On 17 February 2023, the China Securities Regulatory Commission (CSRC) published the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies and related guidelines (“New PRC Regulations”), which will take effect on 31 March 2023. On the same date as the New PRC Regulations take effect, the longstanding Special Regulations on the Overseas Offering and Listing of Shares by Joint Stock Limited Companies (“Special Regulations”) and the Mandatory Provisions for Companies Listing Overseas (“Mandatory Provisions”) will be repealed.
On 24 February 2023, The Stock Exchange of Hong Kong Limited (“Exchange”) published a consultation paper setting out: (1) the consequential amendments to the Rules Governing the Listing of Securities on the Exchange to reflect the New PRC Regulations; and (2) other proposed rule amendments specific to issuers incorporated in the People’s Republic of China (PRC) as joint stock limited companies (“PRC issuers”).
On 17 March 2023, the SFC issued the FAQ and Practice Note 25 to provide guidance on the application of the Codes to PRC issuers in light of the New PRC Regulations.
In summary, the SFC’s current practices in respect of the application of disclosure of interests requirements under Part XV of the SFO and the Codes requirements to PRC issuers will remain largely the same. While the SFC recognises that H shares and domestic shares are one single class of shares under PRC law, the fact that they are traded in separate markets with different regulatory environments and are not directly fungible with each other warrants a different approach, which is further elaborated below.
(1) Part XV of the SFO
Notwithstanding the repeal of the Mandatory Provisions, the current practice of reporting interests in H shares and domestic shares separately under Part XV of the SFO remains unchanged. In other words, interests in H shares of a PRC issuer should continue to be calculated as a proportion of the total issued H shares of the PRC issuer. The same approach applies to domestic shares.
(2) Code on Takeovers and Mergers (“Takeovers Code”)
(a) Class (6) Associate and Rule 22 – Disclosure of dealings during an offer period
To ensure that material and relevant information on dealings by a person holding a substantial stake in H shares are captured and disclosed under Rule 22 of the Takeovers Code, the SFC will continue to treat H shares as a separate class of shares from domestic shares for the purpose of determining whether a person is a class (6) associate1 under the Codes. In other words, in determining whether a holder of H shares is a class (6) associate should continue to be determined by reference to the total issued H shares only, and not the entire issued share capital of the PRC issuer. On the other hand, the SFC will continue to treat A shares and unlisted domestic shares as the same class for the purposes of determining any such class (6) associates.
(b) Rules 2.2 and 2.10 – Delistings and privatisations
Recognising that a proposal to privatise or delist H shares will significantly impact holders of H shares and their interests are materially different compared to holders of domestic shares, the SFC will continue its current approach with respect to Rules 2.2 and 2.102 of the Takeovers Code. A separate class approval from holders of H shares will remain required for transactions that would result in a delisting of H shares, whether by way of a general offer and/or a merger by absorption, to ensure adequate protection for interests of holders of H shares.
(c) Rule 14 – Offers for more than one class of equity shares
During an offer made for H shares by an A+H share issuer, unless waived by PRC authorities or agreed by all holders of A shares (such as in the form of an undertaking not to accept the offer), a comparable offer for A shares pursuant to Rule 14 of the Takeovers Code is normally required by the SFC. Similarly, a comparable H share offer is required to be made at the same time as an A share offer. For the reasons stated above, the SFC will continue to treat A shares and H shares as separate classes of shares, and therefore the requirement to make comparable offers for such different securities will remain unchanged.
(d) Rule 23 – Nature of consideration to be offered
The SFC will continue to treat domestic shares and H shares as separate classes of shares when applying Rule 23 of the Takeovers Code in respect of a cash offer. In other words, the application of Rule 23.1(a) and 23.2 of the Takeovers Code will not be triggered unless the offeror and a party acting in concert with it made purchases carrying 10% or more of the voting rights of a particular class. Similarly, Rule 23.1(b) is applied by reference to the class of shares being acquired during an offer period.
(e) Special deals and whitewash waivers
Under the existing practices, independent shareholders’ approval for special deals under Rule 25 and Practice Note 17, and whitewash waivers under Note 1 on dispensations from Rule 26 and Schedule VI of the Takeovers Code does not require separate H shares class approval. The SFC confirms that such practices will remain unchanged.
(3) Code on Share Buy-backs (“Share Buy-backs Code”)
(a) Rule 2 – Off-market share buy-backs
Under Rule 2 of the Share Buy-backs Code, an off-market share buy-back is subject to the SFC’s approval and an approval by at least three-fourths of the votes cast by disinterested shareholders at a general meeting. Disinterested shareholders are generally considered by the SFC to be those shareholders whose relevant securities will not be bought back under the proposal. No distinction is made for different classes of relevant securities, and no separate class meetings for the approval of off-market share buy-backs by a PRC issuer is required. The SFC will continue this approach following the implementation of the New PRC Regulations.
(b) Rule 3.1 – Share buy-back by general offer
Under Rule 3.1 of the Share Buy-backs Code, a share buy-back by general offer must be approved by a majority of the votes cast by shareholders at a general meeting. The current approach that requires all shareholders regardless of the type of shares they hold are entitled to attend and vote at such general meeting will remain unchanged.
(c) Rule 3.3 – Delistings and privatisations
Under Rule 3.3 of the Share Buy-backs Code, a delisting or privatisation by way of a share buy-back must be approved by at least 75% of the votes attaching to the shares owned by independent shareholders at a general meeting, and number of votes cast against the resolution being not more than 10% of the votes attaching to the shares owned by independent shareholders. Similar to the approach in respect of Rules 2.2 and 2.10 of the Takeovers Code, the current practice that requires a separate H shares class approval for a PRC issuer proposal to delist H shares by way of a share buy-back will remain unchanged.
The SFC strongly recommends that early consultation be made if parties are in doubt about the interpretation and application of any provisions under the Codes following the implementation of the New PRC Regulations.
For assistance with any consultation with the SFC and to discuss what this development might mean for you, please get in touch with our lawyers set out under “Contact Information” or your usual Baker McKenzie contact.
1 “Class (6) associates” is defined under the Codes to include a person who owns or controls 5% or more of any class of relevant securities issued by an offeror or potential offeror or the offeree company.
2 Each of Rules 2.2 and 2.10 requires an approval by at least 75% of the votes attaching to the disinterested shares at a duly convened meeting of the holders of the disinterested shares, and that the number of votes cast against the resolution is not more than 10% of the votes attaching to all disinterested shares.
Baker & McKenzie FenXun (FTZ) Joint Operation Office is a joint operation between Baker & McKenzie LLP, an Illinois limited liability partnership, and FenXun Partners, a Chinese law firm. The Joint Operation has been approved by the Shanghai Justice Bureau. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.
This client alert has been prepared for clients and professional associates of Baker & McKenzie FenXun (FTZ) Joint Operation Office. Whilst every effort has been made to ensure accuracy, this client alert is not an exhaustive treatment of the area of law discussed and no responsibility for any loss occasioned to any person acting or refraining from action as a result of material in this presentation is accepted by Baker & McKenzie FenXun (FTZ) Joint Operation Office.