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Executive summary
We have previously summarised the key pathways for foreign investors to acquire A-shares of Chinese companies listed on the Shanghai and Shenzhen stock exchanges (see previous alert: China removes quotas for foreign institutional investors under the QFII and RQFII schemes[1]). As noted in that alert, a key available pathway which has long existed is the ability to purchase A-shares of listed companies by way of "strategic investment". This regime has historically been aimed at investments of at least 10% in a listed company, and subject to other stringent requirements, which has limited its suitability to a specific set of material transactions. Since the regime commenced in 2005, foreign investors have completed a total of approximately 600 transactions with A-share listed companies through the strategic investor pathway.
Earlier this month, the PRC Government finalised significant amendments designed to relax these requirements and make strategic investment a more attractive option for a broader range of foreign investors. Notably, for the first time foreign investors will be permitted (with regulatory approval) to acquire A-shares through the strategic investment pathway using equity in overseas unlisted companies as consideration. Further detail on the changes, and revised eligibility requirements, is set out below. The changes take effect from December 2, 2024.
Further detail
On November 1, 2024, the PRC Ministry of Commerce ("MOFCOM"), China Securities Regulatory Commission ("CSRC"), 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 promulgated the amended Administrative Measures for Strategic Investment in Listed Companies by Foreign Investors ("New Measures for Strategic Investment" or "New Measures"), which will come into force on December 2, 2024. To facilitate the smooth implementation of the New Measures, officials from the six authorities also responded to public inquiries.
This news alert intends to provide a preliminary analysis and summary of the New Measures, including their historical evolution, scope, application and other related aspects, to assist foreign investors who are intending to make strategic investments in A-share listed companies.
01
Historical evolution of the New Measures
The Administrative Measures for Strategic Investment in Listed Companies by Foreign Investors were initially promulgated in 2005 and implemented in 2006, with minor amendments made in 2015. These amendments waived the requirement for strategic investments made through private placements for listed companies to obtain prior approval from MOFCOM before applying to CSRC.
With the sustained and rapid development of China's economy and the further deepening of reform and opening up policies, the original measures have gradually become inadequate to satisfy the needs of the capital market. In 2018, MOFCOM and other authorities, sought public opinions on amending the measures. During the amendment process, the PRC Foreign Investment Law and its implementing rules were promulgated in 2019, representing a significant reform of China's foreign investment administration system. To align the measures with the new PRC Foreign Investment Law, MOFCOM and other relevant authorities adjusted the measures again in 2020 and sought public input, but no official version has been released until now.
On August 2, 2024, at a press conference held by the State Council Information Office, Zhu Bing, the director of the Department of Foreign Investment Administration of MOFCOM, announced plans to revise and introduce the new Administrative Measures for Strategic Investment in Listed Companies by Foreign Investors. These changes aim to encourage more quality foreign investors to make strategic long-term investments in China's capital markets.
On November 1, 2024, the amended New Measures for Strategic Investment were officially promulgated and will take effect on December 2, 2024.
02
Scope of application of the New Measures
1.Scope of investors covered
Foreign enterprises
Foreign individuals
Other foreign organizations
The above three categories of investors from Hong Kong SAR, Macao SAR and Taiwan, China (the New Measures are applicable as a reference)
Chinese citizens residing abroad (the New Measures are applicable as a reference)
2.Scope of investees covered
A-share listed companies
Companies listed on the National Equities Exchange and Quotations, China's over-the-counter market also known as the New Third Board / Xinsanban (the New Measures are applicable as a reference)
3.Regulated investment activities involving A-share / Xinsanban listed companies
Private placement of shares by listed companies
Transfer by agreement (a regulated pathway for a single buyer to acquire a 5%+ shareholding from a single seller)
Tender offer
Other methods stipulated by laws and regulations
4.Investment activities not regulated by the New Measures
Investment in A-share listed companies by institutional investors participating in the QFII and RQFII schemes (see previous alert: China removes quotas for foreign institutional investors under the QFII and RQFII schemes[2])
Investment in A-share listed companies through stock connect mechanisms (e.g., Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect and Shanghai-London Stock Connect)
The rights and interests of foreign investors who invested before the company's listing in the A-share market (i.e. pre-IPO investments)
Qualified foreign individuals trading A-shares on the secondary market or holding A-shares through a stock incentive plan
03
Qualification requirements for foreign investors
The New Measures for Strategic Investment outline varying requirements for foreign investors based on their investment approaches and investment ratios, in order to be permitted to make a strategic investment. Generally speaking, the qualification requirements for foreign investors primarily focus on their investment capabilities and operational compliance, including the following specific requirements:
1.Investment capabilities
Foreign investors must demonstrate strong financial health, creditworthiness and substantial management experience
Individual foreign investors should possess the ability to identify and tolerate risks
The investor's total assets owned must be at least USD50 million, or total assets managed must be at least USD300 million
If the foreign investor becomes the controlling shareholder of a listed company post-investment, their total assets owned must be at least USD 100 million, or the total assets managed must be at least USD 500 million
If the direct investing entity does not meet these asset requirements, a strategic investment may be permissible if their controlling investor (which wholly owns the direct investing entity) meets these requirements instead
2.Operational compliance requirements
The foreign investor must be properly established with a robust governance structure, effective internal controls, and standardized business practices
The foreign investor has not faced any criminal or material regulatory penalties domestically or internationally in the past 3 years (or since establishment if this period is less than 3 years)
In the case of a cross-border share swap, the foreign investor must legally own the rights and interests of the relevant overseas company, which should be registered in a jurisdiction with a comprehensive legal system. Additionally, the overseas company and its management must not have faced any material penalties from any domestic and overseas regulatory authorities in the past 3 years
04
Other key points relating to the New Measures
Key Point I: The full demonstration of the penetrated supervision principle
The New Measures for Strategic Investment mandate that foreign investors disclose the total number of shares and shareholding ratios they hold in the A-share listed company. Professional advisers engaged by the foreign investor must clearly outline the aggregate shareholding of the investor and any associated parties through various channels (such as QFII/RQFII, Shanghai-Hong Kong Stock Connect, and Shenzhen-Hong Kong Stock Connect). This is to ensure that aggregate shareholdings held through multiple methods do not exceed the stipulated shareholding limits or breach restrictions on obtaining control of the listed company.
Furthermore, if a direct investor does not meet the financial criteria set by the New Measures for Strategic Investment, they may still proceed with the investment if their controlling investor (which wholly owns the direct investing entity) satisfies those requirements. In such cases, the wholly controlling investor must undertake or agree to take joint responsibility for the investment activities.
Key Point II: Adding cross-border share swap as a new investment approach
The measures in 2015 did not address cross-border share swaps. According to the Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors ("M&A Provisions") jointly promulgated by MOFCOM and other five authorities in 2009, a cross-border share swap occurs when shareholders of an overseas company use their shares in that overseas company as the payment method, or the overseas company uses its newly issued shares as the payment method, to purchase the shareholders' equity interest of the PRC target company or the newly issued shares of the PRC target company.
Under the M&A Provisions, only equity interests in an overseas listed company may be used as the payment method for the acquisition of a PRC enterprise by means of cross-border share swap, and the cross-border share swap will be subject to approval by MOFCOM.
The New Measures for Strategic Investment explicitly provide that foreign investors are permitted to conduct cross-border share swaps using equity interests in overseas non-listed companies for their strategic investment in a PRC target company via private placement or tender offer. The New Measures for Strategic Investment no longer require MOFCOM approval for these transactions, but investors must report the investment information to the relevant PRC commerce authorities following completion of the transaction.
Key Point III: Connection between strategic investment activities and other PRC regulatory supervision
Foreign investors engaging in strategic investment activities must adhere to several key regulations. They are required to comply with the provisions of the PRC Company Law and the PRC Securities Law, the specific requirements of the stock exchanges (e.g. obligations on disclosing information and preparing reports on any changes in equity) as well as the procedures set by various other regulatory authorities. Some of these include:
Complying with the relevant provisions of the PRC negative list for foreign investment access, which outlines certain sectors where foreign investment is prohibited or restricted
Conducting security reviews in accordance with the Measures for the Security Review of Foreign Investment and other relevant rules where the investment may impact national security
Notifying the authorities in advance if there is a concentration of businesses that meets the merger clearance notification threshold
Complying with the applicable regulations governing the supervision and administration of state-owned assets where overseas investments are made by state-owned enterprises and state-controlled listed companies, or when there are changes in state-owned equity in listed companies
Completing procedures including the foreign exchange registration and deregistration, account opening and cancellation, foreign exchange settlement and cross-border payments in accordance with relevant foreign exchange administration rules
Handling relevant tax matters relating to strategic investment in accordance with applicable laws, administrative regulations and relevant rules
Applying for registration procedures with the administration for market regulation in accordance with laws (if required)
Additionally, if the listed company operates within a regulated sector, foreign investors must adhere to the specific regulatory requirements applicable to that sector, such as the eligibility criteria for shareholders set by the National Financial Regulatory Administration for financial institutions
Key Point IV: Lock-up period of strategic investment
The New Measures for Strategic Investment have explicitly reduced the lock-up period on a new investment from 3 years to 12 months, calculated from the date of acquiring A-shares in listed companies. This adjustment aims to attract foreign investors to engage more actively in investment while considering the medium- to long-term nature of strategic investments. The following points should be noted regarding the lock-up period:
（1）
Lock-up period violations: The foreign investors may make irrevocable public undertakings as required by professional advisers, the listed company, or relevant parties, i.e., if a foreign investor engages in strategic investment in violation of relevant regulations, such as through false statements, the foreign investor will be prohibited from transferring, gifting, or pledging the relevant shares, receiving dividends, or exercising voting rights on those shares, before and within 12 months after meeting the applicable qualification requirements.
（2）
Strict interpretation of lock-up period: Although the New Measures for Strategic Investment specifies a 12-month lock-up period, any stricter requirements established by other laws or regulations regarding the lock-up period of the shares acquired through investment will take precedence. For example, shares acquired by foreign investors from the acquisition of A-share listed companies or private placement with predetermined target investors may have an adjusted lock-up period of 18 months. Additionally, major shareholders of commercial banks are restricted from transferring their shares for 5 years after acquisition.
（3）
Lock-up period arrangements of indirect transfer: If a direct investor does not meet the financial criteria outlined in the New Measures but is wholly controlled by an investor that does, the lock-up period will apply to any transfer of equity interests by the wholly controlling investor. Thus, the wholly controlling investor is prohibited from divesting through indirect transfer until the lock-up period expires. After the expiration, the new shareholder of the direct investor must comply with relevant requirements and fulfill the obligations of the original wholly controlling investor and direct investor, including information disclosure as mandated by law.
（4）
Lock-up period of strategic investment implemented prior to the promulgation of the New Measures for Strategic Investment: Foreign investors who have made strategic investment prior to the promulgation of the New Measures for Strategic Investment must continue to adhere to the original 3-year lock-up period as specified in the original measures and pursuant to their original undertakings.
Key Point V: Requirements on minimum shareholding ratio for strategic investment
The previous measures stipulated that a foreign investor's initial strategic investment in a listed company must exceed 10% of the company's shares. The New Measures for Strategic Investment amend this requirement as follows:
（1）
Strategic investment via private placement of shares. Foreign investors may subscribe for new shares either as entities pre-determined by the board of directors of the listed company or as entities determined through competitive bidding. In this scenario, the New Measures eliminate the requirement for the foreign investor to hold any minimum shareholding ratio in the listed company.
（2）
Strategic investment implemented through transfer by agreement or tender offer. In this case, the ratio of shares obtained or proposed to be acquired by the foreign investor must not be less than 5% of the shares issued by the listed company.
Key Point VI: New positioning of the responsibilities of authorities of commerce
With the complete repeal of approval and filing requirements for the establishment and modification of foreign-invested enterprises under the PRC Foreign Investment Law, the New Measures for Strategic Investment have also adjusted the procedures related to strategic investments. Specifically, commerce authorities will no longer oversee the approval of strategic investments. Instead, foreign investors and listed companies are required to fulfill their obligations regarding information reporting in accordance with relevant laws and regulations, ensuring that investment information is disclosed truthfully, accurately, and completely.
As a result of these changes, foreign investors making strategic investments through cross-border share swaps are no longer required to obtain prior approval from MOFCOM in accordance with the M&A Provisions. This adjustment significantly simplifies the procedural process for cross-border share swaps.
Key Point VII: The role of professional advisers in the process of strategic investment
The New Measures for Strategic Investment explicitly provide that, where a foreign investor makes a strategic investment, the foreign investor and/or the listed company must engage qualified financial advisors, sponsoring institutions or law firms registered in China to serve as professional advisors.
（1）
Scope of opinions issued by professional advisers: The scope of opinions issued by professional advisers mainly include: whether the strategic investor satisfies the qualification requirements, whether the strategic investment complies with requirements of the negative list for foreign investment access, whether the strategic investment affects or may affect national security, whether the investor has issued undertakings regarding lock-up period and other matters, etc.
（2）
Engagement of professional advisers: If the foreign investor makes the investment through private placement of new shares, the listed company must engage professional advisers to conduct due diligence on potential national security implications and assess compliance with the negative list for foreign investment access. Conversely, if the foreign investor makes the investment through transfer by agreement or tender offer, it is not necessary for the listed company to engage any professional advisers, and all the due diligence must be conducted by the professional advisers engaged by the foreign investor.
（3）
Liability of professional advisers: If the professional advisers determine through due diligence that the investor or the investment does not meet the relevant requirements of the New Measures for Strategic Investment, the PRC securities registration and settlement institution will not proceed with the relevant procedures to complete the transaction. If the professional advisers fail to conduct due diligence or if their documents contain false records, misleading statements, or material omissions, the CSRC may take action in accordance with the PRC Securities Law and any other applicable regulations.
Footnotes：
[1] https://www.kwm.com/cn/en/insights/latest-thinking/china-removes-quotas-for-foreign-institutional-investors-under-the-qfii-and-rqfii-schemes.html
[2] https://www.kwm.com/au/en/insights/latest-thinking/china-removes-quotas-for-foreign-institutional-investors-under-the-qfii-and-rqfii-schemes.html
Authors
Zhihui JIANG
Partner
Beijing/Wuxi
jiangzhihui@cn.kwm.com
Areas of Practice：Mr. Jiang specialises in M&A, equity and business restructuring, outbound investment, private equity investment, domestic & overseas listing, acquisition of listed companies, etc.
Mr. Jiang has extensive experience in AI, semiconductor, automatic driving, FinTech, TMT, consumer industries, and financial institutions.
Jonathan Grant
International Partner
Sydney/Shenzhen
jonathan.grant@au.kwm.com
Areas of Practice：Public and privately negotiated M&A: including schemes of arrangement, takeovers, demergers, asset/share sales, competitive sales processes and joint ventures and other corporate transactions (including capital reductions, buy-backs and share sale facilities); and capital markets transactions: including IPO's, rights offerings, private placements, retail debt and hybrid security issuances.
Jonathan's practice is truly international in focus. He acts on the full range of domestic Australian M&A and ECM transactions and international cross-border M&A.
Tom Harrison
Sydney
Juncheng LIU
Beijing
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