May 15 2009
The Administrative Measures for the Transfer of State-owned Assets in Financial Enterprises came into effect on May 1 2009. This update outlines the main changes and explains how they may affect businesses.
The measures were promulgated by the Ministry of Finance on March 17 2009. Among other things, they confirm that transfers of state-owned interests in unlisted financial institutions are subject to a mandatory public auction or tender process, unless a special approval for transfer by private agreement is obtained from the State Council or the financial authorities.
The ministry and the State-Owned Assets Supervision and Administration Commission of the State Council jointly promulgated the Interim Administrative Measures for the Transfer of State-Owned Assets on December 31 2003 to regulate the transfer of state-owned assets; these measures came into effect on February 1 2004. The 2004 measures specifically excluded transfers of state-owned assets in financial enterprises from their scope of application, stating that such transfers should be subject to regulations to be separately promulgated by the state.
Under the previous regulatory framework, the commission was responsible for the administration of state-owned non-financial assets, whereas the ministry regulated state-owned financial assets. The ministry had previously issued rules on the registration and appraisal of state-owned assets in financial enterprises. However, no specific regulations governed transfers of state-owned assets in financial enterprises. The new measures fill this gap in the framework.
The measures govern the transfer of state-owned assets in financial enterprises to Chinese or foreign legal persons, individuals or other entities by:
Section 2 defines 'financial enterprises' as enterprises that hold a permit to conduct financial business and financial holding (group) companies. Thus, financial enterprises include various types of financial institution regulated by the banking, securities and insurance regulators, such as:
'State-owned assets in financial enterprises' are defined as proprietary interests arising from various forms of investment in financial enterprises by government at all levels and their authorized investment entities. State-owned equity interests or assets in unlisted financial enterprises and transfers of state-owned shares in listed financial institutions fall within the definition. However, sales of listed shares by state-owned or state-controlled financial enterprises for proprietary trading purposes are not governed by the measures.
Unlisted shares - equity exchange
The measures require that unless a special approval for transfer by private agreement is obtained from the council or the relevant financial authority, transfers of state-owned assets in unlisted financial enterprises are subject to a mandatory public auction or tender process conducted through an equity exchange at provincial level or higher. In addition, transfers by state-owned or state-controlled financial enterprises of assets held by their direct subsidiaries are subject to the approval of the financial authorities. The level of financial authority that must approve the transfer depends on the level of state administration to which the financial enterprises are subject. Except for those that require council approval, transfers by state-owned or state-controlled financial enterprises under direct central government administration of assets held by their direct subsidiaries are subject to ministry approval; transfers of the state-owned assets of financial enterprises under local administration require approval from the provincial financial authority (Section 12).
Listed shares - stock exchange
Section 28 of the measures states that transfers of state-owned shares in listed financial enterprises and transfers by financial enterprises of state-owned shares in listed companies must be carried out through the trading systems of a legally established stock exchange (ie, the Shanghai Stock Exchange or the Shenzhen Stock Exchange), unless special approval is obtained for a transfer by private agreement. In practice, this means that a transfer can be consummated through a block sale on the stock exchange trading system.
A controlling shareholder's transfer of state-owned shares in a listed company is subject to the approval of the financial authorities (Section 30). In the case of a non-controlling shareholder, the approval process depends on the amount of shares being transferred. If the aggregate amount of shares to be transferred by a non-controlling shareholder in a listed company within a full financial year (after adding any reduction in shareholding and deducting any increase in shareholding to give the aggregate transferred shares) does not reach 5% of the total issued shares in the company, the transfer need only pass through the transferor's internal corporate approval procedures and be reported afterwards to the relevant financial authority. However, if the aggregate reaches or exceeds the 5% threshold, the financial authority's prior approval must be obtained (Section 31).
Transfer by private agreement
There is an exception to the default position under the measures that transfers of state-owned assets shall be carried out on a public platform (eg, an equity exchange or stock exchange). Subject to the special approval of the council or the relevant financial authority, a transferor may directly transfer state-owned assets in financial enterprises by private agreement under Section 35 if:
The first and third grounds are imprecisely phrased, which could leave room for regulatory discretion and differences in interpretation if no further clarification is provided.
The measures are relatively technical and are likely to complicate the acquisition or disposal of interests in financial enterprises for Chinese and foreign investors.
More complicated process for acquisitions
In recent years a number of foreign investors have acquired shares in unlisted Chinese financial institutions, such as banks and trust companies, from existing state-owned shareholders by way of private agreement. However, such transactions must now be submitted to a public auction or tender process through an equity exchange. The relevant financial authority may consider that the transaction meets the criteria for one of the exceptions and may grant special approval of a transfer by private agreement, but special approvals are likely to be rare. Where this option is unavailable, a foreign investor may wish to improve both deal and price certainty by investing through the subscription of new shares issued by the target financial institution, which would not trigger the public auction or tender procedure requirement. However, the subscription of new shares in an unlisted financial institution is subject to a mandatory value appraisal process and the appraisal results must be verified by or filed with the relevant financial authority. The appraised value must be used as the basis for determining the subscription price of the new shares.
Exercise of pre-emptive rights and call options
Foreign investors in Chinese financial institutions are commonly entitled - by law or under articles of association or a shareholders' agreement - to a pre-emptive right or right of first refusal over a proposed sale of equity or shares held by other shareholders, which are often state-owned entities. In addition, some foreign investors, which are now subject to various statutory caps on their shareholdings, may have negotiated contractual call option rights over shares held by other shareholders, which would become exercisable upon the lifting of the foreign ownership caps. Although doubts have persisted over whether such contractual pre-emption or call option rights are automatically enforceable in China, the foreign investor's ability to take advantage of such rights is likely to be undermined further by the public auction or tender process required under the measures.
Determining sale price of listed shares
The measures restrict the prices at which listed shares may be transferred. For instance, in the case of a transfer by private agreement, the transfer price may not be less than the greater of: (i) the weighted average price of the daily weighted average prices of the shares over the 30 trading days preceding either the date on which the listed company publicly announces the transfer or, if a special waiver of the public announcement requirement has been obtained, the date of execution of the share transfer agreement;(1) or (ii) the weighted average price of the shares on the day preceding the applicable reference date (Section 45).
If the share transfer is effected by means of a block sale, the transfer price may not be lower than the weighted average trading price of the shares on the date of the sale (or the preceding trading day if there were no transactions involving such shares on the date of sale) (Section 33).
Thus, the measures require that the transfer price of listed shares be based largely on market price, which will expose transaction parties to potential fluctuations in the stock market.
For further information on this topic please contact Melissa Thomas at Freshfields Bruckhaus Deringer LLP by telephone (+86 21 5049 1118) or by fax (+86 21 3878 0099) or by email (firstname.lastname@example.org).
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