Copyright Euromoney Institutional Investor PLC Oct 2007

CSRC takes measures to prevent insider trading.

Issued: August 15 2007

Main Contents: Where a listed company anticipates that it will be difficult to maintain the confidentiality of a material event under planning or the related event has already been divulged, it shall take the initiative to apply to the stock exchange for suspension of trading of its shares. Where there is unusual fluctuation in share trading when there is a market rumour involving the listed company or in the absence of any announcement of material price-sensitive information, the listed company shall take the initiative to apply to the stock exchange for suspension of trading of its shares (Article 4). Where, excluding large cap stock factors and inter-sector factors, the accumulated price fluctuation range of a listed company's shares exceeds 20% within 20 trading days prior to the announcement of material price-sensitive information, the listed company shall, at the time of application to the China Securities Regulatory Commission (CSRC) for an administrative licence, provide evidence to prove that no insider trading was conducted by insiders or direct relatives (Article 5).

Where a listed company discloses that there is no major asset restructuring, acquisition or share issue in the clarification announcement or the announcement on the unusual fluctuation in share trading, it shall undertake that no event of the same nature is planned within at least the next three months (Article 6). Where a listed company intends to implement a material event of no precedence and material uncertainty that requires policy consultation and discussion of the proposal with the relevant department, it shall, before policy consultation and discussion of the proposal with the relevant department, apply to the stock exchange for suspension of trading of its shares before the market closes (Article 7). Where a listed company encounters a material event involving an administrative licence and of no precedence and material uncertainty that requires policy consultation and discussion of the proposal with the relevant department, it shall submit to the CSRC the relevant documents evidencing whether insiders or direct relatives have held or traded the listed company's shares within six months prior to the occurrence of the event, and provide sufficient evidence to prove that the relevant personnel has not carried out any insider trading (Article 8).

Related Legislation: PRC Securities Law (Amended), Oct 27 2005, CLP 2006 No.1 p.31; and Measures for the Administration of Information Disclosure by Listed Companies, Jan 30 2007, CLP 2007 No.1 p.9

Copyright Euromoney Institutional Investor PLC Feb 2007

Listed companies required to set up management mechanisms for information disclosure.

Promulgated: January 30 2007

Effective: As of date of promulgation

Main Contents: According to the Measures, information disclosure documents shall mainly include prospectuses, listing announcements, periodic reports and ad hoc reports (Article 5). Information disclosed in foreign markets by companies issuing and listing securities and derivatives thereof in domestic and foreign markets shall also be disclosed in domestic markets simultaneously (Article 2).

Issuers and directors, supervisors and senior management personnel of listed companies shall perform their duties honestly and diligently, and ensure the truthfulness, accuracy, completeness, timeliness and impartiality of the information disclosed (Article 3).

The China Securities Regulatory Commission may formulate specific provisions on information disclosure by listed companies of special industries such as finance and real property (Article 10).

If any of the following circumstances arises prior to the disclosure of information on material events as required, listed companies shall disclose the present status of relevant matters and risk factors that may have an impact on the development of the material event in a timely manner:

(1) where it is difficult to ensure confidentiality of that material event;

(2) where the material event has already been leaked or rumours have already surfaced on the market; and

(3) where there are unusual transactions of the company's securities and derivatives thereof (Article 31).

Material events shall include material changes to the company's business policy and scope; the issuing of new laws, regulations, rules and industry policies that may have a material impact on the company; forming of resolutions by the board of directors relating to the issuing of new shares or other refinancing proposals, or share incentive schemes; and court rulings that prohibits the controlling shareholder from transferring its shares (Article 30).

Listed companies shall establish management mechanisms for information disclosure (Article 37). The secretary to the board of directors shall be responsible for organizing and coordinating matters relating to the listed company's information disclosure, gathering information that shall be disclosed by the company and reporting it to the board of directors, paying constant attention to the media's reports on the company, and verifying the truth of what is reported spontaneously (Article 45). Institutions and individuals may not provide or disseminate information on listed companies that is false or misleading to investors, and shall assume liability to compensate investors in accordance with the law if they suffer losses as a result (Article 56).

Related Legislation: PRC Company Law (Amended), Oct 27 2005, CLP 2005 No.10 p.21 and PRC Securities Law (Amended), Oct 27 2005, CLP 2006 No.1 p.31

Repealed legislation: Implementing Rules for Information Disclosure by Companies Issuing Shares to the Public (Trial Implementation), Jun 10 1993; Circular on Matters Relevant to Public Offerings of Shares and Information Disclosure of Listed Companies, 1993; Circular on Strengthening the Examination of Interim Reports of Listed Companies, Dec 12 1996; Circular on Several Problems Concerning the Release of a Clarification Notice by Listed Companies, Dec 13 1996, CLP 1997 No.5 p.14; Circular on Matters Concerning Electronic Filing for Information Disclosed by Listed Companies, 1998; Circular on Further Strengthening the Regulation of Information Disclosure by ST and PT Companies, 2000; Circular Concerning Issues Relevant to Interim Reports of Listed Companies that Intend to Issues New Shares, 2001; and Circular Concerning the Submission of Ad Hoc Announcements and Relevant Appendices by Listed Companies to Local Offices of the China Securities Regulatory Commission for Record Filing, 2003

Copyright Euromoney Institutional Investor PLC Apr 2007

By Grant Chen and Zhengyi Zhang

grant.chen@llinkslaw.com; zhengyi.zhang@llinkslaw.com

On January 30 2007, the China Securities Regulatory Commission (CSRC) published the Measures for Administrating the Information Disclosure of Listed Companies (Measures), implementing the new Company Law and Securities Law's stricter new requirements on information disclosure. The Measures replaced the Detailed Rules for Complementing the Information Disclosure by Companies Offering Stocks Publicly, which had been in use for almost 14 years, and are regarded as a significant step forward in improving the quality of information disclosures by PRC listed companies.

Who is Responsible for Disclosures?

In practice, the listed companies need the cooperation of other parties to complete information disclosure acts. The Measures require disclosure of information by personnel at all levels of listed companies. Firstly, listed companies, their issuers, directors, supervisors and senior managers are responsible for ensuring the authenticity, accuracy, completeness, and timeliness of the information disclosed. Shareholders, actual controllers and purchasers of listed companies are responsible for giving companies timely and accurate notice regarding any changes in the information subject to disclosure, and they are also responsible for assisting companies with making appropriate disclosures.

The Measures also define the information disclosure responsibilities of other market participants. For example, sponsors of security issues and securities service institutions are required to make special disclosure, including disclosure of their professional opinions. Such individuals are further required to guarantee the authenticity, accuracy and completeness of their disclosures, according to the market's operating rules and industry norms. The Measures further prohibit illegal acquisition, provision or transmission of listed companies' inside information by any institution or individual, and set forth rules for media reporting of information on listed companies.

What Information Must be Disclosed?

Under the Measures, listed companies must make timely disclosures of specified information, such as their prospectus and periodic reports, both of which must contain all information that might materially affect investors' decisions, and listing announcements. The Measures also set forth a timetable for these disclosures, based upon relevant laws and regulations.

In addition to the above disclosures, listed companies are also required to report any major event that may significantly impact the company's share price and is not yet known to investors. Companies must explain causes of such events, current status, and possible legal consequences. The Measures enumerate 20 types of events and the circumstances which would trigger such disclosure obligations.

In the Measures, the CSRC emphasized the obligations of listed companies and related parties to focus on abnormal dealings and media reports affecting their own securities and their derivatives. This emphasis is intended to solve the problems caused by directors failing to exercise due diligence in investigating their own companies. According to the Measures, in the case of any abnormal dealings, or if media reports on securities or securities derivatives may significantly impact trading, listed companies must make timely inquiries to learn all relevant facts. Shareholders and actual controllers are also obligated to file timely and accurate written reports with listed companies, and to help companies make timely and accurate announcements.

The Rules for the Administration of Company Shares Held by Directors, Supervisors and Senior Managers of Listed Companies, and Shares' Changes (Rules) issued by the CSRC on April 5 2007, also affect companies' information disclosure obligations. Under these rules, the directors, supervisors, and senior managers of a listed company must give the company notice of any change in their shareholdings and assist the company in making disclosures within two business days after such changes.

Management of Information Disclosure

The Measures also contain a new chapter on Management of Information Disclosure Affairs, a topic that was not mentioned in any prior information disclosure regulations. This new chapter requires listed companies to develop rules on managing information disclosure affairs, including rules defining in detail the information disclosure responsibilities of directors, supervisors, senior managers, and their various departments. The Measures require each listed company's board of directors to adopt specific rules for managing information disclosures. These rules will then be filed with the stock exchange and the local CSRC office at the company's place of registration.

On April 4 2007, the Shanghai Stock Exchange (SSE) issued the Guidelines for Management System of SSE Listed Companies' Information Disclosure (Guidelines) to implement the Measures, and particularly the new chapter on management of information disclosures.

The Measures for Administrating the Information Disclosure of Listed Companies, together with the Rules for the Administration of Company Shares Held by Directors, Supervisors and Senior Managers of Listed Companies, and Shares' Changes, are a good start to establishing new standards of information disclosure for PRC listed companies. According to officials, CSRC plans to further improve supervision of information disclosures by listed companies, and to issue more detailed implementing regulations to make the Measures more operational and practical.

Copyright Euromoney Institutional Investor PLC Apr 2007

China's new Merger Control Guidelines detail what information is required from a notifying party in its submission to the Antitrust Investigation Office. They also clarify a number of key procedural issues regarding the notifying party, the time for filing and the time limit for the reviewing process. Michael Han and Jiang Tao provide a summary of the main provisions of the new guidelines, together with an analysis of how they will impact foreign companies' future merger filings in China.

By Michael Han, Freshfields Bruckhaus Deringer, and Jiang Tao, the Antitrust Investigation Office of the Ministry of Commerce of the People's Republic of China*

On March 8 2007, the Antitrust Investigation Office of the Ministry of Commerce of the People's Republic of China (the AIO) issued the Guidelines for Antitrust Filing for Merger and Acquisition of Domestic Enterprises by Foreign Investors (the New Guidelines). The New Guidelines were issued in connection with the implementation of the merger control regime under the Regulations on Merger with and Acquisition of Domestic Enterprises by Foreign Investors, which came into force on September 8 2006 (the 2006 M&A Regulations). The New Guidelines replaced the earlier guidelines of April 20 2006 (the 2006 Guidelines), which contain a short checklist of materials required for merger filings.

BACKGROUND

China introduced its first merger control regime as part of the Provisional Regulations on Merger with and Acquisition of Domestic Enterprises by Foreign Investors in 2003 (the 2003 Provisional M&A Regulations). The 2003 Provisional M&A Regulations were replaced by the 2006 M&A Regulations. However, the merger control provisions under the 2003 Provisional M&A Regulations remain unchanged. China is still in the process of reviewing the draft Anti-Monopoly Law, the first comprehensive competition law. It is expected that the provisions relating to merger control contained in the 2006 M&A Regulations will be superceded by the Anti-Monopoly Law after its adoption.

It has been reported that hundreds of merger filings have been reviewed by the AIO and the State Administration of Industry and Commerce. However, foreign companies that have been subject to the merger filing requirements under the 2006 M&A Regulations still do not have much information on how to satisfy the information needs and procedural requirements of the Chinese competition authorities engaged in merger review, given that the 2006 M&A Regulations are silent on the specific procedures and filing materials, while the 2006 Guidelines also provide few details on the filing materials.

CONTENTS OF THE NEW GUIDELINES

The filing party

Under the New Guidelines, the filing party is the acquirer in principle. It may also be the acquired party depending on the specific circumstances of a transaction. However, the New Guidelines fail to clarify in which situations the acquired party has the obligation to make a filing.

Time for filing

The New Guidelines provide that the filing shall be made before the plan for the M&A transaction is publicly announced, for both onshore and offshore transactions. However, for offshore transactions, the filing may also be made at the same time that the transaction is filed with the competent authority of the country where the transaction takes place.

Filing materials

The New Guidelines contain the following extensive list of filing materials.

The filing application letter.

The filing party's identity certificate or registration certificate. When foreign investors acquire PRC domestic enterprises, the above documents need to be notarised and authenticated.

Power of attorney and letter of reference issued to the person handling the filing.

Basic information on the parties to the transaction such as the name, place of registration, scope of business, form, worldwide and PRC turnovers in the most recent fiscal year, the size of the company, its position in the industry and the company history, as well as other relevant information.

A name list and brief introduction to the affiliates of each party.

The approval certificates and business licenses of the entities of each party registered in China.

General information regarding the transaction, including: the nature and method of the transaction; the subject matter; the amount; the process of the transaction; the estimated completion date; the control and affiliation relationship between relevant companies after completion of the transaction (which can be shown in a chart if necessary); the industry or main products related to the transaction; the motive, and the objective or analysis of the economic rationale for the transaction.

Definition of relevant markets, including the product market and geographic market.

The turnover and market shares of each party in relevant markets in the most recent two fiscal years.

Names of the top five competitors in the relevant markets. The parties are encouraged to provide information on the market shares or positions of their competitors together with the names of relevant contact persons and other contact details.

Information on the supply and demand structure of the relevant markets, including a list of major upstream and downstream enterprises and related contact information.

Information on the competition status of the relevant markets, including market entry analysis, horizontal or vertical cooperation agreements, and major events of market entry or exit.

The merger and acquisition agreement.

Each party's audited financial statements for the previous fiscal year.

Information on industrial associations in the relevant industries.

Information on merger filings in other jurisdictions.

Other information to be disclosed to the AIO.

Merger review exemption

An exemption from merger review is available under Article 54 of the 2006 M&A Regulations for transactions that either:

improve conditions for fair competition in the market;

restructure any loss-making enterprises while guaranteeing employment;

bring in advanced technology and management talent and improve the competitiveness of domestic enterprises in the international market; or

improve the environment.

The New Guidelines provide that if the filing party believes the transaction should be exempted from merger review on any of the above grounds, it shall submit relevant materials to the Ministry of Commerce (MOFCOM) to apply for such exemption. However, the New Guidelines do not specify what supporting materials the filing party needs to provide. It is also unclear whether the notifying party would need to provide the detailed market data and analysis described above in cases where the notifying party already believes that the transaction is qualified for exemption. AIO officials have indicated that the AIO has not yet granted filing exemptions for any transactions.

Time limit for review

Under the New Guidelines, the initial review period will be 30 working days (about six weeks), commencing from the receipt of the complete filing materials. Upon expiration of the 30-day period, if the filing party has not received any notice of further review or request for additional information, the transactions may be deemed cleared. If the filing party receives such a notice, the review period shall be extended to the 90th working day after the initial receipt of the filing materials and the filing party shall provide further information as required by the AIO.

Pre-filing consultations

The New Guidelines contemplate a pre-filing consultation process under which the filing party may contact the AIO on an informal basis to discuss such matters as the necessity of filing and the definition of relevant markets prior to the formal filing. The notifying party may also provide a draft filing to the AIO as a basis for consultations and discussions.

IMPACT OF THE NEW GUIDELINES

Pre-filing consultation is highly recommended to reduce the burden of compliance in connection with the documentation requirement under the New Guidelines. The 2006 Guidelines included a short checklist of documentation to be provided by the filing party. The documentation required was relatively limited and the filing party had the flexibility of determining the level of detail of the information provided in the filing.

The New Guidelines contain a much longer and detailed list of filing materials. For example, in addition to such prior requirements as a description of the relevant market, turnover and market share of each party in the relevant market, the New Guidelines require extensive information on the market entry barriers, the supply and demand structure, intellectual property licensing, and other horizontal and vertical agreements, as well as other relevant information. Unlike in the EU, there is not yet any short-form notification available for transactions that clearly do not create competition issues in China 1.

A large number of offshore transactions that will meet the filing thresholds will have a very limited nexus with the PRC. This is due to the fact that the filing thresholds contained in the 2006 M&A Regulations can apply to transactions where either party has a substantial PRC presence (through assets, turnover or ownership interests in foreign invested enterprises in the PRC). Moreover, unlike the merger control rules in the EU, the 2006 M&A Regulations do not provide for any control threshold and a filing will be required for acquisitions of a minority interest as long as either the acquiring company or the target meets the filing thresholds.

As a result of the low filing thresholds, many offshore transactions which have little or no competitive impact in the PRC will be subject to the filing requirements under the 2006 M&A Regulations. In the past, many foreign companies would file such transactions with the AIO despite the lack of sanctions for failure to make a filing under the 2006 M&A Regulations. The main reason was that foreign companies with a significant PRC presence saw the benefit of building up a good compliance record with the Chinese competition authority. Another reason was that the burden of compliance was relatively low. For most offshore transactions that would have an insignificant impact on China, the filing party would have only needed to provide sufficient information to clarify that there was no significant potential for competitive impact in the PRC.

The detailed information requirement contemplated by the New Guidelines might increase the burden of compliance for the filing party. Such burden could potentially discourage foreign companies from complying with the filing requirement in the first place, especially in the case of offshore transactions that create no real competition issues in the PRC. This is obviously not the intention of the New Guidelines. Actually, the New Guidelines reflect a certain degree of flexibility and provide some discretion for the parties to limit the materials submitted on a case-by-case basis. For example, parties are allowed to provide explanations as to why a relevant market definition is unnecessary. Similarly, certain information requirements are only listed as recommendations, instead of mandatory obligations, aimed at promoting the efficiency of the review process. These provisions may be liberally construed to permit parties to self-determine the items necessary to make the filing.

AIO officials explained that the New Guidelines are not intended to render the review of the filing more restrictive and cumbersome. AIO officials have also indicated that they will be flexible with the documentation requirement for the filing, taking into account the specific circumstances of each individual transaction. In particular, the AIO will permit parties to self-determine which items must be included to make a notification filing complete. Additional information will only be required for a limited number of transactions that seem likely to present significant competition issues. For foreign companies with a substantial presence in the PRC, it is still advisable to comply with the filing requirements to set a good compliance record with the Chinese competition authority. However, to minimize the compliance burden, it is highly recommended that foreign companies take advantage of the pre-filing consultation process to apply for waiver of certain documentation by the AIO. 2

Timing for filing offshore transactions

The New Guidelines provide that for an offshore transaction, the filing must be made either before "the plan of merger or acquisition is announced or at the same time as the transaction is filed with the competent authority of the country where the proposed transaction takes place." Such a provision could lead to certain practical difficulties for the filing party even if it tries to comply with the deadline for filing.

First, key terms such as "the plan of merger or acquisition" and "the country where the proposed transaction takes place" are left undefined. It is unclear what document constitutes the "plan of merger or acquisition". For example, if a company issued a press release to announce its intention to make a tender offer of shares in another company, would such press release constitute the "plan of merger or acquisition"? Similarly, it is unclear what will be deemed "the country where the proposed transaction takes place", particularly for offshore transactions involving closings in various countries and requiring multi-jurisdiction filings.

Secondly, the filing party (often the acquiring company) will find it difficult to file a transaction prior to the pubic announcement because it will not be able to collect information from the target company that would be necessary to prepare the filing before entering into a definitive agreement with the target company. Even if it had obtained certain information of the target company in connection with the negotiation of the proposed transaction, such information would often be subject to the confidentiality requirement.

Finally, the AIO would consider it a waste of their limited resources if a filing is made at the time of the public announcement but before the execution of a definitive agreement and the parties ultimately fail to reach an agreement.

It is recommended that the AIO should allow the parties to have certain discretion with respect to the timing of filing. 3 As long as the filing is made before closing, the AIO will have an opportunity to review and block the proposed transaction, especially given that the filing has a suspensory effect on the closing of the proposed transaction. As such, the AIO should not be too concerned with the timing of the filing. 4 For the filing party, given the practical difficulties of complying with the deadline for filing as specified in the New Guidelines, it again should take advantage of the pre-filing consultation process by approaching the AIO at an early stage of the negotiation of the proposed transaction to carefully plan the timing of the filing.

Early Termination of Waiting Periods

Under the New Guidelines, the initial waiting period is specified as 30 working days. For transactions which do not give rise to any PRC competition issues and do not require additional review or information beyond that contained in the initial filing, such a time period seems too long and may unnecessarily delay closing. Although the New Guidelines do not explicitly allow early termination of such a 30-day waiting period, there is nothing in the 2006 M&A Rules or the New Guidelines which will prevent the parties from requesting an early termination of the waiting period by the AIO. In order to apply for an early termination of the waiting period, it is advisable for the filing party to use the pre-filing consultation process to provide all the necessary information regarding the proposed transaction to the AIO and make sure that the information contained in the filing is complete. It is also advisable for the parties to submit the draft filing to the AIO for comments before the formal submission. If the AIO is given an opportunity to review the proposed transaction at an early stage, such as anytime before the commencement of the 30-day countdown, it might, at its own discretion, be willing to consider the parties' request for an early termination.

Conclusion

These New Guidelines represent a positive effort by the Chinese competition authority to provide foreign companies with clearer guidance on the implementation of the existing merger control rules. Clarification of the procedures and information required for merger filings will allow for more effective implementation and compliance with the merger control rules.

Similar to the EU Form CO and the US HSR Form, the New Guidelines mainly provide a standard notification form to clarify what information is required for a filing. However, they fail to provide the parties with any guidance on the substance of the competitive analysis that the Chinese competition authority applies to notified transactions. Additional guidelines in this regard need to be issued by the authority urgently.

*Michael Han is an associate of Freshfields Bruckhaus Deringer. Jiang Tao is an official of the Antitrust Investigation Office of the Ministry of Commerce of the People's Republic of China. The views expressed here are their own, not those of the Antitrust Investigation Office, or any law firm.

Endnotes

1. AIO officials indicated that the AIO may allow the use of short-form filing after the adoption of the AML.

2. The New Guidelines specifically provide that "If the filing party is unable to provide any of the required documentation or, based on the specific situation, thinks that it is not necessary to furnish any of the required documentation, it shall raise this in the pre-filing consultation filing or explain the reasons in the filing materials. Subject to the consent of the AIO, all or part of such documentation may be waived."

3. Under the Recommended Practices for Merger Notification Procedures of the International Competition Network, "Parties should be permitted to notify proposed mergers upon certification of a good faith intent to consummate the proposed transaction".

4. AIO officials have informally advised that despite the ambiguity of the New Guidelines, AIO intends to require the parties to submit the filing at the time when the parties enter into a definitive agreement for the proposed transaction.

Copyright Euromoney Institutional Investor PLC Jul 2007

Transfer of shares by directors, supervisors and senior management personnel curbed.

Issued: April 5 2007

Effective: As of date of issuance

Applicability: The companies listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange (the Stock Exchanges) and their directors, supervisors and senior management personnel shall comply with these Rules (Article 2).

Main Contents: The company's shares held by directors, supervisors and senior management personnel of a listed company refer to all the company's shares registered under their names. In the case of margin trading and short sale of securities, those shares of the company recorded on the credit account shall also be included (Article 3). The company's shares held by directors, supervisors and senior management personnel of a listed company may not be transferred under the following circumstances:

(1) within one year from the date on which the company's shares were listed for trading;

(2) within six months from the date on which the director, supervisor or member of senior management personnel left the company;

(3) within the time period in which the director, supervisor or member of senior management personnel has promised to refrain from transferring the shares; or

(4) other circumstances as specified in laws or regulations or by the China Securities Regulatory Commission or the Stock Exchanges (Article 4).

During the term of service of a director, supervisor or member of senior management personnel of a listed company, the number of shares transferred by him/her by means of central price bidding, block trade and transfer by agreement per year may not exceed 25% of the total number of the company's shares that he/she holds, except where the change in shareholding is resulted from judicial enforcement, inheritance, bequest or division of property according to law (Article 5).

The directors, supervisors and senior management personnel of listed companies shall comply with Article 47 of the Securities Law. Where a director, supervisor and member of senior management personnel, in violation of the said article, sells the company's shares that he/she holds within six months of purchase or buys the company's shares within six months after selling them, the earnings derived therefrom shall belong to the listed company. The board of directors of the company shall retrieve the earnings and disclose the relevant details in a timely manner (Article 12).

A director, supervisor or a member of senior management personnel of a listed company may not purchase or sell the company's shares he/she holds during the following period:

(1) within 30 days prior to the announcement of a periodic report of the company;

(2) within 10 days prior to the forecasst of business results or update of business results;

(3) from the date of occurrence of a major event that may have a major impact on the trading price of the company's shares, or from the process of decision making thereof, to two trading days after the disclosure thereof in accordance with the law; or

(4) other periods as specified by the Stock Exchanges (Article 13).

The purchase and sale of shares by shareholders holding 5% or more of the listed company's shares shall be handled with reference to Article 12 of these Rules (Article 17).

Related Legislation: PRC Company Law (Amended), Oct 27 2005, CLP 2005 No.10 p.21; and PRC Securities Law (Amended), Oct 27 2005, CLP 2006 No.1 p.31

Copyright Euromoney Institutional Investor PLC Jul 2007

By Christophe Han and Patrick Chen

christophe.han@llinkslaw.com; patrick.chen@llinkslaw.com

Along with the reform of the shareholder structure of listed companies, China's capital market has entered into an era of full circulation, in which all shares in the listed company that completed the reform are tradable shares. The reform encourages more enterprises to maximize shareholder profit with an overall listing, which resolves problems with connected transactions and intra-trade competition, and infuses listed companies with new growth momentum.

An overall listing refers to the practice of a company absorbing other companies within the same group, or its assets, with the goal of achieving an overall listing for the entire group. Generally speaking, an overall listing can be achieved through the following methods.

Method I: Share Exchange, Absorption, and IPO of the Parent Company

Where the parent company and the subsidiary belong to the same group, the parent company uses its entire IPO shares as absorption consideration in exchange for all the shares that are not exercised cash options of the subsidiary (a listed company), excluding shares already owned by the parent company. After the share exchange absorption, the subsidiary cancels its legal entity registration, and the subsidiary's stock (with the exception of stock held by the parent company) is converted into shares for this offering. Upon the successful IPO of the parent company, the entire group achieves overall listing.

Method II: Share Exchange, Absorption, Back-door Listing and Dissolution of the Parent Company

The listed subsidiary absorbs the parent company by share exchange. All shareholders of the parent company convert their capital contribution into shares of the subsidiary. The parent company's assets, liabilities, and rights are all taken over by the subsidiary and its legal entity is deregistered. Once the subsidiary completes the absorption of the parent company, the entire group completes the overall listing.

Method III: Reverse Buyout of the Parent Company's Assets

The listed subsidiary uses a combination of public offering and the directional increase of state-owned legal entity stock to issue new shares to raise funds for the buyout of the parent company's primary business assets, and achieves overall listing of the group.

The overall listing of group enterprises faces multifaceted legal challenges due to the following issues:

I. Major Asset Restructuring

The overall listing process may involve the issue of major asset restructuring. Listed companies should follow the CSRC's Notice on Several Issues Concerning Major Purchases, Sales and Exchanges of Assets by Listed Companies when implementing major asset restructuring, and provide relevant documents including the Major Purchases, Sales and Exchanges of Assets Report to the CSRC for examination and approval.

II. Alteration of Share Rights and Controlling Power

The overall listing process will definitely involve changes in share rights of the listed company with possible alteration of controlling power. Listed companies should present relevant reports and disclose information according to the Measures for the Administration of the Takeover of Listed Companies. Prior to the change of controlling power taking effect, the controller of the company should make reparations to the damages incurred by the listed company caused by the controller, repay all of its debt to the listed company, and absolve all the guarantees made by the listed company to the controller.

III. Tender Offer

In the overall listing process, if the acquiring party procures over 30% of the total share equity of the listed company or the acquiring party who holds over 30% of the total shares of the listed company further increases its shareholding ratio in the company, then the listed company and the acquirer should follow the Measures for the Administration of the Takeover of Listed Companies in their implementation of a tender offer and relevant procedures, or apply for exemption from a tender offer.

IV. Pricing

The share exchange, absorption, and asset buyout all involve pricing of the relevant assets and stock in the overall listing process. Generally, the pricing of the exchanged shares is determined by the corresponding market price. If it is a listed company, then the stock price prior to the announcement of the plan shall be used as the base price. If it involves an unlisted company, then the P/E ratio and P/B ratio of similar companies in the same trade may be taken into consideration. The pricing of the asset to be acquired is generally determined by the appraised net asset value.

V. Cash Options

During the overall listing process, when the parent company and subsidiary implements merger by absorption, one party of the absorption usually will provide cash options to outstanding share holders through a third party to buyout outstanding shares. These cash options are similar to the appraisal right of dissenters implemented by Company Law, by protecting the interest of minor shareholders when the company is involved in major mergers. However, cash options do not involve the company's buyback of its shares, involving instead a third party for the buyout. This avoids capital pressure from the surviving company's buyback, and also prevents the surviving company from canceling shares and registered capital.

Copyright Euromoney Institutional Investor PLC Jul 2007

Greater regulatory oversight of foreign acquisitions of domestic firms has been written into the draft anti-monopoly law, according to China Daily. State media have warned that foreigners seeking to acquire Chinese firms will face tougher national security checks.

"Foreign mergers and acquisitions of domestic companies or foreign capital invested in domestic companies in other forms should be examined... if the cases are related to national security," the newspaper quoted the draft law as saying. The draft law has been submitted to top legislators for a second reading.

According to a Pricewaterhouse Coopers report on July 17 2007, merger and acquisition (M&A) activity has continued to grow with the buoyant equity market, and domestic transaction volumes have increased rapidly. However, the source of this activity appears to be increasingly domestic.

Local fears of foreign monopolies in the past had in part been generated by the growth in M&A activity involving foreign investors, and yet foreign interest seems to have diverged from the steadily-climbing local demand due in part to high prices, according to PwC. Selling prices are often pegged to A-share valuations that are high multiples of earnings, rather than to the underlying value. Some Chinese companies will pursue an initial public offering (IPO) at the same time as negotiating a buyout, in order to have a fallback position, which also allows the sellers to ask for more.

"There is still a huge appetite for deals in China, and that appetite is growing," says David Brown, a PwC transactions partner in Hong Kong. "However, with the recovery of the stock markets since April 2006, valuation expectations have inflated, and many deals are being derailed by valuation gaps." Brown notes that the perception in China of foreigners having "deeper pockets" might also contribute to unequal pricing in such deals.

Reports gathered by PwC say that announced deal volumes increased by 20% to 808 inbound deals in the first six months of 2007, up from 674 in the same period last year. Nearly all of this increase is attributed to domestic transactions. Disclosed deal value, meanwhile, fell slightly to US$27.6 billion in the first six months, compared to US$29.4 billion last year. Such figures can be difficult to interpret, however, as they are easily affected by large one-off transactions, such as sales of assets by state-owned groups to listed parents and backdoor listings. Also worth noting is the government's encouragement of its flagship industries to invest outward, to secure natural resources through outbound investment.

Thus, M&A numbers have not grown as much as expected, but should grow exponentially in future, according to PwC. "They haven't grown as strongly as we thought that they would," says Brown, "[but we] generally expect those numbers to get a lot bigger - actually, a quantum leap bigger - than what they are now"

Copyright Euromoney Institutional Investor PLC Mar 2007

By Wayne Chen and James Weng

wayne.chen@llinkslaw.com; james.weng@llinkslaw.com

Since Groupe SEB's strategic investment in SUPOR, the first announced takeover of a PRC listed company by foreign investors following enactment of a series of new M&A regulations in 2006, strategic investments in listed companies by foreign investors continue to make news headlines.

The new M&A regulations, particularly the Measures for the Administration of the Takeover of Listed Companies ([Chinese characters ommitted], the Takeover Measures) implemented on September 1 2006, and the Measures for Strategic Investment in Listed Companies by Foreign Investors ([Chinese characters ommitted], the Strategic Investment Measures), implemented on January 31 2006, have had a significant impact on foreign investors' M&A activities in China. Currently, such strategic investment may involve three acquisition methods: subscribing for new shares of the target listed company, purchasing shares from the target's parent company, and making a partial or overall tender offer for other A-shares to achieve the proposed shareholding ratio.

Private Placements

Under the Strategic Investment Measures, foreign investors may make strategic investments by subscribing for new shares issued by a listed company. Such a private placement must first be approved by the listed company's board of directors and general shareholders' meeting. The company must then obtain tentative approval from the Ministry of Commerce (MOFCOM) before applying to the China Securities Regulatory Commission (the CSRC) for final approval of the private placement.

When structuring a private placement, timing and pricing mechanisms are critical. The placement's schedule must be carefully planned in advance. Usually it takes two or more weeks to obtain approvals from both the board of directors and the general shareholders' meeting. In practice, MOFCOM's approval will normally take more than three months, although the exact length of time may vary. If the acquisition triggers anti-trust review or relates to national economic security concerns, approval is likely to take much longer. The CSRC's review, which will not start until the placement has obtained MOFCOM's approval, will add several more months to the process. As a result, it usually takes half a year or more to complete a private placement acquisition.

Designing a pricing mechanism is equally important. According to the Measures for the Administration of Securities Offerings by Listed Companies ([Chinese characters ommitted]) promulgated on May 6 2006, the offering price for private placements shall not be less than 90% of the average price of the shares of the target listed company during the 20 trading dates prior to the pricing reference date. However, the pricing reference date is not clearly defined in any of the CSRC's rules. In practice, the pricing reference date is often the date when the listed company announces the approval of the private placement by its board of directors, be the date when the relevant board meeting is convened, or the date when the general shareholders' meeting approves the placement.

This uncertainty leads to a great deal of flexibility in pricing private placements. Normally, the earlier the pricing reference date, the lower the price, creating room for huge profits by financial investors and inside traders. These unreasonable profits, in turn, have drawn the CSRC's attention. It is expected that the CSRC will soon develop new policies to define the pricing reference date and distinguish financial investors from strategic investors. In the case of investment by financial investors, the price reference date might then be postponed to minimize such unfair profits.

Share Transfers by Agreement

The regulatory framework for share transfers by agreement is slightly different from that governing private placements. Like private placements, transfers of outstanding shares to foreign investors must be approved by resolutions of both the board of directors and the general shareholders' meeting of the listed company. Unlike private placements, transfers by agreement usually do not need the CSRC's approval and are generally able to go forward with MOFCOM's approval alone. Notwithstanding this, if a transfer would give de facto control of a listed company to a foreign investor, an acquisition report and related documents must be submitted to the CSRC for approval.

Under the Takeover Measures, investors must pay attention to the post-transfer share ratio to avoid triggering an unnecessary tender offer. Investors should also be aware of the new disclosure obligations.

Tender Offers

The Takeover Measures also made changes in the regulation of tender offers. With the introduction of partial tender offers, investors may acquire shares through listed trades on a stock exchange or purchase shares by private agreement, or initiate a tender offer. However, once a foreign investor holds 30% of the target company's equity, it can only acquire additional shares through a tender offer, unless the CSRC grants an exemption.

The Strategic Investment Measures do not indicate whether foreign investors can acquire shares by tender offers. Although the Strategic Investment Measures provide that investors may obtain "A" shares through other methods specified in China's laws and regulations, it remains unclear whether such "other methods" include acquisition by tender offers and whether a foreign investor could make an initiative tender offer. These questions need to be clarified by further interpretation of the CSRC and MOFCOM.

Copyright Euromoney Institutional Investor PLC Jul 2007

China's surge in initial public offerings has been met with an extremely enthusiastic response from both local and foreign investors. The increase in activity has also been warmly welcomed by professional service providers such as law firms, which have benefited immensely from the booming market. This month, China Law&Practice looks at some of the most successful listings of the past year and the legal advisers that worked on them.

By Brandon Kirk of China Law & Practice

China has seen a huge surge in the number and profitability of initial public offerings [IPOs] in the past year, while the local stock markets have steadily risen to unprecedented levels. The rapid growth has benefited a wide spectrum of investors, from investment banks and high net-worth individuals to housewives and taxi drivers. A record number of stock-trading accounts have been opened in the mainland, as households empty their savings accounts into capital markets, and some even quit their jobs to be full-time speculators. But many point to recent fluctuations as warning signs of instability, and overvalued stocks have many investors worried, while high prices carry over to prospective private buyouts. Even "Superman" investor Li Ka-Shing, Hong Kong's richest tycoon and keen market analyst, has expressed concern about the mainland stock market.

Despite a rapid growth in the quantity of stocks available in the local markets, PRC investors have so far been limited to buying shares domestically, which in turn pushes the market to astronomically high levels. These investors, who are often less sophisticated and are largely speculative, complain that they don't have enough quality stocks to choose from - local companies often lack sufficient transparency, and opportunities to invest in Hong Kong and overseas markets are just beginning to be realized, as can be seen by looking at market and regulatory developments.

REGULATORY DEVELOPMENTS

The response from market regulators has been varied - attempts to cool the overheated equity market have been balanced by measures to build investor confidence and stabilize stock prices. One way of handling this has been to provide more supply of quality stocks to satisfy the massive surge in demand. Discreet actions taken by the China Securities Regulatory Commission [CSRC], which is discussed in detail in this feature, have served to encourage more listings in Shanghai, which some say may be related to an attempt to bring quality to the bourse and to help avoid inflated prices. At the same time, though, this has made Hong Kong listings more difficult, according to many legal practitioners.

On May 30 2007, China's stock index took a tumble of around 20% upon the announcement that stamp duty on stock transactions would be tripled [Circular on Revision of the Stamp Duty Rate for Securities (Stock) Transactions]. The market rebounded soon after, but the event demonstrated just how jittery stock investors can be. Even more recently, eight branches of China's biggest banks [including those with recent IPOs] were sanctioned by the CSRC for having been found to have made loans to two state-owned companies that used the money to buy stock and real estate. At the same time, borrowing money to invest in the stock market remains common among individual investors.

Nevertheless, retail investor confidence continues to increase, with millions of new accounts opened every month - but with so many new and less-educated investors, there is worry that any serious change in sentiments could bring the market down rapidly.

Another measure taken by the government to cool the market has been to raise interest rates, which it did in late July 2007 for the third time since March after announcing an 11.9% growth in GDP for the second quarter. Only time will tell if the economy outpaced its caretakers, but from the look of things, public offerings haven't been suffering much from lack of attention.

IPO ROUNDUP

If there was one offering that has caught the attention of investors worldwide, it was certainly that of Industrial & Commercial Bank of China [ICBC], which raked in US$19.1 billion in funds in October 2006. The retail tranche was more than 70 times oversubscribed and 30 times oversubscribed in the global institutional tranche. The listing broke the previous global record of US$18.4 billion raised by NTT DoCoMo in 1998.

Herbert Smith was Hong Kong counsel to the issuer in the ICBC dual listing on the Hong Kong and Shanghai exchanges, while Davis Polk & Wardwell advised on US law and King & Wood advised on PRC law. Freshfields Bruckhaus Deringer was counsel to the underwriters, while Shearman & Sterling advised the underwriters on US law and Haiwen & Partners advised the underwriters on PRC law.

ICBC was the first simultaneous A- plus H-share listing, and because listings rules in Hong Kong are entirely different from those in China, especially regarding disclosure requirements, advisers needed to meet with the CSRC and Hong Kong Stock Exchange [HKEx] to discuss when they could be allowed to disclose the project to potential investors.

For the second-ranked A- plus H-share listing of China CITIC Bank, Skadden, Arps, Slate, Meagher & Flom acted as Hong Kong and U.S. counsel to the issuer, and helped in terms of standard restructuring and coordinating with the underwriter, while King & Wood acted as PRC counsel and assisted with the Shanghai listing. Freshfields Bruckhaus Deringer and Commerce & Finance Law Offices advised the underwriters.

The listing was most notable in terms of complexity, as the CITIC-majority-owned Hong Kong subsidiary - CITIC Ka-Wah - had developed business in both places when it went public in Hong Kong, and so non-compete arrangements had to be made within the group. In addition to dealing with the complex ownership structure, the advisers needed to be sure that both banks would be able to operate in their respective markets without affecting each other's business. "It took a lot of negotiation between the two sister banks, coordinated by the controlling shareholder, which was CITIC," said Skadden partner Gregory Miao.

With dual listings, the two offerings are interlocked; one cannot go ahead without the other, and so all schedules need to be coordinated carefully. "The interesting thing is that in the past, there have been dual listings between HK and the US," said Miao, noting that A- plus H-share listings introduce a new set of challenges.

Such listings normally involve two sets of lawyers working on four sets of issues - but for CITIC, these numbers were effectively doubled. Each ADR, listed as a single share on the NYSE, consisted of 40 Hong Kong shares bundled together, and were completely fungible [readily tradable in the US market], while A- and H-shares were partitioned at different prices, despite being common shares of a single company, since the Renminbi is not a freely tradable currency as the Hong Kong dollar is.

Another lender, the mid-sized Fujian provincial government-invested Industrial Bank, listed on the Shanghai exchange alone, and still managed to raise over US$2 billion in January 2007. King & Wood advised the issuer, while Grandall Legal Group of Shanghai advised the underwriters.

While most investors would agree that stocks on mainland markets are overvalued, Lovells partner Jamie Barr says that overall, the market remains extremely robust. Deals that his firm has worked on, such as China Molybdenum and Country Garden Holdings, along with other deals utilizing US rule 144a, have allowed qualified institutional buyers [QIBs] in the United States buy into key Chinese stocks, and interest is as strong as ever.

China Molybdenum, or "Molly" as it was affectionately known to those working on it, was essentially a state-owned enterprise selling off assets, with Llinks Law Offices and Sidley Austin advising the issuer. As with many such local listings, initiative to go public came from the local level, and eventually made it to the level of China's securities regulator, the CSRC, which deliberated and approved the deal.

Country Garden raised about US$1.6 billion in its offering, which is the largest IPO yet by a mainland real estate developer. Its team of advisers included Woo Kwan Lee & Lo, Hong Kong firm Iu Lai & Li, Simpson Thacher & Bartlett, PRC firm Jingtian & Gongcheng, and offshore firm Conyers Dill & Pearman. Shares were 255 times over-subscribed, in what was considered a very successful listing.

According to Woo Kwan Lee & Lo partner Eddie Lee, the unusual thing about the Country Garden listing was the amount of connected transactions - there were many waivers being applied for, and competition was intense - while shareholders put up a great deal of land on the listing vehicle. Lee also notes that another unique aspect was that one large piece of land the company owned listed a charity as its beneficiary.

Freshfields Bruckhaus Deringer and Jia Yuan Law Firm advised China Communications Construction on its offering that sold 3.5 billion H-shares, or 24.5% of its enlarged share capital. Simmons & Simmons and Jingtian & Gongcheng advised the issuers. The retail portion was 220 times over-subscribed, and the institutional tranche received over 1,000 orders for US$160 billion in aggregate.

Comments Freshfields partner Ng Kay Ian: "This IPO had a lot of challenges including being the first state-owned enterprise at the national level to have the entire business of the group listed together. It was also done at record speed, bearing in mind China Communications Construction was formed less than a year ago following the merger of two infrastructure construction groups in China."

Sichuan Xinhua-Winshare was one of a number of listings by Chinese companies that attracted foreign investment under US Regulation S, with a HK$2.1 billion global offering and listing on the main board of the Hong Kong Stock Exchange. The state-owned publishing and distribution company that operates the largest retail bookstore in Sichuan province, is the first Chinese bookstore operator to list in Hong Kong. Mallesons Stephen Jaques acted as Hong Kong counsel, and Jun He Law Offices acted as PRC counsel on the offering, while Lovells advised on Hong Kong law and Jia Yuan Law Firm advised on PRC law for the underwriters, sponsor and global coordinator. "It's the first publisher to come to market - it's fairly groundbreaking to get CSRC consent," says Jamie Barr of Lovells.

Herbert Smith was particularly busy this past year acting for issuers as well as underwriters, including Goldman Sachs in the Shimao Property Holdings IPO. According to partner Michael Fosh, "What made that truly different [was] the government attempts to cool the property market," which inhibited the listing process and affected pre-listing business, he says.

Freshfields Bruckhaus Deringer also had a hand in the listing, having advised the issuer. Beijing-based partner Chris Wong said that Shimao "was launched against a background of choppy capital market conditions and a raft of Chinese government policies and regulations aimed at curbing real estate speculation". Not the most ideal listing environment to be sure, but the results speak for themselves - total proceeds from the IPO were around US$480 million, making it the largest-ever IPO by a Chinese real estate developer.

OFFSHORE PARADISE

A quick flip through the announcements section of a Chinese newspaper will tell you that more than a few of China's up-and-coming companies are choosing to be incorporated offshore.

Hong Kong-based Chris Bickley, who has been practicing tri-jurisdictionally for over 10 years, notes that his home territory of the Cayman Islands remains the vehicle of choice for NASDAQ listings, and is an accepted jurisdiction for Hong Kong stock exchange dealings. His firm, Conyers Dill & Pearman, is "particularly well known for IPOs [in the Cayman Islands] and in Singapore; we have good relations with US, Hong Kong, and now PRC firms," he says. The firm advised several of the year's top IPOs in its specialist role as an adviser on Cayman Islands law. As for hitting the big numbers, "The size actually doesn't matter too much to us," he says. "Whether it's a huge deal or a smaller deal, we see the same sort of picture."

Conyers is also experienced when it comes to pre-IPO private equity work, for which it takes recommendations from PRC counsel when establishing a company before it is listed. "It's mainly being driven by PRC companies looking to list," often in Hong Kong, he says.

COMPETING MARKETS

There is no shortage of interest for Chinese capital. There is talk that London, NYSE, NASDAQ, and even the Deutsche Bourse are all looking to establish representative offices on the mainland, due to such strong demand for quality stocks. Frenzied A-share buying is often attributed to an overabundance of personal savings, since small investors in the mainland lack sufficient options for investment in any other stocks. In an attempt to alleviate this, regulators have been encouraging companies to list in Shanghai for the last few years, culminating in the landmark A- plus H-share listing of ICBC.

"Hong Kong has clearly lost out on a number of important deals recently," says Matthew Bersani of Shearman & Sterling, who advised the underwriters to ICBC, among other deals. Insiders report that the unspoken rule for IPO hopefuls with assets in China seeking CSRC approval is to start with an A-share listing, then proceed with an H-share listing, if at all. Regulators are said to'sit on' applications until listing parties agree to an A-share listing. "It's pretty clear that they're pushing Shanghai" as a place to list first, Bersani says.

Meanwhile, nearly all market practitioners have made appeals to the CSRC behind the scenes to ensure that there won't be any official policies making this practice the standard. "If the CSRC can maintain a policy that leaves the decision to the companies and the market to decide as to when and where they do the IPO, I think that would be the best policy," says Skadden's Miao.

China's embrace of a free market economy would indeed seem to imply that its policies ought to be market-oriented. On the other hand, market intervention can be at least partially explained by the state of existing regulations, which pose a number of problems to a completely free equity market. Short of full-integration with the global economy, stop-gap measures such as encouraging Shanghai listings appear aimed at fixing a problem for now that might later be eased by further liberalization of outbound investment.

"The Shanghai stock exchange lacks valuable stock; there's not sufficient good stock for punters to go after, so one measure is to increase the supply" by encouraging more companies to list there, says Eddie Lee of Woo Kwan Lee & Lo.

Concerns over measures to cool the economy seem to have a limited impact on the optimism of legal practitioners in the capital markets field. "There's still a lot of work out there," says Michael Fosh of Herbert Smith. Still, the lingering question is whether the instability will escalate into a downturn, or if it will be a blip on an otherwise upward trend.

GOOD ADVICE

Choosing the right legal representation can be crucial for companies looking to do a listing. Some firms will focus on advising issuers, while others tend to do bank-side work, such as Lovells. However, partner Jamie Barr notes that his firm will often seek to advise an issuer if the firm has a strategic interest in the company.

If a company can benefit from an already established relationship as well as legal expertise in their particular sector, then the law firm can expect to generate follow-up business after the IPO. "When it comes to listing, to have people understand your business, it's everything," he says. When it comes to banks, "They want to know they are in safe hands," he adds. Barr also admits that Lovells is not looking to do mega-deals, as they tend to take up a lot of resources and can even compromise morale within the firm.

Other firms try to have a good spread between issuer and underwriters. Skadden is one firm that tries to maintain such a balance. "It's important for us to have the adequate skills and experience to advise on issues that affect both the issuers and the underwriters," says Skadden partner Miao. His Hong Kong-focused colleague, Dominic Tsun, agrees. "We try to find a balance of work" between large, complex deals and straightforward ones, Tsun says. "I think that's one of our strengths."

Larger firms like King & Wood devote most of their efforts towards representing issuers. Partner Wang Jianping says that the firm's size and experience makes it more capable of handling the larger cases - around 50 lawyers are typically devoted to listings like that of ICBC, and many other firms simply don't have enough lawyers. Those representing underwriters, on the other hand, may only need a handful lawyers.

When advising issuers, counsel need to handle inter-company restructuring documents, the listing application, prospectus and other offering documents, and any non-compete agreements needed. Firms advising underwriters, on the other hand, will handle due diligence, advise on certain arrangements between underwriters and issuers, and are exclusively responsible for verification of all material statements in the prospectus, including gathering all supporting documents - these firms will also need to take the lead in gathering underwriter agreements and documentation describing who does what, and even how the offering is going to be divided up between, for example, a Hong Kong offering and global placement, such as the allocation of H-shares. They will also take the lead in negotiating with accountants to come up with a "comfort letter" - a financial disclosure statement from the accounting firm, negotiated between the auditor and the underwriters - which is primarily managed by the underwriter's counsel.

Attorneys to issuers are often dealing with people who have never been through the process before [except in cases such as spin-offs or secondary offerings], and it is important to explain things in a way they can understand. Advising bankers is slightly less involved in this aspect, but with the amount of growth in the region, there are always new bankers on the scene as well.

FUTURE DEVELOPMENTS

As A-share prices climb higher, more PRC companies already listed in Hong Kong are expected to re-list in China; a draft rule to facilitate their return to local markets is expected to be released by the CSRC in the next month or two, and will allow many of these "red chips," or mainland companies listed overseas, to move back to the China market and issue A-shares. Yet companies currently looking to list in Hong Kong are finding preparation work increasingly difficult, as red-chip restructurings and the establishment of overseas holding vehicles now require CSRC and Ministry of Commerce [MOFCOM] approval.

Regulatory sentiment is definitely less than clear. "There's great uncertainty as to what the CSRC policy is now," says Fosh of Herbert Smith. Having been waiting for quite a few H-share approvals for a while now, Fosh says that pending approvals have put a big question mark over the second half of the year. "There is a holdup, which seems to be driven by the CSRC monitoring the progress of the domestic market," he says. "I think they need to be fairly fleet-footed to move with the market."

Skadden's Miao believes that China's market will eventually be as open as that of Hong Kong, but says that there are a number of policy measures, such as having a freely convertible currency, that are prerequisites to fully opening the market. Says Miao, "Everybody agrees that China is doing well, and is on its way, but there's no need to rush."

Copyright Euromoney Institutional Investor PLC Jul 2007

Shares of listed companies held by state-owned shareholders transferred according to the market price.

Promulgated: June 30 2007

Effective: July 1 2007

Applicability: The term "state-owned shareholders" refers to state-owned and state-controlled enterprises, relevant organizations, departments and institutions that hold shares of listed companies (Article 2).

The Measures apply to state-owned shareholders that transfer the shares of listed companies that they hold through a securities trading system or by way of agreement, or that transfer such shares without consideration or indirectly. The transfer of shares of listed companies held by securities companies and fund management companies dedicated to securities business that are wholly state-owned or state-controlled shall be handled according to the relevant provisions (Article 3).

Main Contents: A state-controlled shareholder shall make the decision to transfer shares of a listed company through a securities trading system in accordance with its internal decision-making procedure and file a record with the state-owned assets supervision and administration authority at or above the provincial level within seven working days upon completion of the transfer of shares if the following two criteria are fulfilled at the same time:

(1) in the case of a listed company with a total share capital of no more than one billion shares, the ratio of the net aggregate shares transferred (here and hereinafter, meaning the balance of aggregate transferred shares after the deduction of aggregate increase in shares held) by the state-owned shareholder in the past three consecutive financial years has not reached 5% of the total share capital of the listed company; in the case of a listed company with a total share capital of more than one billion shares, the number of net aggregate shares transferred by the state-controlled shareholder in the past three consecutive financial years has not reached 50 million or the ratio of net aggregate transferred shares has not reached 3% of the total share capital of the listed company; and

(2) the transfer of shares by the state-controlled shareholder does not involve the transfer of controlling power of the listed company.

Where several state-owned shareholders are under the same controlling party, the quantity or ratio of the net aggregate transferred shares shall be calculated in aggregate (Article 8). Where the transfer of shares by a state-owned shareholder fails to fulfil either of the criteria specified above, the share transfer proposal may be implemented only after it has been submitted to the state-owned assets supervision and administration authority of the State Council level by level for check and approval (Article 9). If a state-owned shareholder transfers shares of a listed company by way of block trade, the transfer price may not be less than the weighted average price of the listed company's shares traded on that day (Article 11).

Where a state-owned shareholder intends to transfer shares of a listed company by agreement, it shall, after internal decision-making, submit a written report level by level to the relevant state-owned assets supervision and administration authority at the provincial level or above in accordance with the stipulated procedure in a timely manner and shall at the same time notify the listed company in writing of the information on the proposed transfer of shares by agreement. The listed company shall publicize such information according to law (Article 14). A state-owned shareholders may directly conclude a share transfer agreement without disclosing the information on the proposed transfer upon approval of the relevant state-owned assets supervision and administration authority at or above the provincial level under special circumstances such as:

(1) the listed company has been loss-making for two consecutive years and is facing the risk of delisting or a serious financial crisis, and the transferee proposes a major asset reorganization plan and a specific time schedule for such plan;

(2) there are special requirements on the transferee for key industries and sectors of the national economy; or

(3) the buyback of shares of the listed company involves shares held by the state-owned shareholder (Article 19).

Where a state-owned controlling shareholder intends to transfer shares by agreement and shall no longer possess the controlling power over the listed company, it shall engage a professional institution registered in China to act as the financial consultant (Article 22). The price of shares of a listed company transferred by way of agreement by a state-owned shareholder shall be determined based on the arithmetic average of the daily weighted average price of the 30 trading days prior to the date of announcement of the information on the transfer of the shares of the listed company (or the date of conclusion of the share transfer agreement where the public announcement of information on the share transfer is not required after approval). Where a discount of price is truly necessary, the minimum price may not be less than 90% of the arithmetic average (Article 24).

Related Legislation: PRC Company Law (Amended), Oct 27 2005, CLP 2005 No.10 p.21; PRC Securities Law (Amended), Oct 27 2005, CLP 2006 No.1 p.31; and Tentative Regulations for the Supervision and Administration of Enterprise State-owned Assets, May 27 2003

Copyright Euromoney Institutional Investor PLC Jun 2007

By Christophe Han and Leo Wang

christophe.han@llinkslaw.com; leo.wang@llinkslaw.com

Opportunities to invest in Chinese companies that plan to list on a domestic exchange have gradually matured. Since the majority of share reforms were completed in September 2006, the shares previously issued by companies during initial public offerings (IPOs) are now freely tradable on domestic exchanges. Moreover, the central government has revised the IPO approval process. As a result, European and US private equity investors view public listing as the best withdrawal mechanism for their investments, and one that has already demonstrated its effectiveness in China. Nonetheless, the requirements of the PRC Company Law and PRC Securities Law for companies to list on an exchange remain quite strict, so it remains difficult for small- and medium-sized private companies to list. Private equity investment has therefore become a popular shortcut for companies intending to list on the domestic exchanges.

Exercise caution before investing

Investors should carefully consider the legal and policy environment they operate in before investing in pre-IPO-stage companies. Private equity investors focus on locking up a company as their investment target and getting the fastest, highest return on their investment through a public offering. Companies focus on attracting private equity investment prior to their offering. In this situation, it is important for both companies and private equity investors to carefully consider, from both commercial and legal perspectives, the opportunity costs and the safety of their investments.

Choose an effective strategy

Private equity investors must carefully select investment opportunities and design effective share-holding strategies. Private equity investments are limited both by the investors' (or fund's) own capital transfer requirements and by the legal restrictions on equity transfers before and after IPOs. Under Article 142 of the PRC Company Law, for one year after a company restructures as a share-limited company, the sponsor's stock may not be transferred. Moreover, shares already issued by a company prior to an IPO may not be transferred for one year after the offering. The Stock Exchanges themselves also impose further requirements. Article 5.1.4 of the Shanghai Stock Exchange's Share Listing Regulations and Article 5.1.6 of the Shenzhen Stock Exchange's Share Listing Regulations both require that when a company files an IPO request with either exchange, any person who obtained that company's stock through a share issue designed to increase capital during the 12 months prior to an IPO must promise that they will not transfer those shares for 36 months from the date they obtained such stock. Finally, Article 8 of the Temporary Regulations on Issues with Establishing Foreign-Invested Share-Limited Companies, issued by the Foreign Trade Cooperative Commission in 1995, requires that a sponsor's stock in foreign-invested share-limited companies may not be transferred for three years from the date the company is registered. Although the Ministry of Commerce (MOFCOM) is currently considering revisions to Article 8, it still remains in effect. Only by fully understanding these various lockup periods and their effect on the investor's own capital transfer requirements can private investors develop reasonable share holding plans.

Make appropriate concessions

During the capital raising process, private equity investors must have the courage and vision to make the right concessions. Private equity investors are accustomed to companies guaranteeing returns on their investments, and specially establishing share buy-backs, priority rights to subscriptions and distributions of new shares, or priority rights to participate in sales of shares. Companies also offer private equity investors veto power in the board of directors or other such privileges to help guarantee the safety of and return on their investment. In China, these types of conditions are frequently seen in the joint venture contracts or Articles of Association of companies planning to attract private equity investment and restructure as a Sino-foreign joint venture. However, before their IPOs, companies must comply with the China Securities Regulatory Commission's (CSRC) requirements for listed companies. CSRC regulations require that these types of special privileges must be removed from the company's articles of association, because of their potential effect on the rights and interests of public investors. Private equity investors must therefore make some concessions.

Guard against uncertainties

When preparing for an IPO, private equity investors must find some way to protect their own rights and interests. Private equity investors face the risk that the company's IPO will fail or be perpetually postponed. Reducing the time between the investors' concessions and the company's public offering will help to reduce the risks arising from the uncertainties associated with the IPO. Investors could consider retaining various profit guarantees, share-buy backs, veto powers, and other special clauses in the pre-IPO company's articles of association, and promising to waive these special guarantees on the date the company's IPO is successfully listed. Such promises would then be reflected in the revisions to the company's articles of association and securities filings. Private equity investors could also consider requesting that when a company reorganizes as a share-limited company, that the sponsor's agreement or shareholder's agreement retain provisions preserving the current shareholders' rights and interests (such as priority rights to subscriptions and distributions of new shares, priority rights to participate in sales of shares, and anti-dilution rights). However, if these types of clauses are retained, it generally must be done on condition that it will not affect a company's ability to successfully make an IPO.

Copyright Euromoney Institutional Investor PLC Jun 2007

A report released by international law firm Norton Rose has shown that China is expected to be Asia's largest destination for inbound merger and acquisition (M&A) activity in 2007. However, China will remain one of the most challenging jurisdictions in which to conduct M&A transactions.

The report, Cross-border M&A, The Asian Perspective, predicts continued growth in M&A activity in the region. In 2006, there were more than 2,073 cross-border deals, valued at US$52.4 billion, in Asia. Financial services and telecommunications remain the most active sectors.

China leads the field in M&A, with 92% of companies expecting to look at such a deal in the next 12 months. Although it is expected to be the most active market in terms of M&A, China was ranked the most difficult in which to operate. The report says that 25% of respondents (including 31% of respondents in China) chose it as the most challenging among Asian markets.

"It may seem counter-intuitive for two of Asia's most regulated industries to attract so much cross-border M&A activity," says David Stannard, Norton Rose's managing partner for Asia, "but the willingness of companies to buy into these sectors despite foreign-ownership restrictions indicates their faith in the growth of Asia's economies - indeed, financial services and telecoms are two of the most direct ways to participate in an economy's growth, particularly in huge consumer markets like China and India, which have a combined population of 2.5 billion people."

The report, which was compiled from a survey of 258 executives across Asia as well as interviews with M&A practitioners, found that the US, China and France are regarded as the countries most likely to block M&A deals because of strategic and political concerns. It also found that because corporate governance and transparency initiatives appear to have taken root in Asia, they are now seen as the regulatory issues having the most significant impact on plans for cross-border M&A.

Says Norton Rose's corporate finance partner Richard Crosby: "These findings have important messages for both Asia and the west. Western companies will be reassured to know that corporate governance in the region is improving. Hong Kong and Singapore have always been strong on this front, but other countries and notably China are catching up. Asian companies need to be prepared to meet compliance and regulatory requirements if they are hoping to attract western investors at the right price."

Copyright Euromoney Institutional Investor PLC May 2007

By Christophe Han and Kuno Shen, Llinks Law Offices

christophe.han@llinkslaw.com; kuno.shen@llinkslaw.com

Since the resumption of domestic inital public offerings (IPOs), increasing numbers of private and foreign-invested companies hope to become share-limited companies and then list on the domestic A-share market. In a large number of these companies, for historical reasons, employees' shareholding structure does not comply with current regulations. Given that the A-share market requires all shares to be freely tradable, these flawed shareholding structures frequently lead to disputes and other problems. These shareholding structures must therefore be corrected prior to any IPO. Additionally, some companies, in consideration of their long-term development, also wish to create employee stock ownership plans prior to their IPOs. Currently, one of the following three methods is usually used to arrange such plans.

Employees Hold Stock Directly

In order to settle property rights, the entity that previously held stock for employees (such as the union, an employees' stockholding agency, or key management) may choose to directly transfer its stock to employees. However, this type of direct transfer is governed by the PRC Company Law. Under the PRC Company Law, limited liability companies may not have more than 50 shareholders. Therefore, if more than 50 employees that wish to participate in the stock ownership plan, it may be difficult to directly transfer stock to them.

Establishing a Holding Company

A holding company is a limited liability or share limited company established by capital contributions from employees. The holding company's only purpose is to hold stock in the target company and help employees indirectly hold the target company's stock. The current PRC Company Law removed limitations on a company's investment ratios, so that employees can create holding companies and participate in employee stock ownership plans with little cost. The limit on the number of shareholders means that it may be necessary to create several holding companies. Based on publicly available information, a number of recently listed companies used holding companies to implement their employee stock ownership plans.

When using holding companies to carry out an employee stock ownership plan, future tax costs should be considered. For example, when a parent company distributes dividends, the holding company must pay enterprise taxes and deduct contributions to the statutory common reserve before distributing dividends to its employee-shareholders, who will not receive the same dividend as if they directly held the parent company's stock. If holding companies dissolve after the lockup period (when sales of their stock are forbidden), and their tradeable A-shares are distributed to shareholders, the holding company will again need to pay enterprise taxes. On the other hand, when employees receive their shares of stock from the dissolution of the holding company, the employees will again have to pay personal taxes on the shares.

Equity Trusts

Equity trusts are a system whereby the principal authorizes a trustee to manage or dispose of his stocks. The trustee acts in his own name for the benefit of the trust's beneficiary of some other specially defined purpose.

Most business trusts are conducted through trust companies' capital trusts. It is important to note that the Measures for the Administration of Trust Companies' Trust Plans of Assembled Funds, which took effect on March 1 2007, make substantial changes to the prior Interim Measures for the Administration of Capital Trust of the Trust and Investment Companies. Under the new regulations, no more than 50 natural persons may participate in a single trust plan of assembled funds (a "trust plan"), and each person must be a qualified investor. A qualified investor must either: have a minimum investment in the trust plan of more than Rmb1 million; have individual or family financial assets exceeding Rmb1 million at the time of subscription to the trust plan; or have annual income exceeding Rmb200,000 for the past three years. These regulations will raise the threshold for participating in trust plans, and will impact the use of trust plans to implement employee stock ownership plans.

After promulgation of the PRC Trust Law, equity trusts were initially considered to be an effective way of implementing employee stock ownership plans. However, because trust arrangements may conceal the actual beneficiary, the China Securities Regulatory Commission (CSRC) has not encouraged the use of trust arrangements by companies applying to list on a stock exchange. The CSRC also discourages the use of equity trusts by controlling shareholders or actual controllers of companies applying to list. Trust arrangements by controlling shareholders or actual controllers can easily lead to property disputes, misappropriation of profits, or transfer of controlling rights. There are very few A-share listed companies that have successfully used a trust structure to implement their employee shareholding plans.

Both holding companies and equity trusts help employees indirectly hold a target company's stock. According to the CSRC and other securities regulatory institutions, the total number of registered shareholders and employees indirectly holding stock cannot exceed 200. According to the CSRC, this restriction is based on two laws: (a) Article 79 of the PRC Company Law, which states that a company limited by shares shall have no more than 200 founding shareholders; and (b) Article 10 of the PRC Securities Law, which states that a company issuing shares to more than 200 recipients constitutes a public offering.

Copyright Euromoney Institutional Investor PLC Feb 2007

Great efforts have been made to improve China's corporate governance regime by revising the securities and company laws and the rules governing the banking and equity markets. However, there are still many challenges ahead to bring PRC companies in compliance with internationally-accepted best practices, suggests Johnny KW Cheung.

By Johnny KW Cheung of American International Group

China has made many positive improvements to its corporate governance structure in recent times by revising its securities and company laws. Notable changes include greater financial disclosure requirements, improved protection of minority shareholders' rights and clearer guidelines on the role of supervising boards.

Significant progress has also been made in improving corporate governance in both the banking and equity markets. Foreign banks are now allowed to invest in PRC banks and to bring with them their corporate governance concepts. The government has also introduced a share reform programme, making it mandatory for non-tradable shares in state-owned enterprises (SOEs) to be converted into tradable shares. Efforts have also been made to decrease financial risk in China's banking system by reducing the large number of non-performing loans held by local banks.

While there have been significant improvements in the corporate governance structure in China, it still lags behind that of many developed countries. What are the shortcomings in China's corporate governance system?

China has a two-tier board governance structure for companies which is very similar to the German system, with a board of directors and a supervisory board. Unfortunately, in reality, supervisory boards in China usually just rubber-stamp decisions taken by the board of directors. This duplication in the system does not do any good except to create redundancy and increase administrative costs for companies. Also, although Chinese companies are required to have at least a third of their boards constitute independent directors, in practice these directors have very limited ability to influence how their companies are run.

Moreover, the financial disclosure requirements of Chinese listed companies are still weak compared to those of many developed jurisdictions. The continued uncertain reform of SOEs' share structures and the lack of good financial information make it extremely difficult for China's equity markets to grow and function properly.

The PRC government has been encouraging companies to improve their awareness of good corporate governance. One method adopted by the government has been to actively encourage local companies to list on the Hong Kong stock exchange, which has a more internationally-accepted corporate governance system for listed companies. However, this plan could backfire and hinder the development of China's equity markets, as it creates the perception that the local stock exchanges in Shanghai and Shenzhen - and the companies listed on them - are weaker and less professionally managed.

Another corporate governance problem for big PRC companies (most of which are majority government-owned) is of the government trying to exert a strong management influence on them. Many of the senior management of these majority stated-owned companies see their role as that of keeping the government happy at all costs. Clearly, there is plenty of room to improve China's corporate governance system.

Legislative efforts

Great efforts have been made to overhaul the corporate governance framework in China, particularly through recent revisions to the securities and company laws.

In the area of financial disclosure, limited liability companies are now required to have their financial and accounting reports audited by professional accounting firms. Previously, this requirement only applied to joint stock companies. The amendment has strengthened the terms upon which companies can engage and dismiss external auditors.

Formal procedures have also been established for entering into related-party transactions. Under the new procedures, it is mandatory for a resolution to be approved at a shareholders' meeting before a company can provide security to a shareholder or to the controlling shareholder. The shareholder in question or the shareholders under the controlling party must abstain from voting on related matters to avoid conflicts of interests.

Improvements have also been made to the position of minority shareholders, which have been given rights to make motions, convene and preside over shareholders' meetings, and to bring derivative suits against directors and senior management. Shareholders in joint stock companies have also been given greater powers: they are allowed to use a cumulative voting system to elect supervisors and directors. In addition, the information available to shareholders has been extended: they are now able to obtain articles of association, shareholders' meeting minutes, board resolutions, financial reports and accounting books.

The supervisory boards of companies have also benefited from the legislative amendments which give them increased powers and functions, making them less like rubber-stamping machines.

The functions and voting rights of board members have also been clarified. In addition, the powers of the board's chairman have been reduced: his/her right to exercise some of the powers of the board when it is not in session have been cancelled.

Corporate governance issues

Government influence on SOEs

Many large listed companies are still majority state-owned, which has created the problem of local and city governments continuing to impose an influence on SOEs' operations and management. This undesirable situation has created an environment in which senior managers in SOEs align almost always with the state (the majority shareholder), to the detriment of minority shareholders.

Moreover, due to the non-merit based promotion system in many SOEs, it is difficult for some SOEs to attract good managers, as they prefer to go to multinational companies where they have a better chance to advance. This poses a great problem for the future development of SOEs.

If SOEs are to survive in the increasingly competitive markets, senior management must learn to develop their independent decision-making skills based on market needs and not what the government asks them to do.

Traditionally, there has not been a culture of good corporate governance in many PRC companies. The government needs to put a greater emphasis on corporate governance awareness and adoption by introducing training programmes for managers, senior executives and directors.

Financial disclosure

Financial disclosure in the PRC remains weak compared to many advanced jurisdictions. This results in a hampering of the growth of efficient equity markets. A common complaint among investors in China is that financial information on company performance is either unavailable or, if provided, lacks reliability. The government is beginning to tackle this problem by establishing more open disclosure rules and adopting international financial reporting standards..

On February 15 2006, the Ministry of Finance formally issued 38 specific Basic Accounting Standards for Business Enterprises, which apply to all listed Chinese companies as of January 1 2007. The new standards will bring Chinese accounting practices largely in line with the International Financial Reporting Standards (IFRS), with some exceptions. It is hoped that the implementation of these standards will significantly improve this area of corporate governance in the PRC.

Board governance structure

On the surface, the board governance structure for companies in China is designed similar to the two-tier structure in Germany, in which a management board is responsible for running the company and a supervisory board supervises the management board. However, in reality Chinese companies have had muddled one-tier board structures, which has created redundancy and inefficiency.

Fortunately, this unsatisfactory situation has been dealt with in the recent revision to China's company law. The structure of the board of directors and supervisory board has now been improved and clarified through the following measures.

i. The board of directors of a company is styled after the board of directors in the Anglo-American model of corporate governance, where the board oversees and helps management's decision-making process. Similar to practices followed in the US and the UK, guidelines issued by the China Securities Regulatory Commission require that at least one-third of directors be independent.

However, the blending of the Anglo-American model and the German model of corporate governance dilutes the effectiveness of both the board of directors and the supervisory board of a company and duplicates administrative costs by increasing the overall number of directors in a company.

ii. The supervisory board of a company in the PRC is much smaller than the supervisory board of a company in Germany, and shares only a few similar responsibilities with its European counterpart.

iii. In the PRC, the board of directors is the main decision-making authority in a company, with the supervisory board designated with legal powers to overturn decisions taken by the board of directors. In practice, the supervisory board is only symbolic and any attempt to strengthen its role is likely to create further ambiguity in China's board structure.

Slow-growing capital markets

With reforms underway in the equity and banking sectors, China's government has temporarily suspended the issuance of new capital on local stock exchanges and the market has been dormant since 2005. Listed PRC companies cannot issue new shares on the Shanghai or Shenzhen stock exchanges until they convert all non-tradable shares to tradable shares. In the meantime, PRC companies looking to raise new capital can only do so in Hong Kong, New York or Singapore.

The PRC government is hoping that having domestic companies list outside of China will improve their standards of corporate governance on a long-term basis. However, this plan may unfortunately backfire, as investors may see companies being listed on China's stock exchanges as having weaker corporate governance models and less protection for their investments, which does not help the growth of the equity markets.

China's government must try very hard to educate both the public and company executives of the importance of corporate governance if it wants to improve the growth and development of the local equity markets.

Expanding abroad

Significant steps have been taken to improve China's corporate governance framework, particularly through amendments to the company and securities laws. Unfortunately, there is still a large amount of work that needs to be done in order to raise the standards to an international level.

Many Chinese companies have great ambitions to become multinational corporations. For example, Lenovo, which has taken over IBM's personal computer business is a classic show case. However, the poor corporate governance structure of PRC companies is halting the progress of their internationalization, especially during the bidding process of merger and acquisition deals.

It therefore pays for Chinese companies to improve their corporate governance systems. The PRC government should encourage companies to take an active role in implementing internationally-accepted governance standards so that they can move to the next phase of their growth and development in the international play field.

About the author

Johnny KW Cheung is the associate general counsel of American International Group (AIG) for the Asia-Pacific region. Prior to joining AIG, he was an in-house counsel at ExxonMobil and InterContinental Hotels Group. He was also previously an attorney at Linklaters & Paines and Clifford Chance and a management consultant at the Boston Consulting Group.