On March 2 2018, after having solicited two sets of public opinions, the China Insurance Regulatory Committee (CIRC) finally promulgated the new Measures for the Administration of Equity in Insurance Companies. The measures took effect on April 10 2018 and have dramatically shifted the landscape for insurers in China with regard to:
- shareholder categories;
- shareholder qualification conditions;
- the upper limit on the percentage of shares held by a single shareholder;
- the supervision principle; and
- administrative penalties.
Further, the measures stipulate that 'foreign-invested insurers' (defined as those with a greater than 25% aggregate foreign shareholding) must apply the relevant provisions of the measures "by reference". This is noteworthy, as Article 33 of the previous Measures for the Administration of Equity in Insurance Companies, which took effect on June 1 2014, clearly stated that if the capital contribution or shareholding proportion of an insurer's foreign shareholders accounted for more than 25% of its registered capital, the relevant provisions on the administration of foreign-invested insurers applied, unless otherwise stipulated by the CIRC. Thus, the previous measures did not apply to foreign-invested insurers, as defined; instead, China had two legal systems which regulated foreign-invested and domestic-invested insurers separately.
Conversely, Article 85, Paragraph 2 of the new measures states that if the shareholding proportion of an insurer's foreign shareholders accounts for more than 25% of its registered capital, the relevant provisions of the new measures must be applied by reference.
The new measures have thus brought fundamental changes for foreign-invested insurers. Since there is no precedent for ascertaining the extent to which the new measures apply to foreign-invested insurers, which provisions are likely to apply must be analysed from a legal perspective.
Upper limit on proportion of shares held by single shareholder
One question that must be examined is whether the upper limit on the proportion of shares held by a single shareholder under the new regulation applies to foreign shareholders and investors.
Article 29 of the new measures states that:
"The percentage of shares held by a single shareholder shall not exceed one-third (1/3) of the total registered capital of the insurance company.
Where an insurance company invests in the establishment or acquisition of another insurance company due to needs for business innovation, specialization or group-style business operations, the upper limit of its capital contribution or shareholding percentage shall not be restricted.
The shareholding ratios of shareholders, its affiliated parties and its persons acting in concert shall be calculated in combination."
Pre-existing foreign shareholders
According to existing insurance market information, many pre-existing insurers have among their shareholders (including both domestic and foreign shareholders) single shareholders whose shareholding percentage exceeds one-third of the insurer's total registered capital. As such, the new measures will arguably not affect pre-existing shareholding proportions.
According to non-retroactivity of the law principle, it follows that this provision of the new measures will apply only to future applicants and investors. To this effect, it is unlikely that the authorities will require existing shareholders to reduce their shareholding percentages in order to comply with the new measures. Further, according to Article 4 of the new measures (further explored below), a 'controlling shareholder' is a shareholder that holds more than one-third of an insurer's equities. By implication, this provision recognises – on the CIRC's behalf – the pre-existence of shareholders that hold more than one-third of the equity in an insurer.
In support of this assumption, the CIRC stated, in a March 7 2018 press briefing, that the new measures will not lead to the retrospective adjustment of insurers' existing shareholding structures. However, the CIRC did say that it may issue guidance and supervisory measures to certain insurers whose existing shareholding structures may carry potential risks.
If acquisitions by new foreign investors in Chinese foreign-invested companies are now subject to the upper one-third shareholding limit, this could affect many ongoing and potential equity transactions. For example, if a pre-existing foreign shareholder which holds more than one-third of the capital in a foreign-invested insurer intends to transfer its entire shareholding and withdraw, it may have to find several purchasers to subscribe to the shares so that no single investor acquires a shareholding that exceeds the one-third limit. Meanwhile, in accordance with the supervision principle under Article 29 (discussed above), those investors should not have an affiliated relationship or act in concert, as their shareholdings will be calculated together for the purpose of applying the one-third limit.
However, according to some opinions, Article 29 of the new measures is inconsistent with the 50% upper limit applied to foreign-invested life insurers, as prescribed for in the Rules for the Implementation of the Administrative Regulations on Foreign- Invested Insurance Companies, which were promulgated by the CIRC in 2004 and are still valid. The relevant provision of the implementation rules is Article 3, Paragraph 1, which reads as follows:
"A foreign-invested life insurance company which is incorporated within the territory of China by a foreign insurance company with a Chinese company or enterprise, the shareholding ratio of the foreign insurance company shall be no more than 50% of the total equity of the company."
Arguably, since the CIRC promulgated both the implementation rules and the new measures, the interpretative legal principle by which new laws are considered to supersede previous ones could provide a reasonable basis for the limits under the new measures to apply. Therefore, the limit on foreign investment in foreign-invested life insurers by a single investor can be considered to have been tightened considerably – from 50% to one-third.
However, if this is the case, the new measures contravene China's World Trade Organisation commitment and its overall stance towards foreign investment. In 2017 the State Council promulgated several notices and measures to further open up the Chinese market internationally and make active use of, and promote further growth in, foreign investment. At a November 10 2017 press briefing, Vice Finance Minister Zhu Guangyao announced significant plans to remove caps on foreign ownership of Chinese financial institutions. For China's insurance industry, this means gradually liberalising foreign ownership limits; the cap on the percentage of shares that foreign investors can hold in a joint venture in the life insurance industry will be increased to 51% of the shares in three years and removed entirely in five years.
It is therefore likely that future single foreign investors in foreign-invested insurers will not be bound by the one-third capital limit, but rather that this limit under the new measures will apply only to domestic investors. In addition, it can be argued that the one-third shareholding limit under the new regulation does not conflict with the 50% limit under the implementation rules, as the one-third limit applies only to single shareholders, whereas the 50% limit refers only to the sum total among foreign shareholders.
Should foreign investors apply both new measures and other regulations?
Another question is whether foreign investors should apply both the new Measures for the Administration of Equity in Insurance Companies and other relevant regulations on foreign-invested insurers.
Regulations on foreign-invested insurers Several regulations concern foreign-invested insurers, including the Regulations on the Administration of Foreign-Invested Insurance Companies, which the State Council promulgated on August 1 2013.
As the State Council issued the administrative regulations and the CIRC issued the new Measures for the Administration of Equity in Insurance, some commentators have argued that in accordance with the principles of legal hierarchy, the administrative regulations should prevail over the new measures with regard to their application to foreign-invested insurers.
Others have argued that if an existing law or regulation applies to foreign-invested insurers and specifically addresses a particular matter, then – as a general principle of interpretation – that law or regulation should apply. If those existing laws or regulations are silent on a matter, foreign-invested insurers should take the relevant provisions of the new measures as their primary reference.
While these controversies have yet to be settled, the fact that the administrative regulations were issued by a higher authority means that the new measures should be interpreted as being consistent with the administrative regulations (ie, where there is a discrepancy between the two, the administrative regulations should prevail). The issuance of more prescriptive and detailed requirements under the new measures should be permitted, as long as they do not conflict with the administrative regulations. Therefore, in the absence of any conflict between them, foreign investors and foreign-invested insurers should apply both the administrative regulations and the new measures in practice.
Rules for implementation of administrative regulations on foreign-invested insurers Other notable CIRC regulations that apply specifically to foreign-invested insurers are the Rules for the Implementation of the Administrative Regulations on Foreign-Invested Insurance Companies. In accordance with the aforementioned interpretative legal principle by which new laws are considered to supersede previous ones, the implementation of applicable provisions under the new measures should theoretically take precedence over those in the implementation rules. Since the implementation rules remain valid, both are likely applicable in practice, subject to the authorities' discretion and final interpretation.
Should foreign shareholders and investors be categorised separately?
Another question that has arisen with the promulgation of the new Measures for the Administration of Equity in Insurance Companies is whether foreign shareholders and investors in foreign-invested insurers should be classified into four categories under the measures.
Article 4 of the measures states that:
"The shareholders of an insurance company shall be divided into the following 4 categories according to their shareholding percentage, qualification conditions and impact on the business operations and management of the insurance company:
1. Financial I shareholders, referring to a shareholder who holds less than 5% of the equities of the insurance company
2. Financial II shareholders, referring to a shareholder who holds at least 5% but less than 15% of the equities of the insurance company.
3. Strategic Shareholder, referring to investors whose equity occupy more than 15%, but less than one-third of total equity of an insurance company, or investors who enjoy a voting right according to its capital contribution or the stocks it holds is large enough to impose a material impact upon the resolution of shareholders' meeting or the shareholders' assembly.
4. Controlling Shareholder, referring to investors whose equity occupy more than one-third of total equity of an insurance company, or investors who enjoy a voting right according to its capital contribution or the stocks it holds is large enough to impose a controlling impact upon the resolution of the shareholders' meeting or the shareholders' assembly."
If these provisions apply to foreign shareholders of and investors in foreign-invested insurers, the categories and definitions therein will raise concerns for joint venture insurers in practice. For instance, foreign shareholders and investors that hold or attempt to hold more than one-third of the shares in a joint venture will be treated as controlling shareholders under the new measures. This is despite the fact that they will have no actual controlling or decision-making power, as the majority of shares in such joint venture insurers are normally held by domestic shareholders.
An additional concern is that once foreign investors have been classified into the four types of shareholder, additional specific sets of qualification criteria will be applied to each category going forward. Including new foreign investors in foreign-invested insurers in these categories at this stage could therefore have a long-term negative bearing in terms of further restrictions and conditions.
Which new restrictions bind foreign investors?
The question of which restrictions under the new measures are binding for foreign investors has also arisen.
According to Article 30 of the new measures:
"Investors, their affiliates and persons acting in concert can become controlling shareholders for only one insurance company that conducts similar businesses. If the investor is an insurance company, it may not invest or set up an insurance company that conducts the similar business of the investor.
The number of insurance companies of which the investors, their affiliates and persons acting in concert become controlling and strategic shareholders, may not exceed two in total.
An insurance company that invests in the establishment of another insurance company for the purpose of business innovation or specialized operations shall not be bound by the preceding Paragraph (1) and (2), however such insurance company (being the shareholder) shall not transfer its controlling power in any case. The shareholder who has already become the controlling shareholders for two or more insurance companies, this shareholder is not allowed to be the strategic shareholders for other insurance companies."
Key points Foreign investors that are classified as Financial I or Financial II shareholders under Article 4 of the new measures will not be limited in the number of insurers in which they can invest. If a foreign investor already holds more than 15% of the equity in two insurers in the same insurance sector (eg, the life insurance or general insurance sector), they will be permitted to invest in a third insurer only if that holding is less than 15% of the equity. However, some commentators have argued that if the foreign investor already holds more than 15% of the equity in each of two insurers in the same insurance sector, it will be impossible for it to hold any further equity in an insurer in the same sector.
The new Measures for the Administration of Equity in Insurance Companies aim to improve the shareholding structures and equity transactions of insurers and ensure prudential supervision. The new measures are clearly more stringent than the previous ones and the express inclusion of foreign-invested insurers represents a substantial shift away from current practice. As such, queries relating to the "application by reference" of the relevant provisions of the new measures are expected to increase. The answers to such queries, as well as opinions and further clarifications from the authorities, will hopefully paint a clearer picture.
Aside from the recent announcement of the merger of the CIRC and the China Banking Regulatory Commission, the new measures are considered to be the most influential announcement that the CIRC has made in the past three years. That said, news of the merger has brought an added element of uncertainty to their enforcement. An impending trade war with the United States has further muddied the waters and simultaneously brought China's commitment to further liberalising the financial sector – and, by virtue, the potential impact of the new measures – into sharper focus.
For further information on this topic please contact Hao Zhan, Dong Xin, Shaofang Zheng or Sharif Hendry at AnJie Law Firm by telephone (+86 10 8567 5988) or email ([email protected], [email protected], [email protected] or [email protected]). The AnJie Law Firm website can be accessed at www.anjielaw.com.
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