing its supervisory and penalty functions in accordance with law, the competent commerce authority may also impose administrative penalties on conduct that violates the relevant provisions of the Measures.

Q4: Can foreign investors make strategic investments in companies listed on the National Equities Exchange and Quotations (NEEQ), also known as the "New Third Board"?

Answer: Foreign investors making strategic investments in NEEQ-listed companies may apply the Measures by reference.

Q5: Do foreign investors purchasing listed company shares or depositary receipts through QFII/RQFII, Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, or Shanghai-London Stock Connect need to comply with the Measures?

Answer: No, but they must comply with the relevant securities market regulatory requirements.

Q6: After the issuance of the Measures, will the lock-up period for foreign investors who have already made strategic investments be similarly shortened?

Answer: The lock-up period will not be shortened. To maintain the stability of investment relationships and protect the interests of securities market investors, foreign investors who have already made strategic investments shall continue to comply with the 3-year lock-up period requirement under the original Measures in accordance with their original commitments.

Q7: Can foreign investors participate in pre-determined targeted issuances by listed companies as "domestic or overseas strategic investors" under the Administrative Measures for Registration-based Securities Issuance by Listed Companies?

Answer: Yes. Foreign investors participating in pre-determined targeted issuances by listed companies as "domestic or overseas strategic investors" must comply with the relevant requirements of the Measures as well as the provisions and regulatory requirements of the CSRC.

Q8: After the issuance of the new Measures, do foreign investors' strategic investments in listed companies still need to be submitted to commerce authorities for approval?

Answer: No. After the implementation of the Foreign Investment Law of the People's Republic of China, the examination, approval, and filing of the establishment and modification of foreign-invested enterprises by commerce authorities has been fully abolished, and commerce authorities no longer approve strategic investment matters. Foreign investors and listed companies implementing strategic investments shall fulfill their information reporting obligations in accordance with the Foreign Investment Law and the Measures for Reporting of Foreign Investment Information, truthfully, accurately, and completely disclosing and submitting investment information.